CHINA RECYCLING ENERGY CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
Commission
file number: 000-12536
China
Recycling Energy Corporation
(Exact
name of registrant as specified in its charter)
Nevada
(State or
other jurisdiction of incorporation or organization)
90-0093373
(I.R.S.
Employer Identification No.)
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12/F,
Tower A
Chang
An International Building
No.
88 Nan Guan Zheng Jie
Xi
An City, Shan Xi Province
China
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710068
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|
|
(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (011) 86-29-8769-1097
Securities
registered pursuant to Section 12(b) of the Act:
NONE
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
¨
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
¨
No
x
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 Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
¨
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 “small
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
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Large
accelerated filer
¨
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Accelerated
filer
¨
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Non-accelerated
filer
¨
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Smaller
reporting company
x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
The
aggregate market value of 11,953,346 shares of voting stock held by
non-affiliates of the registrant was approximately $11,833,813 based on the last
reported sale price of the registrant’s Common Stock as reported on the
NASD’s Over-the-Counter Bulletin Board on June 30, 2009.
As of
March 12, 2009, the registrant had 38,778,035 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the China Recycling Energy Corporation Proxy Statement regarding the 2010
Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated into
Part III of this Annual Report on Form 10-K.
CHINA
RECYCLING ENERGY CORPORATION
FORM
10-K
TABLE
OF CONTENTS
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PART
I
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1
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| Item 1. Business. |
1
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| Item 1A. Risk Factors. |
7
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| Item 2. Properties. |
11
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| Item 3. Legal Proceedings. |
11
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| Item 4. Submission of Matters to a Vote of Security Holders. |
11
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PART
II
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11
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| Item 5. Market for Common Equity, Related Shareholder Matters and Small Business Issuer Purchases of Equity Securities. |
11
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| Item 6. Selected Financial Data. |
15
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| Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
15
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| Item 7A. Quantitative and Qualitative Disclosures About Market Risk. |
25
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| Item 8. Financial Statements and Supplementary Data. |
26
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| Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. |
51
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| Item 9A. Controls and Procedures. |
51
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| Item 9B. Other Information. |
52
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PART
III
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52
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| Item 10. Directors, Executive Officers and Corporate Governance. |
52
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| Item 11. Executive Compensation. |
52
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| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. |
52
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| Item 13. Certain Relationships and Related Transactions, Director Independence. |
52
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| Item 14. Principal Accountant Fees and Services. |
52
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| Item 15. Exhibits, Financial Statement Schedules. |
52
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When we
use the terms ”we,” ”us,” ”our” and “the Company,” we mean China Recycling
Energy Corporation., a Nevada corporation, and its wholly-owned subsidiary,
Sifang Holdings Co., Ltd., and Sifang Holdings Co., Ltd.’s wholly-owned
subsidiary, Shanghai TCH Energy Technology Co., Ltd. and Shanghai TCH Energy
Technology Co., Ltd’s wholly-owned subsidiary, Xi’an TCH Energy Technology Co.,
Ltd. Prior to March 8, 2007, China Recycling Energy Corporation’s name was China
Digital Wireless, Inc.
General
We
currently engage in the recycling energy business, providing energy savings and
recycling products and services.
Overview
Business
History.
We
originally began operations as a Colorado corporation known as Boulder Brewing
Company, or Boulder Brewing. We were incorporated in Colorado on May 8, 1980 and
operated as a microbrewery of various beers. Boulder Brewing was unable to
become profitable within any segment of its core business, became illiquid, and
was forced to divest itself of all of its assets. Boulder Brewing became dormant
without any operations or assets in the second quarter of 1990.
In
September 2001, Boulder Brewing changed its state of incorporation from Colorado
to Nevada and changed its name to Boulder Acquisitions, Inc., or Boulder
Acquisitions. From the date of reincorporation until June 23, 2004, Boulder
Acquisitions had no material operations or assets.
On June
23, 2004, we completed a stock exchange transaction with the shareholders of
Sifang Holdings Co., Ltd. (“Sifang Holdings”). The exchange was consummated
under Nevada and Cayman Islands law pursuant to the terms of a Securities
Exchange Agreement dated as of June 23, 2004 by and among Boulder Acquisitions,
Sifang Holdings and the shareholders of Sifang Holdings. Pursuant to the
Securities Exchange Agreement, we issued 13,782,636 shares of our common stock
to the shareholders of Sifang Holdings, representing approximately 89.7% of our
post-exchange issued and outstanding common stock, in exchange for 100% of the
outstanding capital stock of Sifang Holdings. We presently carry on the business
of Sifang Holdings’ wholly-owned subsidiary, Shanghai TCH Energy
Technology Co., Ltd. or Shanghai TCH, a corporation organized under the laws of
the People’s Republic of China (“PRC” or “China”).
Effective August 6, 2004, we changed
our name from Boulder Acquisitions, Inc. to China Digital Wireless,
Inc.
From
August 2004 to December 2006, we primarily engaged in the business of pager and
mobile phone distribution and provided value added information services to the
customers in the PRC. We gradually phased out and substantially
scaled down most of the business of mobile phone distribution and provision of
pager and mobile phone value-added information services, and on May 10, 2007,
the Company approved and announced that it completely ceased and discontinued
these businesses.
In
December 2006, we began to engage in business activities in the energy saving
and recycling industry, including purchasing certain equipment, devices,
hardware and software for the construction and installation of top gas recovery
turbine systems (“TRT”) and other renewable energy products. TRT is an
electricity generating system that utilizes the exhaust pressure and heat
produced in the blast furnace of steel mills to generate electricity. It has
commercial value for the steel mills by using waste heat and steam to produce
electricity for the operation of the mills.
On March
8, 2007, we changed our name from China Digital Wireless, Inc. to China
Recycling Energy Corporation.
1
Our
current business is primarily conducted through our wholly-owned subsidiary,
Sifang Holdings and its wholly-owned subsidiaries, Shanghai TCH and Shanghai
TCH’s wholly-subsidiaries, Xi’an TCH Energy Technology Company, Ltd (“Xi’an
TCH”), Xingtai Huaxin Energy Tech Co., Ltd. (“Huaxin”), Xi’an TCH’s 80% owned
subsidiary Erdos TCH, and Sifang Holding’s subsidiary, Huahong New Energy
Technology Co., Ltd. (“Huahong”). Shanghai TCH was established as a
foreign investment enterprise in Shanghai under the laws of the PRC on May 25,
2004, with registered capital of $7.2 million. Xi’an TCH was
established as a foreign investment enterprise in Xi’an, Shannxi Province under
the laws of the PRC on December 14, 2007. Huaxin was incorporated in Xingtai,
PRC in November, 2007. Erdos TCH was incorporated in April
2009. Huahong was registered in February 2009.
On April
8, 2007, our Board of Directors approved and made effective a TRT Project
Joint-Operation Agreement (“Joint-Operation Agreement”) which was conditionally
entered on February 1, 2007 between Shanghai TCH and Xi’an Yingfeng Science and
Technology Co., Ltd. (“Yingfeng”). Yingfeng is a Chinese company that is located
in Xi’an, Shaanxi Province, China, which is engaged in the business of
designing, selling, installing, and operating TRT systems and other renewable
energy products.
Under the
Joint-Operation Agreement, Shanghai TCH and Yingfeng jointly pursued a top gas
recovery turbine project (“Project”) to design, construct, install and operate a
TRT system for Xingtai Iron and Steel Company, Ltd. (“Xingtai”). This project
was initiated by a Contract to Design and Construct TRT System (“Project
Contract”) entered by Yingfeng and Xingtai on September 26, 2006. Due to
Yingfeng’s lack of capital in pursuing this Project alone, Yingfeng sought
Shanghai TCH’s cooperation. After intensive and substantial inquiry and
assessment, Shanghai TCH agreed to pursue this project with Yingfeng as a joint
venture. Under the terms of the Joint-Operation Agreement, Shanghai TCH provided
various forms of investments and properties into the Project including cash,
hardware, software, equipments, major components and devices. In return,
Shanghai TCH obtained all the rights, titles, benefits and interests that
Yingfeng originally had under the Project Contract, including but not limited to
the regular cash payments made by Xingtai and other property rights and
interests.
On
October 31, 2007, Shanghai TCH entered an asset-transfer agreement with Yingfeng
to transfer from Yingfeng to Shanghai TCH all electricity-generating related
assets owned by Yingfeng. As the result, the contractual relationships between
Shanghai TCH and Yingfeng under the TRT Project Joint-Operation Agreement
entered on April 8, 2007 were terminated.
In
November 2007, Shanghai TCH signed a cooperative agreement with Shengwei Group
to build two sets of 12MW pure low temperature cement waste heat power generator
systems (“CHPG”) for Shengwei’s two 2,500-tons-per-day cement manufacturing
lines in Jin Yang and for a 5,000-tons-per-day cement manufacturing line in Tong
Chuan. Total investment in these projects will be approximately
$12,593,000 (RMB 93,000,000). At the end of 2008, construction of the
CHPG in Tong Chuan was completed at a cost of approximately $6,191,000 (RMB
43,000,000) and put into operation. Under the original agreement, the
ownership of the power generator system would belong to Shengwei from the date
the system was put into service. Shanghai TCH is responsible for the
daily maintenance and repair of the system, and charges Shengwei a 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 Shengwei
of a properly functioning 5,000-tons-per-day cement manufacturing line and not
less than 7,440 heat hours per year for the electricity generator
system. Shengwei Group collateralized the cement manufacturing line
in Tong Chuan 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, Shanghai TCH will have no
further obligations under the cooperative agreement. On May 20, 2009,
Shanghai TCH entered into a supplementary agreement with Shengwei Group to amend
the timing for title transfer to the end of the lease term. In addition, the
supplementary agreement provided that Shanghai TCH will charge Shengwei based on
actual power usage subject to a minimum of $0.31 million (RMB 2.1
million) per month during the operating period.
On
June 29, 2009, construction of the CHPG in Jin Yang was completed at a cost
of approximately $7,318,000 (RMB 50,000,000) and put into
operation. Shanghai TCH charges Shengwei a technical service fee of
$336,600 (RMB 2,300,000) monthly for the sixty months of the lease
term. Shengwei has the right to purchase the ownership of the CHPG
systems for $29,000 (RMB 200,000) at the end of lease term. Shengwei is required
to provide assurance of properly functioning 5,000-tons-per-day cement
manufacturing lines and not less than 7,440 heat hours per year for the
CHPG. Shengwei Group collateralized the cement manufacturing lines in
Jin Yang to guarantee its obligations to provide the minimum electricity income
from the power generator system under the agreement during the operating
period. Effective July 1, 2009, Shanghai TCH outsourced the operation
and maintenance of the CHPG systems in Tong Chuan and JinYang to a third party
for total of $732,000 (RMB 5,000,000) per year.
2
On April
14, 2009, the Company incorporated a joint venture (“JV”) with Erdos Metallurgy
Co., Ltd. (“Erdos”) to recycle waste heat from Erdos 's metal
refining plants to generate power and steam, which will then be sold back to
Erdos. The name of the JV is Inner Mongolia Erdos TCH Energy Saving
Development Co., Ltd (“Erdos TCH”) with a term of 20 years, and the registered
capital of the JV is $2,635,000 (RMB 18,000,000). On September 30,
2009, Xi’an TCH Energy Technology Co., Ltd. (“Xi’an TCH”) injected additional
capital of $4.03 million (RMB 27,500,000). In November of 2009, Xi’an TCH
injected further capital of $5.05 million (RMB 34,500,000). As of December 31,
2009, total registered capital is $11.71 million (RMB 80,000,000), of which,
$11.45 million (RMB 78,200,000) was from Xi’an TCH, and $0.26 million (RMB
1,800,000) was from Erdos. Total investment for the project is estimated at
approximately $74 million (RMB 500 million) with an initial investment of $17.55
million (RMB 120,000,000). Erdos contributed 10% of the total
investment of the project, and Xi'an TCH contributed 90% of the total
investment. Xi'an TCH and Erdos will receive 80% and 20% of the profit from the
JV, respectively, until Xi'an TCH has received a complete return on its
investment. Xi'an TCH and Erdos will then receive 60% and 40% of the
profit from the JV, respectively. The profits to be distributed will be computed
based on Chinese generally accepted accounting principles. The main difference
between US GAAP and Chinese GAAP with regards to Erdos is a sales-type lease
under US GAAP is treated as an operating lease under Chinese
GAAP. When the term of the JV expires, Xi'an TCH will transfer its
equity in the JV to Erdos at no additional cost.
At the
end of 2009, Erdos TCH completed the first 9MW power station of Phase I of the
project and put it into operation. The Phase I includes two 9-MW units for a
combined 18-MW power capacity. Pursuant to the Co-operation Agreement and
the supplement agreements signed between Erdos and Erdos TCH, Erdos shall
purchase all the electricity and steam to be generated from the JV’s power
generation projects. Erdos TCH leased the two 9 MW units to Erdos and will be
responsible for the operation and maintenance of the units. For each phase of
the project, the lease term is 20 years starting from the date of completion of
the phase. Erdos agreed to pay a fixed minimum of $0.22 million (RMB 1.5
million) per month for each 9MW capacity power generation unit. In addition
Erdos will pay the actual amount if the actual sale of the electricity generated
is more than $0.22 million (RMB 1.5 million) monthly per unit. After 20 years,
the units will be transferred to Erdos without any charge.
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 subleased for higher rental income under one-year,
non-cancellable leases. The Company did not renew its lease when it expired in
April 2009, and as a result, the sublessee was unable to renew its lease with
the Company.
On
September 30, 2009, Xi’an TCH delivered to Shenmu County Jiujiang Trading Co.,
Ltd. (“Shenmu”) a set of 18 megawatt capacity Waste Gas Power Generation
(“WGPG”) power generating systems pursuant to a Cooperative Contract on
Coke-oven Gas Power Generation Project (including its Supplementary Agreement)
and a Gas Supply Contract for Coke-oven Gas Power Generation
Project. The Contracts are for 10 years and provide that Xi’an TCH
will recycle coke furnace gas from the coke-oven plant of Shenmu to generate
power, which will be supplied back to Shenmu. Shenmu agrees to supply
Xi’an TCH the coke-oven gas free of charge. Under the Contracts,
Shenmu will pay the Company an annual “energy-saving service fee” of
approximately $5.6 million in equal monthly installments for the life of the
Contracts, as well as such additional amount as may result from the supply of
power to Shenmu in excess of 10.8 million kilowatt hours per
month. The Company is responsible for operating the systems and will
do so through an unrelated third party. Shenmu guarantees that monthly gas
supply will not be lower than 21.6 million standard cubic meters. If gas supply
is less, Shenmu agrees to pay Xi’an TCH energy-saving service fee described
above or up to 10.80 million kilowatt-hours per month. Xi’an TCH maintains the
ownership of the project throughout the term of the Contracts, including the
already completed investment, design, equipment, construction and installation
as well as the operation and maintenance of the project. At the end
of the 10-year term, ownership of the systems transfers to Shenmu at no
charge. Shenmu gave a lien on its production line to guarantee its
performance under the Contracts. Shenmu’s three major shareholders
provide an unlimited joint liability guarantee to Xi’an TCH for Shenmu’s
performance under the Contracts and the Yulin Huiyuan Group, an independent
third party, provides a guarantee to Xi’an TCH for Shenmu’s performance under
the Contracts.
In
November 2008, the Chinese government announced a series of economic stimulus
plans aimed at bolstering its weakening economy – a sweeping move to help fight
the effects of the global slowdown. In the announcements, China estimated it
would spend $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 ten areas, including low-income housing, electricity, water, rural
infrastructure and projects aiming at environmental protection and technological
innovation.
3
Market
Description
of the TRT (Blast Furnace Top-Gas Recovery Turbine Unit) Market
Energy is
a major strategic issue affecting the development of the Chinese economy. The
Chinese government has committed to adjusting the economic structure and
changing the mode of economic growth in order to encourage the use of more
advanced and more environment-friendly technologies. Also, the Chinese
government has been promoting the development of recycling and the circulated
use of resources by encouraging enterprises to engage in the energy-recycling
industry. Various government issued documents indicate the government’s plan to
promote the use of energy saving and recycling equipment and
systems.
The 2009
Report of China’s Iron & Steel Association predicted 240 TRT systems or
plants will be installed in China from 2010 to 2012.
TRT
projects are one of our core businesses and we have an excellent team
specialized in development, installation, production and operation of TRT
systems and equipment. Also, we have rich marketing experience in this field and
have become a leader in the TRT market.
We
invested and built three TRT projects in 2007 (one for Shanxi Changzhi Steel
Group, and two for Hebei Xingtai Steel Group). In addition, we have one project
currently under construction and scheduled to be completed in 2010 for Zhonggang
Binhai.
Description
of CHPG (Cement Low Temperature Heat Power Generation) Market
Cement
waste heat power generation, or CHPG, is power generation by recovering cement
residual heat without additional fuel, to be built on NSP (New Suspension
Pre-heater Dry Process) cement clinker production lines.
State of the
market
The
cement industry experienced substantial growth in China during past years
according to a February 2009 article of China’s
Securities News
. China’s
total investment in the cement industry reached $15 billion (RMB 105 billion) in
2008, a 60% increase from 2007. Of the $15 billion (RMB 105 billion)
investment, 65 percent was spent on NSP cement clinker production lines, a 10%
increase from 2007. It is estimated that the percentage of NSP production lines
of the total will rise to 70% by the end of 2009. There are three main reasons
for such strong demand of CHPG systems.
First,
during the period of the Chinese government’s 10th Five-Year Plan, the output of
NSP production lines reached 40% of the total cement output. The 11
th
Five-Year plan has continued to promote the NSP production line as a primary
goal for the cement industry. This government promotion provides a good
foundation for CHPG.
Second,
with the development of China’s national economy, demand for electricity and
coal has been increasing, and the price for such materials has been rising. This
exerts a negative effect on cement enterprises. As the price of power and coal
reached the majority of the production cost and substantially exceeded the cost
of raw materials, companies are motivated to utilize CHPG to reduce production
cost.
Third, at
the end of the 10th Five-Year Plan and the start of the 11th Five-Year Plan, the
Chinese government called for an energy saving campaign and issued a
Medium and Long-Term Plan on Special
Energy-Saving
which indicated that CHPG should be widely used, and
specified that 30 CHPG systems be established annually on cement producing lines
with an output of 2000 tons daily. The 11th Five-Year Plan provides policy
support for development of CHPG.
4
Market
prospects
The rapid
development of CHPG creates a good opportunity for the development, marketing
and sales of cement residual heat boilers. In 2006, eight Chinese state
ministries jointly issued
Views on Adjustment of Structure of
Cement Industry
that pointed out that by the end of 2010, the percentage
of the NSP production lines equipped with CHPG should reach 40% and the total
output of cement will reach between 1.4 billion-1.5 billion tons up from 1.24
billion tons in 2006. According to regulations on Chinese saving-energy
industry, in the future, the NSP production will gradually replace shaft kiln
cement. The 2007 Report of China’s Cement Association estimated there
will be a demand for more than 400 CHPG systems beyond 2010.
We
invested and have built two CHPG systems. One (Tongchuan) was
completed at the end of 2008 and the other (Jinyang) was completed in June
2009.
Description
of WGPG (Waste Gas Power Generation)
During
the process of industrial production, some by-products, such as blast furnace
gas, coke furnace gas, oil gas, and others are created with certain high
intensive thermal energy. The waste gas can be collected and used as a fuel by
gas turbine system to generate power energy.
Gas
turbines are a set of hi-tech equipment and devices that is crucial to the
energy development strategy of China. Gas turbine, which uses flammable gas as
fuel and combines with recycling power generating technology, has many
merits. These include high efficiency power generation, low
investment, short construction periods, small land usage, water savings,
environment protection and more. We believe the market prospect of
the gas turbine industry is promising. An analysis report in 2008
indicated that during the Tenth Five-year Plan Period, the total volume of
Chinese gas power generating was almost 10 million KW and it is expected to
reach 20 million KW by 2010, and 60 million KW by 2020. The natural
gas power plants being or to be built, representing about 6% of the total
equipment capability of China, most of which are newly constructed projects,
provide huge market potential for gas turbine.
Through
years of research, development and experimental applications, this gas-to-energy
system has started to be applied into some high energy intensive industrial
plants, such as in the course of iron-smelting in metallurgy
plants. Metallurgical enterprises, as the biggest industrial energy
user in China, consume 13%-15% of the nation’s
electricity. Electricity consumed by the iron-smelting industry
accounts for 40% of that consumed by metallurgical enterprises. If
all top furnaces in the iron-smelting industry are equipped with gas recovery
systems, electricity consumption may be decreased by
30-45%. Furthermore, environmental pollution will be reduced while
energy efficiency is improved in those heavy industries.
As noted
above, we constructed one WGPG facility for a coking plant (Shenmu) during the
third quarter of 2009, and we are currently working with Erdos Metallurgy to
build up a cluster of WGPG systems. At the end of 2009, a first power
generation unit was completed for Erdos and another unit is currently under
construction.
Suppliers
Through our business subsidiaries in
China, we believe we maintain good relationships with TRT, CHPG and WGPG
equipment suppliers, and these relationships help provide cost-effective
equipment purchasing for our intended projects and ensure the timely completion
of these projects.
We have established business
relationships with our suppliers, including Hangzhou Boiler Plant, Beijing
Zhongdian Electric Machinery, Chengdu Engine Group, Shanghai Electric Group,
China Aviation Gas Turbine Co. Ltd and Xuji Electric. Therefore, we
believe we now have strong support in equipment supply and installation, and in
research and development of technologies.
5
Main
Customers
Our
customers are mainly large-size domestic enterprises involving high
energy-consuming businesses producing iron and steel, cement, coking, and
metallurgy. As stated below, due to the continued expansion of the
Chinese markets and administrative support for energy-recycling by the Chinese
government, our market to provide TRT, CHPG and WGPG projects continues to
expand.
Demand
for Recycled Energy
The
following table is the funds invested, or expected to be invested, in
environmental protection industry by the Chinese government (in billion
RMB).
|
|
Eighth Five-
Year Plan
(1991-1995)
|
Ninth Five-
Year Plan
(1996-2000)
|
Tenth Five-
Year Plan
(2001-2005)
|
Eleventh Five-
Year Plan
(2006-2010)
|
||||||||||||
|
Total
Investment Amount
(in
billion RMB)
|
131 | 450 | 750 |
1,350
(proj.)
|
||||||||||||
|
Percentage
of PRC’s GDP
|
0.73 | % | 1.3 | % | 1.5 | % | 1.5 | % | ||||||||
Source:
11
th
Five-Year Plan of the China National Environmental Protection
Plans.
Currently,
recycled energy accounts for less than 1% of China’s total energy consumption.
As a result, due to environmental protection pressure and improvement of
infrastructure in western China, recycled energy, as a special and stable energy
resource, can be expected to grow in China.
Intellectual
Property Rights
We have
applied for the service mark “TCH” in China, which will be used in all of our
business operations.
Research
and Development
In 2009
and 2008, we invested about $198,000 and $120,000, respectively, in research and
development.
Government
and Environmental Management System
We own
all licenses that the Chinese governments require for our
operations.
Competition
The
Company faces limited domestic competition. Currently, most TRT, CHPG and WGPG
systems are purchased, constructed and operated by steel, cement, coking and
metallurgy companies, themselves, rather than outsourced to a
third-party. Our main competitors as third-party providers are state
owned research institutes or their wholly owned construction companies. The
reasons for low competition are high entry barriers in technology, experience,
investment capital, and credibility, as well customer relationships. We believe
that we offer advantages over our competitors in several ways:
6
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|
·
|
Our
management team has over 20 years of industry experience and
expertise;
|
|
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·
|
We
have the capabilities to provide TRT, CHPG and WGPG systems, while our
competitors usually concentrate on one type or
another;
|
|
|
·
|
We
have the capabilities and experience in undertaking large scale projects;
and
|
|
|
·
|
We
provide BOT or capital lease services to the customers, while our
competitors usually use an EPC (engineering, procurement and construction)
or turnkey contract model.
|
Employees
As of
December 31, 2009, we have 214 employees:
|
Management:
|
10
Employees
|
|
|
Administration:
|
9
Employees
|
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Marketing:
|
25
Employees
|
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|
Research
& Development:
|
43
Employees
|
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Accounting
& Finance:
|
12
Employees
|
|
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Project
Officer:
|
115
Employees, including 69
operators
|
All of
our personnel are employed full-time and none of them are represented under
collective bargaining agreements. We consider our relations with our employees
to be good.
Costs
and effects of compliance with environmental laws
There
were many new laws, regulations, rules and notices regarding the environment and
energy production adopted, promulgated and put into force during past years.
The Chinese government is putting more stringent requirements and urgency
on reducing pollution and emissions and improving energy efficiency nationwide.
Our products are designed and constructed to comply with the environmental laws
and regulations of China. As our systems allow our customers to use
waste heat and gases to create energy, we help reduce the overall environmental
impact of our customers. Since our business focuses on recycling
energy, the effect of the strengthening of environmental laws in China may be to
increase demand for the products and services we offer and others like
them.
Risks
Related to our Common Stock
The
market price for our common stock may be volatile.
The
market price for our common stock is highly volatile and subject to wide
fluctuations in response to factors including the following:
|
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·
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actual or anticipated
fluctuations in our quarterly operating
results,
|
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|
·
|
announcements of new services by
us or our competitors,
|
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|
·
|
changes in financial estimates by
securities analysts,
|
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|
·
|
conditions in the energy
recycling and saving services
market,
|
|
|
·
|
changes in the economic
performance or market valuations of other companies involved in the same
industry,
|
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|
·
|
announcements by our competitors
of significant acquisitions, strategic partnerships, joint ventures or
capital commitments,
|
7
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·
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additions or departures of key
personnel,
|
|
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·
|
potential litigation,
or
|
|
|
·
|
conditions in the
market.
|
In
addition, the securities markets from time to time experience significant price
and volume fluctuations that are not related to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
Shareholders
could experience substantial dilution.
We may
issue additional shares of our capital stock to raise additional cash for
working capital. If we issue additional shares of our capital stock, our
shareholders will experience dilution in their respective percentage ownership
in the company.
We
have no present intention to pay dividends.
We have
not paid dividends or made other cash distributions on our common stock during
any of the past three years, and we do not expect to declare or pay any
dividends in the foreseeable future. We intend to retain any future earnings for
working capital and to finance current operations and expansion of our
business.
A
large portion of our common stock is controlled by a small number of
shareholders.
A large
portion of our common stock is held by a small number of shareholders. As a
result, these shareholders are able to influence the outcome of shareholder
votes on various matters, including the election of directors and extraordinary
corporate transactions including business combinations. In addition,
the occurrence of sales of a large number of shares of our common stock, or the
perception that these sales could occur, may affect our stock price and could
impair our ability to obtain capital through an offering of equity securities.
Furthermore, the current ratios of ownership of our common stock reduce the
public float and liquidity of our common stock which can in turn affect the
market price of our common stock.
We
may be subject to “penny stock” regulations.
The
Securities and Exchange Commission, or SEC, has adopted rules that regulate
broker-dealer practices in connection with transactions in “penny stocks.” Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). Penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
those rules, to deliver a standardized risk disclosure document prepared by the
SEC, which specifies information about penny stocks and the nature and
significance of risks of the penny stock market. A broker-dealer must also
provide the customer with bid and offer quotations for the penny stock, the
compensation of the broker-dealer, and our sales person in the transaction, and
monthly account statements indicating the market value of each penny stock held
in the customer’s account. In addition, the penny stock rules require that,
prior to a transaction in a penny stock not otherwise exempt from those rules,
the broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the trading activity in the secondary market for stock that becomes
subject to those penny stock rules. These additional sales practice and
disclosure requirements could impede the sale of our securities. Whenever any of
our securities become subject to the penny stock rules, holders of those
securities may have difficulty in selling those securities.
Risks
Related to Our Business Operations
We
depend on the waste energy of our customers to generate
electricity.
We
acquire waste pressure, heat and gases from steelworks, cement, coking or
metallurgy plants and use these to generate power. Therefore, our power
generating capacity depends on the availability of an adequate supply of our
“raw materials” from our customers. If we do not have enough supply, power
generated for those customers will be impeded. Since our contracts are often
structured so that we receive compensation based on the amount of energy we
supply, a reduction in production may cause problems for our revenues and
results of operations.
8
The
global financial crisis intensified in 2009 and will adversely affect our
revenues.
Although
the Chinese government indicated it will focus on keeping its economy on track,
it is difficult to insulate any economy from the global financial crisis and
economic downturn that intensified worldwide during 2009. After five years of
annual growth in excess of 10 percent, the Chinese economy is beginning to
weaken. Growth in exports and investment is slowing, consumer confidence is
waning and stock and property markets are severely depressed. At a time when
major infrastructure projects are being put off around the world, there are
obvious slowdowns in China’s major industries, like iron and steel, construction
and energy. Our customers in such industries may face more challenges
and hardships than before and tend to take more conservative positions in their
business and investment, including the purchase of TRT, CHPG or WGPG
systems.
Our
insurance may not cover all liabilities and damages.
Our
industry can be dangerous and hazardous. The insurance we carry might not be
enough to cover all the liabilities and damages that may be caused by potential
accidents.
A
downturn in the Chinese economy may slow down our growth and
profitability.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There is no assurance that growth of the Chinese economy will
be steady or that any downturn will not have a negative effect on our business.
Our profitability will decrease if less energy is consumed due to a downturn in
the Chinese economy.
Our
heavy reliance on the experience and expertise of our management may cause
adverse impacts on us if a management member departs.
We depend
on key personnel for the success of our business. Our business may be severely
disrupted if we lose the services of our key executives and employees or fail to
add new senior and middle managers to our management.
Our
future success is heavily dependent upon the continued service of our key
executives. We also rely on a number of key technology staff for the operation
of our company. Our future success is also dependent upon our ability to attract
and retain qualified senior and middle managers to our management team. If one
or more of our current or future key executives or employees are unable or
unwilling to continue in their present positions, we may not be able to easily
replace them, and our business may be severely disrupted. In addition, if any of
these key executives or employees joins a competitor or forms a competing
company, we could lose customers and suppliers and incur additional expenses to
recruit and train personnel. We do not maintain key-man life insurance for any
of our key executives.
We
may need more capital for the operation and failure to raise the capital we need
may delay the development plan and reduce the profits.
If we
don’t have adequate income or our capital can’t meet the requirement for
expansion of operations, we will need to seek financing to continue our business
development. If we fail to acquire adequate financial resources at acceptable
terms, we might have to postpone our proposed business development plans and
reduce projections of our future incomes.
Risks
Related to the People’s Republic of China
China’s
economic policy may affect our business.
All of
our assets are in China, and all of our revenue comes from business in China.
Therefore, our business and prospects are tied to China’s economic, political
and legal development.
9
China’s
economy has quickly developed over the past 20 years. The Chinese government has
taken many measures to balance the economic development and the allocation of
resources. Some measures may have adverse effect on our industry. For example,
the government’s excessive investment control and changes in tax law may have
adverse impacts on us.
China’s
economy had been changed from a planned economy into a market economy. In recent
years, the government has taken many measures to strengthen market forces to
reduce state-owned assets and set up joint ventures. However, a great portion of
Chinese assets still remains controlled by the government. In addition, the
government plays a great role in industrial development. The great level of
interference of government in the business and industrial development might have
an adverse impact on us because we are not part of the state-owned business, and
our relationship with the governmental authorities might not be as strong as
those state-owned enterprises.
China’s
regulation of foreign currency exchange and cash out-flow may prevent us from
remitting profits and dividends to the United States.
China has
adopted complicated rules that govern foreign currency exchange and cash
out-flow. Although we believe we meet the requirements of those rules, we may
not be able to remit all of our profits to the United States and distribute
dividends to our shareholders if those rules are substantially changed to
restrict the cash out-flow. Foreign currency exchange rate changes
might also have negative impact on our financial performance.
We
may face the hindrance of China’s bureaucratic system.
Foreign
companies face the political, economic and legal risks when developing business
in China. China’s bureaucratic system might hinder investment from foreign
countries.
The
legal system in China has some uncertainties, which may affect the
implementation of laws.
The legal
system in China is a system of civil laws, based on provisions and written
codes, therefore precedents and cases are not binding on the future decisions of
the courts. Only after 1979 did the Chinese government begin to promulgate a
comprehensive system of laws that regulate economic affairs in general and
encourage foreign investment in China. Although the influence of the
law has been increasing, in certain rural areas the legal system and its
enforcement are not well implemented. In addition, there have been
constant changes and amendments of laws and regulations over the past 30 years
in order to keep up with the rapidly changing society and economy in China.
Because government agencies and courts provide interpretations of laws and
regulations and decide contractual disputes and issues, their inexperience on
new business and new polices or regulations in certain less developed areas
causes uncertainty and may affect our business. In some
provincial areas, the government agencies and the courts are protectionist and
may not fully enforce contractual rights against local parties. In
certain areas, the intellectual property and trade secret protections are not as
effective as those in the other areas in China or in the U.S. in
general. Consequently, we cannot clearly foresee the future direction
of Chinese legislative activities with respect to either businesses with foreign
investment or the effectiveness on enforcement of laws and regulations in the
less developed areas in China. The uncertainties, including new laws and
regulations and changes of existing laws, as well judicial interpretation by
inexperienced officials in the agencies and courts in certain areas, may cause
possible problems to foreign investors.
Where
You Can Find More Information
We file
annual, quarterly and special reports, proxy statements and other information
with the SEC. Our SEC filings are available to the public over the Internet at
the SEC’s web site at http://www.sec.gov. You may also read and copy any
document we file at the SEC’s Public Reference Room at 100 F Street,
NE, Washington, DC 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.
10
We
currently lease two office spaces, one in Xi’an and one in
Shanghai. On February 1, 2010, we expanded and moved our leased
office space in Xi’an within the Chang’an Metropolis Center where we previously
occupied part of a floor in Tower B. Our leased space in Xi-an is now
the 12
th
Floor
of Tower A at Chang’an Metropolis Center, No. 88, Nanguanzheng Street, Xi’an,
PRC. Our leased office space in Shanghai is located at Room 3163,
Floor 31, Jinmao Plaza, No.88 Century Avenue, Pudong New District, Shanghai,
PRC. Average monthly rent for all locations was $11,174 in 2009 and
is $16,937 in 2010.
The
Company is not a party to any legal proceedings that it believes will have a
material adverse effect upon the conduct of its business or its financial
position.
There
were no matters submitted to the Company’s stockholders during the fourth
quarter of fiscal 2009.
Our
common stock is currently traded on the NASD’s Over-the-Counter Bulletin Board
under the symbol “CREG.” (“CHDW” prior to March 8, 2007). On August 6, 2004 we
changed our name from Boulder Acquisitions, Inc. to China Digital Wireless, Inc.
and changed our symbol from “BAQI” to “CHDW.” On March 8, 2007, we changed our
name from China Digital Wireless, Inc. to China Recycling Energy Corporation,
and changed our symbol from “CHDW” to “CREG”. On March 12, 2010, the
last reported sales price for our common stock was $5.15 per share. As of March
12, 2010, there were 38,778,035 shares of our common stock outstanding held by
approximately 2,881 shareholders of record.
The table
below provides information with respect to the Company’s quarterly stock prices
during 2009 and 2008:
|
2009
|
2008
|
|||||||||||||||||||||||||||||||
|
4Q
|
3Q
|
2Q
|
1Q
|
4Q
|
3Q
|
2Q
|
1Q
|
|||||||||||||||||||||||||
|
High
|
$ | 4.30 | $ | 1.80 | $ | 1.00 | $ | 0.75 | $ | 1.09 | $ | 1.34 | $ | 1.88 | $ | 2.72 | ||||||||||||||||
|
Low
|
1.65 | 0.65 | 0.30 | 0.22 | 0.27 | 0.80 | 1.05 | 1.25 | ||||||||||||||||||||||||
|
Close
|
4.12 | 1.73 | 0.99 | 0.44 | 0.51 | 1.10 | 1.24 | 1.45 | ||||||||||||||||||||||||
Dividend
Policy
We did
not pay any cash dividends on our common stock in 2008 or 2009. We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings, if any, to finance
operations and the expansion of our business.
11
Recent
Sales of Unregistered Securities
On
January 24, 2007, a group of individual purchasers entered a share purchase
agreement with a group of shareholders of China Digital Wireless, Inc.
(“Company”) to purchase 12,911,835 shares of the Company’s common stock owned by
Sellers, $ 0.001 par value, for $490,000. Purchasers were Guohua Ku, Hanqiao
Zheng, Ping Sun, Qianping Huang, Xiaohong Zhang and Lixia Zhang. Sellers were
Caihua Tai, Ming Mao, Ying Shi, Sixing Fu, Xiaodong Zhang, Tianqi Huang, Wei
Huang, Jing Song, Ruijie Yu, and Weiping Jing, all of whom were shareholders of
the Company. In accordance with the share purchase agreement, Guohua Ku acquired
9,073,700 shares. Hanqiao Zheng acquired 2,406,365 shares. Ping Sun acquired
745,880 shares. Qianping Huang acquired 157,755 shares. Xiaohong Zhang acquired
72,018 shares. Lixia Zhang acquired 456,117 shares. This sale was a sale of
restricted shares between the shareholders of the Company and the individual
purchasers under Rule 144A of the Securities Act of 1933. Therefore, the Company
did not issue any new shares to purchasers and this sale did not change the
total number of issued and outstanding shares of the Company. The proceeds of
the sale were directly paid by the purchasers to the sellers and Company neither
was entitled to nor received the proceeds of the sale.
On June
21, 2007, two of Company’s major shareholders, Guohua Ku and Hanqiao Zheng
executed and consummated a share exchange agreement with a group of individual
purchasers all of whom were shareholders of Xi’an Yingfeng Science and
Technology Co. Ltd (“Yingfeng”). Guohua Ku and Hanqiao Zheng sold 289,427 and
2,406,365 shares of CREG’s common stock (“CREG shares”) they owned,
respectively, to the purchasers for 8,087,376 shares of Yingfeng’s common stock
(“Yingfeng Shares”). The share exchange agreement was initially negotiated and
signed by Guohua Ku, Hanqiao Zheng and the representative of the purchasers on
February 22, 2007. On June 21, 2007, the agreement was executed and consummated
when all purchasers and sellers received the physical stock certificates of CREG
shares and Yingfeng Shares delivered by the other party, pursuant to the
Execution and Closing Clause of the share exchange agreement. As the result of
this share exchange transaction, the purchasers, who were 472 individual
shareholders of Yingfeng, acquired 2,695,792 shares of CREG’s common
stock. None of the purchasers acquired more than 1% of the total
issued and outstanding common stock of CREG in this transaction. Guohua Ku and
Hanqiao Zheng own 8,784,273 and 0 shares of CREG’s common stock, respectively,
upon the consummation of this transaction. None of the purchasers in this share
exchange transaction was a U.S. Person, as such term is defined in Rule 902(k)
of Regulation S, or located within the U.S. This transaction was between
non-U.S. Persons and took place outside of the U.S. Therefore, this transaction
was exempt from registration under the Securities Act of 1933 pursuant to
Regulation S of the rules and regulations promulgated by the SEC under the
Securities Act of 1933.
On August
22, 2007, Guohua Ku executed and consummated a share exchange agreement with
another group of individual shareholders of Yingfeng. Under the terms of this
Agreement, Guohua Ku sold 623,410 shares of CREG’s common stock to the
purchasers for 1,870,230 shares of Yingfeng’s common stock. As the result of
this share exchange transaction, this group of Yingfeng Shareholders acquired
623,410 shares of CREG’s common stock. None of them acquired more than 1% of the
total issued and outstanding common stock of CREG in this transaction. Guohua
Ku, owned 8,160,863 shares of CREG’s common stock after the consummation of this
transaction.
On August
23, 2007, Guohua Ku executed and consummated a share purchase agreement with
Hanqiao Zheng to sell 8,160,863 shares of CREG’s common stock he owned to
Hanqiao Zheng for US $2,040,215. As the result of this share purchase
transaction, Hanqiao Zheng acquired 8,160,863 shares of CREG’s common stock.
Guohua Ku, owns 0 shares of CREG’s common stock after the consummation of this
transaction.
On
November 14, 2007, the Company entered into an Assets Transfer and Share
Issuance Agreement (the “Agreement A”) with Hanqiao Zheng, the President and
major shareholder of the Company and Shanghai TCH. Under the Agreement A,
Hanqiao Zheng sold and transferred two TRT equipment systems (the “Assets”)
amounting to $9,677,420 (equivalent to RMB 72,000,000) to the Company for
7,867,821 shares of common stock of the Company at a 23-days weighted average
market price of $1.23 per share. Under the same Agreement A, the Company
subsequently sold and transferred to Shanghai TCH the aforementioned Assets for
$9,677,420 (equivalent to RMB 72,000,000). Currently, the management of Shanghai
TCH has no intention to use these Assets on any new projects.
Also on
November 14, 2007, the Company entered into a Share Purchase Agreement (the
“Agreement B”) with Hanqiao Zheng for a cash investment of $4,032,258 for
3,278,259 shares of common stock of the Company issued at a 23-days weighted
average market price of $1.23 per share.
12
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 to the Investors a 10% Secured
Convertible Promissory Note 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 $5,000,000, and (ii) the issuance
and sale by the Company to the Investors of a 5% Secured Convertible Promissory
Note 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% and matured on November 16, 2009. The principal face
amount of the First Note, together with any interest thereon was convertible 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 had no embedded beneficial conversion feature (“BCF”) because the
conversion price was less than the quoted market price at the time of the
issuance. Accordingly, the BCF 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 BCF. 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 (the “Amendment”). Under the terms of the Amendment, (i) the
Company issued and the Investors subscribed for 4,066,706 shares of common stock
of the Company, at $1.23 per share for $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 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 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% and matures on April 29, 2011. The principal
face amount of the Second Note, together with any interest thereon, is
convertible 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 BCF 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 (the “Rescission”) to rescind the conversion of the First
Note and the issuance of conversion shares of Common Stock at the Second Closing
pursuant to the Amendment. The Company and the Investors rescinded the
conversion of $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 was recorded as a decrease in
interest expense for the period. At the Rescission closing, the Company repaid
in full the First Note and issued to the Investors 4,065,040 shares of Common
Stock at $1.23 per share for $5,000,000. This was done through a
cross receipt arrangement; the amortized portion of BCF was reversed to
additional paid in stock. The Company concluded that in substance the
transaction resulted in the conversion of the first $5,000,000 note into common
stock and that the remaining BCF of $3,472,603 at the date of conversion should
have been expensed.
13
On
November 13, 2007, the Company approved the 2007 Non-statutory Stock Option Plan
(the “2007 Plan”). Pursuant to the 2007 Plan, the Company may issue stock, or
grant options to acquire the Company’s common stock, par value $0.001 (the
“Stock”), with an aggregate amount of 3,000,000 shares of the Stock, from time
to time to employees and directors of the Company or other individuals,
including consultants or advisors, all on the terms and conditions set forth in
the 2007 Plan. The exercise price of the options is the closing price per share
of the Company’s common stock on the grant date. On August 4, 2008, the Company
approved the forms of Nonstatutory Stock Option Agreement – Manager Employee and
Nonstatutory Stock Option Agreement – Non-Manager Employee for grants under the
2007 Plan. The vesting terms of option grants under the 2007 Plan are
subject to the 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 on the first
year anniversary of the grant date. An additional 50% of the total stock options
shall vest and become exercisable on 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. Accelerated vesting of options may also
occur upon a change in control or termination of employment due to death or
disability.
The
Company issued 3,278,259 shares of its Common Stock to Mr. Hanqiao Zheng, a
major shareholder of the Company as discussed above, 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.
On April
29, 2009, we issued an 8% Secured Convertible Promissory Note of $3 million to
CAGP with a maturity of April 29, 2012. The note holder has the right
to convert all or any part of the aggregate outstanding principal amount of this
note, together with interest, if any, into shares of the Company’s common stock,
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 on a date prior to March 30, 2010) and prior to
the maturity date (or such later date on which this note is paid in full), at a
conversion price per share of common stock equal to US $0.80. The
conversion feature of this note is not beneficial to the holder as the stock
price on April 29, 2009 was $0.47.
On April
29, 2009, the Company and CAGP amended and restated the Second
Note. The Conversion Rights and Conversion Price were amended so that
the holder of the Second Note has the right, but not the obligation, to convert
all or any part of the aggregate outstanding principal amount of the Second
Note, together with interest, into shares of the Company’s common stock, 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 on a date prior to March 30, 2010) and prior to
the maturity date (or such later date on which this Note is paid in full), at
the following conversion price: (a) an amount equal to (i) the Company’s net
profit, adjusted in accordance with the Second Note, multiplied by (ii) 5.5, and
less (iii) the principal amount of the Second Note, together with accrued
interest, divided by (b) the then total shares of the Company’s common stock
outstanding on a fully-diluted basis.
On April
29, 2009, to the Company also agreed with the Investors to amend and restate the
Registration Rights Agreement for the holder of the convertible notes to amend
the rights for demand registration by certain investors and the applicable
liquidated damages for the Company if it fails to timely comply with the demand
for registration.
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 of $2 million, or $0.85 per share.
14
Equity
Compensation Plan Information
Information
about our equity compensation plans at December 31, 2009 that were either
approved or not approved by our shareholders is as follows:
|
Plan Category
|
Number of
securities
to be issued
upon
exercise of
outstanding
options
|
Weighted-average
exercise price of
outstanding options
|
Number of
securities
remaining
available
for future
issuance
under equity
compensation
plans
|
|||||||||
|
Equity
compensation plans approved by security holders
|
- | - | - | |||||||||
|
Equity
compensation plans not approved by security holders
|
3,000,000 | $ | 0.95 | 0 | ||||||||
|
Total
|
3,000,000 | $ | 0.95 | 0 | ||||||||
Not
applicable.
Note
Regarding Forward-Looking Statements
This
annual report on Form 10-K 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
risks contained in Item 1A. “Risk Factors” and the section “results of
operations” below). 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.
15
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. (“Shanghai TCH”), is in the business of
selling and leasing energy saving systems and equipment. 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 to hold a
100% equity interest in Shanghai TCH. Shanghai 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 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” (codified in Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 360).
On April
8, 2007, our Board of Directors approved and made effective a TRT Project
Joint-Operation Agreement (“Joint-Operation Agreement”) which was conditionally
entered on February 1, 2007 between Shanghai TCH and Xi’an Yingfeng Science and
Technology Co., Ltd.(“Yingfeng”). Yingfeng is a Chinese company that is located
in Xi’an, Shaanxi Province, China, which is engaged in the business of
designing, selling, installing, and operating TRT systems and other renewable
energy products.
Under the
Joint-Operation Agreement, Shanghai TCH and Yingfeng jointly pursued a top gas
recovery turbine project (“Project”) to design, construct, install and operate a
TRT system for Xingtai Iron and Steel Company, Ltd. (“Xingtai”). This project
was initiated by a Contract to Design and Construct TRT System (“Project
Contract”) entered by Yingfeng and Xingtai on September 26, 2006. Due to
Yingfeng’s lack of capital in pursuing this Project alone, Yingfeng sought
Shanghai TCH’s cooperation. After intensive and substantial inquiry and
assessment, Shanghai TCH agreed to pursue this project with Yingfeng as a joint
venture. Under the terms of the Joint-Operation Agreement, Shanghai TCH provided
various forms of investments and properties into the Project including cash,
hardware, software, equipment, major components and devices. In return, Shanghai
TCH obtained all the rights, titles, benefits and interests that Yingfeng
originally had under the Project Contract, including but not limited to the
regular cash payments made by Xingtai and other property rights and
interests.
On
October 31, 2007, Shanghai TCH entered an asset-transfer agreement with Yingfeng
to transfer from Yingfeng to Shanghai TCH all electricity-generating related
assets owned by Yingfeng. As the result, the contractual relationships between
Shanghai TCH and Yingfeng under the TRT Project Joint-Operation Agreement
entered on April 8, 2007 were terminated.
In
November 2007, Shanghai TCH signed a cooperative agreement with Shengwei Group
to build two sets of 12MW pure low temperature cement waste heat power generator
systems (“CHPG”) for Shengwei’s two 2,500-tons-per-day cement manufacturing
lines in Jin Yang and for a 5,000-tons-per-day cement manufacturing line in Tong
Chuan. Total investment in these projects will be approximately
$12,593,000 (RMB 93,000,000). At the end of 2008, construction of the
CHPG in Tong Chuan was completed at a cost of approximately $6,191,000 (RMB
43,000,000) and put into operation. Under the original agreement, the
ownership of the power generator system would belong to Shengwei from the date
the system was put into service. Shanghai TCH is responsible for the
daily maintenance and repair of the system, and charges Shengwei a 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 Shengwei
of a properly functioning 5,000-tons-per-day cement manufacturing line and not
less than 7,440 heat hours per year for the electricity generator
system. Shengwei Group collateralized the cement manufacturing line
in Tong Chuan 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, Shanghai TCH will have no
further obligations under the cooperative agreement. On May 20, 2009,
Shanghai TCH entered into a supplementary agreement with Shengwei Group to amend
the timing for title transfer to the end of the lease term. In addition, the
supplementary agreement provided that Shanghai TCH will charge Shengwei based on
actual power usage subject to a minimum of $0.31 million (RMB 2.1
million) per month during the operating period.
16
On
June 29, 2009, construction of the CHPG in Jin Yang was completed at a cost
of approximately $7,318,000 (RMB 50,000,000) and put into
operation. Shanghai TCH charges Shengwei a technical service fee of
$336,600 (RMB 2,300,000) monthly for the sixty months of the lease
term. Shengwei has the right to purchase the ownership of the CHPG
systems for $29,000 (RMB 200,000) at the end of lease term. Shengwei is required
to provide assurance of properly functioning 5,000-tons-per-day cement
manufacturing lines and not less than 7,440 heat hours per year for the
CHPG. Shengwei Group collateralized the cement manufacturing lines in
Jin Yang to guarantee its obligations to provide the minimum electricity income
from the power generator system under the agreement during the operating
period. Effective July 1, 2009, Shanghai TCH outsourced the operation
and maintenance of the CHPG systems in Tong Chuan and JinYang to a third party
for total of $732,000 (RMB 5,000,000) per year.
On April
14, 2009, the Company incorporated a joint venture (“JV”) with Erdos Metallurgy
Co., Ltd. (“Erdos”) to recycle waste heat from Erdos 's metal
refining plants to generate power and steam, which will then be sold back to
Erdos. The name of the JV is Inner Mongolia Erdos TCH Energy Saving
Development Co., Ltd (“Erdos TCH”) with a term of 20 years, and the registered
capital of the JV is $2,635,000 (RMB 18,000,000). On September 30,
2009, Xi’an TCH Energy Technology Co., Ltd. (“Xi’an TCH”) injected additional
capital of $4.03 million (RMB 27,500,000). In November of 2009, Xi’an TCH
injected further capital of $5.05 million (RMB 34,500,000). As of December 31,
2009, total registered capital is $11.71 million (RMB 80,000,000), of which,
$11.45 million (RMB 78,200,000) was from Xi’an TCH, and $0.26 million (RMB
1,800,000) was from Erdos. Total investment for the project is estimated at
approximately $74 million (RMB 500 million) with an initial investment of $17.55
million (RMB 120,000,000). Erdos contributed 10% of the total
investment of the project, and Xi'an TCH contributed 90% of the total
investment. Xi'an TCH and Erdos will receive 80% and 20% of the profit from the
JV, respectively, until Xi'an TCH has received a complete return on its
investment. Xi'an TCH and Erdos will then receive 60% and 40% of the
profit from the JV, respectively. The profits to be distributed will be computed
based on Chinese generally accepted accounting principles. The main difference
between US GAAP and Chinese GAAP with regards to Erdos is a sales-type lease
under US GAAP is treated as an operating lease under Chinese
GAAP. When the term of the JV expires, Xi'an TCH will transfer its
equity in the JV to Erdos at no additional cost.
At the
end of 2009, Erdos TCH completed the first 9MW power station of Phase I of the
project and put it into operation. The Phase I includes two 9-MW units for a
combined 18-MW power capacity. Pursuant to the Co-operation Agreement and
the supplement agreements signed between Erdos and Erdos TCH, Erdos shall
purchase all the electricity and steam to be generated from the JV’s power
generation projects. Erdos TCH leased the two 9 MW units to Erdos and will be
responsible for the operation and maintenance of the units. For each phase of
the project, the lease term is 20 years starting from the date of completion of
the phase. Erdos agreed to pay a fixed minimum of $0.22 million (RMB 1.5
million) per month for each 9MW capacity power generation unit. In addition
Erdos will pay the actual amount if the actual sale of the electricity generated
is more than $0.22 million (RMB 1.5 million) monthly per unit. After 20 years,
the units will be transferred to Erdos without any charge.
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 subleased for higher rental income under one-year,
non-cancellable leases. The Company did not renew its lease when it expired in
April 2009, and as a result, the sublessee was unable to renew its lease with
the Company.
17
On
September 30, 2009, Xi’an TCH delivered to Shenmu County Jiujiang Trading Co.,
Ltd. (“Shenmu”) a set of 18 megawatt capacity Waste Gas Power Generation
(“WGPG”) power generating systems pursuant to a Cooperative Contract on
Coke-oven Gas Power Generation Project (including its Supplementary Agreement)
and a Gas Supply Contract for Coke-oven Gas Power Generation
Project. The Contracts are for 10 years and provide that Xi’an TCH
will recycle coke furnace gas from the coke-oven plant of Shenmu to generate
power, which will be supplied back to Shenmu. Shenmu agrees to supply
Xi’an TCH the coke-oven gas free of charge. Under the Contracts,
Shenmu will pay the Company an annual “energy-saving service fee” of
approximately $5.6 million in equal monthly installments for the life of the
Contracts, as well as such additional amount as may result from the supply of
power to Shenmu in excess of 10.8 million kilowatt hours per
month. The Company is responsible for operating the systems and will
do so through an unrelated third party. Shenmu guarantees that monthly gas
supply will not be lower than 21.6 million standard cubic meters. If gas supply
is less, Shenmu agrees to pay Xi’an TCH energy-saving service fee described
above or up to 10.80 million kilowatt-hours per month. Xi’an TCH maintains the
ownership of the project throughout the term of the Contracts, including the
already completed investment, design, equipment, construction and installation
as well as the operation and maintenance of the project. At the end
of the 10-year term, ownership of the systems transfers to Shenmu at no
charge. Shenmu gave a lien on its production line to guarantee its
performance under the Contracts. Shenmu’s three major shareholders
provide an unlimited joint liability guarantee to Xi’an TCH for Shenmu’s
performance under the Contracts and the Yulin Huiyuan Group, an independent
third party, provides a guarantee to Xi’an TCH for Shenmu’s performance under
the Contracts.
In
November 2008, the Chinese government announced a series of economic stimulus
plans aimed at bolstering its weakening economy – a sweeping move to help fight
the effects of the global slowdown. In the announcements, China estimated it
would spend $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 ten 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
(“US 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, Shanghai TCH, and Shanghai TCH’s subsidiaries
Xi’an TCH Energy Tech Co., Ltd. (“Xi’an TCH”) and Xingtai Huaxin Energy Tech
Co., Ltd. (“Huaxin”), and Xi’an TCH’s 90% owned subsidiary Erdos TCH, and Sifang
Holding’s subsidiary, Huahong New Energy Technology Co., Ltd. (“Huahong”). Xi’an
TCH, Huaxin, Erdos TCH and Huahong engage in the same business as Shanghai TCH.
Substantially all of the Company’s revenues are derived from the operations of
Shanghai TCH and its subsidiaries, which represent substantially all of the
Company’s consolidated assets and liabilities as of December 31, 2009 and 2008,
respectively. All significant inter-company accounts and transactions were
eliminated in consolidation.
18
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 management’s 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, receivables 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 People’s Republic of China (“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 constructs and leases TRT, CHPG, WGPG and other waste heat power
generating systems to its customers. The Company usually transfers all benefits,
risks and ownership of the TRT, CHPG, WGPG or other waste heat power generation
system to its customers at the end of each lease. The Company’s
investment in these projects is recorded as investment in sales-type leases in
accordance with SFAS No. 13, “Accounting for Leases” (codified in FASB ASC Topic
840) and its various amendments and interpretations. The Company manufactures
and constructs the TRT, CHPG and WGPG systems and waste heat power generating
systems, and finances its customers for the price of the systems. The
sales and cost of sales 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.
19
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 exchange rate for the conversion of RMB to USD after
the balance sheet date.
The
Company uses SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC
Topic 220). 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
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning
of those fiscal years. The Company is currently evaluating the impact
of this ASU on its consolidated financial statements.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168 , “The FASB
Accounting Standards Codification™ and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative GAAP for nongovernmental entities to be only comprised
of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC
registrants, guidance issued by the SEC. The Codification is a
reorganization and compilation of all then-existing authoritative GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of GAAP in Notes to the Consolidated Financial
Statements.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”), codified as FASB ASC Topic 810-10, which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. SFAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 167 will have an impact on its financial condition, results of operations
or cash flows.
20
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB
Topic ASC 860, which requires entities to provide more information regarding
sales of securitized financial assets and similar transactions, particularly if
the entity has continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 166 will have an impact on its financial condition, results of operations
or cash flows.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in
FASB ASC Topic 855-10-05, which provides guidance to establish general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
SFAS 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS 165 is effective for interim and annual periods ending after June 15, 2009,
and accordingly, the Company adopted this pronouncement during the second
quarter of 2009. SFAS 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued.
In April
2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic
825-10-50. This FSP essentially expands the disclosure about fair value of
financial instruments that were previously required only annually to also be
required for interim period reporting. In addition, the FSP requires certain
additional disclosures regarding the methods and significant assumptions used to
estimate the fair value of financial instruments. These additional disclosures
are required beginning with the quarter ending June 30, 2009.
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB
ASC Topic 320-10. This FSP modifies the requirements for recognizing
other-than-temporarily impaired debt securities and changes the existing
impairment model for such securities. The FSP also requires additional
disclosures for both annual and interim periods with respect to both debt and
equity securities. Under the FSP, impairment of debt securities will be
considered other-than-temporary if an entity (1) intends to sell the security,
(2) more likely than not will be required to sell the security before recovering
its cost, or (3) does not expect to recover the security’s entire amortized cost
basis (even if the entity does not intend to sell). The FSP further indicates
that, depending on which of the above factor(s) causes the impairment to be
considered other-than-temporary, (1) the entire shortfall of the security’s fair
value versus its amortized cost basis or (2) only the credit loss portion would
be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP 115-2 requires entities to initially
apply the provisions of the standard to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulate other comprehensive income. The Company adopted FSP No. SFAS 115-2
and SFAS 124-2 beginning April 1, 2009. This FSP had no material impact on the
Company’s financial position, results of operations or cash flows.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP
No. SFAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on the Company’s financial position, results of
operations or cash flows.
21
RESULTS
OF OPERATIONS
Comparison
of the Years Ended December 31, 2009 and 2008
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
2009
|
2008
|
|||||||||||||||
|
$
|
% of Sales
|
$
|
% of Sales
|
|||||||||||||
|
Sales
|
$ | 44,235,208 | 100 | % | $ | 19,217,663 | 100 | % | ||||||||
|
Sales
of Products
|
38,286,835 | 87 | % | 8,048,956 | 42 | % | ||||||||||
|
Rental
income
|
5,948,373 | 13 | % | 11,168,707 | 58 | % | ||||||||||
|
Cost
of sales
|
(33,601,015 | ) | 76 | % | (14,001,736 | ) | 73 | % | ||||||||
|
Cost
of products
|
(29,451,411 | ) | 77 | % | (6,191,505 | ) | 77 | % | ||||||||
|
Rental
expense
|
(4,149,604 | ) | 70 | % | (7,810,231 | ) | 70 | % | ||||||||
|
Gross
profit
|
10,634,193 | 24 | % | 5,215,927 | 27 | % | ||||||||||
|
Interest
income on sales-type leases
|
7,052,574 | 16 | % | 2,285,582 | 12 | % | ||||||||||
|
Total
operating income
|
17,686,767 | 40 | % | 7,501,509 | 39 | % | ||||||||||
|
Total
operating expenses
|
(4,194,632 | ) | 9 | % | (3,354,028 | ) | 17 | % | ||||||||
|
Income
from operations
|
13,492,135 | 31 | % | 4,147,481 | 22 | % | ||||||||||
|
Total
non-operating expenses
|
(483,992 | ) | (1 | )% | (4,734,308 | ) | (25 | )% | ||||||||
|
Income
(loss) before income tax
|
13,008,143 | 30 | % | (586,827 | ) | (3 | )% | |||||||||
|
Income
tax expense
|
2,946,387 | 7 | % | 1,632,754 | 9 | % | ||||||||||
|
Net
income (loss) attributable to noncontrolling
interest
|
352,480 | 1 | % | 83 | - | |||||||||||
|
Net
income (loss)
|
$ | 9,709,276 | 22 | % | $ | (2,219,664 | ) | (12 | )% | |||||||
SALES.
Net sales for the
year ended December 31, 2009 were $44.24 million while our net sales for the
year ended December 31, 2008 were $19.22 million, an increase in revenues
of $25.02 million. The increase was due to selling one energy saving
system (Jin Yang CHPG system) through a sales-type lease at the end of June of
2009, one Shenmu WGPG system through a sales-type lease at the end of September
of 2009, and the completion and sale of one heat/waste gas recovery power
generation system in Erdos Phase I project in December of 2009 in addition to
two TRT systems sold under a sales-type leases in 2007 and one energy saving
system (Tong Chuan CHPG system) sold under a sales-type lease at the end of
2008. During the year ended December 31, 2009, we recorded $9.51 million
revenue from the sale of the Jin Yang CHPG system, $18.43 million revenue from
the sale of the Shenmu WGPG system and $10.34 million revenue from sale of the
Erdos Phase-I recycling waste heat power generating system, and rental
income of approximately $5.95 million from leasing our two power generating
systems through an operating lease. The operating lease term ended in April
of 2009. In 2008, we sold one CHPG system through sales-type leasing
with sales of approximately $8.05 million and rental income of $11.17 million
from leasing our two power generating systems. Sales and cost of sales are
recorded at the time of leases; the interest income from the sales-type leases
is our other major revenue source in addition to sales
revenue.
COST OF SALES.
Cost of
sales for the year ended December 31, 2009 was $33.6 million while our cost of
sales for the same period in 2008 was $14 million, an increase
of $19.6 million. The increase was mainly due to the cost of sales
for sales-type leases of the Jin Yang CHPG system, Shenmu WGPG system and Erdos
Phase-I recycling waste heat power generating system.
GROSS PROFIT
. Gross profit
was $10.63 million for the year ended December 31, 2009 as compared to $5.22
million for the same period in 2008, representing a gross margin of
approximately 24% and 27% for the year ended December 31, 2009 and 2008,
respectively. The increase in gross profit was mainly from the sales-type leases
of the Jin Yang CHPG system
,
Shenmu WGPG system and Erdos
Phase-I power generating system which have a profit margin of about 23%, and our
operating lease business in connection with leasing out two energy recycling
power generation equipment systems from April 2008 to April 2009 with a profit
margin of about 30%.
OPERATING INCOME
. Operating
income was $17.69 million for the year ended December 31, 2009 while our
operating income for the same period in 2008 was $7.50 million, an increase
of $10.19 million. The growth in operating income was mainly due to
the increase in sales and interest income from selling and leasing our energy
saving systems through sales-type leases. Interest income on sales-type leases
for the year ended December 31, 2009 was $7.05 million, an $4.76 million
increase from $2.29 million for the same period in
2008.
22
OPERATING
EXPENSES.
Operating expenses consisted of selling, general and
administrative expenses totaling $4.19 million for the year ended December 31,
2009 as compared to $3.35 million for the same period in 2008, an increase
of $840,604 or 25%. This increase was mainly due to increased
expenses in connection with our sales of three energy recycling systems through
sales-type leases in 2009. The Company recorded $1.79 million compensation
expense for stock options and warrants during the year ended December 31, 2009,
compared to $1.44 million compensation expense for employee stock options plan
for the same period in 2008.
NET INCOME.
Our net
income for the year ended December 31, 2009 was $9.71 million as compared to a
$2.22 million net loss for the same period in 2008, an increase
of $11.93 million. This increase in net income was mainly due to
increased interest income from sales-type leases of the energy saving systems
and sales of three systems in 2009. In the same period of 2008, we
only sold one energy saving system through a sales-type lease, and we recorded a
$4.68 million one-time expense for the unamortized portion of the beneficial
conversion feature of our first $5 million convertible note and compensation
expense of the fair value of stock options of $1.44
million.
LIQUIDITY AND CAPITAL
RESOURCES
Comparison
of the Years Ended December 31, 2009 and 2008
As of
December 31, 2009, the Company had cash and cash equivalents of $1,111,943. At
December 31, 2009, other current assets were $8.27 million and current
liabilities were $17.13 million. Working capital amounted to negative
$7.75 million at December 31, 2009. The ratio of current assets to current
liabilities was 0.55:1 at the year ended December 31, 2009.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Cash
provided by (used in):
|
||||||||
|
Operating
Activities
|
$ | 15,906,816 | $ | 1,958,334 | ||||
|
Investing
Activities
|
(54,903,664 | ) | (10,896,198 | ) | ||||
|
Financing
Activities
|
32,841,386 | 13,957,150 | ||||||
Net cash
flow provided by operating activities was $15.91 million during the
year ended December 31, 2009, as compared to $1.96 million used in the same
period of 2008. The increase in net cash inflow was mainly due to the
significant increase in net income as well as less payment made for prepaid
expenses and accounts payable as compared to 2008.
Net cash
flow used in investing activities was $54.9 million in the year ended December
31, 2009, as compared to $10.9 million used in the same period of 2008. The
increase of net cash flow used in investing activities was mainly due to our
investment of $18.8 million in Jingyang CHPG, Shenmu WGPG and Erdos Phase-I
recycling waste heat power generating system, and $34.6 million payment for
construction in progress of Erdos Phase II and III projects and Zhonggang Binhai
project, as well as restricted cash of $1.46 million in the bank as collateral
for the same amount of bank acceptances in order to support our payment
obligations to our vendors.
Net cash
flow provided by financing activities was $33.0 million for the year ended
December 31, 2009 compared to net cash provided by financing activities of
$13.96 million for 2008. The $33.0 million cash inflow from financing activities
mainly consisted of common stock issued for $2 million, convertible note issued
for $3 million, $1.46 million bank acceptance and trust plan loan of $25.56
million, while in the same period of 2008 we received $14 million from the
issuance of common stock and convertible notes.
The Company’s cash balance hit its
lowest point during the period at the end of 2009. We believe, however, that our
cash resources will continue to increase and our cash position will improve
through 2010 due to the steady revenue stream from our current operating
projects. As of December 31, 2009, we have six sales-type leases to
generate cash inflow, which consisted of two TRT systems, two CHPG systems, one
WGPG system and one recycling waste heat power generating
system. The company also is committed with Beijing Trust for
additional loan capital raising in 2010 under the Trust Plan for the remaining
phase of the Erdos project. Additionally, the Company may take advantage
of our line of credit, discussed below, if needed for instant working
capital. We believe we are going to have sufficient cash resources to
cover our anticipated capital expenditures and operating activities
for 2010.
23
We do not
believe inflation has had a significant negative impact on our results of
operations during 2009.
Off-Balance Sheet
Arrangements
Other
than as otherwise described herein, we have not entered into any 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.
Convertible Notes
Payable
On April
29, 2008, we issued and sold to certain investors a 5% Secured Convertible
Promissory Note 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
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.
On April
29, 2009, CREG issued an 8% Secured Convertible Promissory Note of $3 million to
Carlyle Asia Growth Partners III, L.P. with maturity on April 29, 2012. The note
holder has the right to convert all or any part of the aggregate outstanding
principal amount of this note, together with interest, if any, into shares of
the Company’s common stock, 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 on a date prior to March
30, 2010) and prior to the maturity date (or such later date on which this note
is paid in full), at a conversion price per share of common stock equal to US
$0.80.
Revolving Financing
Agreement
On
October 26, 2009, Xi’an TCH and Erdos TCH entered into a one-year Non Promissory
Short Term Revolving Financing Agreement (the “Citi Agreement”), dated and
effective from October 12, 2009, with Citi Bank (China) Co., Ltd., Shanghai
Branch (“Citi”). The maximum financing provided under in
the Citi Agreement is RMB 20 million ($2.9 million). The Citi
Agreement allows for Xi’an TCH and Erdos TCH to borrow money to maintain current
liquidity for notes receivable, such as trade notes payable to the
Company, or in order to capitalize on discounts for early payment of
accounts payable, such as for equipment or raw materials. The maximum maturity
date for each financing is six months. The interest rate for any note discount
financing will be determined by the relevant note discount documents and the
interest rate for accounts payable financing will be determined by the
relevant accounts payable documents.
The
proceeds received under the financing arrangement are to be used for working
capital and to purchase raw materials. The amounts received pursuant to the Citi
Agreement are secured by an account maintained by the Company with Citi,
accounts receivable of Xi’an TCH and Erdos TCH and the guarantees of Shanghai
TCH Energy Technology Co., Ltd , an affiliate of Xi’an TCH, and Guohua Ku, the
Chairman of the Board and Chief Executive Officer of the Company.
Citi has
the discretion to accelerate maturity date of the outstanding loans and request
for payment as well as to cancel or terminate the
financing. Xi’an TCH and Erdos TCH have agreed not to use the
loan to pay for related party transactions
without Citi’s
permission. Xi’an TCH and Erdos TCH also have agreed to deposit their
income from sales of products and services into their accounts with Citi with a
combined average monthly income amount of no less than RMB 5 million
($0.73 million). Xi’an TCH and Erdos TCH may not draw on the
Citi Agreement until the monthly income amount reaches 80% of expected income
amount as set forth in the Citi Agreement for that month. Each loan
of Xi’an TCH and Erdos TCH should be no more than 35% of the maximum financing
limit. If the single monthly income amount for Xi’an TCH and Erdos TCH is less
than 70% of the expected income amount of that month, Citi has the right to
suspend, cancel or terminate the financing and accelerate the maturity date
of any outstanding amount and request for immediate reimbursement. As
of December 31, 2009, Xi’an TCH and Erdos TCH had no amounts outstanding under
the Citi Agreement
Notes Payable – Bank
Acceptances
We had
notes payable for bank acceptances of $1,461,060 at December 31, 2009, which was
collateralized by depositing the same amount of cash in the bank as restricted
cash. We endorsed the bank acceptances to vendors as payment of our
obligations. Most of the bank acceptances have a maturity of less
than six months.
Loan Payable – Collective
Capital Trust Plan
On
December 3, 2009, the Company and Beijing International Trust Co., Ltd.
("Beijing Trust") formed a Low Carbon Fortune-Energy Recycling No. 1 Collective
Capital Trust Plan ("Plan"). Under the Plan, Beijing Trust raised RMB
181,880,000 (US$ 26.75 million) through the sale of 181,880,000 total trust
units at RMB 1 per unit. All amounts raised under the Plan are loaned to Erdos
TCH in connection with its waste heat power generation projects Phase II and
Phase III construction and operation.
24
The Plan
included 145,500,000 category A preferred trust units ($ 21.4 million),
consisting of category A1 preferred trust 12,450,000 units (US$ 1.8 million),
category A2 preferred trust 15,000,000 units (US$ 2.2 million), category A3
preferred trust 118,050,000 units (US$ 17.4 million); and 36,380,000 category B
secondary trust units (US$ 5.35 million), consisting of category B1 secondary
trust 9,100,000 units (US$ 1.34 million) and category B2 secondary trust
27,280,000 units (US$ 4.01 million). The B1 units have been purchased by members
of management of Erdos TCH and the B2 units have been purchased by Xi'an TCH.
Under the Agreement, the annual base interest rate is 9.94% for A1 preferred
trust fund units with a term of two years, 11% for A2 preferred trust fund units
with a term of three years, 12.05% for A3 preferred trust fund units and 8.35%
for the category B secondary trust fund units, each with a term of four
years.
Erdos TCH
gave a lien on its equipment, assets and accounts receivable to guarantee the
loans under the Agreement. Xi'an TCH and Mr. Guohua Ku (the Company’s CEO) also
gave unconditional and irrevocable joint liability guarantees to Beijing Trust
for Erdos TCH's performance under the Agreement. Erdos (the minority shareholder
and customer of Erdos TCH) provided a commitment letter on minimum power
purchase from Erdos TCH.
On
December 18, 2009, an additional RMB 25,000,000 (US$3.68 million) was raised to
support the Company's Erdos Power Generation Projects. The Company
sold 25,000,000 trust units at RMB 1 per unit which included 20,000,000 category
A1 preferred trust units (US$ 2.94 million) and 5,000,000 category B2 secondary
trust units (US$ 0.74 million). The B2 units were purchased by Xi'an
TCH.
Beside
the base interest rate, Erdos TCH agrees to share the benefits from the Clean
Development Mechanism (“CDM”) under the Kyoto Protocol
equally with Beijing
Trust during the term of the loan, as well as to pay a management incentive
benefit to be calculated by a formula tied to Erdos TCH’s net profit and average
registered capital of the fiscal year prior to the maturity date of the loan.
Under the formula the management incentive benefit is paid at the end of year
four and can range between 0% and 100% of the net profit of Erdos TCH in the
fiscal year prior to the maturity date of the loan depending upon the amount of
average contributed capital of Erdos TCH at the time of
measurement.
At
December 31, 2009, the Company sold 206,880,000 units for RMB 206,880,000 ($30.3
million), of which, 9,100,000 units ($1.3 million) was purchased by the
management of Erdos TCH, 32,280,000 units purchased by Xi’an TCH for $4.7
million was considered as an investment by Xi’an TCH into Erdos TCH,
accordingly, was eliminated in the consolidation. The net long term loan payable
under this trust plan was $25.6 million at December 31, 2009.
COMMITMENTS
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”) in Cangzhou City,
Hebei Province, a world-class nickel- alloy 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-alloy 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. Total investment in this project is
$7.8 million (RMB 55 million). Construction on the project started in March of
2009, but the Company did not incur any material expenses for the project in
2009; the Company originally expected the completion of the project within 11
months from the construction commencement date. The construction was
delayed due to a delay in the installation of furnace cove by Zhonggang. The
construction was resumed in February of 2010; the Company expects the project to
be completed in the beginning of 2011. Zhonggang agrees to purchase all the
electricity and steam to be generated from the system for the term of 9 years,
at a pre-agreed price. Zhonggang also agrees to guarantee the
minimal working hours of supplying heat (6,800 hours per year)
and the minimum monthly payment of electricity and steam fees,
which is no less than $365,000 (RMB 2.5 million) per month, By
the end of the term, the system shall be transferred
to Zhonggang at a nominal price of RMB
1.
Not
applicable.
25
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Shareholders of China Recycling Energy Corporation:
We have
audited the accompanying consolidated balance sheets of China Recycling Energy
Corporation (the “Company” or “CREG”) and subsidiaries as of December 31, 2009
and 2008 and the related consolidated statements of income and other
comprehensive income, shareholders’ equity, and cash flows for the years ended
December 31, 2009 and 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of China Recycling
Energy Corporation and Subsidiaries as of December 31, 2009 and 2008 and the
consolidated results of their operations and their consolidated cash flows for
the years ended December 31, 2009 and 2008, in conformity with U.S. generally
accepted accounting principles.
Goldman
Parks Kurland Mohidin
Encino,
California
March 15,
2010
26
CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
|
AS
OF DECEMBER 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
& cash equivalents
|
$ | 1,111,943 | $ | 7,267,344 | ||||
|
Restricted
cash
|
1,461,659 | - | ||||||
|
Investment
in sales-type leases, net
|
4,396,395 | 1,970,591 | ||||||
|
Interest
receivable on sales-type leases
|
437,626 | 82,406 | ||||||
|
Prepaid
expenses
|
445,458 | 3,849,087 | ||||||
|
Other
receivables
|
1,524,949 | 102,850 | ||||||
|
Inventory
|
- | 10,534,633 | ||||||
|
Total
current assets
|
9,378,030 | 23,806,911 | ||||||
|
NON-CURRENT
ASSETS
|
||||||||
|
Investment
in sales-type leases, net
|
48,147,738 | 14,837,879 | ||||||
|
Advance
for equipment
|
- | 2,642,889 | ||||||
|
Property
and equipment, net
|
97,311 | 95,359 | ||||||
|
Construction
in progress
|
34,858,845 | 3,731,016 | ||||||
|
Intangible
assets, net
|
- | 3,482 | ||||||
|
Total
non-current assets
|
83,103,894 | 21,310,625 | ||||||
|
TOTAL
ASSETS
|
$ | 92,481,924 | $ | 45,117,536 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable
|
$ | 3,583,219 | $ | 1,186,902 | ||||
|
Notes
payable - bank acceptances
|
1,461,659 | - | ||||||
|
Unearned
revenue
|
- | 658,415 | ||||||
|
Taxes
payable
|
681,707 | 1,313,949 | ||||||
|
Accrued
liabilities and other payables
|
2,785,796 | 3,528,527 | ||||||
|
Advance
from related parties, net
|
468,475 | - | ||||||
|
Deferred
tax liability
|
148,193 | - | ||||||
|
Convertible
notes
|
8,000,000 | 5,000,000 | ||||||
|
Total
current liabilities
|
17,129,049 | 11,687,793 | ||||||
|
DEFERRED
TAX LIABILITY, NET
|
2,762,115 | 823,407 | ||||||
|
ACCRUED
INTEREST ON CONVERTIBLE NOTES
|
353,024 | 168,494 | ||||||
|
LOAN
PAYABLE
|
25,570,429 | - | ||||||
|
CONTINGENCIES
AND COMMITMENTS
|
||||||||
|
STOCKHOLDERS'
EQUITY
|
||||||||
|
Common
stock, $0.001 par value; 100,000,000 shares authorized, 38,778,035 and
36,425,094 shares issued and outstanding as of December 31, 2009 and 2008,
respectively
|
38,779 | 36,425 | ||||||
|
Additional
paid in capital
|
38,319,163 | 34,528,289 | ||||||
|
Statutory
reserve
|
2,497,724 | 1,319,286 | ||||||
|
Accumulated
other comprehensive income
|
3,709,490 | 3,582,587 | ||||||
|
Retained
earnings (deficit)
|
1,485,914 | (7,044,924 | ) | |||||
|
Total
Company stockholders' equity
|
46,051,070 | 32,421,663 | ||||||
|
Noncontrolling
interest
|
616,237 | 16,179 | ||||||
|
Total
equity
|
46,667,307 | 32,437,842 | ||||||
|
TOTAL
LIABILITIES AND EQUITY
|
$ | 92,481,924 | $ | 45,117,536 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
27
CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
|
YEARS
ENDED DECEMBER 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenue
|
||||||||
|
Sales
of systems
|
$ | 38,286,835 | $ | 8,048,956 | ||||
|
Rental
income
|
5,948,373 | 11,168,707 | ||||||
|
Total
revenue
|
44,235,208 | 19,217,663 | ||||||
|
Cost
of sales
|
||||||||
|
Cost
of systems
|
29,451,411 | 6,191,505 | ||||||
|
Rental
expense
|
4,149,604 | 7,810,231 | ||||||
|
Total
cost of sales
|
33,601,015 | 14,001,736 | ||||||
|
Gross
profit
|
10,634,193 | 5,215,927 | ||||||
|
Interest
income on sales-type leases
|
7,052,574 | 2,285,582 | ||||||
|
Total
operating income
|
17,686,767 | 7,501,509 | ||||||
|
Operating
expenses
|
||||||||
|
General
and administrative expenses
|
4,194,632 | 3,354,028 | ||||||
|
Total
operating expenses
|
4,194,632 | 3,354,028 | ||||||
|
Income
from operations
|
13,492,135 | 4,147,481 | ||||||
|
Non-operating
income (expenses)
|
||||||||
|
Interest
income
|
88,852 | 27,033 | ||||||
|
Interest
expense
|
(475,995 | ) | (4,787,292 | ) | ||||
|
Other
income
|
13,597 | 108,999 | ||||||
|
Other
expense
|
(107,680 | ) | (811 | ) | ||||
|
Exchange
loss
|
(2,766 | ) | (82,237 | ) | ||||
|
Total
non-operating expenses, net
|
(483,992 | ) | (4,734,308 | ) | ||||
|
Income
(loss) before income tax
|
13,008,143 | (586,827 | ) | |||||
|
Income
tax expense
|
2,946,387 | 1,632,754 | ||||||
|
Income
(loss) from operations
|
10,061,756 | (2,219,581 | ) | |||||
|
Less:
Income attributable to noncontrolling interest
|
352,480 | 83 | ||||||
|
Net
income (loss) attributable to China Recycling, Inc.
|
9,709,276 | (2,219,664 | ) | |||||
|
Other
comprehensive item
|
||||||||
|
Foreign
currency translation gain
|
126,903 | 1,864,327 | ||||||
|
Comprehensive
income (loss)
|
$ | 9,836,179 | $ | (355,337 | ) | |||
|
Basic
weighted average shares outstanding
|
38,068,929 | 32,095,814 | ||||||
|
Diluted
weighted average shares outstanding **
|
46,191,950 | 49,702,199 | ||||||
|
Basic
net earnings per share *
|
$ | 0.26 | $ | (0.07 | ) | |||
|
Diluted
net earnings per share *
|
$ | 0.21 | $ | (0.07 | ) | |||
|
*
|
Interest
expense on convertible notes are added back to net income for the
computation of diluted EPS.
|
|
*
|
Basic
and diluted loss per share are the same for 2008 because common stock
equivalent are anti-dilutive.
|
|
**
|
Diluted
weighted average shares outstanding includes estimated shares upon
conversion of the Second Note issued on April 29, 2008 with a conversion
price that is tied to audited 2009 after-tax
profits.
|
The
accompanying notes are an integral part of these consolidated financial
statements.
28
CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
YEARS
ENDED DECEMBER 31, 2009 AND 2008
|
Common stock
|
||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Paid in
capital
|
Statutory
reserves
|
Other
comprehensive
income
|
Accumulated
retained earning
(deficit)
|
Total
|
||||||||||||||||||||||
|
Balance
at January 1, 2008
|
25,015,089 | 25,015 | 19,070,908 | 832,467 | 1,718,260 | (4,338,441 | ) | 17,308,209 | ||||||||||||||||||||
|
Shares
issued for capital contribution
|
11,410,005 | 11,410 | 14,020,848 | - | - | - | 14,032,258 | |||||||||||||||||||||
|
Stock
compensation expense related to stock options
|
- | - | 1,436,533 | - | - | - | 1,436,533 | |||||||||||||||||||||
|
Net
loss for the year
|
- | - | - | - | - | (2,219,664 | ) | (2,219,664 | ) | |||||||||||||||||||
|
Transfer
to statutory reserves
|
- | - | - | 486,819 | - | (486,819 | ) | - | ||||||||||||||||||||
|
Foreign
currency translation gain
|
- | - | - | - | 1,864,327 | - | 1,864,327 | |||||||||||||||||||||
|
Balance
at December 31, 2008
|
36,425,094 | $ | 36,425 | $ | 34,528,289 | $ | 1,319,286 | $ | 3,582,587 | $ | (7,044,924 | ) | $ | 32,421,663 | ||||||||||||||
|
Shares
issued for capital contribution
|
2,352,941 | 2,354 | 1,997,646 | - | - | - | 2,000,000 | |||||||||||||||||||||
|
Compensation
expenses related to stock options and warrants
|
- | - | 1,793,228 | - | - | - | 1,793,228 | |||||||||||||||||||||
|
Net
income for the year
|
- | - | - | - | - | 9,709,276 | 9,709,276 | |||||||||||||||||||||
|
Transfer
to statutory reserves
|
- | - | - | 1,178,438 | - | (1,178,438 | ) | - | ||||||||||||||||||||
|
Foreign
currency translation gain
|
- | - | - | - | 126,903 | - | 126,903 | |||||||||||||||||||||
|
Balance
at December 31, 2009
|
38,778,035 | $ | 38,779 | $ | 38,319,163 | $ | 2,497,724 | $ | 3,709,490 | $ | 1,485,914 | $ | 46,051,070 | |||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
29
CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
|
YEARS
ENDED DECEMBER 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Income
(loss) including noncontrolling interest
|
$ | 10,061,756 | $ | (2,219,581 | ) | |||
|
Adjustments
to reconcile net income (loss) including noncontrolling interest to net
cash provided by operating activities:
|
||||||||
|
Depreciation
and amortization
|
35,121 | 18,079 | ||||||
|
Amortization
of discount related to conversion feature of convertible
note
|
- | 4,684,932 | ||||||
|
Stock
options and warrants expense
|
1,793,228 | 1,436,533 | ||||||
|
Accrued
interest on convertible notes
|
184,530 | 105,480 | ||||||
|
Changes
in deferred tax
|
2,085,709 | 823,407 | ||||||
|
(Increase)
decrease in current assets:
|
||||||||
|
Interest
receivable on sales-type lease
|
(355,220 | ) | 61,856 | |||||
|
Prepaid
expenses
|
3,166,691 | - | ||||||
|
Prepaid
equipment rent
|
- | (3,796,985 | ) | |||||
|
Other
receivables
|
(1,421,503 | ) | (66,659 | ) | ||||
|
Increase
(decrease) in current liabilities:
|
||||||||
|
Accounts
payable
|
2,394,223 | (1,245,854 | ) | |||||
|
Unearned
revenue
|
(658,762 | ) | 647,948 | |||||
|
Taxes
payable
|
(633,648 | ) | 707,013 | |||||
|
Accrued
liabilities and other payables
|
(745,309 | ) | 802,165 | |||||
|
Net
cash provided by operating activities
|
15,906,816 | 1,958,334 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Restricted
cash
|
(1,461,060 | ) | - | |||||
|
Increase
investment in subsidiary
|
(16,103 | ) | - | |||||
|
Gross
investment in sales-type leases
|
(18,796,831 | ) | (7,063,105 | ) | ||||
|
Acquisition
of property & equipment
|
(33,498 | ) | (115,350 | ) | ||||
|
Construction
in progress
|
(34,596,172 | ) | (3,717,743 | ) | ||||
|
Net
cash used in investing activities
|
(54,903,664 | ) | (10,896,198 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Notes
payable - bank acceptances
|
1,461,060 | - | ||||||
|
Issuance
of common stock
|
2,000,000 | 9,032,258 | ||||||
|
Convertible
notes
|
3,000,000 | 5,000,000 | ||||||
|
Proceeds
from loan (trust plan)
|
25,559,947 | - | ||||||
|
Advance
from (repayment to) related party
|
556,940 | (75,108 | ) | |||||
|
Cash
contribution from noncontrolling interest
|
263,439 | - | ||||||
|
Net
cash provided by financing activities
|
32,841,386 | 13,957,150 | ||||||
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
61 | 613,718 | ||||||
|
NET
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
(6,155,401 | ) | 5,633,004 | |||||
|
CASH
& CASH EQUIVALENTS, BEGINNING OF YEAR
|
7,267,344 | 1,634,340 | ||||||
|
CASH
& CASH EQUIVALENTS, END OF YEAR
|
$ | 1,111,943 | $ | 7,267,344 | ||||
|
Supplemental
Cash flow data:
|
||||||||
|
Income
tax paid
|
$ | 1,480,698 | $ | 152,881 | ||||
|
Interest
paid
|
$ | 358,789 | $ | - | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
30
CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 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 (“Shanghai TCH”), sells and leases
energy saving systems and equipment. On March 8, 2007, the Company
changed its name to “China Recycling Energy Corporation”.
On
February 1, 2007, the Company’s subsidiary, Shanghai TCH, entered into two top
gas recovery turbine systems (“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
Joint-Operation Agreement, Shanghai TCH and Yingfeng jointly pursued a top gas
recovery turbine project (“Project”) to design, construct, install and operate a
TRT system for Xingtai Iron and Steel Company, Ltd. (“Xingtai”). This Project
was initiated by a Contract to Design and Construct TRT System (“Project
Contract”) entered by Yingfeng and Xingtai on September 26, 2006. Due to
Yingfeng’s lack of capital in pursuing this Project alone, Yingfeng sought
Shanghai TCH’s cooperation. After intensive and substantial inquiry and
assessment, Shanghai TCH agreed to pursue this project with Yingfeng as a joint
venture. Under the terms of the Joint-Operation Agreement, Shanghai TCH provided
various forms of investments and properties into the Project including cash,
hardware, software, equipment, major components and devices. In return, Shanghai
TCH obtained all the rights, titles, benefits and interests that Yingfeng
originally had under the Project Contract, including but not limited to the
regular cash payments made by Xingtai and other property rights and
interests.
On
October 31, 2007, Shanghai TCH entered an asset-transfer agreement with Yingfeng
to transfer from Yingfeng to Shanghai TCH all electricity-generating related
assets owned by Yingfeng. As the result, the contractual relationships between
Shanghai TCH and Yingfeng under the TRT Project Joint-Operation Agreement
entered on April 8, 2007 were terminated.
In
November 2007, Shanghai TCH signed a cooperative agreement with Shengwei Group
to build two sets of 12MW pure low temperature cement waste heat power generator
systems (“CHPG”) for Shengwei’s two 2,500-tons-per-day cement manufacturing
lines in Jin Yang and for a 5,000-tons-per-day cement manufacturing line in Tong
Chuan. Total investment in these projects will be $12,593,000 (RMB
93,000,000). At the end of 2008, construction of the CHPG in Tong
Chuan was completed at a cost of $6,191,000 (RMB 43,000,000) and put into
operation. Under the original agreement, the ownership of the power
generator system would belong to Shengwei from the date the system was put into
service. Shanghai TCH is responsible for the daily maintenance and
repair of the system, and charges Shengwei a 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 Shengwei of a properly functioning
5,000-tons-per-day cement manufacturing line and not less than 7,440 heat hours
per year for the electricity generator system. Shengwei Group
collateralized the cement manufacturing line in Tong Chuan 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, Shanghai TCH will have no further obligations under the
cooperative agreement. On May 20, 2009, Shanghai TCH entered into a
supplementary agreement with Shengwei Group to amend the timing for title
transfer to the end of the lease term. In addition, the supplementary agreement
provided that Shanghai TCH will charge Shengwei based on actual power usage
subject to a minimum of $0.31 million (RMB 2.1 million) per
month during the operating period.
31
On June
29, 2009, construction of the CHPG in Jin Yang was completed at a cost of
approximately $7,318,000 (RMB 50,000,000) and put into operation. Shanghai TCH
charges Shengwei a technical service fee of $336,600 (RMB 2,300,000) monthly for
the sixty months of the lease term. Shengwei has the right to purchase the
ownership of the CHPG systems for $29,000 (RMB 200,000) at the end of lease
term. Shengwei is required to provide assurance of properly functioning
5,000-tons-per-day cement manufacturing lines and not less than 7,440 heat hours
per year for the CHPG. Shengwei Group collateralized the cement manufacturing
lines in Jin Yang to guarantee its obligations to provide the minimum
electricity income from the power generator system under the agreement during
the operating period. Effective July 1, 2009, Shanghai TCH outsourced the
operation and maintenance of the CHPG systems in Tong Chuan and JinYang to a
third party for total of $732,000 (RMB 5,000,000) per year.
On April
14, 2009, the Company incorporated a joint venture (“JV”) with Erdos Metallurgy
Co., Ltd. (“Erdos”) to recycle waste heat from Erdos 's metal refining plants to
generate power and steam, which will then be sold back to Erdos. The name of the
JV is Inner Mongolia Erdos TCH Energy Saving Development Co., Ltd (“Erdos TCH”)
with a term of 20 years, and the registered capital of the JV is $2,635,000 (RMB
18,000,000). On September 30, 2009, Xi’an TCH Energy Technology Co., Ltd.
(“Xi’an TCH”) injected additional capital of $4.03 million (RMB 27,500,000). In
November of 2009, Xi’an TCH injected further capital of $5.05 million (RMB
34,500,000). As of December 31, 2009, total registered capital is $11.71 million
(RMB 80,000,000), of which, $11.45 million (RMB 78,200,000) was from Xi’an TCH,
and $0.26 million (RMB 1,800,000) was from Erdos. Total investment for the
project is estimated at approximately $74 million (RMB 500 million) with an
initial investment of $17.55 million (RMB 120,000,000). Erdos contributed 10% of
the total investment of the project, and Xi'an TCH contributed 90% of the total
investment. Xi'an TCH and Erdos will receive 80% and 20% of the profit from the
JV, respectively, until Xi'an TCH has received a complete return on its
investment. Xi'an TCH and Erdos will then receive 60% and 40% of the profit from
the JV, respectively. The profits to be distributed will be computed based on
Chinese generally accepted accounting principles. The main difference between US
GAAP and Chinese GAAP with regards to Erdos is a sales-type lease under US GAAP
is treated as an operating lease under Chinese GAAP. When the term of the JV
expires, Xi'an TCH will transfer its equity in the JV to Erdos at no additional
cost.
At the
end of 2009, Erdos TCH completed the first 9MW power station of Phase I of the
project and put it into operation. The Phase I includes two 9-MW units for a
combined 18-MW power capacity. Pursuant to the Co-operation Agreement and
the supplement agreements signed between Erdos and Erdos TCH, Erdos shall
purchase all the electricity and steam to be generated from the JV’s power
generation projects. Erdos TCH leased the two 9 MW units to Erdos and will be
responsible for the operation and maintenance of the units. For each phase of
the project, the lease term is 20 years starting from the date of completion of
the phase. Erdos agreed to pay a fixed minimum of $0.22 million (RMB 1.5
million) per month for each 9MW capacity power generation unit. In addition
Erdos will pay the actual amount if the actual sale of the electricity generated
is more than $0.22 million (RMB 1.5 million) monthly per unit. After 20 years,
the units will be transferred to Erdos without any charge.
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 subleased for higher rental income under one-year,
non-cancellable leases. The Company did not renew its lease when it expired in
April 2009, and as a result, the sublessee was unable to renew its lease with
the Company.
On
September 30, 2009, Xi’an TCH delivered to Shenmu County Jiujiang Trading Co.,
Ltd. (“Shenmu”) a set of 18 megawatt capacity Waste Gas Power Generation
(“WGPG”) power generating systems pursuant to a Cooperative Contract on
Coke-oven Gas Power Generation Project (including its Supplementary Agreement)
and a Gas Supply Contract for Coke-oven Gas Power Generation
Project. The Contracts are for 10 years and provide that Xi’an TCH
will recycle coke furnace gas from the coke-oven plant of Shenmu to generate
power, which will be supplied back to Shenmu. Shenmu agrees to supply
Xi’an TCH the coke-oven gas free of charge. Under the Contracts,
Shenmu will pay the Company an annual “energy-saving service fee” of
approximately $5.6 million in equal monthly installments for the life of the
Contracts, as well as such additional amount as may result from the supply of
power to Shenmu in excess of 10.8 million kilowatt hours per
month. The Company is responsible for operating the systems and will
do so through an unrelated third party. Shenmu guarantees that monthly gas
supply will not be lower than 21.6 million standard cubic meters. If gas supply
is less, Shenmu agrees to pay Xi’an TCH energy-saving service fee described
above or up to 10.80 million kilowatt-hours per month. Xi’an TCH maintains the
ownership of the project throughout the term of the Contracts, including the
already completed investment, design, equipment, construction and installation
as well as the operation and maintenance of the project. At the end
of the 10-year term, ownership of the systems transfers to Shenmu at no
charge. Shenmu gave a lien on its production line to guarantee its
performance under the Contracts. Shenmu’s three major shareholders
provide an unlimited joint liability guarantee to Xi’an TCH for Shenmu’s
performance under the Contracts and the Yulin Huiyuan Group, an independent
third party, provides a guarantee to Xi’an TCH for Shenmu’s performance under
the Contracts.
32
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
These
accompanying consolidated financial statements have been prepared in accordance
with United States Generally Accepted Accounting Principles (US GAAP) and
pursuant to the rules and regulations of the Securities Exchange Commission
(SEC) for annual financial statements.
Basis of
Consolidation
The
consolidated financial statements include the accounts of CREG and, its
subsidiaries, Sifang Holdings and Shanghai TCH, and Shanghai TCH’s subsidiaries
Xi’an TCH Energy Tech Co., Ltd. (“Xi’an TCH”) and Xingtai Huaxin Energy Tech
Co., Ltd. (“Huaxin”), and Xi’an TCH’s 90% owned subsidiary Erdos TCH, and Sifang
Holding’s subsidiary, Huahong New Energy Technology Co., Ltd. (“Huahong”). Xi’an
TCH, Huaxin, Erdos TCH and Huahong engage in the same business as Shanghai TCH.
Substantially all of the Company’s revenues are derived from the operations of
Shanghai TCH and its subsidiaries, which represent substantially all of the
Company’s consolidated assets and liabilities as of December 31, 2009 and 2008,
respectively. All significant inter-company accounts and transactions were
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 December 31, 2009 and
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 December 31, 2009 and 2008, the Company had an accounts receivable
allowance of $0.
The
operations of the Company are located in 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.
33
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 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 (codified in Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 360), 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 was no impairment as of December 31, 2009
and 2008.
Sales-type Leasing and Related
Revenue Recognition
The
Company constructs and leases TRT, CHPG, WGPG and other waste heat power
generating systems to its customers. The Company usually transfers all benefits,
risks and ownership of the TRT, CHPG, WGPG or other waste heat power generating
systems to its customers at the end of each lease. The Company’s
investment in these projects is recorded as investment in sales-type leases in
accordance with SFAS No. 13, “Accounting for Leases” (codified in FASB ASC Topic
840) and its various amendments and interpretations. The Company manufactures
and constructs the TRT, CHPG and WGPG systems and waste heat power generating
systems, 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,” (codified in FASB
ASC Topic 740), which requires 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.
34
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, (“FIN 48”), codified in FASB ASC Topic 740, 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, and 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. At December 31, 2009 and 2008, the Company did not
take any uncertain positions that would necessitate recording of tax related
liability.
Non-Controlling
Interest
Certain
amounts presented for prior periods previously designated as minority interest
have been reclassified to conform to the current year presentation. Effective
January 1, 2009, the Company adopted Financial Accounting Standards (“FASB”)
Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which
established new standards governing the accounting for and reporting of
noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and
the loss of control of subsidiaries. Certain provisions of this standard
indicate, among other things, that NCIs (previously referred to as minority
interests) be treated as a separate component of equity, not as a liability (as
was previously the case), that increases and decreases in the parent’s ownership
interest that leave control intact be treated as equity transactions rather than
as step acquisitions or dilution gains or losses, and that losses of a partially
owned consolidated subsidiary be allocated to the NCI even when such allocation
might result in a deficit balance. This standard also required changes to
certain presentation and disclosure requirements. The provisions of the standard
are applied to all NCIs prospectively, except for the presentation and
disclosure requirements, which are applied retrospectively to all periods
presented.
The net
income (loss) attributed to the NCI has been separately designated in the
accompanying statements of income and other comprehensive income. Losses
attributable to the NCI in a subsidiary may exceed the NCI’s interests in the
subsidiary’s equity. The excess attributable to the NCI is attributed to those
interests. The NCI shall continue to be attributed its share of losses even if
that attribution results in a deficit NCI balance.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows” (codified in FASB ASC
Topic 230), 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
For
certain of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, accounts receivable, receivables on sales-type
leases, other receivables, accounts payable, accrued liabilities and short-term
debt, the carrying amounts approximate their fair values due to their short
maturities.
ASC Topic
820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair
value of financial instruments held by the Company. ASC Topic 825, “Financial
Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:
35
|
o
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
o
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
o
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
As of
December 31, 2009, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at 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” (codified in FASB ASC Topic 718). The Company recognizes in
its 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:
|
2009
|
2008
|
|||||||
|
Net
income (loss) for common shares
|
$ | 10,591,684 | $ | (2,219,664 | ) | |||
|
Interest
expense on convertible notes (1)
|
184,529 | 168,576 | ||||||
|
Net
income (loss) for diluted shares
|
$ | 10,776,213 | $ | (2,051,088 | ) | |||
|
Weighted
average shares outstanding - basic
|
38,068,929 | 32,095,814 | ||||||
|
Effect
of dilutive securities:
|
||||||||
|
Convertible
notes (2)
|
7,037,460 | 16,583,080 | ||||||
|
Options
granted
|
1,133,295 | 1,023,305 | ||||||
|
Warrants
granted
|
22,301 | - | ||||||
|
Weighted
average shares outstanding - diluted
|
46,191,950 | 49,702,199 | ||||||
|
Earnings
(loss) per share – basic
|
$ | 0.26 | $ | (0.07 | ) | |||
|
Earnings
(loss) per share – diluted (3)
|
$ | 0.21 | $ | (0.07 | ) | |||
36
|
(1)
|
Interest
expense on convertible note was added back to net income (loss) for the
computation of diluted earnings per
share.
|
|
(2)
|
Diluted
weighted average shares outstanding includes shares estimated upon
conversion of the Second Note issued on April 29, 2008 with conversion
price that is tied with audited after-tax profit for the year ended
December 31, 2009.
|
|
(3)
|
Basic
and diluted loss per share for 2008 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” (codified in FASB ASC
Topic 220). 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”
(codified in FASB ASC Topic 280) 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.
Research
and Development
During
the years 2009 and 2008, we invested about $198,000 and $120,000, respectively,
in research and development.
Reclassifications
Certain
prior year amounts were reclassified to conform to the manner of presentation in
the current period.
New Accounting
Pronouncements
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning
of those fiscal years. The Company is currently evaluating the impact
of this ASU on its consolidated financial statements.
37
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168 , “The FASB
Accounting Standards Codification™ and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative GAAP for nongovernmental entities to be only comprised
of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC
registrants, guidance issued by the SEC. The Codification is a
reorganization and compilation of all then-existing authoritative GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of GAAP in Notes to the Consolidated Financial
Statements.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”), codified as FASB ASC Topic 810-10, which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. SFAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 167 will have an impact on its financial condition, results of operations
or cash flows.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB
Topic ASC 860, which requires entities to provide more information regarding
sales of securitized financial assets and similar transactions, particularly if
the entity has continuing exposure to the risks related to transferred financial
assets. SFAS 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. SFAS 166 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS 166 will have an impact on its financial condition, results of operations
or cash flows.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in
FASB ASC Topic 855-10-05, which provides guidance to establish general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
SFAS 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS 165 is effective for interim and annual periods ending after June 15, 2009,
and accordingly, the Company adopted this pronouncement during the second
quarter of 2009. SFAS 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued.
In April
2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic
825-10-50. This FSP essentially expands the disclosure about fair value of
financial instruments that were previously required only annually to also be
required for interim period reporting. In addition, the FSP requires certain
additional disclosures regarding the methods and significant assumptions used to
estimate the fair value of financial instruments. These additional disclosures
are required beginning with the quarter ending June 30, 2009.
38
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB
ASC Topic 320-10. This FSP modifies the requirements for recognizing
other-than-temporarily impaired debt securities and changes the existing
impairment model for such securities. The FSP also requires additional
disclosures for both annual and interim periods with respect to both debt and
equity securities. Under the FSP, impairment of debt securities will be
considered other-than-temporary if an entity (1) intends to sell the security,
(2) more likely than not will be required to sell the security before recovering
its cost, or (3) does not expect to recover the security’s entire amortized cost
basis (even if the entity does not intend to sell). The FSP further indicates
that, depending on which of the above factor(s) causes the impairment to be
considered other-than-temporary, (1) the entire shortfall of the security’s fair
value versus its amortized cost basis or (2) only the credit loss portion would
be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP 115-2 requires entities to initially
apply the provisions of the standard to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulate other comprehensive income. The Company adopted FSP No. SFAS 115-2
and SFAS 124-2 beginning April 1, 2009. This FSP had no material impact on the
Company’s financial position, results of operations or cash flows.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP
No. SFAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on the Company’s financial position, results of
operations or cash flows.
3. NET INVESTMENT IN SALES-TYPE
LEASES
Under
sales-type leases, Shanghai TCH leased TRT systems to Xingtai and Zhangzhi with
terms of five years and thirteen years, respectively; and CHPG systems to Tong
Chuan Shengwei and Jin Yang Shengwei respectively for five years, WGPG systems
to Shenmu for ten years, and power and steam generating system from waste heat
from metal refining to Erdos for twenty years. The components of the net
investment in sales-type leases as of December 31, 2009 and 2008 are as
follows:
|
2009
|
2008
|
|||||||
|
Total
future minimum lease payments receivables
|
$ | 143,876,773 | $ | 41,431,868 | ||||
|
Less:
unearned interest income
|
(91,332,640 | ) | (24,623,398 | ) | ||||
|
Net
investment in sales - type leases
|
$ | 52,544,133 | $ | 16,808,470 | ||||
|
Current
portion
|
$ | (4,396,395 | ) | $ | (1,970,591 | ) | ||
|
Noncurrent
portion
|
$ | 48,147,738 | $ | 14,837,879 | ||||
As of
December 31, 2009, the future minimum rentals to be received on non-cancelable
sales-type leases by years are as follows:
|
Years
ending December 31,
|
||||
|
2010
|
$ | 17,362,214 | ||
|
2011
|
17,194,788 | |||
|
2012
|
15,576,918 | |||
|
2013
|
15,576,918 | |||
|
2014
|
10,762,501 | |||
|
Thereafter
|
67,403,434 | |||
| $ | 143,876,773 | |||
39
4.
RESTRICTED CASH, NOTES PAYABLE – BANK ACCEPTANCES
Restricted
cash at December 31, 2009 represented $1,461,659 held in the bank as collateral
for the bank to issue the same amount of bank acceptances without charging
interest. The Company endorses the bank acceptances to vendors as
payment of their own obligations. Most of the bank acceptances have
maturities of less than six months.
5. 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 $4,455,000 (RMB 31,000,000). At the end of
this lease, the Company had the right to renew the lease for another four-year
term at an aggregate of $10,940,000 (RMB 75,000,000). The lease payment of
approximately $4,455,000 was paid in full. The Company did not renew
the lease at the end of the one-year lease.
Also on
April 10, 2008, the Company entered into a lease with a lessee to sublease the
above power generation equipment under a one-year, non-cancellable lease for
$583,000 (RMB 4,000,000) per month with an option to renew. The lessee would
have paid a monthly payment of $486,000 (RMB 3,333,000) if the
Company had renewed the lease of the equipment from the ultimate lessor after
one year. The lessee was unable to renew the lease as the Company did
not renew its lease.
On May
21, 2008, the Company leased energy recycling power generation equipment from
the same lessor under a one-year, non-cancellable lease for $6,560,000 (RMB
45,000,000). At the end of the one-year lease term, the Company had the right to
renew the lease for another four-year term at an aggregate of $17,500,000 (RMB
120,000,000) with a separate agreement. The lease payment
of $6,560,000 was paid in full. The Company did not renew
the lease at the end of the one-year lease.
Also on
May 21, 2008, the Company entered into a lease with the same lessee referenced
in the second paragraph of this Note 5 to sublease the above power generation
equipment under a one-year, non-cancellable lease for $887,000 (RMB 5,850,000)
per month with an option to renew. The lessee would have paid a monthly payment
of $729,000 (RMB 5,000,000) if the Company had renewed the lease of the
equipment from the ultimate lessor after one year. The lessee was
unable to renew the lease as the Company did not renew its
lease.
At
December 31, 2009 and 2008, the prepaid equipment rent for operating leases was
approximately $0 and $3,821,000, respectively.
Prepaid
expenses – other
Other
prepaid expenses mainly consisted of prepayment for interest, supplies, office
rental, parking space, salary, insurance and legal fees. Other
prepaid expenses were $445,000 and approximately $28,000 at December 31, 2009
and 2008, respectively.
6.
OTHER RECEIVABLE
“Other
receivables” consisted of the following at December 31, 2009 and 2008,
respectively:
|
2009
|
2008
|
|||||||
|
From
third party and short term advance to employees
|
$ | 184,355 | $ | 102,850 | ||||
|
Deductible
VAT
|
1,340,594 | - | ||||||
| $ | 1,524,949 | $ | 102,850 | |||||
40
Deductible
VAT represented 17% VAT incurred on the cost of construction of Erdos TCH
project which will be used to offset future VAT payable.
7. INVENTORY
At
December 31, 2008, inventory of $10,543,633 (RMB 72,000,000) consisted of two
equipment systems to be used for TRT, CHPG or WGPG. During 2009, the
systems were incorporated into the Shenmu project.
8. ADVANCE FOR
EQUIPMENT
“Advance
for equipment” represented advance payment of $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 officially transferred to the Company as the Company’s
inventory. This equipment was incorporated into the Shenmu project during
third quarter of 2009.
9. CONSTRUCTION IN
PROGRESS
“Construction
in progress” represented the amount paid for constructing power generation
systems. At December 31, 2009 and 2008, the construction in progress was $34.86
million for the power generation system projects in Erdos TCH and $3.73 million
for the Jin Yang project, respectively. The Jin Yang project was
completed and put into operation at June 30, 2009.
10. TAX
PAYABLE
“Tax
payable” consisted of the following at December 31, 2009 and 2008,
respectively:
|
2009
|
2008
|
|||||||
|
Income
tax payable
|
$ | 598,327 | $ | 1,217,026 | ||||
|
Business
tax payable
|
74,286 | 86,692 | ||||||
|
Other
taxes payable
|
9,094 | 10,231 | ||||||
| $ | 681,707 | $ | 1,313,949 | |||||
11. ACCRUED LIABILITIES AND
OTHER PAYABLES
“Accrued
liabilities and other payables” consisted of the following at December 31,
2009 and 2008, respectively:
|
2009
|
2008
|
|||||||
|
Employee
training, labor union expenditure and social insurance
payable
|
$ | 421,824 | $ | 125,323 | ||||
|
Consulting
and legal expenses
|
371,544 | 371,125 | ||||||
|
Payable
to Yingfeng
|
1,678,372 | 1,676,878 | ||||||
|
Security
deposit from lessee
|
- | 1,024,252 | ||||||
|
Total
other payables
|
2,471,740 | 3,197,578 | ||||||
|
Accrued
payroll and welfare
|
243,826 | 258,443 | ||||||
|
Accrued
maintenance expense
|
70,230 | 72,506 | ||||||
|
Total
|
$ | 2,785,796 | $ | 3,528,527 | ||||
41
“Consulting
and legal expenses” was the expenses paid by a third party for the Company and
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 a deposit received for leasing
out the power generation equipment.
12. ADVANCE FROM RELATED PARTY,
NET
At
December 31, 2009, “Advance from related party” was $468,475 representing
$483,290 received from Erdos (the minority shareholder of Erdos TCH) as an
advance for the capital needs of Erdos TCH, net of $14,815 payment in advance to
the Company’s management for officers paying certain operating expenses on
behalf of the Company.
13. NONCONTROLLING
INTEREST
“Non-controlling
interest” represents the 20% equity interest of the outside shareholder in
Huaxin at December 31, 2008. The Company acquired the remaining 20%
equity interest in Huaxin from this shareholder during 2009 for
$110,000.
As of
December 31, 2009, total registered capital of Erdos JV is RMB 80,000,000
($11.71 million), of which, RMB 78,200,000 ($11.45 million) was injected from
Xi’an TCH, and RMB 1,800,000 ($0.26 million) was injected from
Erdos.
Huaxin
and Erdos TCH engage in business similar to that of Shanghai TCH. The
minority share of the income was $352,480 and $83 for the years ended December
31, 2009 and 2008, respectively.
Erdos TCH
allocates its income to Xi’an TCH and Erdos at a proportion of 80% and 20% based
on the net income calculated under Chinese GAAP. The main difference
between US GAAP and Chinese GAAP with respect to Erdos is a sales-type lease
under US GAAP is treated as an operating lease under Chinese
GAAP. The following is the profit and loss statement of Erdos TCH,
prepared under Chinese GAAP for the year ended December 31, 2009:
|
Net
Revenue
|
$ | - | ||
|
Cost
of Revenue
|
- | |||
|
Gross
Profit
|
- | |||
|
Operating
expenses
|
(12,291 | ) | ||
|
Loss
from operations
|
(12,291 | ) | ||
|
Non-operating
income
|
3,115 | |||
|
Income
tax expense
|
- | |||
|
Net
loss
|
$ | 9,176 |
The
following is a reconciliation of net loss per Chinese GAAP to net income per US
GAAP:
|
Net
loss per Chinese GAAP
|
$ | (9,176 | ) | |
|
Revenue
per sales-type lease
|
10,344,162 | |||
|
Cost
of revenue
|
(7,957,048 | ) | ||
|
Interest
expense
|
(1,411 | ) | ||
|
Accrued
expense per US GAAP
|
(17,348 | ) | ||
| 2,368,355 | ||||
|
Deferred
income tax expense
|
(596,779 | ) | ||
|
Net
income
|
$ | 1,771,5 76 |
The
following is the balance sheet statement of Erdos TCH, prepared under Chinese
GAAP at December 31, 2009:
|
Assets
|
||||
|
Cash
and Cash equivalents
|
$ | 892,204 | ||
|
Other
current assets
|
9,739 | |||
|
Property
and equipment
|
9,301,576 | |||
|
Construction
in process
|
33,793,025 | |||
|
Total
Assets
|
$ | 43,996,544 | ||
|
Liability
|
||||
|
Account
payable
|
$ | 1,864,654 | ||
|
Other
current liabilities
|
127,069 | |||
|
Long
term loan
|
30,297,882 | |||
|
Total
liabilities
|
32,289,605 | |||
|
Equity
|
||||
|
Paid
in capital
|
11,713,717 | |||
|
Other
comprehensive income
|
2,398 | |||
|
Retained
earnings
|
(9,176 | ) | ||
|
Total
stockholders’ equity
|
11,706,939 | |||
|
Total
liabilities and stockholders’ equity
|
$ | 43,996,544 | ||
42
14. DEFERRED
TAX
Deferred
tax asset arose from the accrued maintenance cost on power generation machines
that can be deducted for tax purposes in the future. Deferred tax
liability represented differences between the tax bases and book bases of
sales-type leases.
As of
December 31, 2009 and 2008, deferred tax asset (liability) consisted of the
following:
|
2009
|
2008
|
|||||||
|
Deferred
tax asset — noncurrent
|
$ | 24,658 | $ | 34,215 | ||||
|
Deferred
tax liability — noncurrent
|
(2,786,773 | ) | (857,622 | ) | ||||
|
Deferred
tax liability, net of deferred tax asset - noncurrent
|
(2,762,115 | ) | (823,407 | ) | ||||
|
Deferred
tax liability — current
|
$ | 148,193 | $ | - | ||||
15. 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. Under the new Chinese tax law the tax treatment of
finance and sales-type leases is similar to US GAAP rules. However,
the local tax bureau continues to treat the sales-type leases as operating
leases. Accordingly, the Company recorded deferred income
taxes.
The
Company’s subsidiaries generate all of their net income from their PRC
operations. Shanghai TCH’s effective income tax rates for 2009 and 2008 are 20%
and 18%, respectively. Xi’an TCH’s effective income tax rate for 2009 and 2008
is 15% as a result of its high tech enterprise status that has been approved by
the taxing authority. Xingtai Huaxin’s effective income tax rate for 2009 and
2008 is 25%. Huahong and Erdos TCH’s effective income tax rate for
2009 is 25%. Shanghai TCH, Xi’an TCH, Xingtai Huaxin, Huahong and
Erdos TCH 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 five-years as
follows:
|
Year
|
Tax Rate
|
|||
|
2007
|
15 | % | ||
|
2008
|
18 | % | ||
|
2009
|
20 | % | ||
|
2010
|
22 | % | ||
|
2011
|
24 | % | ||
|
2012
|
25 | % | ||
43
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 Corporation, is taxed in the U.S. and has
net operating loss carry forwards for income taxes of $2,459,000 at December 31,
2009 which may be available to reduce future years’ taxable income as NOL
can be carried forward up to 20 years from the year the loss is incurred.
Management believes the realization of benefits from these losses appears
uncertain due to the Company’s limited operating history and continuing losses.
Accordingly, a 100% deferred tax asset valuation allowance was
provided.
Foreign
pretax earnings approximated $16,333,000 and $6,091,000 for the years ended
December 31, 2009 and 2008, respectively. Pretax earnings of a foreign
subsidiary are subject to U.S. taxation when repatriated. The Company provides
income taxes on the undistributed earnings of non-U.S. subsidiaries except to
the extent that such earnings are indefinitely invested outside the United
States. At December 31, 2009, $13,052,000 of accumulated undistributed earnings
of non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal
income tax rate, additional taxes of approximately $4,159,000 would have to be
provided if such earnings were remitted currently.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2009 and 2008,
respectively:
|
2009
|
2008
|
|||||||
|
US
statutory rates
|
34.0 | % | (34.0 | )% | ||||
|
Tax
rate difference – current provision
|
(11.3 | )% | (93.8 | )% | ||||
|
Effect
of tax holiday
|
(10.8 | )% | 4.5 | % | ||||
|
Effect
of tax on loss on nontaxable jurisdiction
|
- | % | 1.4 | % | ||||
|
Non-tax
deductible expense - beneficial conversion feature
|
- | % | 291.4 | % | ||||
|
Other
|
2.0 | % | - | % | ||||
|
Valuation
allowance on US NOL
|
8.8 | % | 108.8 | % | ||||
|
Tax
per financial statements
|
22.7 | % | 278.3 | % | ||||
The Company’s income tax expense for the years
ended December 31, 2009 and 2008 consist of the following:
16. BANK
LOAN PAYABLE
On April
13, 2009, Xi’an TCH entered into a one-year working capital loan agreement with
the Industrial Bank Co., Ltd. Xi’an branch, to borrow $2.9 million (RMB 20
million) at 5.3% and make quarterly interest payments. The loan agreement
contains standard representations, warranties and covenants, and the borrowed
funds are to be guaranteed through a separate guaranty contract with Shanxi
Zhongze Investment Co., Ltd. This loan was fully repaid on December 31,
2009.
17.
LOAN PAYABLE – COLLECTIVE CAPITAL TRUST PLAN
On
December 3, 2009, the Company and Beijing International Trust Co., Ltd.
("Beijing Trust") formed a Low Carbon Fortune-Energy Recycling No. 1 Collective
Capital Trust Plan ("Plan"). Under the Plan, Beijing Trust raised RMB
181,880,000 ($ 26.75 million) through the sale of 181,880,000 total trust units
at RMB 1 per unit. All amounts raised under the Plan are loaned to Erdos TCH in
connection with its waste heat power generation projects Phase II and Phase III
construction and operation.
The Plan
included 145,500,000 category A preferred trust units ($21.4 million),
consisting of category A1 preferred trust 12,450,000 units ($1.8 million),
category A2 preferred trust 15,000,000 units ($2.2 million), category A3
preferred trust 118,050,000 units ($17.4 million); and 36,380,000 category B
secondary trust units ($5.35 million), consisting of category B1 secondary trust
9,100,000 units ($1.34 million) and category B2 secondary trust 27,280,000 units
($4.01 million). The B1 units have been purchased by members of management of
Erdos TCH and the B2 units have been purchased by Xi'an TCH. Under the
Agreement, the annual base interest rate is 9.94% for A1 preferred trust fund
units with a term of two years, 11% for A2 preferred trust fund units with a
term of three years, 12.05% for A3 preferred trust fund units and 8.35% for the
category B secondary trust fund units, each with a term of four
years.
44
Erdos TCH
has agreed to provide a lien on its equipment, assets and accounts receivable to
guarantee the loans under the Agreement. Xi'an TCH and Mr. Guohua Ku (the
Company’s CEO) also provided unconditional and irrevocable joint liability
guarantees to Beijing Trust for Erdos TCH's performance under the Agreement.
Erdos (the minority shareholder and customer of Erdos TCH) provided a commitment
letter on minimum power purchase from Erdos TCH.
On
December 18, 2009, an additional RMB 25,000,000 ($3.68 million) was raised to
support the Company's Erdos Power Generation Projects. The Company
sold 25,000,000 trust units at RMB 1 per unit which included 20,000,000 category
A1 preferred trust units ($ 2.94 million) and 5,000,000 category B2 secondary
trust units ($ 0.74 million). The B2 units were purchased by Xi'an
TCH.
In
addition to the above, if the financial index reflected on the Borrower’s
audited financial reports for the fiscal year prior to the expiration of the
loan term meets certain threshold, the Borrower shall pay the Lender (category B
secondary trust purchaser) a sum of management stimulation profit.
At
December 31, 2009, the Company sold 206,880,000 units for RMB 206,880,000
($30.28 million), of which, 9,100,000 units ($1.33 million) were purchased by
the management of Erdos TCH; 32,280,000 units purchased by Xi’an TCH for the
amount of $4.73 million were considered as investment by Xi’an TCH into Erdos
TCH and, accordingly, was eliminated in the consolidation. The net long term
loan payable under this trust plan was $25.57 million at December 31,
2009.
18. CONVERTIBLE NOTES PAYABLE
AND REVOLVING FINANCING AGREEMENT
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 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 of
and subscription by the Investors for 4,066,706 shares of common stock of
Company, at $1.23 per share for $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% and was due November 16, 2009. The principal
amount of the First Note, together with any interest thereon, converted, 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 a beneficial conversion feature (“BCF”) because the
conversion price was less than the quoted market price at the time of issuance.
Accordingly, the beneficial conversion feature of $5,000,000 was recorded
separately as unamortized beneficial conversion feature based on the intrinsic
value method. As the BCF was greater than the face value of the note, all of the
proceeds were allocated to the BCF. No value was assigned to the note option or
the equity option (two subsequent transactions discussed above). 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.
45
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
Investors subscribed for 4,066,706 shares of common stock of the Company, at
$1.23 per share for $5,002,048, as originally contemplated under the Agreement;
(ii) the Investors converted the principal under the First Note (and
waived any accrued interest thereon) into 4,065,040 shares of common stock of
the Company at $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 of $5,000,000 (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 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% and matures April 29, 2011. The principal face
amount of the Second Note, together with any interest thereon, converts, 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 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 a beneficial conversion feature because
the conversion price and convertible shares are contingent upon 2009 audited net
profits.
On June
25, 2008, the Company and 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 was 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
$1.23 per share for $5,000,000. This was done through a cross receipt
arrangement; the BCF was reversed to additional paid in stock. The
Company has now concluded that in substance the transaction resulted in the
conversion of the first $5,000,000 note into common stock, and based on
substance over form, the remaining BCF of $3,472,603 at the date of conversion
should have been expensed.
On April
29, 2009, CREG issued an 8% Secured Convertible Promissory Note in the principal
amount of $3 million to CAGP with a maturity of April 29, 2012. The note holder
has the right to convert all or any part of the aggregate outstanding principal
amount of this note, together with interest, if any, into shares of the
Company’s common stock, 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 on a date prior to March 30,
2010) and prior to the maturity date (or such later date on which this note is
paid in full), at a conversion price per share of common stock equal to US
$0.80. The conversion feature of this note is not beneficial to the
holder as the stock price on April 29, 2009 was $0.47.
46
On April
29, 2009, CREG amended and restated the 5% secured convertible promissory note
(the “Second Note”), which was issued as part of the amendment of the First Note
on April 28, 2008. Accordingly the Conversion Rights and Conversion Price were
amended so that the holder of the Second Note has the right, but not the
obligation, to convert all or any part of the aggregate outstanding principal
amount of the Second Note, together with interest, into shares of the Company’s
common stock, 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 on a date prior to March 30, 2010) and
prior to the maturity date (or such later date on which this Note is paid in
full), at the following conversion price: (a) an amount equal to (i) the
Company’s net profit, adjusted in accordance with the Second Note, multiplied by
(ii) 5.5, and less (iii) the principal amount of the Second Note, together with
accrued interest, divided by (b) the then total shares of the Company’s common
stock outstanding on a fully-diluted basis.
On April
29, 2009, the Company also agreed with the Investors to amend and restate the
Registration Rights Agreement for the convertible notes to amend the rights for
demand registration by the Investors and the applicable liquidated damages for
the Company if it fails to timely comply with the demand for
registration.
Revolving Financing
Agreement
On
October 26, 2009, Xi’an TCH and Erdos TCH entered into a one-year Non Promissory
Short Term Revolving Financing Agreement (the “Citi Agreement”), dated and
effective from October 12, 2009, with Citi Bank (China) Co., Ltd., Shanghai
Branch (“Citi”). The maximum financing provided under the
Citi Agreement is RMB 20 million ($2.9 million). The Citi Agreement
allows for Xi’an TCH and Erdos TCH to borrow money to maintain current liquidity
for notes receivable, such as trade notes payable to the Company, or in
order to capitalize on discounts for early payment of accounts payable, such as
for equipment or raw materials. The maximum maturity date for each financing is
six months. The interest rate for any note discount financing will be determined
by the relevant note discount documents and the interest rate for accounts
payable financing will be determined by the relevant accounts payable
documents.
The
proceeds received under the financing arrangement are to be used for working
capital and to purchase raw materials. The amounts received pursuant to the Citi
Agreement are secured by an account maintained by the Company with Citi,
accounts receivable of Xi’an TCH and Erdos TCH and the guarantees of Shanghai
TCH Energy Technology Co., Ltd , an affiliate of Xi’an TCH, and Guohua Ku, the
Chairman of the Board and Chief Executive Officer of the Company.
Citi has
the discretion to accelerate maturity date of the outstanding loans and request
for payment as well as to cancel or terminate the financing if the single
monthly income amount for Xi’an TCH and Erdos TCH is less than 70% of the
expected income amount of that month. As of December 31, 2009, Xi’an TCH and
Erdos TCH had no amounts outstanding under the Citi Agreement.
19. 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 3,000,000 options to acquire the Company’s common stock at
$1.23 per share to twenty (20) managerial and non-managerial employees under the
2007 Plan.
The
vesting terms of options granted under the 2007 Plan are 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 on the first year anniversary of the grant date. An additional 50%
of the total stock options shall vest and become exercisable on 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)”), codified in FASB ASC Topic 718, 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 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 options were accounted as a modification to the
options that were cancelled on June 25, 2008. The grant date fair value of
options was $5.04 million.
47
On
November 9 and 11, 2009, the Company and three optionees agreed to cancel
vested but unexercised options for 87,000 vested but not exercised shares and
forfeit unvested options for 203,0000 unvested shares. On November
11, 2009, the Company granted options to two other employees for 290,000 shares
of the Company's common stock with an exercise price of $2.35 per share. 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 3.84%, and
dividend yield of 0%. The grant date fair value of options was
$518,513.
The
following table summarizes activity for employees in the Company’s Plan for
2009:
|
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
|
290,000 | 2.35 | 5.00 | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Cancelled
vested options
|
(87,000 | ) | 0.80 | - | ||||||||
|
Forfeited
|
(203,000 | ) | 0.80 | - | ||||||||
|
Outstanding
at December 31, 2009
|
3,000,000 | $ | 0.95 | 4.45 | ||||||||
On
October 30, 2009, the Company granted stock options to acquire 130,000 shares of
the Company’s common stock, par value $0.001, at $1.85 per share to 3
independent directors. The options shall vest and become exercisable on the
six-month anniversary of the grant date with 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 3.54%, and dividend
yield of 0%. The grant date fair value of options was $183,000.
The
following table summarizes activity for independent directors in the Company’s
Plan for the year ended December 31, 2009:
48
|
Number of
Shares
|
Average
Exercise
Price per Share
|
Weighed
Average
Remaining
Contractual
Term in Years
|
||||||||||
|
Outstanding
at January 1, 2009
|
- | $ | - | - | ||||||||
|
Granted
|
130,000 | 1.85 | 5.00 | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Forfeited
|
- | - | - | |||||||||
|
Outstanding
at December 31, 2009
|
130,000 | $ | 1.85 | 4.97 | ||||||||
On
October 1, 2009, the Company granted warrants to acquire an aggregate amount
of 200,000 shares of the Company’s common stock, par value $0.001, at $1.50
per share to certain investor relations firms. The warrants are exercisable, in
whole or in part, at any time and from time to time from and after July 1, 2010
(the “Vesting Date”) and prior to October 1, 2014 (the “Expiration Date”). The
fair value of the warrants was calculated using the following assumptions:
estimated life of five years, volatility of 100%, risk free interest rate of
3.54%, and dividend yield of 0%. The grant date fair value of the
warrants was approximately $272,000.
The
following table summarizes activity for the warrants to certain investor
relations firms for the year ended December 31, 2009:
|
Number of
Shares
|
Average
Exercise
Price per Share
|
Weighed
Average
Remaining
Contractual
Term in Years
|
||||||||||
|
Outstanding
at January 1, 2009
|
- | $ | - | - | ||||||||
|
Granted
|
200,000 | 1.50 | 5.00 | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Forfeited
|
- | - | - | |||||||||
|
Outstanding
at December 31, 2009
|
200,000 | $ | 1.50 | 4.99 | ||||||||
The
Company recorded $1,793,228 compensation expense for stock options and warrants
during the year ended December 31, 2009. There were no options
exercised during the year ended December 31, 2009.
During
the year ended December 31, 2008, the Company recorded $1,436,533 of
compensation expense of stock options including the amortized portion of
incremental cost arising from the modification to the employee stock
options.
20. SHAREHOLDERS’
EQUITY
On April
29, 2008, the Company issued and the Investors subscribed for 4,066,706 shares
of common stock of the Company, at $1.23 per share for $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 the 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 $1.23 per share for
$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.
49
On April
20, 2009, the Company entered into a Stock Purchase Agreement with an accredited
private investor. Pursuant to the agreement, the Company issued approximately
2.4 million shares, with a one-year lock-up period not to sell, for an aggregate
of $2 million, or $0.85 per share.
21. STATUTORY
RESERVES
Pursuant
to the corporate law of the PRC effective January 1, 2006, the Company is 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 to which the Company can elect to
transfer 5% to 10% of its net income. 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. The
Company did not participate in this voluntary fund.
22. CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in 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 expense 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.
23. COMMITMENTS
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”) in Cangzhou City,
Hebei Province, a world-class nickel-alloy 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-alloy 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. Total investment in this project
will be approximately $7.8 million (RMB 55 million). Construction on the project
started in March of 2009, but the Company did not incur any material expenses on
the project in 2009. The Company originally expected the completion of the
project within eleven months from the construction commencing
date. The construction was delayed, however, due to the delay in
installation of a furnace cove by Zhonggang. The construction was resumed in
February of 2010; the Company expects the project to be completed in the
beginning of 2011. Zhonggang agrees to purchase all the electricity and steam to
be generated from the system for a term of 9 years, at a pre-agreed price.
Zhonggang also agrees to guarantee the minimal working hours
of supplying heat (6,800 hours per year) and the minimum monthly
payment of electricity and steam fees, which is no less
than $365,000 (RMB 2.5 million) per month, By the end of the term, the
system shall be transferred to Zhonggang at a nominal price
of RMB 1.
50
None.
Disclosure
Controls and Procedures
Our
management, including our principal executive officer and principal financial
officer, concluded an evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under
the Securities and Exchange Act of 1934 as of December 31, 2009. Our
evaluation tested controls and other procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Securities and Exchange Act of 1934, as amended, or the Exchange Act,
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Act is accumulated and communicated to the issuer’s
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on our evaluation, as of
December 31, 2009, our management, including our principal executive
officer and principal financial officer, concluded that our disclosure controls
and procedures were effective.
Internal
Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America. The Company’s internal control over financial
reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be detected
in a timely manner. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our internal control over financial
reporting as of the Evaluation Date, pursuant to Exchange Act Rule 13(a). We
carried out this evaluation using criteria similar to that proscribed by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control — Integrated Framework. While management concluded that no
material weaknesses existed as of December 31, 2009, management determined that
there were deficiencies related to (i) the need for additional financial
personnel with experience with U.S. public company reporting and US GAAP and
(ii) the need for improved internal communications. During 2009 and with
the assistance of its consultant, the Company underwent internal testing
and improvements related to its internal control over financial
reporting. In 2009, the Company retained Deloitte as a consultant to assist
as in making improvements to the quality of our controls and procedures. We
intend to continue to engage Deloitte, or a similar consultant, in
2010 to assist with our improvement of internal control over financial
reporting, including the training and education of our accounting
staff.
This annual report on Form 10-K does
not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to the temporary rules of
the Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report on Form 10-K.
51
Changes
in internal control over financial reporting
Other
than the internal testing and continued training discussed above, there were no
changes in our internal control over financial reporting that occurred during
the quarter ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Not
applicable.
The
information required by Part III of this Annual Report on Form 10-K, pursuant to
General Instruction G(3) of Form 10-K, will be set forth in the Company’s
definitive Proxy Statement to be filed pursuant to Regulation 14A relating to
the Company’s Annual Meeting of Shareholders and is incorporated herein by
reference.
Information regarding our directors and
executive officers required by this Item will be set forth under the captions
“Proposal 1 — Election of Directors,” “Executive Officers,” “Section 16(a)
Beneficial Ownership Reporting Compliance” and “Information About Our Board of
Directors and Corporate Governance” in the Company’s definitive Proxy Statement
and is incorporated by reference into this Annual Report on Form
10-K.
Information
required by this Item will be set forth in the Company’s definitive Proxy
Statement under the captions “Information About Our Board of Directors and
Corporate Governance,” “Executive Compensation” and “Director Compensation” and
is incorporated by reference into this Annual Report on Form 10-K.
Information
required by this Item will be set forth in the Company’s definitive Proxy
Statement under the captions “Security Ownership of Certain Beneficial Owners
and Management” and “Equity Compensation Plan Information” and is incorporated
by reference into this Annual Report on Form 10-K.
Information
required by this Item will be set forth in the Company’s definitive Proxy
Statement under the captions “Certain Relationships and Related Party
Transactions” and “Information About Our Board of Directors and Corporate
Governance” and is incorporated by reference into this Annual Report on Form
10-K.
Information required by this Item will
be set forth in the Company’s definitive Proxy Statement under the caption
“Information about Our Independent Registered Public Accounting Firm” and is
incorporated by reference into this Annual Report on Form 10-K.
|
(a)
|
Financial
Statements and Schedules
|
|
|
(1)
|
The
following Financial Statements are filed as a part of this
report:
|
|
(i)
|
Report
of Independent Registered Public Accounting
Firm.
|
52
|
|
(ii)
|
Consolidated
Balance Sheets as of December 31, 2009 and December 31,
2008.
|
|
(iii)
|
Consolidated
Statements of Operations for the years ended December 31, 2009
and December 31, 2008.
|
|
(iv)
|
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2009
and December 31, 2008.
|
|
(v)
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
December 31, 2008.
|
|
(vi)
|
Notes
to Consolidated Financial
Statements.
|
|
(2)
|
All
schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have
been omitted.
|
|
(3)
|
Exhibits.
Please see the list of exhibits set forth on our Exhibit Index, which is
incorporated herein by
reference.
|
53
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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:
March 16, 2010
|
By:
|
/s/ Guohua Ku
|
|
Guohua
Ku
|
||
|
Chairman of the Board of Directors and Chief Executive Officer
|
||
|
Date:
March 16, 2010
|
By:
|
/s/ Xinyu
Peng
|
|
Xinyu
Peng
|
||
|
Chief Financial Officer and
Secretary
|
||
Pursuant
to the requirements of the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on March 16, 2010.
Each
person whose signature appears below constitutes and appoints Guohua Ku and
Xinyu Peng as his true and lawful attorneys-in-fact and agents, each acting
alone, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the U.S. Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
|
Signature
|
Title
|
|
|
/s/ Guohua Ku
|
Chairman
of the Board of Directors and Chief
|
|
|
Guohua
Ku
|
Executive
Officer
|
|
|
/s/ Nicholas Shao
|
Director
|
|
|
Nicholas
Shao
|
||
|
/s/ Lanwei Li
|
Director
and Vice President and Director of
|
|
|
Lanwei
Li
|
Business
|
|
|
/s/ Dr. Robert Chanson
|
Director
|
|
|
Dr.
Robert Chanson
|
||
|
/s/ Timothy Driscoll
|
Director
|
|
|
Timothy
Driscoll
|
||
|
/s/ Julian Ha
|
Director
|
|
|
Julian
Ha
|
||
|
/s/ Sean Shao
|
Director
|
|
|
Sean
Shao
|
54
The
following documents listed below that have been previously filed with the SEC
(1934 Act File No. 000-12536 unless otherwise stated) are incorporated herein by
reference:
|
Exhibit
No.
|
Description
|
|
|
3.1
|
Articles
of Incorporation (filed as Exhibit 3.05 to the Company’s Form 10-KSB for
the fiscal year ended December 31, 2001).
|
|
|
3.2
|
Second
Amended and Restated Bylaws (filed as Exhibit 3.1 to the Company’s Current
Report on Form 8-K dated December 2, 2009).
|
|
|
4.1
|
Common
Stock Specimen (filed as Exhibit 4.1 to the Company’s Form SB-2 dated
November 12, 2004; 1934 Act File No. 333-120431).
|
|
|
10.1
|
Securities
Exchange Agreement by and among Boulder Acquisitions, Inc., Sifang
Holdings Co., Ltd. and the shareholders of Sifang Holdings Co., Ltd.,
dated effective as of June 23, 2004 (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated July 8,
2004).
|
|
|
10.2
|
Share
Purchase Agreement, dated January 24, 2007, between individual purchasers
and shareholders of China Digital Wireless, Inc. (filed as Exhibit 11.1 to
the Company’s Current Report on Form 8-K dated January 26,
2007).
|
|
|
10.3
|
TRT
Joint Operation Agreement between Shanghai TCH Energy Technology Co. Ltd.
and Xi’an Yingfeng Science and Technology Co. Ltd. dated February 1, 2007
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
April 9, 2007)
|
|
|
10.4
|
Share
exchange agreement between Hanqiao Zheng and Guohua Ku and a group of
individual purchasers all of whom are shareholders of Xi’an Yingfeng
Science and Technology Co. Ltd (“Yingfeng”) signed on February 22, 2007
and consummated on June 21, 2007 (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K dated June 22, 2007)
|
|
|
10.5
|
Share
exchange agreement between Guohua Ku and a group of individual purchasers
all of whom are shareholders of Xi’an Yingfeng Science and Technology Co.
Ltd (“Yingfeng”) dated on August 22, 2007 (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated August 23,
2007).
|
|
|
10.6
|
Share
purchase agreement between Guohua Ku and Hanqiao Zheng dated on August 23,
2007 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated August 24, 2007).
|
|
|
10.7
|
Assets
Transfer and Share Issuance Agreement between Company and Hanqiao Zheng on
November 14, 2007 (filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K dated November 16, 2007).
|
|
|
10.8
|
Share
Purchase Agreement between Company and Hanqiao Zheng on November 16, 2007
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated
November 16, 2007).
|
|
|
10.9
|
Stock
and Notes Purchase Agreement, between Company, Sifang Holdings Co., Ltd.,
Shanghai TCH Energy Technology Co., Ltd. and Carlyle Asia
Growth Partners III, L.P. and CAGP III Co-Investment, L.P. dated November
16, 2007 (filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K dated November 16, 2007).
|
|
|
10.10
|
Amendment
to Stock and Notes Purchase Agreement, between Company, Sifang Holdings
Co., Ltd., Shanghai TCH Energy Technology Co., Ltd. and Carlyle Asia
Growth Partners III, L.P. and CAGP III Co-Investment, L.P. dated April 29,
2008 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated April 30, 2008).
|
|
|
10.11
|
Form
of 10% Secured Convertible Promissory Note issued by the Company to
Carlyle Asia Growth Partners III, L.P. and CAGP III Co-Investment, L.P.
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated
November 16,
2007).
|
|
10.12
|
Form
of 5% Secured Convertible Promissory Note issued by the Company to Carlyle
Asia Growth Partners III, L.P. and CAGP III Co-Investment, L.P. (filed as
Exhibit 10.3 to the Company’s Current Report on Form 8-K dated November
16, 2007).
|
|
|
10.13
|
5%
Secured Convertible Promissory Note in the aggregate principal amount of
$5,000,000 issued by the Company to Carlyle Asia Growth Partners III, L.P.
and CAGP III Co-Investment, L.P. 2008 (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K dated April 30,
2008).
|
|
|
10.14
|
Form
of 5% Secured Convertible Promissory Note in the aggregate principal
amount of $10,000,000 issued by the Company to Carlyle Asia Growth
Partners III, L.P. and CAGP III Co-Investment, L.P. 2008 (filed as Exhibit
10.3 to the Company’s Current Report on Form 8-K dated April 30,
2008).
|
|
|
10.15
|
Registration
Rights Agreement between Company and Carlyle Asia Growth Partners III,
L.P. and CAGP III Co-Investment, L.P. dated November 16, 2007 (filed as
Exhibit 10.6 to the Company’s Current Report on Form 8-K dated November
16, 2007).
|
|
|
10.16
|
Shareholders
Agreement between Company and Carlyle Asia Growth Partners III, L.P., CAGP
III Co-Investment, L.P., Hanqiao Zheng and Ping Sun dated November 16,
2007 (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K
dated November 16, 2007).
|
|
|
10.17
|
Form
of Nonstatutory Stock Option Agreement - Manager Employee (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 8,
2008). *
|
|
|
10.18
|
2007
Nonstatutory Stock Option Plan (filed as Exhibit 10.1 to the Company’s
Registration Statement on Form S-8 dated November 13,
2007).*
|
|
|
10.19
|
Form
of Nonstatutory Stock Option Agreement - Non-Manager Employee (filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 8,
2008).
|
|
|
10.20
|
Stock
Purchase Agreement with Great Essential Investment, Ltd. (filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K dated April 20,
2009).
|
|
|
10.21
|
Registration
Rights Agreement with Great Essential Investment, Ltd. (filed as Exhibit
10.2 to the Company’s Current Report on Form 8-K dated April 20,
2009).
|
|
|
10.22
|
Note
Subscription and Amendment Agreement between the Company and Carlyle Asia
Growth Partners III, L.P. and CAGP III Co-Investment, L.P. (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 29,
2009).
|
|
|
10.23
|
Form
of 8% Secured Convertible Promissory Note issued to Carlyle Asia Growth
Partners III, L.P. and CAGP III Co-Investment, L.P. (filed as Exhibit 10.2
to the Company’s Current Report on Form 8-K dated April 29,
2009).
|
|
|
10.24
|
Form
of Amended and Restated 5% Secured Convertible Promissory Note issued to
Carlyle Asia Growth Partners III, L.P. and CAGP III Co-Investment, L.P.
(filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated
April 29, 2009).
|
|
|
10.25
|
Amended
and Restated Registration Rights Agreement between the Company and, among
others, Carlyle Asia Growth Partners III, L.P. and CAGP III Co-Investment,
L.P. (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K
dated April 29, 2009).
|
|
|
10.26
|
Joint Operation
Agreement between Xi’an TCH Energy Technology Co., Ltd., a
wholly owned subsidiary of the Company, and Inner Mongolia Erdos
Metallurgy Co., Ltd. (filed as Exhibit 10.1 to the Company’s Form 10-Q for
the quarterly period ended June 30, 2009).
|
|
|
10.27
|
Supplementary Agreement between Inner Mongolia Erdos TCH Energy Saving Development Co., Ltd. and Inner Mongolia Erdos Metallurgy Co., Ltd. † | |
|
10.28
|
Loan
Agreement between Xi’an TCH Energy Technology Co., Ltd., a wholly
owned subsidiary of the Company, and Industrial Bank Co., Ltd., Xi’an
Branch (filed as Exhibit 10.2 to the Company’s Form 10-Q for the quarterly
period ended June 30,
2009).
|
|
10.29
|
Loan Agreement between Inner Mongolia Erdos TCH Energy Conservation Development Co., Ltd. and Beijing International Trust Co., Ltd. † | |
|
10.30
|
Non-Promissory Short-Term Revolving Financing Agreement between Citi Bank (China) Limited, Shanghai Branch, Xi’an TCH Energy Technology Co., Ltd., a wholly owned subsidiary of the Company, and Inner Mongolia Erdos TCH Energy-Saving Development Co., Ltd. † | |
|
10.31
|
Form
of Independent Director Agreement. (filed as Exhibit 10.28 on the
Company’s Registration Statement on Form 10, filed on February 5, 2010)
*
|
|
|
10.32
|
Employment
Agreement between the Company and Guohua Ku . (filed as Exhibit 10.29 on
the Company’s Registration Statement on Form 10, filed on February 5,
2010)*
|
|
|
10.33
|
Employment
Agreement between the Company and Xinyu Peng . (filed as Exhibit 10.30 on
the Company’s Registration Statement on Form 10, filed on February 5,
2010)*
|
|
|
14.1
|
Code
of Ethics (filed as Exhibit 14.1 to the Company’s Current Report on Form
8-K dated December 2, 2009).
|
|
|
21.1
|
Subsidiaries
(filed as Exhibit 21.1 on the Company’s Current Report on Form 8-K dated
November 16, 2007).
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) certification of the Chief Executive Officer.
†
|
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) certification of the Chief Financial Officer.
†
|
|
|
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.
†
|
*
Management contract, compensatory plan or arrangement.
†
Exhibits filed herewith.
Revolving Financing
Agreement
On
October 26, 2009, Xi’an TCH and Erdos TCH entered into a one-year Non Promissory
Short Term Revolving Financing Agreement (the “Citi Agreement”), dated and
effective from October 12, 2009, with Citi Bank (China) Co., Ltd., Shanghai
Branch (“Citi”). The maximum financing provided under the
Citi Agreement is RMB 20 million ($2.9 million). The Citi Agreement
allows for Xi’an TCH and Erdos TCH to borrow money to maintain current liquidity
for notes receivable, such as trade notes payable to the Company, or in
order to capitalize on discounts for early payment of accounts payable, such as
for equipment or raw materials. The maximum maturity date for each financing is
six months. The interest rate for any note discount financing will be determined
by the relevant note discount documents and the interest rate for accounts
payable financing will be determined by the relevant accounts payable
documents.
The
proceeds received under the financing arrangement are to be used for working
capital and to purchase raw materials. The amounts received pursuant to the Citi
Agreement are secured by an account maintained by the Company with Citi,
accounts receivable of Xi’an TCH and Erdos TCH and the guarantees of Shanghai
TCH Energy Technology Co., Ltd , an affiliate of Xi’an TCH, and Guohua Ku, the
Chairman of the Board and Chief Executive Officer of the Company.
Citi has
the discretion to accelerate maturity date of the outstanding loans and request
for payment as well as to cancel or terminate the financing if the single
monthly income amount for Xi’an TCH and Erdos TCH is less than the 70% of the
expected income amount of that month. As of December 31, 2009, Xi’an TCH and
Erdos TCH had no amounts outstanding under the Citi Agreement.
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Common Equity, Related Shareholder Matters and Small Business Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Shareholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesItem 15. Exhibits, Financial Statement Schedules