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.)

12/F, Tower A
Chang An International Building
No. 88 Nan Guan Zheng Jie
Xi An City, Shan Xi Province
China
 
710068
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (011) 86-29-8769-1097
 
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):

Large accelerated filer ¨
Accelerated filer ¨
   
Non-accelerated filer ¨
Smaller reporting company x
 
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
 
PART I
 
1
     
Item 1.     Business.  
1
Item 1A.  Risk Factors.  
7
Item 2.     Properties.  
11
Item 3.     Legal Proceedings.  
11
Item 4.     Submission of Matters to a Vote of Security Holders.  
11
     
PART II
 
11
     
Item 5.     Market for Common Equity, Related Shareholder Matters and Small Business Issuer Purchases of Equity Securities.  
11
Item 6.     Selected Financial Data.  
15
Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.  
15
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.  
25
Item 8.     Financial Statements and Supplementary Data.  
26
Item 9.     Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.  
51
Item 9A.   Controls and Procedures.  
51
Item 9B.   Other Information.  
52
     
PART III
 
52
     
Item 10.   Directors, Executive Officers and Corporate Governance.  
52
Item 11.   Executive Compensation.  
52
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.  
52
Item 13.   Certain Relationships and Related Transactions, Director Independence.  
52
Item 14.   Principal Accountant Fees and Services.  
52
Item 15.   Exhibits, Financial Statement Schedules.  
52

 
 

 

PART I
 
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.
 
ITEM 1. BUSINESS
 
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

 
 
 
·
Our management team has over 20 years of industry experience and expertise;
 
·
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
     
Marketing:
 
25 Employees
     
Research & Development:
 
43 Employees
     
Accounting & Finance:
 
12 Employees     
     
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.
 
ITEM 1A. RISK FACTORS
 
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:
 
 
·
actual or anticipated fluctuations in our quarterly operating results,
 
·
announcements of new services by us or our competitors,
 
·
changes in financial estimates by securities analysts,
 
·
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,
 
·
announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments,

 
7

 

 
·
additions or departures of key personnel,
 
·
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

 
 
ITEM 2. PROPERTIES
 
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.
 
ITEM 3. LEGAL PROCEEDINGS
 
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.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
There were no matters submitted to the Company’s stockholders during the fourth quarter of fiscal 2009.
 
PART II
 
ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
 
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  

ITEM 6.  SELECTED FINANCIAL DATA.
 
Not applicable.
 
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 
 
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.

 
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  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.

 
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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.

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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.  

 
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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.  

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.

 
25

 
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
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
CONSOLIDATED BALANCE SHEETS

   
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
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
   
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
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
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.

 
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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.

 
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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.

 
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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.  

 
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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.

 
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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:

 
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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 )

 
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(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. 

 
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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.

 
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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  

 
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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  

 
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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  

 
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“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  
 
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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 %

 
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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.

 
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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

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
 
ITEM 9A. CONTROLS AND PROCEDURES.
 
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.  
 
ITEM 9B. OTHER INFORMATION.
 
Not applicable.
 
PART III
 
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.
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
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.

ITEM 11.  EXECUTIVE COMPENSATION.
 
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.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.
 
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.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
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.
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 
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.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(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

 

EXHIBIT INDEX
 
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.
 
 
 

 

Exhibit 10.27

Supplementary Agreement

Party A: Inner Mongolia Erdos TCH Energy Saving Development Co.,Ltd. (“Party A )

Party B: Inner Mongolia Erdos Metallurgy Co.,Ltd. (”Party B”)

Whereas: According to the requirements of the Tax Administration and the fact that the the Cooperation Agreement of Wast-Heat Electricity Generaton Project (“Cooperation Agreement) signed between the two parties became effective, the both parties hereby agree to sign this Supplementary Agreement through friendly negotiation in order to adapt to the changing situation.

The Article 3 of the Cooperation Agreement signed by the two parties in April, 2009 is revised as the following:

1.
Party A should be responsible for the operation after the project is completed, and Party A provides Party B with the electricity. The settlement price of the electricity shall be reconfirmed in accordance with the Power Purchase Agreement.
2.
For each project, from the date of completion and operation, the operation period for Party A is 20 years. After the operation period ended, Party A shall transfer the title of the project assets to Party B without futher charges.
3.
Party B shall try its best to coordinate production scheduling arrangement between  the power generatiion project and Party B and to ensure the stable working hours of the power generation project not less than 7,500 hours per year.
4.
In consideretion of the difference in the tax base to be levied between sales tax and value-added tax, both parties agree to adjust the electricity price from previously agreed 0.28 Yuan /Kwh to 0.325 Yuan/Kwh, and the adjustment shall be confirmed in the Power Purchase Agreement.
5.
In order to guarantee the economic returns of Party A’s investment and reflect the change in the forms of reveunes, the equipment rental shall turn into a fixed amount revenue to Party A as following: if the electricity sale is more than 1.5 million yuan per 9MW station, the revenue shall be calculated based on the actual sale of electricity; and if the electricity sale is less than 1.5 million per 9MWstation, the revenue shall be fixed as 1.5 million yuan per 9MW station.

 
1

 

6.
In view of forcasting on the future electrovalence of the State Grid, both parties agree to sign the Power Purchase Contract on yearly basis, to determine the realtime electricity selling price, however, the adjsutment of the electricity selling price shall not effect the fulfillment of the above-mentioned item 5.

This agreement is the supplemental to the Cooperaton Agreement signed by both parties in April, 2009, and it has the same legal effect as the above-mentioned contract. This agreement shall prevail in the event of any inconsistency between this agreement and the above-mentioned contract.
This Supplemental Agreement shall be made in four originals, two for each party. This agreement shall takes effective from the date when it is signed by both Parties’ legal representatives or their authorized representatives and stamped with corporate seals of both Parties.

Party A: Erdos TCH Energy Saving Development Co.,Ltd.
Legal Representative (Authorization):  /s/ Legal Representative of Erdos TCH Energy Saving Development Co.,Ltd.
Date: 1 Dec., 2009

Party B: Erdos Metallurgy Co.,Ltd.
Legal Representative (Authorization):   /s/ Legal Representative of Erdos Metallurgy Co., Ltd.
Date: 1 Dec., 2009

 
2

 
 
Exhibit 10.29
 

 
Capital Trust Loan Contract
 
of
 
Beijing International Trust Co.,Ltd.
 
as the Lender
 
and
 
Inner Mongolia Erdos TCH Energy Conservation
 
Development Co.,Ltd.
 
as the Borrower
 
Contract No.: No. 033, Documents of Trust and Trust Loan, Beijing, 2009
 
Beijing City, Chaoyang District

 
 

 

Capital Trust Loan Contract

 
Content
 
Term 1  Definition and interpretation
3
   
Term 2   Loan
7
   
Term 3  Basic Interest of Loan
12
   
Term 4  Floating interest of loan
13
   
Term 5  Repayment of loa n principal
15
   
Term 6  Taxes
15
   
Term 7  Payment
16
   
Term 8  Repre sentations and warranties
16
   
Term 9  Commitment and other engagement items
18
   
Term 10   Event of default
21
   
Term 11  Treatment of default
22
   
Term 12   Safeguard measures of repayment
23
   
Term 13 Supplement, change and assignment of the Contract
24
   
Term 14   Notification
25
   
Term 15   Other items
25

 
1

 

Capital Trust Loan Contract

 
The Lender:    Beijing International Trust Co.,Ltd.
 
Legal representative: Liu Jianhua
 
Address:      Beijing Finance Trust Mansion Block C No.5 An’ding Road, Chaoyang District, Beijing City
 
Postal code:    100029
 
Telephone:      010 64436553                 Fax:    010 64436551
 
Borrower:      Inner Mongolia Erdos TCH Energy Conservation Development Co.,Ltd.
 
Legal representative: Ku Guohua
 
Address:    Qipanjing Industrial Park, Otog Qi, Erdos City,Inner Mongolia
 
Postal code:    016064
 
Telephone:    (0477)6470617               Fax:  (0477)6470616
 
(The Lender and the Borrower are hereinafter referred to as the parties, the Lender or the Borrower is referred to as “the party”,the Lender is “the other party” to the Borrower, vice versa.
 
Whereas:
 
1.
The Lender is a legally existing trust company approved by –China Banking Regulatory Commission, and the Borrower is a legally existing business entity established in pursuant with the laws of the P.R.C.
 
2.
The Borrower applied to the Lender for trust loan made in RMB (defined in term 1.1) to meet the capital requirements of the construction and operation of II and III stage project of power generating by waste heat (defined in the term 1.1). The Lender agreed to provide the Borrower with the trust loan in pursuant with the provisions hereunder.
 
3.
When signing this Contract, the Borrower has understood and confirmed that the loan capital hereunder comes from the trust capital of low-carbon wealth·No.1 renewable energy collective fund trust plan managed by the Lender.
 
4.
Through friendly negotiation, based on the principle of equality, the parties concluded an agreement on the relevant matters of trust loan for the construction and operation of II and III stage project of power generating by waste heat.
 
According to The Trust Law of the People's Republic of China, The Contract Law of the People's Republic of China , General Principles of the Civil Law of the People's Republic of China , Management Regulation of Trust Company , Measures for Administration of Collective Fund Trust Plans of Trust Companies, General Rules on Loan and other relevant laws, administrative rules and regulations as well as the rules of departments, the parties entered into this Contract and prepared to act in pursuant with it.

 
2

 

Capital Trust Loan Contract


Term 1  Definition and interpretation
 
1.1 
Definition
 
In this Contract, unless other interpretations and indications specified in the context, the following words have the meanings stated as below:
 
The Lender: 
Beijing International Trust Co.,Ltd. and its legal successors.
 
The Borrower:      Inner Mongolia Erdos TCH Energy Conservation Development Co.,Ltd. and its legal successors.
 
This contract:
it refers to the Capital Trust Loan Contract executed by and between Beijing International Trust Co., Ltd acting as the Lender and Inner Mongolia Erdos TCH Energy Conservation Development Co., Ltd acting as the Borrower.
 
Documents about safeguard measures of repayment: it refers to the written documents signed in pursuant with the relevant provisions hereunder and for the purpose of ensuring the rights and benefits of the Lender and the Borrower’s on-time and full repayment, and such documents include but not limited to Equipment Mortgage Contract, Receivable Pledge Contract, Account Custody Contract and Contract of Guaranty, etc.
 
RMB( ):
The legal currency in China, its arithmetical unit is Yuan.
 
Project of power generating by waste heat:
It refers to the project in which the Borrower generates electric energy by making a comprehensive utilization of low-temperature exhaust gas heat from large-scale cluster electric stove of Erdos Metallurgy Co., Ltd.
 
Capital trust:
It refers to the legally established trust in which the trustor, in complete trust of Beijing International Trust Co., Ltd, entrusts its legal capital under its full powers of free disposal to Beijing International Trust Co., Ltd, who will in its own name take management, application and disposal of the capital in pursuant with the trustor’s will.
 
3


Capital Trust Loan Contract

 
Trust plan :
it refers to the low-carbon wealth · No.1 renewable energy collective fund trust plan, the capital collected from this trust plan shall be all used to provide the Borrower with the loan hereunder. Unless otherwise specified, or the “turst plan” and the capital trust plan shall have the same meaning.
 
Trust loan:
it refers to the loan provided from the trust capital by Beijing International Trust Co., Ltd as the trustee in pursuant with the trust provisions under the Low-carbon Wealth · No.1 Renewable Energy Collective Fund Trust Contract (referred to as “Trust Contract”) and the agreements hereunder unless otherwise indicated, the “loan” under this contract and the trust loan shall have the same meaning.
 
Loan term:
It means the term of the trust loan specified by the parties under this contract
 
Special account of trust property: the unique account for receiving, paying and depositing  trust capital under the trust plan.
 
Loan custody account: it refers to the account, established by Inner Mongolia Erdos TCH Energy Conservation Development Co., Ltd as the Borrower in a bank designated by Beijing International Trust Co., Ltd as the Lender, is specially used as an unique account for keeping the loan given by the Lender. The capital in such account shall be supervised by three parties including the Lender, the Borrower and the bank designated by the Lender, and the Lender shall cancel the capital supervision at the appointed time in pursuant with provisions hereunder.
 
Account of repayment reserve: it refers to the account, established by Inner Mongolia Erdos Tiankehua Energy Conservation Development Co., Ltd as the Borrower in a bank designated by Beijing International Trust Co., Ltd as the Lender in pursuant with the Account Custody Contract (referred to as “Account Custody Contract”) signed by and between the Lender and the Borrower, which is used as an unique bank account for keeping all of the income of the Borrower. The capital in the account shall be used and stored as reserve in pursuant with the requirements and arrangements in the Account Custody Contract and the Repayment Plan.

 
4

 

 Capital Trust Loan Contract


Raising period: 
it refers to a six-months period from the date of establishment of the trust plan.
 
Subscription period: 
it refers to the period when trust institutions are opened for being subscribed by investors during the raising period.
 
CDM project: 
CDM refers to Clean Development Mechanism, which was established by the Kyoto protocol and is used to solve problems of climate change by market approach. The CDM project stated herein is developed from the project of generating power by waste heat of Inner Mongolia Tiankehua Energy Conservation Development Co., Ltd in pursuant with the CDM and used for verifying the profitability of Carbon Emission Reduction or Voluntary Emission Reduction (CER/VER).
 
Interest payment date: it refers to the date when loan interest is payable in pursuant with the sub-clause 3.5 herein.
 
Repayment date:      It refers to the date when part or all of the loan principal is payable in pursuant with the sub-clause 5.1 herein.
 
Advanced repayment:
It refers to that the Borrower voluntarily makes a repayment of part or full of the loan principal in advance of the repayment date.
 
Loan note:
It refers to the loan borrowing voucher filled by the Borrower to be commonly used in pursuant with the regulations by the Lender in RMB loan services.
 
Interest penalty:
It refers to the interest penalty, published by People’s Bank of China, which is applicable for the penalty interest rate of the loans of the financial institutions.
 
Business day:
It refers to the normal business day of the Lender except for the legal festivals and holidays.
 
Financing documents:
it refers to the legal documents in connection with the loan matters hereunder, such documents include but not limited to this Contract, Equipment Mortgage Contract, Receivable Pledge Contract, Account Custody Contract and Contract of Guaranty, etc.
 
 
5

 

 Capital Trust Loan Contract

 
Corporate surety:
it refers to one of the Borrower’s shareholders, e.g. Xi’an TCH Energy Science&Technology Co., Ltd.
 
Material adverse change: It refers to any event, situation, effect, status or the complex event of the said situation from which the material adverse impact on the business, operation, assets, debt, any related rights, business, financial status or expectations of the Borrower may arise, or that is reasonably considered by the Lender to have material adverse impact, whether such event, situation, effect, status or the complex event of the said situation exist or occur in the date of execution of this Contract or before the date, or exist or occur after such date.
 
Force majeure: 
It refers to all events that occur after the date of execution of this Contract and can not be foreseen in the said date, of which the occurrence and consequence cannot be avoided or conquered, and which will prevent any of the parties from all or part of act or omission, such events include but not limited to, fire, flood , earthquakes, typhoons, tsunamis, wars, terrorist acts or other acts of violence, strikes, pestilence and quarantine restrictions.
 
1.2 
Interpretation
 
Unless otherwise specified in the context, such phrases as “of this Contract”, “in this Contract”, “in the Contract” and “under this Contract”, and other similar words or phrases shall indicate the entire Contract including all components of this Contract instead of any particular parts or clauses hereof.
 
The title of the term hereof shall not be considered equivalent to the entire content of the term, or shall not be used for the interpretation of the term or this Contract.
 
In this Contract, unless otherwise required or specified, the words or phrases defined in the Trust Contract shall have the same meaning when used in this Contract.

 
6

 

Capital Trust Loan Contract
 
Term 2   Loan
 
2.1
Loan amount
 
The Lender agrees that, in the precondition of establishment of capital trust plan, it shall provide the Borrower with the trust loan coming from all of the trust capital collected by the trust plan in pursuant with this Contract and the agreements in the trust documents, the total amount of the trust loan shall be no less than RMB150,000,000.00, and no more than RMB300,000,000.00(the amount shall be the actually collected amount by the trust plan).
 
2.2
Loan application
 
2.2.1
The trust loan hereunder shall uniquely used by the Borrower for its development, construction and operation of II and III stage project of power generating by waste heat.
 
 
2.2.2
The specific application of each loan capital shall be handled in pursuant with the Detailed Application List of Trust Loan Capital(see appendix 3 hereto) confirmed by the Borrower affixing its seal on it.
 
2.3
Unless the Lender has been satisfied by all of the documents listed in this clause in the respect of form and content, or the preconditions in this clause have been completely met, or the Lender gives a written approval of postponement or waiver of such preconditions that have not been met, the Lender shall have no obligations to provide the Borrower with any loan hereunder:
 
 
2.3.1
The copies of the following documents affixing the Borrower’s corporate stamp to affirm the authenticity, integrality, validity and freshness of such documents:
 
(1)
The Borrower’s Business License for Enterprise Legal Person, issued by the industrial and commercial administrative department, which shall have passed the latest annual check;
 
(2) 
The Borrower’s Organizaiton Code Certificate
 
(3)
The Borrower’s Tax Registration Certificate (including National Tax Registration Certificate and Local Tax Registration Certificate)
 
The Borrower’s Company Charter(including all of its revision

 
7

 

 Capital Trust Loan Contract


The original copies of the name lists of shareholders and board members of the Borrower affixing its corporate stamp, the copies of the ID card/passport of all shareholders/board members of the Borrower affixing its corporate stamp, and the specimen signature of all shareholders/board members of the Borrower as well;
 
 
2.3.2
The original copies of resolution of board of shareholders and resolution of board of directors given by the Borrower in pursuant with the articles of incorporation, the content of such resolutions shall include:
 
 
(1)
The agreement that the Borrower apply to the Lender for the loan hereunder;
 
 
(2)
The agreement that in pursuant with the requirements of the Lender the correlative equipments and assets of the Borrower shall be pledged to the Lender as the security for the Borrower s repayment of its debts.
 
 
(3)
The agreement that all of the receivables of I, II and III stage project of power generating by waste heat(the rights, interest and recourse related to the receivable included) shall be pledged to the Lender as the security for the Borrower s repayment of its debts;
 
 
(4)
The agreement that all of the income of I, II and III stage project of power generating by waste heat shall be remitted into the custody account established by the Borrower in the bank designated by the Lender, and the said income shall be controlled, managed and used in pursuant with the agreement in the Account Custody Contract and the Lender s requirements;
 
 
(5)
The agreement that the Borrower shall sign and implement the financing documents.
 
 
(6)
The appointment of certain person to act as the duly authorized proxy of the Borrower and sign the financing documents, and sign and issue and receive any notifications or documents in connection with this Contract;
 
 
(7)
The specimen signature of the duly authorized proxy shall have become the appendix to the resolution of the board of directors.
 
 
8

 

 Capital Trust Loan Contract


 
2.3.3
The copies of the capital verification report about the Borrower’s full subscription of registered capital issued by the Chinese Certified Public Accountant who has been proved to be genuine.
 
 
2.3.4
The copy of the Corporate Surety’s Business License affixing its corporate stamp for proving the authenticity, integrality and freshness of the license.
 
 
2.3.5
The original copy of the resolution of the shareholders/the resolution of the board of directors about the agreement that the Corporate Surety shall provide unconditional and irrevocable joint liability guarantee for the Borrower’s full repayment of its debts to the Lender;
 
 
2.3.6
The original copies of the name lists of shareholders and board members of the Corporate Surety affixing its corporate stamp, the copies of the ID card/passport of all shareholders/board members of the Corporate Surety affixing its corporate stamp, and the specimen signature of all shareholders/board members of the Corporate Surety as well;
 
 
2.3.7
The copy of the ID card of the surety Mr. Ku Guohua, and the ID card shall be proved to be genuine;
 
 
2.3.8
All of the financing documents and the guarantee documents in connection with the loan hereunder (including but not limited to Equipment Mortgage Contract, Contract of Guaranty, Receivable Pledge Contract, Account Custody Contract and etc.) legally and effectively signed by the clients of the parties;
 
 
2.3.9
All of the legal and valid approval, registration, record and authorization in connection with the loan hereunder (the approval from the government departments and the approval from the Borrower’s company both included);
 
2.3.10
Valid credit card and its password offered by the People’s Bank of China for the Borrower;Valid credit card and its password offered by the People’s Bank of China for the Borrower;
 
2.3.11
The Commitment Letter issued by Inner Mongolia Erdos Metallurgy Co., Ltd on the lowest amount of power purchase; Inner Mongolia Erdos Metallurgy Co., Ltd Large-scale Cluster Electric Stove Low-temperature Flue Gas Waste Heat Comprehensive Utilization Project (energy efficiency EPP project) Cooperation Contract signed by and between Inner Mongolia Erdos Metallurgy Co., Ltd and the Corporate Surety, which shall be issued by Inner Mongolia Erdos Cashmere Product Co., Ltd, and the Letter of Guarantee under the aforementioned Commitment Letter on the lowest amount of power purchase, which can voluntarily provide joint responsibility to guarantee, shall be issued by Inner Mongolia Erdos Cashmere Product Co., Ltd and have been disclosed;
 
 
9

 

Capital Trust Loan Contract


2.3.12
Upon the completion of all mortgage registration formalities for the mortgage under the Equipment Mortgage Contract in the administrative department, the certificate of other rights shall be held and managed by the Lender, and the Lender shall legally enjoy No.1 right to mortgage on the mortgages, and the relevant rights and interests.
 
2.3.13
The formalities of receivable pledge registration under the Receivable Pledge Contract shall have been finished in the Credit Information Center of the People’s Bank of China, the Lender shall enjoy No.1 right to pledge on the pledge object, and the relevant rights or interests.
 
2.3.14
The Borrower shall have established the custody account for loan offering in the bank designated by the Lender.
 
2.3.15
Loan Application (see appendix 1 hereto) legally filled and signed, and the Lender given Repayment Plan, signed and issued by the Borrower in pursuant with the form and content in the appendix 2 hereto, which shall be on the Borrower’s plan of repayment of the loan principal and its interest hereunder to the Lender.
 
2.3.16
The Borrower shall, on the date of loan offering, provide the Lender with such documents legally filled and signed by the Borrower listed as following: Detailed Application List of Trust Loan Capital (see appendix 3 hereto), Irrevocable Drawing Notice (see appendix 4 hereto), Loan Offering Confirmation (see appendix 5 hereto), and the Loan Note (see appendix 6 hereto).
 
2.3.17
Capital Verification Report for proving the full payment of the project capital.
 
2.3.18
Other documents, suggestions and guarantee required by the Lender
 
 
10

 

 Capital Trust Loan Contract


2.4
Loan offering
 
The Borrower irrevocably agrees that the trust loan offered by the Lender shall be appropriated to the loan custody account by the Lender, and the loan shall be used by the Borrower in pursuant with the conditions and terms hereunder and in the trust documents.
 
2.5
Loan application
 
2.6
The Borrower shall submit the Repayment Application to the Lender prior to any of its application of the capital in the custody account, however, the following conditions shall be met firstly:
 
 
2.5.1
The said application shall be in pursuant with the provisions of the Detailed Application List of Trust Loan Capital (see the appendix 3 hereto) affirmed by the Borrower affixing its corporate stamp on it.
 
 
2.5.2
The Repayment Application, appropriately filled and signed by the duly authorized proxy of the Borrower, shall be delivered to the Lender in advance of the repayment by at least three (3) business days, such application shall specify the amount to be used, purpose, date and other relevant matters;
 
 
2.5.3
The certification documents such as the related contracts and agreements on the Borrower’s application of loan capital shall be provided, and such documents shall be in integrality, authenticity and validity;
 
 
2.5.4
The certification documents such as the related contracts and agreements on the Borrower’s application of loan capital shall be provided, and such documents shall be in integrality, authenticity and validity;
 
 
2.5.5
Prior to the proposed payment, no event of default (cross default included) or potential event of default shall occur, nor shall occur such circumstance in which the application of the loan capital will incur any event of default, meanwhile,  the representations and warranties made by the Borrower shall be in authenticity, accuracy and integrality, and shall not mislead anything.
 
 
2.5.6
From the Lender’s point of view, any event that will have material adverse impact on the Borrower’s ability to implement the obligations hereunder and in other financing documents shall not occur, nor shall occur the Force Majeure that will have overall effect on the Borrower; and
 
2.5.7
Any adverse change in the applicable laws for this Contract that will make the loan hereunder illegal shall not occur.
 
 
11

 

 Capital Trust Loan Contract


2.6
Loan term
 
 
The loan term hereunder shall be four (4) years, from the date of __ (month) __ (day), 2009, when the first loan interest is calculated, to the expiration date of __ (month) __ (day), 2009.
 
Term 3  Basic Interest of Loan
 
3.1
The corresponding loan interest rate for the basic interest of the loan hereunder shall be the annual interest rate, the interest rate of the basic interest of the loan, in accordance with the corresponding trust capital’s trust institutions, shall be divided into:
 
 
3.1.1
The annual loan interest rate corresponding to the trust capital corresponding to trust institutions of category B under the trust plan shall be 8.35 percent;
 
 
3.1.2
The annual loan interest rate corresponding to the trust capital corresponding to the trust institutions of category A1 under the trust plan shall be 9.94 percent;
 
 
3.1.3
The annual loan interest rate corresponding to the trust capital corresponding to the trust institutions of category A2 under the trust plan shall be 11 percent;
 
 
3.1.4
The annual loan interest rate corresponding to the trust capital corresponding to the trust institutions of category A3 under the trust plan shall be 12.05 percent.
 
3.2
The loan interest rate corresponding to the basic interest of loan hereunder shall be the fixed interest rate, the rate shall not be adjusted during the term of this Contract.
 
3.3
Initial day of calculation of the basic interest
 
On the precondition of the establishment of the trust plan, the parties confirmed that:
 
 
3.3.1
The initial day of calculation of the loan interest shall be the day of establishment of the trust plan, e.g. [ ] (month) [ ] (day), 2009, the relevant matters of the first loan such as its actual amount shall be confirmed in pursuant with the Loan Offering Amount Confirmation (see appendix 5 hereto for its form) submitted by the Borrower in the light of the requirements of the Lender;
 
 
12

 

 Capital Trust Loan Contract


 
3.3.2
The initial day of calculation of the other loan interest shall be the next working day from the date of the expiration of each subscription within the raising period, e.g. the interest of such loan shall be calculated from the next working day from the date of expiration of corresponding subscription period, the relevant matters of such loan as the date of the initial day of calculation of the interest or the actual amount shall be confirmed in pursuant with the Loan Offering Amount Confirmation (see appendix 5 hereto for its form) submitted by the Borrower in the light of the requirements of the Lender.
 
3.4
The basic interest of loan hereunder, based on 360 days as a year, shall be calculated according to the loan balance, number of occupied days and the loan interest rate in pursuant with the provisions in sub-clause 3.1 hereunder from the initial day of calculation of the interest in pursuant with the provisions in the sub-clause 3.3 hereunder.
 
3.5
The basic interest of loan hereunder shall be pre-paid by _____ yuan (Say:______ CNY) within 10 working days from the date of the loan offering, the rest of the interest shall be paid in pursuant with the interest payment date stated as below: the payment shall be made on the day of one, two, three and four year(s) from the initial date of calculation of the first loan interest, e.g., the interest payment day shall be the day of one, two, three and four year(s) from the initial date of calculation of the first loan interest.
 
Term 4  Floating interest of loan
 
The Borrower agrees that, except for the basic interest of loan specified in the term 3 herein, it shall provide the Lender with the following floating interest of loan, e.g. the profit sharing from the CDM project and the management stimulation profit:
 
4.1
Within the loan term specified herein, if the Borrower obtains profit sharing from the CDM project, the Borrower shall pay the Lender 50 percent of the profit sharing from the CDM project, and the payment shall be made within five (5) working days from the date of the Borrower’s obtainment of each profit sharing from the CDM project.
 
 
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 Capital Trust Loan Contract


4.2
If the financial index reflected on the Borrower’s audited financial reports for the the fiscal year prior to the expiration of the loan term meets P × Y 1.06, the Borrower shall pay the Lender a sum of management stimulation profit, which is the profit = (P × Y - 1.06) × class sub-B trust institution share × RMB 1.00 yuan, in which:a)
 
P= the audited net profit in the fiscal year prior to the expiration of the loan term   ÷ the Borrower’s average amount of registered capital in the said fiscal year;
 
b) 
Y refers to the “multiple”:
 
 
i)
When the Borrower’s average amount of registered capital in the aforementioned fiscal year is no more than RMB150,000,000.00, Y shall be “5”;
 
 
ii)
When the Borrower’s average amount of registered capital in the aforementioned fiscal year is more than RMB150,000,000.00, but less than RMB200,000,000.00, Y shall be “6”;
 
 
iii)
When the Borrower’s average amount of registered capital in the aforementioned fiscal year is no less than RMB200,000,000.00, Y shall be “8”;
 
4.3
The payment of the management stimulation profit shall be made on the day of the Borrower’s full repayment of all loan principal to the Lender/the expiration of the loan term (the one which come earlier shall be adopted).
 
 
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 Capital Trust Loan Contract


Term 5  Repayment of loan principal
 
5.1
The Borrower shall make the repayment of the loan principal to the Lender in pursuant with the following requirements of time and amount:
 
 
5.1.1
The Borrower shall make the repayment of the loan principal corresponding to the trust capital amount corresponding to the trust institutions of category A1 under the trust on the day of the next year from the date of the initial calculation of the first loan interest;
 
 
5.1.2
The Borrower shall make the repayment of the loan principal corresponding to the trust capital amount corresponding to the trust institutions of category A2 under the trust on the day of the third year from the date of the initial calculation of the first loan interest;
 
 
5.1.3
The full repayment of the rest of the loan principal shall be made by the Borrower to the Lender on the day of the fourth year from the date of the initial calculation of the first loan interest.
 
5.2
The loan term hereunder shall not be extended.
 
5.3
Without the Lender’s prior written approval, the Borrower shall not make the repayment ahead of schedule; if the Lender agrees the Borrower’s repayment in advance, the following conditions about the Borrower shall be met:
 
 
5.3.1
The trust plan shall have been existing for 2 years from the date of the establishment of the plan;
 
 
5.3.2
The advanced repayment shall be put forward in written form, the amount and detailed date of the repayment shall be illustrated;
 
 
5.3.3
For any of the advanced repayment, except for the repayment of the loan principal, the repayment of all of the loan interest on the engaged repayment date shall have to be made by the Borrower in pursuant with the sub-clause 5.1 herein.
 
Term 6   Taxes
 
6.1
The Lender and the Borrower shall respectively pay its taxes and other relevant charges in pursuant with the laws of the P.R.C.
 
6.2
The relevant charges arising from the negotiation, draft, subscription of this Contract, including but not limited to assessment fee, audit charges, attorney fee, registration fee, communication expenses and travel expenses, shall be assumed by the Borrower.
 
 
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 Capital Trust Loan Contract


Term 7   Payment
 
7.1
All of the Borrower’s payment hereunder shall have to be made in due time and in full, any neutralization, claim or restraints shall not be affixed to the said payment, nor the deduction or withholding of the taxes in any nature.
 
7.2
The Borrower shall preserve the repayment reserve in pursuant with the Repayment Plan issued by the Borrower to the Lender.  The Borrower’s reasonable requirements of adjustment to the Repayment Plan shall be met upon the obtainment of the Lender’s approval, or the Lender may have the rights to investigate for the Borrower’s responsibility of breach of this Contract, and may require the surety to assume the joint liability to guarantee and/or exercise the right to mortgage and pledge.
 
7.3
When the Borrower makes a certain payment (including but not limited to the charges, damages, interest penalty, basic and floating interest, principal and advanced repayment) due to the Lender in pursuant with the provisions hereunder, if the date of such payment is just the Lender’s non-business day, the postponement to the nearest next business day of the Lender shall be made on the abovementioned date, and the interest rate shall be calculated for the days of postponement.
 
7.4
The Borrower hereby makes the commitment that, if the amount of the loan principal and/or basic interest given to the Lender from the Borrower is less than the amount due to the Lender in such date of the said principal/interest repayment, the Lender shall have the right to appropriate the said repayment from the custody account in the order stated as below: accrue fees, damages, penalty interest, basic interest and principal.
 
Term 8   Representations and warranties
 
8.1
The Borrower makes the following representations and warranties to the Lender on the day of execution of this Contract:
 
 
8.1.1
The Borrower shall be a limited company, established in pursuant with the laws of the P.R.C, legally existing in legal entity status, which has right to enter into this Contract;
 
 
8.1.2
The Borrower makes the warranty that the loan shall be applied in pursuant with the provisions hereunder, and not applied for other purposes not specified herein, and not applied to take any illegal activities or other activities forbidden by policies, laws and regulations.
 
 
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8.1.3
The Borrower shall not be involved in any liquidation, dissolution, merger, separation or other similar legal procedures, and any other events or circumstances from which such involvement in the said legal procedures may arise shall not occur;
 
 
8.1.4
The Borrower shall not be involved in any civil, criminal or administrative litigation or arbitration procedure that will have adverse impact on the Borrower’s ability to implement this Contract, and the event or circumstance from which such  involvement in the said litigation and arbitration procedure may arise shall not occur.
 
 
8.1.5
Any important asset of the Borrower shall not be involved in any measures of compulsory execution, property preservation, distrainment, detention, retention or supervision, and any events or circumstances from which the said involvement in such measures may arise shall not occur.
 
 
8.1.6
Any event of default in the Borrower party shall not occur, nor the circumstance in which such event may last;
 
 
8.1.7
The Borrower shall sign this Contract and exercise and implement the obligations and rights hereunder, and shall not violate any documents of agreement, mortgage, pledge, bond or other documents signed by the Borrower or binding on the Borrower and its asset, and shall not violate the approved documents and internal rules and regulations established by the Borrower or laws, governmental orders and judicial decisions.
 
 
8.1.8
The Borrower makes the warranty that the loan project and matters shall comply with laws and regulations, and the provisions and requirements of the national policies on land, property, environmental protection and investment, and have already been approved or recorded.
 
8.2
The Borrower confirms that the aforementioned representations and warranties shall keep consistently valid prior to the Borrower’s full payment of its dues hereunder to the Lender, and the Borrower understands exactly the aforementioned representations and warranties shall act as the basis for the Lender’s approval of its loan request and subscription of this Contract.
 
 
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Term 9  Commitment and other engagement items
 
For the related matters during the loan term, the Borrower makes further commitments stated as below:
 
9.1
The Borrower shall purchase property insurance for I, II and III stage project of power generating by waste heat in pursuant with the requirements of the Lender;
 
9.2
The Borrower shall legally run its business, comply with the national laws and regulations, and apply the loan in pursuant with the applications specified herein.
 
9.3
The Lender shall have the right to, at any time, in the reasonable manner the Lender believes it to be, examine and supervise the application of the loan, and try to know the plan execution, operation management, financial activities, inventory materials and significant business contract of the Borrower. The Borrower must cooperate actively with the Lender on the Lender’s supervision on its application of the loan and its business situation, and provide relevant material in pursuant with the requirements of the Lender.
 
9.4
The Borrower shall provide the documents about the construction and operation of the project of power generating by waste heat in pursuant with the requirements of the Lender, such documents shall include but not limited to:
 
 
9.4.1
Overall planning progress report of the construction of the project of power generating by waste heat;
 
 
9.4.2
Archival records of public bidding of the project of power generating by waste heat;
 
 
9.4.3
Monthly image progress examined by the management company of the project of power generating by waste heat;
 
 
9.4.4
Monthly report on the construction of the project of power generating by waste heat;
 
 
9.4.5
Summary report on the monthly operation of the waste heat power station;
 
 
9.4.6
Monthly brief report on work of the waste heat power station;
 
 
9.4.7
Report on the monthly generated power amount of the waste heat power station and the payment condition of Inner Mongolia Ordos Metallurgy Co., Ltd;
 
 
9.4.8
Documents on the funds available and construction progress of the follow-up project of power generating by waste heat.
 
 
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Capital Trust Loan Contract

 
9.5
The Borrower, in pursuant with the requirements of the Lender, shall provide the related financial and accounting information and the documents about the business condition of the company prior to the 5th day of each calendar month, such information and documents include but not limited to the balance sheet, income statement, cash flow statement, loan capital payment chart and other notes to statements (including but not limited to the note on account receivable, other account receivable, stock, fixed assets, short and long term loan,  accounts payable, etc.)of the company in the previous month.
   
9.6
The Borrower, in pursuant with the requirements of the Lender, shall mortgage the its equipments of the construction of I, II and III stage project of power generating by waste heat to the Lender, and register the said mortgage within three working days from the date of the Lender’s acquisition of ownership of the said equipment.
   
9.7
The Borrower shall have the obligations to promptly inform the Lender the changes that will or may happen on the project, business, properties and scope.
   
9.8
The Borrower makes the warranty that, prior to taking loan credit preservation measures approved by the Lender in written form, it shall not take the following actions as dissolution, liquidation, substantial increase of financing debt and establishment of subsidiary company as well as any other actions that will have adverse impact on the rights and interests of the creditor.
   
9.9
The Borrower makes the warranty that it shall not make the full repayment of the other loan in priority by not violating the normal repayment order, and not sign any contract, agreement or other legal documents at present or in the future that will make the loan hereunder be in the secondary status.
   
9.10
The Borrower makes the warranty that, without the written approval from the Lender, it shall not provide the third party with the security that will be enough to have adverse impact on its financial situation and its ability to implement its obligations hereunder.
   
9.11
The Borrower makes the warranty that, once the occurrence or potential occurrence of the event that will have adverse impact on the  repayment safeguard measures specified in the term 12 hereof, it shall promptly provide the alternative security approved by the Lender.
   
9.12
The Borrower makes the warranty that, once the occurrence of the following situation, it shall inform the Lender the situation within seven days and implement the full repayment and security of the debts hereunder in pursuant with the requirements of the Lender:

 
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Capital Trust Loan Contract
 
9.12.1
All litigation, arbitration and administrative disposal that will have adverse impact on the interests of the Borrower;
 
9.12.2
Any event of default or potential event of default, furthermore, once the occurrence of the event of default, the Borrower shall show the properties and duration of the said event, as well as the action or measures that the Borrower has taken or will take;
 
9.12.3
The Borrower, once its acquaintance of the involvement of it or its important asset in any litigation procedure, arbitration procedure, compulsory execution, distrainment, detention or similar measures, or the event or circumstance from which the said involvement may arise, shall inform the Lender in pursuant with the provisions in present clause, and make detailed list of the impacts that have been on it or will be potentially on it, as well as the remedies which it has taken or it plans to take;
 
9.12.4
The Borrower’s economic disputes with the third party incurred by the economic activities, or the events that will have adverse impact on the normal operational activities of the Borrower;
 
9.12.5
Failure on the part of the Borrower to confirm the capital shortage incurred by project overruns or other reasons;
 
9.12.6
Any severe event that will be probable to seriously affect the business, capital and property status of the Borrower;
 
9.12.7
Any event, having adverse impact on the normal repayment of the Borrower, which will potentially happen or have happened;
 
9.12.8
The requirements of the Borrower to change legal representative, duly authorized proxy, postal address or institution name, or to amend its charter or Legal Person Public Institution Certificate for meeting the significant changes in the respect of finance and staffing.

 
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Capital Trust Loan Contract
  
Term 10  Event of default
 
10.1
Any of the following events shall constitute the Borrower’s breach of this Contract:
   
10.1.1
The Borrower fails to make the payment due and payable stipulated herein on the maturity date in pursuant with the currency and method hereunder;
     
10.1.2
Any of the representations and warranties hereunder made by the Borrower is incorrect, untrue, misleading, disobeyed, or the representations and warranties are proved to be incorrect, untrue, misleading, disobeyed when they are being made or considered to be made, or the representations and warranties have become incorrect and misleading currently;
     
10.1.3
The repayment of the Borrower’s debts under any other financing agreement has not been made on the maturity date, or such debts is declared as being acceleration of maturity prior to its fixed maturity;
     
10.1.4
The Borrower is involved in any liquidation, bankrupt, dissolution, shutout or the similar legal procedures;
     
10.1.5
Any of the Borrower’s important asset is involved in any compulsory execution, distrainment, detention, property preservation, supervision measures or similar measures;
     
10.1.6
The Borrower fails to substantially comply with or implement any of its commitments hereunder;
     
10.1.7
The significant changes,  incurred by the changes of the laws or any of the administrative orders from the governmental departments, occurs in the business condition or important assets of the Borrower, or the events or circumstance from which the said significant changes may arise also occurs, the said changes, events or circumstance have been reasonably considered by the Lender as having had or probably having material adverse impact on the Borrower’s ability in repayment hereunder;
     
10.1.8
The Borrower fails to preserve the repayment reserve in pursuant with the Repayment Plan given to the Lender, or the said repayment reserve is adjusted without the Lender’s approval;
     
10.1.9
The Borrower violates the term 8 as “Representations and warranties” or the term 9 as “Commitment and other engagement items”.

 
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Capital Trust Loan Contract

10.2
The failure of the Lender to provide the Borrower with the loan in pursuant with this Contract shall constitute a breach of this Contract, except for the Borrower’s breach abovementioned.
 
Term 11  Treatment of default
 
11.1
Upon the occurrence of one or some of the default listed in the sub-clause 10.1 herein, the Lender may unilaterally and unconditionally adopt one or some of the measures listed below to handle the said default, under this condition, the Borrower shall agree to unconditionally cancel the right to defense, and compensate for the Lender’s all losses incurred by its default:
 
11.1.1
The Lender shall stop providing undrawn loan, declare the loan principal hereunder be on maturity immediately, recover all or part of the provided loan ahead of the schedule, ask the Borrower’s full payment of the owed interest and the dues, and make the immediate recourse to the Borrower in various ways;
 
11.1.2
Within the Contract term, if the Borrower’s unauthorized diversion of any of the loan hereunder without the written approval from the Lender occurs, the interest penalty, according to the diversion amount, number of days of actual diversion and the penalty interest rate of 0.05 percent per day, shall be calculated from the day of unauthorized diversion till the full repayment of the principal and interest. The Lender’s charge of the penalty interest shall not affect its other rights hereunder;
 
11.1.3
Within the loan term herein, if the Borrower fails to make the payment of the basic and floating interest in pursuant with payment term herein, the said interest shall be charged with the penalty interest, the penalty interest shall be calculated from the date of the day overdue by the penalty interest rate of 0.05 percent per day;
 
11.1.4
For the overdue loan or the loan the Lender declares to be on maturity immediately, the penalty interest, according to the penalty interest rate of 0.05 percent per day, shall be calculated from the date of the day overdue or the day declared to be on maturity till the full repayment of the principal and interest;
 
11.1.5
The Lender shall cancel the Borrower’s undrawn loan;

 
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Capital Trust Loan Contract
 
11.1.6
The Lender shall require the Borrower to provide the alternative security with the written approval from the Lender;
 
11.1.7
Other necessary measures stipulated by the laws.
 
11.2 
If the Borrower’s application of all or part of the loan is not made, the payment of the interest shall still be made in full by the Borrower in pursuant with the provisions herein.
 
Term 12   Safeguard measures of repayment
 
12.1
For the loan principal, basic interest, floating interest and other payment dues, the Borrower provides the Lender with the following payment safeguard measures:
 
12.1.1
The Borrower, in pursuant with the requirements of the Lender, shall mortgage its possessing relevant assets of the construction of I, II and III stage project of power generating by waste heat to the Lender;
 
12.1.2
Xi’an Tiankehua Energy Science&Technology Co., Ltd shall provide the Lender with the unconditional and irrevocable joint liability guarantee on all of the Borrower’s obligations hereunder;
 
12.1.3
Mr. Ku Guohua shall provide the Lender with the unconditional and irrevocable joint liability guarantee on all of the Borrower’s obligations hereunder;
 
12.1.4
The Borrower shall pledge all of the receivables of I, II and III stage project of power generating by waste heat (the relevant rights, interests or right of recourse of the receivables included) to the Lender, the said receivables shall act as the security for the Borrower’s implementation of all of its obligations hereunder;
 
12.1.5
The Borrower shall remit all of its income from the project of power generating by waste heat into the repayment reserve account, and preserve the repayment reserve in time and in full in pursuant with the engagement in the Repayment Plan;
 
12.1.6
The Borrower shall arrange Inner Mongolia Erdos Metallurgy Co., Ltd to provide the Borrower with the commitment on the lowest amount of power purchase;

 
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Capital Trust Loan Contract
 
12.1.7
The Borrower shall arrange Inner Mongolia Erdos Cashmere Product Co., Ltd to provide the joint liability guarantee for Inner Mongolia Ordos Metallurgy Co., Ltd to implement the Inner Mongolia Erdos Metallurgy Co., Ltd Large-scale Cluster Electric Stove Low-temperature Flue Gas Waste Heat Comprehensive Utilization Project (energy efficiency EPP project) Cooperation Contract and the obligations in the commitment on the lowest amount of power purchase;
     
12.2
The Borrower agrees that it shall from time to time provide other safeguard measures satisfying the Lender in pursuant with the requirements of the Lender.
   
Term 13  Supplement, change and assignment of the Contract
   
13.1
For the outstanding issues of this Contract, the parties may conclude supplemental agreement through negotiation. The supplemental agreement, acting as the appendix to this Contract, shall constitute a part of this Contract and have the same legal effect as this Contract.
   
13.2 
If this Contract violates the national laws and regulations, in the premise that the safety and efficiency of the loan from the Lender can be guaranteed, the parties shall promptly conclude supplemental agreement to improve this Contract. However, whether the supplemental agreement is signed or not, the Lender shall reserve the right to accelerate the maturity of the loan and make recourse to the Borrower immediately;
   
13.3
Upon the execution of this Contract, the change of the terms of this Contract shall have to be made on the basis of negotiated consensus among the parties hereof and the related third party, and the formalities of approval, registration and record of this Contract and its relevant documents shall be handled in pursuant with the provisions in the laws;
   
13.4
The Borrower shall not assign any of its rights or obligations hereunder;
   
13.5
Within the Contract term, the Lender, informing the Borrower in written form ahead of the assignment stated below by ten business days, may make the assignment of the Lender’s rights and obligations hereunder to the other party, the Borrower’s prior approval for the assignment is not required;
   
13.6
For carrying out the aforementioned assignment, the Assignor and the Assignee shall separately sign the written assignment document, the Assignee and the Borrower shall separately sign the Loan Contract and all other relevant documents required by the repayment safeguard measures, and handle the formalities of approval, registration and record required by the Loan Contract and other documents. The Borrower shall have the obligations to unconditionaly cooperate with the Assignor and the Assignee and complete all of the relevant formalities.

 
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Capital Trust Loan Contract

Term 14   Notification
   
14.1
The addresses of the parties hereof are at the top of this Contract. If the address of any party changes, the party shall inform the other party in written form ahead of the said change by fifteen days.
   
14.2
The notices of the parties hereof shall be sent by registered letter, fax or EMS. The notices shall be deemed as being delivered on the following date:
 
14.2.1
When sent by the registered letter, the date shown on the return receipt of the registered letter;
 
14.2.2
When sent by fax, the first working day from the date of receiving the reply code or successfully sending the confirmation slip;
 
14.2.3
When sent by EMS, the same day as the notified party signs after receiving.
 
Term 15   Other items
 
15.1
This Contract shall take effect upon affixing their seals by the parties hereof and the subscription of the legal representatives or duly authorized proxy of the parties hereof, the loan principal, basic interest, floating interest, interest penalty and other payment dues shall automatically terminate upon the full repayment of them;
   
15.2
The establishment, effectiveness, implementation, amendment and termination of this Contract shall be governed by the current effective laws, administrative laws and regulations, judicial interpretation and relevant regulations of the P.R.C.
   
15.3
The disputes arising from the implementation of this Contract shall be settled through negotiation between the parties. If the negotiation fails, any party shall have the right to bring the dispute to the competent people’s court in the Lender’s location.
   
15.4
The documents on repayment safeguard measures, loan application and irrevocable loan application notice required or stipulated by this Contract, and other relevant documents and information provided by the Lender and the Borrower, shall be the integral part of this Contract.

 
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Capital Trust Loan Contract

  
15.5
The original copy of this Contract shall be in sextuplicate, each party shall hold two copies, the rest shall be used for handling relevant formalities.
   
15.6
This Contract is executed in Chaoyang District, Beijing City on [ ](month) [ ](day), 2009.
 
(rest of the page intentionally left blank)

 
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Capital Trust Loan Contract

(This page, including the signed content hereof, is the integral part of Capital Trust Loan Contract numbered No.033, Documents of Trust and Trust Loan, Beijing, 2009. The signed content of this page shall be used and only be used to sign Capital Trust Loan Contract by and between Beijing International Trust Co., Ltd acting as the Lender and Inner Mongolia Erdos TCH Energy Conservation Development Co., Ltd acting as the Borrower.)

The Borrower (corporate stamp)
Inner Mongolia TCH Energy Conservation Development Co., Ltd

/s/ Legal Representative of Inner Mongolia TCH Energy Conservation Development Co., Ltd
Legal Representative or Duly Authorized Proxy (signature)

The Lender (corporate stamp) Beijing International Trust Co., Ltd

/ s/ Legal Representative of Beijing International Trust Co., Ltd
Legal Representative or Duly Authorized Proxy (signature)

 
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Capital Trust Loan Contract

Appendix I
Loan Application

RE Beijing International Trust Co., Ltd:
 
The undersigned company is a joint venture established between Xi’an TCH Energy Science&Technology Co., Ltd (hereinafter “Xi’an TCH”) and Inner Mongolia Erdos Metallurgy Co., Ltd. (hereinafter “Erdos Metallurgy”), specifically for investment, construction and operation of the “comprehensive utilization project of using waste heat resource from the large scale cluster electric stove of Erdos Metallurgy Co., Ltd for power generation” (hereinafter “project of power generating by waste heat”), the company has 80 million CNY registered capital, in which Xi’an TCH contributes 80% and Erdos Metallurgy contributes 20%.
 
The project of power generating by waste heat shall offer investment, construction and operation of waste heat recycling power generation facilities associated to 64 sets of ferrosilicon, silicomanganese and calcium carbide electric stoves owned by Erdos Metallurgy in the manner of 20-year BOT. Since the project is designed to convert abandoned thermal energy into electric energy, and it can be described as an energy conservation renovation project as well as a comprehensive resource utilization project which are in conformity with the state’s industrial preferential policies and economic development planning; hence it is entitled to preferential tax policies and financial encouragement policies. Meanwhile, the project will save 247,000 tons of coal equivalent per year after its commissioning, and will become an energy conservation and emission reduction project which is biggest in China’s metallurgy industry and the first in ferroalloy industry. The project will construct 11 generator sets at a gross installed capacity of 130mw in five stages. Currently, the project’s first stage construction (two generator sets at 9mw) has initiated since March 2009, and is anticipated to be put into service at the end of the year; the second and the third stage have successively deployed early stage preparation, and it is planned to construct 4 generator sets at 9mw capacity, which is anticipated to initiate at the end of 2009 and to be put into service at the end of 2010.

 
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Capital Trust Loan Contract

The gross investment of first stage, second stage and third stage is approximately 420 million CNY, which means there will be a shortage of 240 million CNY considering the company will offer 180 million CNY as independent investment; hence the company intends to submit an loan application to your company in the manner of putting the company’s engineering facilities in first stage, second stage and third stage construction in pledge as well as putting the company’s accounts receivable in pledge, meanwhile one of the company’s shareholders i.e. Xi’an TCH and its actual controlling entity will offer an irrevocable security with unlimited joint and several liability, in addition the company’s another shareholder i.e. Erdos Metallurgy will make an commitment upon its minimum power purchase, and further have its indirect controlling shareholder provide a performance bond for its payment obligation as well as its commitment upon minimum power purchase. The term of the said loan is estimated to be 4 years.
 
The company undertakes to persist in its principle of goodwill first, and honor the contract to the end. Your company’s kind support will be deeply appreciated.
 
In witness whereof,

Inner Mongolia Erdos TCH Energy Conservation Development Co., Ltd.
 
 2009 11 10
 
November 10, 2009

 
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Capital Trust Loan Contract

Appendix II
Repayment Plan

RE Beijing International Trust Co., Ltd.:
 
In the light of the relevant agreements under the Capital Trust Loan Contract by and between the undersigned company and your company, the undersigned company shall strictly subject to the following plan in preparing the accounts payable specified in Capital Trust Load Contract in full amount and in due time so as to ensure the fulfillment of repayment obligation:
 
1. In addition to the reserved accounts specified in Item 2 and Item 3 hereunder, the company hereby undertakes that the balance of repayment reserve account shall remain not less than 20% of current year’s mature/payable principle and interest at the date 4 months prior to the repayment date of principle and interest specified in Capital Trust Loan Contract; the balance of repayment reserve account shall remain not less than 40% of current year’s mature/payable principle and interest at the date 3 months prior to the repayment date of principle and interest; the balance of repayment reserve account shall remain not less than 70% of current year’s mature/payable principle and interest at the date 2 months prior to the repayment date of principle and interest; and the balance of repayment reserve account shall remain not less than 100% of current year’s mature/payable principle and interest at the date 1 week prior to the repayment date of principle and interest.
 
2. Every time prior to the date of receiving the profits of a CDM project, the undersigned company undertakes to save 50% of the profits received from the CDM project into repayment reserve account for the purpose of settling variable interest.
 
3. 5 working days prior to the maturity of loan term, the undersigned company undertakes to save a repayment reserve in equivalent to the profits of management stimulus into repayment reserve account.

Inner Mongolia Erdos TCH Energy Conservation Development Co., Ltd.
Legal Representative or Duly Authorized Proxy (Signature):

Date:       [  ](month) [  ](day), [  ](year)

 
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Capital Trust Loan Contract

Appendix III
Detailed Application List of Trust Loan Capital

RE Beijing International Trust Co., Ltd.:
 
In the light of the agreements concluded by and between the undersigned company and your company in Capital Trust Loan Contract, the undersigned company shall apply entire capital under trust plan to the first stage and second stage construction under the “comprehensive utilization project of power generating by waste heat from the large scale cluster electric stove of Erdos Metallurgy Co., Ltd’s for power generation” (hereinafter “project of power generating by waste heat”) as per capital utilization approaches specified in the trust plan; details of utilization are as follows:
 
1. Design and survey: ¥_____________ (Say: _______________CNY)
  
2 Civil engineering: ¥______________ (Say: _____________CNY)
 
3. Equipments procurement and installation: ¥______________ (Say: _____________CNY)
 
4. Daily operating capital: ¥_____________ (Say: ______________CNY)
 
The undersigned company undertakes to fulfill its obligations concerning capital utilization specified in Capital Trust Loan Contract and assume all liabilities in breach.

The Borrower: (corporate stamp) Inner Mongolia Erdos TCH Energy Conservation Development Co., Ltd.
Legal Representative or Duly Authorized Proxy (Signature):
Date:        [ ](month) [ ](day), [ ](year)

 
31

 

Capital Trust Loan Contract

Appendix IV
Irrevocable Capital Withdrawal Notice
No:            

RE Beijing International Trust Co., Ltd.:
 
In the light of the provisions of the Capital Trust Loan Contract (Contract No.:          ) concluded on [ ](month) [ ](day), [ ](year) in which your company acts as the Lender and the undersigned company acts as the Borrower (hereinafter “Loan Contract”), the undersigned company hereby delivers this irrevocable capital withdrawal notice to your company. The definitions in the Loan Contract have the same implications of that in this irrevocable capital withdrawal notice.
 
The said capital withdrawal is based on the terms and conditions specified in the Loan Contract, by which your company is requested to transfer the loan of ¥___________ (Say: ___________CNY) to undersigned company’s CNY loan account at your company’s specified bank on [ ](month) [ ](day), [ ](year):
Account name: ______________________________:
Account number: ____________________________;
Opening bank: ______________________________;
 
The company hereby confirms the following matters upon the delivery of this irrevocable capital withdrawal notice:
1. All capital withdrawn shall be applied to the capital application specified in the Loan Contract;
2. The undersigned company guarantees that the representations and warranties made by the undersigned company in the Loan Contract are still accurate, authentic, intact and effective;
3. Not a single breach specified in the Loan Contract has occurred or is currently ongoing, neither the capital withdrawal will incur any of such breaches;
4. Should the undersigned company fail to withdraw the loan or withdraw the loan in full amount prior to the withdrawal date, the undersigned company will undertake the liabilities for breach specified in the Loan Contract.

The Borrower: (corporate stamp)

Legal Representative or Duly Authorized Proxy (Signature):

Date:           [ ](month) [ ](day), [ ](year)

 
32

 

Capital Trust Loan Contract

Appendix V
Loan Offering Confirmation
 
RE Beijing International Trust Co., Ltd.:
 
In the light of the provisions of the Capital Trust Loan Contract (Contract No.:          ) concluded on [ ](month) [ ](day), [ ](year) in which your company acts as the Lender and the undersigned company acts as the Borrower (hereinafter “Loan Contract”) , the undersigned company hereby confirms the following matters concerning crediting with your company:
1. Upon the date of issuing this Loan Offering Confirmation, the undersigned company has received the loan granted by your company, which amounts to:  ¥_______________ (Say: _________________CNY);
2. The sum of the aforementioned loan is related to the detailed loan amounts, load interest rates and repayment dates specified in the following sheet:

Source of the trust
loan
 
Capital size/loan
amount 
(10 thousand CNY)
 
Loan
interest  rate
 
Repayment date
Trust capital corresponding to trust institutions of Category A1
 
[        ]
 
10.05%
 
December [  ],2011
Trust capital corresponding to trust institutions of Category A2
 
[        ]
 
11.11%
 
December [  ],2012
Trust capital corresponding to trust institutions of Category A3
 
[        ]
 
12.17%
 
December[  ],2013
Trust capital corresponding to trust institutions of Category B
 
[        ]
 
8.47%
 
December[  ],2013

3. The interest date of the aforementioned loan is [ ](month) [ ](day), 20[ ].

4. Definitions in the Loan Contract have the same implications of that in this Loan Offering Confirmation.

Legal Representative or Duly Authorized Proxy (Signature):

Date:          [ ](month) [ ](day), [ ](year)

 
33

 

Capital Trust Loan Contract

Appendix VI
Loan Note

 
34

 

Capital Trust Loan Contract

Appendix VII
Payment Application
No.:            

RE Beijing International Trust Co., Ltd.:
 
In the light of the provisions of the Capital Trust Loan Contract (Contract No.:          ) concluded on [ ](month) [ ](day), 2009 in which your company acts as the Lender and the undersigned company acts as the Borrower (hereinafter “Loan Contract”), the undersigned company hereby delivers this Payment Application to your company. Definitions specified in the Loan Contract have the same implications of that in this Payment Application.

1. Payment in this application is: loan ¥________ , (Say: __________CNY)
2. Payment application: _____________________;
3. Payment basis: _____________________;
4. Payment date: _____________________;
5. Account for colleting payment:
Account name: ______________________________;
Account number: ____________________________;
Opening bank: ______________________________;

Upon the delivery of this irrevocable payment application, the undersigned company hereby confirms the following matters:

1. The entire payment in this application shall be used for the purposes previously specified;
2. The undersigned company guarantees that the representations and warranties made by the undersigned company in the Loan Contract are still accurate, authentic, intact and effective;
  
3 . 
Not a single breach specified in the Loan Contract has occurred or is currently ongoing, neither the capital withdrawal will incur any of such breaches.

The Applicant: (Corporate stamp) Inner Mongolia Erdos TCH Energy Conservation Development Co., Ltd.

Legal Representative or Duly Authorized Proxy (Signature):

Date:          [ ](month) [ ](day), [ ](year)

 
35

 

Exhibit 10.30
 
Non-promissory Short Term Revolving Financing Agreement
 
October 12, 2009
 
This Agreement is signed between the two parties as follows :

(1)
Citi Bank (China) Limited, Shanghai Branch
Address: 33th floor Citigroup Tower, No.33 Hua Yuan Shi Qiao Road, Lu Jia Zui Finance and Trade Area, Shanghai, P.R.Chian
(hereinafter referred to as the Loan Bank ), and

(2)
Xi’an TCH Energy Technology Co., Ltd.(“Xi’an TCH”)
Address: No.86 Gao Xin Road, Gao Xin District, Xi’an City, P.R.Chian, and

(3)
Inner Mongolia Erdos TCH Energy-Saving Development Co., Ltd (“Erdos TCH”).
Address: Etuokeqi Qipan Jing Industrial Park, Eros City, Inner Mongolia, P.R.Chian
(Signatory (2) and Signatory (3) are hereinafter referred t to as the Customers )

The two parties hereby agree as follows :
 
1.
The attached “Financing Agreement General Terms and Conditions” and any relevant ancillary files are integral parts of the agreement.
   
2.
The maximum amount of the financing: RMB20,000,000
   
In any case, the total outstanding financing the two customers have under this agreement shall not exceed the aforementioned financing amount.
   
3.
Financing Currency: RMB
   
4.
Financing Methods and Limits:
· for discount business: shall not exceed RMB20,000,000
· for accounts payable financing: shall not exceed RMB20,000,000
 
In any case, the total outstanding financing subject to all the aforementioned financing methods shall not exceed the maximum financing amount.

 
 

 

5.
The longest maturity of any financing method: 6 months
   
6.
loaning rate/commission rate/financing rate:
· In reference to any discount business, the discount rate shall be determined in the ancillary files to be attached.
· In reference to accounts payable financing, the financing rate shall be determined in the ancillary files to be attached..
   
7.
Purpose of financing: for working capital needs and purchasing raw materials
   
8.
Guaranty and Guaranty Provider:
·
The customers shall provide Pledge Agreements signed between the customers and the loan bank as cash guaranty
·
Xi’an TCH shall provide a Letter of Assurance for Erdos TCH as guaranty.
·
Erdos TCH shall provide a Letter of Assurance for Xi’an TCH as guaranty.
·
Shanghai TCH Energy Technology Co., Ltd. shall provide a Letter of Assurance as guaranty.
·
Mr. Guohua Ku shall provide a Letter of Assurance as guaranty.
·
The customers shall provide Pledge Guaranties with its accounts receivable through signing Accounts Receivable Pledge Agreement and Accounts Custody Agreements with the loan bank.
     
9.
Penalty interest rate:
   
Pursuant to the provision in the term 12 of Financing Agreement General Terms and Conditions, penalty interest rate shall be:
In RMB: penalty interest rate shall be the lowest penalty interest rate that is allowed according to the related regulations of People’s Public of China on overdue loans.
In US dollar: penalty interest rate shall be determined by the loan bank.
 
10.
Fees for setup of a credit line: the customers shall pay credit line setup fees in accordance with the specified amount, time and other provisions in the “Letter for  Credit Line Setup Fees ” issued by the loan bank in any time.
   
11.
Independence and division

 
 

 

11.1
Every funding transaction supplied by the loan bank in accordance to the agreement is an independent transaction. The relevant ancillary files provided by the customers for each funding transaction under this the agreement constitute a complete set of independent contract for the funding. The contract shall automatically expire after the customers pay off all the principle and interest and/or related interest.
   
11.2
Each customer shall have joint obligation under this agreement. If one  customer fails in repayment for the payable on the due date, the loan bank shall have the right to request the other customer(s) for repayment.
   
11.3
If the loan bank decides to cancel and/or terminate providing funds to one customers, and/or accelerate the expiration date of any or all unpaid loans and request for immediate repayment, the loan bank shall have the right to decide to accelerate the expiration date of unpaid loans of the other customer(s).
   
11.4
It is irrevocably agreed by all the customers under this agreement that any changes, amendments or supplements to the provisions of this agreement and its ancillary files can be made by signing amendment or supplementary agreement between the loan bank and the directly related customer, and no need the other parties of this agreement to sign such amendment or supplements.
   
12.
restriction on related-party transaction:
   
12.1
The customers agree that, without the consent of the loan bank, the financing under the agreement shall not be used for paying any transactions between the customer(s) and its related parties. The related party includes (1) the customers’ subsidiary, share-holding company (either directly or indirectly), affiliated company, the customers’ shareholders (either legal entity or individual), other corporations or companies in which the customers’ shareholders hold the shares directly or indirectly (no matter in control or not); (2) any corporations or companies in which the customers’ shareholders’ (natural person) spouses, direct relatives, or collateral relatives in three generations, directors, supervisors, executives, and any corporations or companies in which the aforementioned persons hold the shares (no matter in control or not); (3) the corporation in which the customers may actually take controls in business through investment relationship, agreement or other arrangements.

 
 

 

12.2
If the customers need to use the fund under the agreement to pay for the transactions between the customers and any aforementioned related party, the customers should submit a written request to the loan bank. After being examined and approved by the loan bank, the customers may use the funds approved for the related party in accordance within the line of financing of this agreement.
   
13.
Special assurance:
   
Starting from the date of signing this agreement to the date when all the loan principle and interests have been paid off, the customers hereby agree:

· 
the customers agree to deposit their incomes from sales of products and services into the accounts with the loan bank (hereinafter referred to as “income amount”), and average monthly income amount of the customers is no less than RMB5,000,000. The condition for the first draw for the customers is that the single month income amount shall reach 80% of the expected income amount as set forth in the agreement for that month. The expected income amount for each month is listed as follows.

Incoming Month
 
Expected Incoming Amount (RMB)
 
September, 2009
    6,600,000  
October, 2009
    6,600,000  
November, 2009
    11,900,000  
January, 2010
    11,900,000  
February, 2010
    11,900,000  
March, 2010
    11,900,000  
April, 2010
    11,900,000  
May, 2010
    11,900,000  
June, 2010
    11,900,000  
July, 2010
    11,900,000  
August, 2010
    11,900,000  
September, 2010
    11,900,000  
October, 2010
    11,900,000  

 
 

 

·
For the customers, the interval between two drawings shall not be shorter than 30 days.
   
·
For the customers, the amount of each drawing shall not exceed 35% of the maximum financing amount.
   
·
If a single month income amount is less than 70% of the expected income amount of that month, the loan bank shall have the right to suspend, cancel or terminate finance immediately in accordance with the term 16.2 of Financing Agreement General Terms and Conditions, and to accelerate the expiration date of part or all unpaid loans and request for immediate repayment. Meanwhile, the loan bank shall have the off-set right in accordance with the term 15 of Financing Agreement General Terms and Conditions.

WHEREAS, both parties of the agreement duly authorize representatives to sign the agreement on the date stated in the beginning of the agreement, this agreement shall take effect from the date of its execution by the duly authorized representatives of the parties.

/s/ Representative of the Loan Bank
Representatives of the Loan Bank

 
 

 

/s/ Representative of Xi’an TCH Engergy Technology Co., Ltd.
Representatives of Xi’an TCH Energy Technology Co., Ltd.

(Official sealed)

/s/ Representative of Inner Mongolia TCH Energy-Saving Development Co., Ltd.
Representatives of Inner Mongolia TCH Energy-Saving Development Co., Ltd.

(Official sealed)

 
 

 

Financing Agreement General Terms and Conditions

1.
General Terms
   
1.1
The terms and conditions (“terms and conditions”) shall apply to each financing transaction under the financing agreement signed from any time or signed in the future between the customers and related branch of the Citi Bank (China) which supplies the financing (“loan bank”) mentioned in the financing agreement (“financing agreement”), and be binding on the customers and the loan bank.
   
1.2
The terms and conditions may be revised and/or amended by the financing agreement, and shall be read with the financing agreement. The terms and conditions is the integral part of the financing agreement (together are called “the agreement”).
   
1.3
If the terms and conditions are inconsistent with the financing agreement, the latter shall govern. If the financing agreement is inconsistent with the ancillary files (defined as follows), the latter shall govern.
   
2.
Financing
   
2.1
Subject to the terms and conditions of the agreement and its ancillary files, the customers may ask the loan bank and the loan bank may agree (but no obliged to) to supply the customers with the non-promissory short term credit financing (the financing), financing methods include loan, bank guarantee, standby letter of credit, trading letter of credit, discount business, credits, acceptance bill, accounts receivable/payable financing and/or import/export financing (subject to the Article 4 of financing agreement upon specific situation). The maximum of total financing amount for all financing method is accordance with the amount in the Article 2 of the financing agreement(the maximum of financing).
   
2.2
For the purpose of the agreement, ancillary files mean the following files signed and conformed by the customers (as the case may be):

In reference to the loan, it shall mean (a) the notice of drawing; and (b) notice of conforming(if any).

 
 

 

In reference to the bank guarantee or standby letter of credit, it shall mean the application and agreement for standby letter of credit/or letter of guaranty.

In reference to the trading letter of credit, it shall mean (a) application for the documentary credit, and (b) agreement for irrevocable standby letter of credit.

In reference to the discount business, it shall mean (a) discount business contract; and (b) any related ancillary files may be signed by the customers.

In reference to the credits, it shall mean (a) credit agreement; and (b) any related files may be signed by the customers.

In reference to the acceptance bill, it shall mean acceptance bill agreement; and (b) any related files may be signed by the customers.

In reference to the receivable/payable financing, it shall mean (a) application letter; and (b) any related files may be signed by the customers.

In reference to the import/export financing, it shall mean (a) application letter; and (b) any related files may be signed by the customers.

3
prerequisite conditions
   
3.1
Unless otherwise specified in the agreement or its ancillary files, any and each use of the financing shall meet general prerequisite conditions and satisfy the loan bank.

 
 

 

4
Conditions of drawing and loans
   
4.1
For each loan, the customers shall provide the loan bank with the notice of drawing in no less than 2 business days before the expected date for the drawing . The customers shall confirm in each notice of drawing: (a) intended date of drawing; (b) intended amount of drawing; and (c) intended payment date for repaying the drawing. Once the loan bank receives the notice of drawing, the customers shall not cancel the expected money drawing; and, if the customers cancel the drawing after the notice is given, the customers shall be responsible for  all the cost, fees and/or loss caused to the loan bank.
   
4.2
For each loan, the loan bank shall provide a conforming notice (called “the confirming notice”). The conforming notice shall specify the necessary details that may be chose by the loan bank. Unless there is any obvious error, the conforming notice (or, if there is no such conforming notice), the internal records of the loan bank [either in written or in electronic version]) shall be the conclusive evidence in the aspect of supplying loans to the customers.
   
5
Repayment and the interest of the loans
   
5.1 
Subject to the term 5.2, all the due principle, accrual interest and other payable, which are specified on the notice of drawing, should be fully repaid on the due date. If the due date is not on a business date, the due date shall be postponed to the first business day after this due date (the interest shall be adjusted accordingly), if the business day belongs to another calendar month, the aforementioned amount must be repaid on the business day before the due date. The amount which is  repaid under this term may be borrowed again in accordance with the terms and conditions of this agreement.    
 
5.2
By providing the loan bank with a new notice of drawing in no less than 2 business days before the due date, the customers may ask the loan bank to extend all or parts of the principle amount of the due loan. If the loan bank agrees to extend the loan, the customers shall be deemed having repaid this loan (or a part of the loan, as the case may be) on the due date and in the meantime having been granted a new loan upon the terms of the agreement. For avoiding questions, the customers shall repay the accrued interests and other payables under the previous loan.

 
 

 

6.
Early repayment of loans, cash reimbursement and cancellation of letter of credit/ letter of guarantee
   
6.1
Upon the agreement by the loan bank in written and in compliance with the related regulations and rules of the Foreign Exchange Control Bureau (if applies), the customers may pay off the loan with accrued interests early. The prerequisite for an early pay back of the loan is that the customers have paid in full to the loan bank all the costs and losses arose from such early repayment. No other early repayment is allowed.
   
6.2
Whether or not a trading letter of credit and/or a standby letter of credit ( together called letter of credit) and/or bank guarantee are due, whether or not the loan bank has been requested to make payment under the letter of credit and/or the bank guarantee, the loan bank may request the customers to provide cash reimbursement for all or part of loans under the issued letter of credit and/or bank guaranty. The customers shall provide reimbursement in cash within 3 business days after receiving the request.
   
6.3
Notwithstanding the provisions in the 6.2 term, the obligations and duties of customers shall not be exempted unless the loan bank notifies the customer that the obligations and duties of customers under the agreement or any attachment are exempted by a written notice. Notwithstanding the aforementioned notice, in case the loan bank is responsible for the provisions of letter of credit/letter of guarantee, the reimbursement of the term 13 shall be still effective. The decision made by the loan bank on whether or not to exempt the obligations under the letter of credit/letter of guarantee shall be binding on the customers.
   
7.
Taxation
   
7.1
Unless the law requests the customers to withhold any tax from the payment, the customers shall not pay the tax and the tax shall be deemed as being cleared, and shall not withhold any tax and any amount shall not be deducted. If the customers have to withhold tax on the accounts payable or payments, or other tax related amount, or other withholdings, the customers shall pay the loan bank additional amount to ensure that the net amount received by the loan bank equals to amount  as if taxes have not been withheld or and the other amounts have not been paid. The customers shall pay tax on time and shall pay the taxes to be withheld from paid or should be paid amounts under the agreement in accordance with the law. Within 15 days, it shall provide the loan bank with documentation (including all related tax return forms) which will satisfy the loan bank and can prove that the customers have made payment to relevant authority.

 
 

 

8.
Statement
   
8.1
The customers’ representations and warranties: the corporation is founded by Law of People’s Republic of China, and shall have the right of signing this agreement and any attachment, and take actions to make this agreement and the attachments legal, effective, binding and enforceable.
   
8.2
Representations and warranties made by the customers under this agreement shall be deemed as being made repeatedly on the date of each loan, letter of credit/ letter of guarantee, accounts receivable/payable financing or import/export financing.
   
9.
Promise
   
9.1
The customers shall apply, receive and comply with all the legal ratification, authorization, approval, registration, license and agreement, and remain in full force and effect, to make sure to sign this agreement and other attachments legally and to fulfill the duties. If the loan bank requires, the customers shall provide the related evidence right away.
   
9.2
The customers shall notify the loan bank any event which may affect the ability to fulfill their duties.
   
9.3
The financing under this agreement only satisfy the capital requirement for general operation or other agreed purposes. The customers shall not use the financing under this agreement in investment on stocks or other purposes than core business of customers. The loan bank shall have no responsibility to supervise or examine the usage of the financing under this agreement.

 
 

 

10.
Special terms for foreign guaranty (when applicable)
   
10.1
The customers shall obey the rules issued by Foreign Exchange Control Bureau from time to time with regards of financing under overseas related guarantee. The customers shall promise hereby: within the validity period of the financing agreement, (1) medium and long term foreign debt amount, (2) short term foreign debt balance and (3) the total amount of the performance guarantee (hereinafter referred to as balance of liabilities) of its foreign entity and person (calculate according to the real balance of external liabilities) shall not exceed the difference between it total investment and registration capital (hereinafter referred to as the gap of investment). The customers shall register the foreign liabilities in the Foreign Exchange Control Bureau after guarantee the performance in the foreign country.
   
10.2
For the aforementioned purposes, the customers promise: in the valid period of the financing agreement, the customers shall or on demand of the loan bank from time to time provide the loan bank with the related files and/or information on the balance of liabilities and the difference between the investment and registered capital; and the aforementioned file and/or information shall be true, accurate and complete.
   
11.
Fees and expenses
   
11.1
Any fees and expenses arising from negotiation, preparing, signing, protecting or enforcing by the loan bank, or any fees or expenses from completion of this transaction agreement or any ancillary document shall be compensated by the customer, once the loan bank makes such request. The customer shall pay all stamp tax and other taxes that related to this agreement or any ancillary document.
   
12.
Penalty rate
   
Any loan, guarantee of letter/ credit, receivable account/payable account financing and import/export financing, which should be paid on its due date on time. Otherwise, the customers shall pay the penalty rate, and the penalty rate shall be calculated from its due date to its actual payment day. The penalty rate is defined in term 9 under Financing Agreement . Any penalty rate shall be compounded monthly

 
 

 

13.
Compensation
   
13.1
The customers shall compensate the loan bank all of losses, amount, responsibility (including environmental liabilities), fees (including any attorney fees and other legal fees arising from the loan bank taking any enforcement or claim actions against the customer), charges and expenses arising from performing this agreement or transaction under this agreement, but damages caused by loan bank’s major negligence or intended misconducts are excluded.
   
13.2
The payment currency under this financing agreement should be consistent with the currency specified in Article 3 of Financing Agreement .  If it is resulted from judgment, arbitration, liquidation of guarantor or others that the currency received by loan bank is not the currency for financing (financing currency) provide by loan bank, the customer’s obligation to this agreement shall not be released until the loan bank use the received money to buy sufficient amount of financing currency through normal bank procedure. If the amount of the financing currency bought by loan bank is less than the payable amount after it deducts exchange cost under this agreement, the short difference shall be compensated by customer, this compensation obligation is independent of customer’s other obligations under this agreement, and it shall be a supplement to other obligations.
   
13.3
Both parties agree that, under any circumstance, neither party shall take any responsibilities for other party’s indirect or secondary losses or damages arising from this agreement
   
14.
Payment and notice
   
14.1
Any payment under this agreement and its ancilliary files shall be paid by customer according to the time, amount, currency and account specified by loan bank, and shall be paid with the value on the due date on time. The either party signing the agreement shall send its notice to its counterparty’s address as set in this Financing Agreement , and the party should notify its address in a written form to its counterparty.

 
 

 

15.
Counteraction—Offsets
   
15.1
The customers agree that, besides loan bank’s rights according to laws, the loan bank also has the right to combine or consolidate all of customer’s accounts with its debt to the loan bank, or counteract or transfer any/ several credit balance of any/several account of the customer to repay any of customer’s debt to the loan bank under this agreement without notifying it to the customers, no matter this debt is real or contingent, prime or secondary, is joint or severe, due or undue, and in different nature or in different currency. In addition, if any obligation of the customer to the loan bank is contingent or anticipative, the loan bank has the right to suspend paying any money to customer until the contingency or  anticipative incident takes place.

16.
Financing termination
   
16.1
The customer confirms that the nature of financing under this agreement is short-time, and the bank has the right to audit the financing every year.
   
16.2
Although with the regulation of term 16.1 above, the loan bank has the right to cancel or terminate the financing, or accelerate repayment of any or all unpaid loan and require customer to pay it promptly, or modify any term of this agreement, without reasons or notifying it to customer in advance.
   
17.
Transfer
   
17.1
The customer shall not transfer, divert, renew or dispose its right/obligation or other benefits relating to its right or obligation under this agreement. The loan bank may transfer its right/obligation under this agreement/any ancillary document to other entity/person any time by sending transfer notice to the customer, and the customer agrees that the notice of transfer can be in any written form that loan bank may use, and needs no customer’s permit or approval. Although the transfer occurs, this agreement/any ancillary document will continuously take effectiveness for customer and customer agrees and accepts the binding of this contract/any ancillary document. The loan bank may provide the copy of this agreement and disclose any information under this agreement/ancillary documents or any information from this agreement/ancillary document to the entity/person whoever is intended or has already reached an agreement with the loan for transfer or participation or other agreements related to this agreement/ancillary documents.

 
 

 

18.
Information disclosure
   
18.1
Under confidential use purpose by the loan bank(including but not limited to data processing, statistic, risk analysis and credit monitoring and tracing), the customer agrees the loan bank to disclose relevant information( including but not limited to any information comes from loan behavior credit evaluation and assessment purpose) about the customer or the financing to loan bank’s branch, subsidiary company, parent company, related organization, representative office, agent or any third party (hereinafter referred to as “relevant party”) chose by the loan bank. The customer shall urge the guarantor to agree and comply with the above information disclosing clause. The loan bank and its related parties shall comply with the requirements of any applicable laws, regulations or rules, court, supervisory authority or judicial procedure to disclose information.
   
19.
Applicable laws and judicial jurisdiction
   
19.1
This agreement is applicable to Chinese law and be explained by it. The Chinese court where the loan bank locates has the with non-exclusive jurisdiction to any dispute arising from this agreement or related to this agreement.
   
20.
Telephone or fax indication
   
Unless agreed by both parties, the loan bank has no obligation to perform or accept any instruction from customer by oral or fax. Under any circumstances, the loan bank will take no responsibility in any of customer losses resulted from bank’s misunderstanding due to ambiguous, difficult identified or unclear instruction.
   
21.
Independence of clause
   
21.1
Any invalid, illegal or unenforceable clause under this agreement or ancillary documents shall not influence other valid, legal and enforceable clause under this agreement or ancillary documents.
 

 
22.
Non-waiver, modification
   
22.1
The loan bank’s failure or defer in exercise its right under this agreement or any ancillary documents shall not affect its right and shall not be taken as its waiver. Any exemption for one breach behavior/event under this agreement or ancillary documents shall not be taken as the exemption for other breach behavior/event. Under any circumstances, any clause modification or exemption of this agreement or any ancillary documents shall come into force only after getting loan bank’s written signature.
   
23.
Language
   
23.1
This agreement shall be signed both in Chinese and English with identical effects.  If there is any conflict in language, the Chinese version shall prevail.
   
At tachment
 
General precondition
 
According to the term 3 of the general terms and conditions of Financing Agreement , every time before using the financing money, all of the following conditions should be met and be satisfied by loan bank,
 
1. The loan bank has received the following documents from customer,
 
(a) Copy of Articles of Incorporations and any of its amendment;
 
(b) Copy of valid and legal business license
 
(c) The board of director’s resolution, including agreeing and authorizing the customer to make financing and sign this agreement or any ancillary documents
 
(d) Customer’s authorization to one or several personnel to sign this agreement or any ancillary documents, and the signature sample of the authorized person(s).
 
2. Any and all subsidiary documents are signed in the forms and contents that satisfy loan bank, and have been received by loan bank.
 
3. The intended date of providing a loan, or issue of letter of credit/letter of guarantee is the loan bank’s business day
 
3. Other documents to be required by loan bank in any time.

 
 

 

EXHIBIT 31.1
 
CERTIFICATIONS
 
I, Guohua Ku, certify that:
 
 
1.
I have reviewed this annual report on Form 10-K of China Recycling Energy Corporation;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: March 16, 2010

 
/s/  Guohua Ku
 
Guohua Ku
 
Chairman of the Board and Chief Executive
 
Officer

 
 

 

EXHIBIT 31.2
 
CERTIFICATIONS
 
I, Xinyu Peng, certify that:
 
 
1.
I have reviewed this annual report on Form 10-K of China Recycling Energy Corporation;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: March 16, 2010

 
/s/ Xinyu Peng
 
Xinyu Peng
 
Chief Financial Officer and Secretary
 

 
Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of China Recycling Energy Corporation (the “Company”) on Form 10-K for the period ended December 31, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, Guohua Lu, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 16, 2010
/s/  Guohua Ku
  Guohua Ku
  Chairman of the Board and Chief Executive Officer

 
 

 
 
Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of China Recycling Energy Corporation (the “Company”) on Form 10-K for the period ended December 31, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, Xinyu Peng, Chief Financial Officer of the Company and Secretary, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 16, 2010
/s/ Xinyu Peng
 
Xinyu Peng
 
Chief Financial Officer and Secretary