UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
___________________
FORM
10-K
(Mark
One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended
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December
31, 2008
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or
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
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to
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Commission
file number
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000-53283
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CHINA
ENERGY RECOVERY, INC.
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(Exact
Name of Registrant as Specified in its
Charter)
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Delaware
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33-0843696
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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7F,
No. 267 Qu Yang Road
Hongkou
District, Shanghai
China
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200081
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
telephone number, including area code
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+86
(0)21 5556-0020
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Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
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Name of Each Exchange on Which
Registered
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None.
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Securities
registered pursuant to Section 12(g) of the Act:
Common
stock, par value $0.001
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
o
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
o
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.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) 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.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
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o
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Accelerated
filer
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o
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Non-accelerated
filer
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o
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Smaller
reporting company
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x
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(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
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Yes
o
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No
x
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The
aggregate market value of the voting and non-voting common equity held by
nonaffiliates is $64,599,264, as computed by reference to the price at which the
common equity was last sold as of the last business day of the registrant's most
recently completed second fiscal quarter.
Number of
shares outstanding of the registrant's common stock as of March 19,
2009:
29,936,172
shares of Common Stock, $0.001 par value per share
DOCUMENTS
INCORPORATED BY REFERENCE
The
information required by Part III of this Annual Report on Form 10-K, to the
extent not set forth herein, is incorporated herein by reference from the
registrant's definitive proxy statement to be disseminated in connection with
its 2009 Annual Meeting of Stockholders, which definitive proxy statement shall
be filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year to which this Form 10-K relates.
Item
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Page
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PART
I
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2
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Item
1.
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Business.
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18
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Item
1A.
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Risk
Factors.
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35
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Item
1B.
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Unresolved
Staff Comments.
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35
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Item
2.
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Properties.
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35
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Item
3.
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Legal
Proceedings.
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35
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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36
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PART
II
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36
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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36
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Item
6.
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Selected
Financial Data.
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41
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
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41
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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52
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Item
8.
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Financial
Statements and Supplementary Data.
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53
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
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54
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Item
9A(T).
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Controls
and Procedures.
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55
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Item
9B.
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Other
Information.
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57
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PART
III
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57
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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57
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Item
11.
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Executive
Compensation.
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57
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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57
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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57
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Item
14.
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Principal
Accountant Fees and Services.
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57
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PART
IV
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57
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Item
15.
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Exhibits
and Financial Statement Schedules.
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57
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SIGNATURES
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61
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PART
I
CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
Annual Report on Form 10-K and other materials we will file with the U.S.
Securities and Exchange Commission (the "SEC") contain, or will contain,
disclosures which are forward-looking statements. Forward-looking statements
include all statements that do not relate solely to historical or current facts,
such as, but not limited to, the discussion of economic conditions in market
areas and their effect on revenue growth, the discussion of our growth strategy,
the potential for and effect of future governmental regulation, fluctuation in
global energy costs, the effectiveness of our management information systems,
and the availability of financing and working capital to meet funding
requirements, and can generally be identified by the use of words such as "may,"
"believe," "will," "expect," "project," "estimate," "anticipate," "plan" or
"continue." These forward-looking statements are based on our management's
current plans and expectations and are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or those anticipated. These risks and uncertainties include,
but are not limited to: our limited operating history; our ability to
effectively market our products and services; the loss of key personnel; our
inability to attract and retain new qualified personnel; our capital needs and
the availability of and costs associated with potential sources of financing;
adverse effects of the current turmoil in the credit markets; adverse effects of
the current depressed global economic conditions; our inability to increase
manufacturing capacity to meet demand; economic conditions affecting
manufacturers of energy recovery systems and the industry segments they serve;
our dependence on certain customer segments; difficulties associated with
managing future growth; our failure to protect our intellectual property rights;
allegations of claims of infringements of intellectual property rights brought
against us; the loss of our ability to sell and install energy recovery systems
made by third parties or such systems manufactured by us under licenses from
third parties; fluctuations in currency exchange rates; our failure to comply
with applicable environmental regulations; increased competition in our
industry; our exposure to litigation from performing work on our customers'
properties; an increase in warranty claims; our liability for injuries caused by
our products; our inability to cover damages owed by insurance; fluctuation
energy prices resulting in fluctuating demand for our products and services;
risks related to our corporate structure, such as our inability to control our
affiliated entities and conflicts of interest between our Chief Executive
Officers' duties to us and to our affiliated entities; the uncertainties
associated with the environmental, economic, political and legal conditions in
China and changes thereof; the adverse effect of governmental regulation and
other matters affecting energy recovery system manufacturers; Chinese
restrictions on foreign currency exchange transactions; restrictions on foreign
investments in China; ineligibility for and expiration of current Chinese
governmental incentives; natural disasters and health related concerns; the
development of an active trading market for our common stock; our failure to
maintain quotation of our common stock on the OTC BB; the loss of coverage of
our common stock by securities analyst; the failure of our complying with
securities laws in private placements; our common stock being a penny stock; a
sudden increase in the number of shares of our common stock in the market as a
result of Rule 144 sales or conversion or exercise of derivative securities; our
failure to maintain adequate internal controls over financial reporting; and our
inability to attract unsolicited buyers of our business because of our ability
to issue blank check preferred stock.
These
forward-looking statements speak only as of the date of this Annual Report on
Form 10-K. Except as required by law, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. You should also read, among other
things, the risks and uncertainties described in the section of this Annual
Report on Form 10-K entitled "Risk Factors."
Overview
of Our Business
China
Energy Recovery, Inc. (the "Company," "we," "us," "our") is headquartered in
Shanghai, China, and, through its subsidiaries and affiliates, is in the
business of designing, fabricating, implementing and servicing industrial energy
recovery systems. The Company's energy recovery systems capture industrial waste
energy for reuse in industrial processes or to produce electricity and thermal
power, thereby allowing industrial manufacturers to reduce their energy costs,
shrink their emissions and generate sellable emissions credits. A majority of
the manufacturing takes place at the Company's leased manufacturing facilities
in Shanghai, China. The Company transports the manufactured systems in parts via
truck, train or ship to the customers' facilities where the system is assembled
and installed. The Company has primarily sold energy recovery systems to
chemical manufacturing plants to reduce their energy costs by increasing the
efficiency of their manufacturing equipment. The Company has installed over 100
energy recovery systems both in China and internationally. The Company sells its
energy recovery systems and services mainly directly to customers.
Our
History
Unless
otherwise noted, the disclosures about our history reflect the Company's capital
structure as of the time of the occurrences described and do not take into
account subsequent stock splits or other adjustments to the Company's capital
structure.
We
incorporated in the State of Maryland in May 1998 under the name Majestic
Financial, Ltd. We changed our name to Commerce Development Corporation, Ltd. in
April 2002. Effective June 5, 2007, we changed our name to MMA Media
Inc.
On
January 24, 2008, we entered into a Share Exchange Agreement (the "Share
Exchange Agreement") with Poise Profit International, Ltd., a private British
Virgin Islands corporation ("Poise Profit"), and Poise Profit's shareholders
pursuant to which we agreed to acquire all of the issued and outstanding shares
of Poise Profit's common stock in exchange for the issuance of 41,514,179 shares
of our common stock (on a post-1-for-9 stock split basis approved by our board
of directors in connection with entering into the Share Exchange Agreement) to
Poise Profit's shareholders (the "Share Exchange").
On
January 25, 2008, we entered into and closed an Asset Purchase Agreement with
MMA Acquisition Company, a Delaware corporation, pursuant to which we sold
substantially all of our assets to MMA Acquisition Company in exchange for MMA
Acquisition Company's assuming a substantial majority of our outstanding
liabilities. The transferred assets consisted of letters of intent for the
proposed acquisitions of MMAWeekly.com, dated June 9, 2007, and Blackbelt TV,
Inc., dated July 16, 2007, and all shares of common stock in Blackbelt TV, Inc.
we owned, among other things. The total book value of the assets acquired was
approximately $317,000. The assumed liabilities consist of accounts payable,
convertible debt, accrued expenses and shareholder advances of approximately
$360,000.
Effective
February 5, 2008, we changed our name to China Energy Recovery, Inc. and
conducted a 1-for-9 reverse stock split of our issued and outstanding capital
stock pursuant to which each nine shares of our common stock issued and
outstanding on the record date of February 4, 2008 was converted into one share
of our common stock. We had 84,922,000 shares of common stock issued and
outstanding immediately prior to the reverse stock split and 9,435,780 shares
thereafter.
On April
15, 2008, we closed the Share Exchange pursuant to which we acquired all of the
issued and outstanding shares of Poise Profit's common stock in exchange for the
issuance of 41,514,179 shares of our common stock to Poise Profit's
stockholders. Upon the closing of the Share Exchange, Poise Profit became our
wholly-owned subsidiary and our business operations consisted of those of Poise
Profit's wholly-owned subsidiary, HAIE Hi-tech Engineering (Hong Kong) Company,
Limited ("Hi-tech"), incorporated in the Hong Kong Special Administration
Region, China.
Also on
April 15, 2008 and as a condition to closing of the Share Exchange, we entered
into Securities Purchase Agreements (the "Securities Purchase Agreement") with
25 accredited investors pursuant to which we issued and sold an aggregate of
7,874,241 units at a price per unit of $1.08 with each unit consisting of one
share of our Series A Convertible Preferred Stock, par value $0.001 per share,
and one warrant to purchase one-half of one share of our common stock at an
exercise price of $1.29 per share (the "Financing"). Thus, at the closing of the
Financing, we issued 7,874,241 shares of our Series A Convertible Preferred
Stock to the investors and we also issued warrants to the investors for the
purchase of an aggregate of 3,937,121 shares of our common stock for an
aggregate purchase price of $8,504,181. After the April 16, 2008 1-for-2 reverse
stock split described below, the warrants are exercisable into 1,968,561 shares
of common stock at an exercise price of $2.58.
On April
16, 2008, we conducted a 1-for-2 reverse stock split of our issued and
outstanding capital stock pursuant to which each two shares of our common stock
issued and outstanding on the record date of April 15, 2008 was converted into
one share of our common stock. We had 50,949,959 shares of common stock issued
and outstanding immediately prior to the reverse stock split and 25,474,980
shares thereafter.
On May 6,
2008, we filed a registration statement on Form S-1 to register for resale
certain shares of our common stock held by selling stockholders. The
registration statement became effective on September 8, 2009.
On June
17, 2008, we filed a registration statement on Form 8-A to register our common
stock under Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
Starting
in the summer of 2008, we began a reorganization of our corporate structure as
further described under the caption "Organizational Structure and Subsidiaries"
below.
From
inception until 2000, we were engaged in the limited origination and servicing
of new modular building leases. We conducted such activity primarily in the
State of California and accounted for all the leases we entered into as
operating leases. We ceased entering into new leases in 2000. Immediately before
the closing of the Share Exchange, we were considered to be in the development
stage because our operations principally involved market research and other
business planning activities.
As a
result of the closing of the Share Exchange on April 15, 2008, our new business
operations consist of those of Poise Profit's Chinese subsidiary, Hi-tech, which
were subsequently transferred to CER Hong Kong as described in Item 1 Business -
Organizational Structure and Subsidiaries. CER Hong Kong is principally engaged
in designing, marketing, licensing, fabricating, implementing and servicing
industrial energy recovery systems capable of capturing industrial waste energy
for reuse in industrial processes or to produce electricity and thermal
power.
Organizational
Structure and Subsidiaries
After
closing of the Share Exchange, our organizational structure reflected Chinese
limitations on foreign investments and ownership in Chinese businesses.
Generally, these limitations prevent a U.S. corporation from owning directly
certain types of Chinese businesses. Instead, a U.S. corporation can obtain the
benefits and risk of equity ownership of a Chinese business either by being a
part-owner of a Chinese joint venture or by entering into fairly extensive and
complicated contractual relationships with Chinese companies wholly-owned by
Chinese owners. At that time, and still to a significant extent, our business
relied on contractual relationships. However, we began a corporate reorganizing
process in the summer of 2008 to gradually move our assets and operations from
affiliated entities with which we have only contractual relationships into
wholly-owned subsidiaries. Until our reorganization is complete, our corporate
structure will reflect a combination of control via direct ownership and
contractual arrangements.
Poise
Profit is our only wholly-owned subsidiary and was incorporated on November 23,
2007 under the laws of the British Virgin Islands. Poise Profit, in turn, owns
100% of the issued and outstanding equity interests in Hi-tech and CER (Hong
Kong) Holdings Limited ("CER Hong Kong"). Hi-tech was incorporated under the
laws of the Hong Kong Special Administration Region, China on January 4, 2002.
Historically, all of our operations were conducted through Hi-tech, via
contractual arrangements with affiliated Chinese entities, but we are in the
process of transferring our assets and operations from Hi-tech to CER Hong Kong
and its wholly-owned subsidiary CER Energy Recovery (Shanghai) Co., Ltd. ("CER
Shanghai"). As a step of our reorganization, CER Hong Kong was incorporated on
August 13, 2008 under the laws of the Hong Kong Special Administrative Region,
China and was originally jointly owned by Mr. Qinghuan Wu, one of our directors
and our Chairman of the Board and Chief Executive Officer, and his spouse, Mrs.
Jialing Zhou, who is one of our directors. On December 3, 2008, Mr. Wu and Mrs.
Zhou transferred ownership of CER Hong Kong to Poise Profit. CER Shanghai was
incorporated on November 11, 2008 as a wholly foreign-owned enterprise in
Shanghai, China. After our reorganization is complete, CER Shanghai will be our
primary operating entity in China and CER Hong Kong will be our primary holding
entity holding all equity interests in our Chinese subsidiaries, including CER
Shanghai. While we are gradually transferring our current assets and operations
to CER Shanghai, we plan that CER Shanghai will enter into the majority of all
new business contracts.
Before
December 3, 2008, all of our operations were conducted through Hi-tech and its
affiliated companies. Hi-Tech was engaged in the marketing and sale of energy
recovery systems which were designed, manufactured and installed by affiliated
companies. Hi-tech had entered into contractual relationships with two entities
incorporated in Shanghai, China: Shanghai Hai Lu Kun Lun Hi-tech Engineering
Co., Ltd. ("Shanghai Engineering") and Shanghai Xin Ye Environmental Protection
Engineering Technology Co., Ltd. ("Shanghai Environmental"). Each of Shanghai
Engineering and Shanghai Environmental was considered a "variable interest
entity" and its financial information was consolidated with Hi-tech's pursuant
to the Financial Accounting Standards Board's ("FASB") Financial Interpretation
46 (Revised), Consolidation of Variable Interest Entities, which interprets
Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements.
Hi-tech entered into contractual relationships with Shanghai Engineering and
Shanghai Environmental to comply with Chinese laws regulating foreign-ownership
of Chinese companies. Shanghai Engineering is engaged in the business of
designing, manufacturing and installing energy recovery systems. All
manufacturing is done by Vessel Works Division pursuant to a cooperative
manufacturing agreement between Shanghai Engineering and Vessel Works Division's
parent, Shanghai Si Fang Boiler Factory ("Shanghai Si Fang"), as further
described below. Vessel Works Division holds important permits for the
manufacturing and installation of boilers used in our energy recovery systems.
Shanghai Environmental is not an operating company but it served in the past as
a vehicle for arranging sales and maximizing tax benefits. We did not use
Shanghai Environmental for these purposes during our 2008 fiscal year and do not
intend to do so in the future. We intend to start the process to dissolve
Shanghai Environmental in 2009. Shanghai Engineering is owned jointly by Mr.
Qinghuan Wu, one of our directors and our Chairman of the Board and Chief
Executive Officer, and his spouse, Mrs. Jialing Zhou, who is one of our
directors. Shanghai Environmental is wholly-owned by Mr. Wu.
The
material contractual relationships between Hi-tech and each of Shanghai
Engineering and Shanghai Environmental consisted of:
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Consulting
Services Agreements - These agreements allow Hi-tech to manage and operate
Shanghai Engineering and Shanghai Environmental, and collect the
respective net profits of each company. Under the terms of the agreements,
Hi-tech is the exclusive provider of advice and consultancy services to
Shanghai Engineering and Shanghai Environmental, respectively, related to
the companies' general business operations, human resources needs and
research and development, among other things. In exchange for such
services, each of Shanghai Engineering and Shanghai Environmental must pay
to Hi-tech such company's net profits. Hi-tech will own all intellectual
property rights developed or discovered through research and development
in the course of providing services under the agreements but will grant a
license to use such intellectual property back to the respective company
if necessary to conduct the business. Each of Shanghai Engineering and
Shanghai Environmental are required to cause their respective shareholders
to pledge such shareholders' equity interests in the respective companies
to secure the fee payable by Shanghai Engineering and Shanghai
Environmental, respectively, under the agreements. The agreements contain
affirmative covenants requiring each of Shanghai Engineering and Shanghai
Environmental to take certain actions, such as (but not limited to)
delivering periodic financial reports to Hi-tech. The agreements also
contain negative covenants preventing each of Shanghai Engineering and
Shanghai Environmental from taking certain actions such as (but not
limited to) issuing equity, incurring indebtedness and changing its
business. The agreements are effective until terminated and they may be
terminated by Hi-tech for any or no reason and by either party for reasons
explicitly set forth in the agreements, including (but not limited to) a
breach by the other party or the other party's becoming bankrupt or
insolvent. The parties may not assign or transfer their rights or
obligations under the respective agreements without the prior written
consent of the other party, except that Hi-tech may assign its rights or
obligations under the agreements to an
affiliate.
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Operating
Agreements - The parties to each of these agreements are Hi-tech, Shanghai
Engineering, Shanghai Environmental, respectively, and all of the
shareholders of each of Shanghai Engineering and Shanghai Environmental,
respectively. Under the agreements, Hi-tech guarantees the contractual
performance by each company under any agreements with third parties, in
exchange for a pledge by each of Shanghai Engineering and Shanghai
Environmental of all of its respective assets, including accounts
receivable. Hi-tech has the right to approve any transactions that may
materially affect the assets, liabilities, rights or operations of each
company and provide, binding advice regarding each company's daily
operations, financial management and employment matters, including the
dismissal of employees. In addition, Hi-tech has the right to recommend
director candidates and appoint the senior executives of each company. The
agreements expire 10 years from execution unless renewed. Hi-tech has the
right to terminate each of the agreements upon 30 days' written notice but
Shanghai Engineering and Shanghai Environmental do not have the right to
terminate their respective agreement during its term. Hi-tech may freely
assign its rights and obligations under the agreements upon written notice
to Shanghai Engineering and Shanghai Environmental, respectively. Shanghai
Engineering and Shanghai Environmental may not assign their rights or
obligations under the respective agreements without the prior written
consent of Hi-tech.
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Proxy
Agreements - Hi-tech has entered into proxy agreements with all of the
shareholders of each of Shanghai Engineering and Shanghai Environmental
under which the shareholders have vested their voting power of the
companies in Hi-tech and agreed to not transfer the shareholders'
respective equity interests in the two companies to anyone but Hi-tech or
its designee(s). The agreements do not have an expiration date. Hi-tech
has the right to terminate each of the agreements upon 30 days' written
notice but the shareholders may not terminate the agreements without
Hi-tech's consent.
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Option
Agreements - The parties to each of these agreements are Hi-tech, Shanghai
Engineering, Shanghai Environmental, respectively, and all of the
shareholders of each of Shanghai Engineering and Shanghai Environmental,
respectively. The shareholders of each of Shanghai Engineering and
Shanghai Environmental have granted Hi-tech or its designee(s) the
irrevocable right and option to acquire all or a portion of such
shareholders' equity interests in the two companies. The shareholders have
also agreed not to grant such an option to anyone else. The purchase price
for a shareholder's equity interests will be equal to such shareholder's
original paid-in price for such equity interest. Pursuant to the terms of
the agreements, the shareholders and each of Shanghai Engineering and
Shanghai Environmental have agreed to certain restrictive covenants to
safeguard Hi-tech's rights under the respective agreement. The agreements
expire 10 years from execution unless renewed. Hi-tech may freely assign
its rights and obligations under the agreements upon written notice to
Shanghai Engineering, Shanghai Environmental and the shareholders,
respectively. Shanghai Engineering, Shanghai Environmental and the
shareholders, respectively, may not assign their rights or obligations
under the respective agreements without the prior written consent of
Hi-tech.
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·
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Equity
Pledge Agreements - The parties to each of these agreements are Hi-tech,
Shanghai Engineering, Shanghai Environmental, respectively, and all of the
shareholders of each of Shanghai Engineering and Shanghai Environmental,
respectively. The shareholders of each of Shanghai Engineering and
Shanghai Environmental have pledged all of their respective equity
interests in the two companies to Hi-tech to guarantee each of Shanghai
Engineering and Shanghai Environmental's performance of these companies'
respective obligations under the Consulting Services Agreements. The
pledge expires two years after the obligations under the Consulting
Services Agreements described above are fulfilled. Hi-tech has the right
to collect any and all dividends paid on the pledged equity interests.
Pursuant to the terms of the agreements, the shareholders and each of
Shanghai Engineering and Shanghai Environmental have agreed to certain
restrictive covenants to safeguard Hi-tech's rights under the respective
agreement. Upon an event of default under the agreements, Hi-tech may
vote, control, sell or dispose of the pledged equity interests and may
require the shareholders to pay all outstanding and unpaid amounts due
under the Consulting Services Agreement. Pursuant to the terms of the
agreements, the shareholders have agreed to certain restrictive covenants
to safeguard Hi-tech's rights under the respective agreement. Hi-tech may
freely assign its rights and obligations under the agreements upon written
notice to the shareholders. The shareholders, may not assign their rights
or obligations under the respective agreements without the prior written
consent of Hi-tech.
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On
December 3, 2008, as a step in our reorganization, all of the above-referenced
contracts between Hi-tech and Shanghai Engineering and between Hi-tech and
Shanghai Environmental were transferred to CER Hong Kong. From this date, CER
Hong Kong is engaged in the marketing and sale of energy recovery systems which
are designed, manufactured and installed by its subsidiaries and affiliated
companies.
All of
Shanghai Engineering's manufacturing activities are conducted through a Leasing
and Operation Agreement, a form of cooperative manufacturing agreement,
originally effective as of May 1, 2003 and subsequently amended, with a
state-owned enterprise, Shanghai Si Fang. Pursuant to the agreement, Shanghai Si
Fang leases one of its subsidiaries, Vessel Works Division (sometimes also
translated from Chinese into English as "Shanghai Si Fang Boiler Factory
Container Branch Factory"), to Shanghai Engineering. The agreement expires on
December 31, 2009 unless renewed. According to the agreement, we have the
following rights: (a) complete control over the operations of Vessel Works
Division; (b) right of use of the employees, property, plant and equipment of
Vessel Works Division; (c) use of the "Si Fang" brand name and license for
pressure vessels; and (d) entitlement to the net profits of Vessel Works
Division. Shanghai Si Fang provides quality control for the manufactured
products. We pay Shanghai Si Fang rental and management fees of 2.7 million
Renminbi in the aggregate (approximately $389,206 at the 2008 annual average
exchange rate) per year during the period from January 1, 2008 to December 31,
2009. We are in the process of renegotiating the rental and management fees and
expect them to increase in the near future due to inflation and an increase in
the price of land in the area. Although we do not own any of the outstanding
equity interests in Vessel Works Division, we have control over Vessel Works
Division and the risks and rewards associated with equity ownership under the
terms of the agreement.
At the
time of the closing of the Share Exchange, Hi-tech owned 90% of a joint venture
called Shanghai Haie Investment Consultation Co., Ltd. ("JV Entity"), a company
organized in Shanghai, China, providing investment consultancy services,
enterprise management consultancy services and marketing policy planning
services to third-party customers as well as affiliates. The remaining 10% was
owned by Shanghai Engineering. In compliance with the new Chinese regulation
effective January 2008, on June 16, 2008, JV Entity's board of directors
approved a plan to dissolve JV Entity. The application for dissolution was
approved by the Chinese governmental authority in July 2008. We dissolved JV
Entity on September 1, 2008 and its assets, in the form of an initial capital
contribution from Hi-tech, were returned to Hi-tech on September 18,
2008.
The following is an organizational chart setting
forth the current status of the Company's subsidiaries and affiliated companies:
Industry
Overview
Global
demand is increasing for innovative environmental protection and renewable
energy solutions for sustainable economic growth. Modern industrial nations and
emerging markets today are faced with the growing challenge of reducing and
controlling air pollution emissions that present serious health risks to
national populations, cross international borders, and damage the environment.
Increased energy consumption has forced governments and industries to invest in
improving energy efficiency and alternative forms of power generation and
conservation. As the global power generation industry and manufacturing
industries increase their focus on improving efficiency and mitigating the
environmental impact of its processes, we believe that energy recovery systems
will play a major role in improving the output that can be obtained from current
supplies.
Energy
recovery systems can salvage the majority of the wasted energy from excess heat
that industrial manufacturing facilities and power plants release into the
atmosphere in the form of hot exhaust gases or high pressure steam by converting
the heat into electricity (often through steam driven generator turbines) which
can be used in industrial processes, thereby lowering energy costs. In addition,
energy recovery systems can also capture harmful pollutants that would otherwise
be released into the environment from certain industrial processes. These
reduced emissions can also help companies meet environmental regulations. Energy
recovery systems may also be used in heat recovery applications whereby excess
heat may be used to heat buildings and water. Examples of end-users of this type
of energy recovery system include hospitals and schools that may heat their
buildings and water with excess heat generated by their own large electrical
equipment. This type of energy recovery system is less complicated and requires
significantly less technical qualifications to build than the industrial energy
recovery systems described above as it is essentially redirecting the heat
generated by one system into other on-site systems. As a result, this type of
energy recovery system is cheaper to build and the barriers to entry into this
market are lower than in the market for industrial energy recovery systems. Our
business focuses on energy recovery systems for industrial
applications.
We
believe that energy recovery systems represent a large-scale, environmentally
friendly and economically feasible form of power generation and tool for
improving energy efficiency. Compared with other alternative forms of power,
such as solar, wind or biomass, we believe that energy recovery systems are
dramatically more affordable for technology capable of delivering power on the
scale necessary for industrial clients. In our opinion, energy recovery systems
are cost competitive even with large-scale, traditional power sources such as
coal, fossil fuels and nuclear power, but have the added benefit of reducing
pollution and greenhouse gas emissions.
According
to recent studies from the U.S. Department of Energy and the U.S. Environmental
Protection Agency, energy recovery systems could generate nearly 200 gigawatt
("GW") of new power, equivalent to approximately 20% of current U.S. power
generation capacity. The European Union is a significant user of energy recovery
systems, with 104 GW installed power generating capacity; Germany and Italy have
the most installed capacity at 16 GW and 13 GW, respectively.
We have
developed and commercialized our proprietary customized energy recovery
technologies and solutions to cost-effectively reduce pollution and capture the
waste heat released by our customer's industrial processes. Our energy recovery
systems can help our customers improve their energy use efficiency. For example,
our energy recovery systems applied in sulfuric acid manufacturing processes can
produce as much as three times the useable energy from the same fuel by
recovering otherwise lost energy and reusing it in the manufacturing processes
directly or to further generate electrical power, which may allow customers to
slash energy expenditures by up to two-thirds. Additionally, these systems can
reduce harmful emissions resulting from certain types of sulfuric acid
manufacturing processes that otherwise would have been released into the
atmosphere. Other benefits include our customers' ability to sell carbon
credits, reduction of flue gas and equipment sizes of all flue gas handling
equipment such as fans, stacks, ducts, and burners, and a reduction in auxiliary
energy consumption.
The most
notable target customers for our energy recovery systems are major types of
industrial manufacturing facilities, such as chemical plants, petrochemical
plants, paper manufacturing plants, oil refineries, cement plants, steel mills,
etc. These types of customers generally operate manufacturing equipment that
release waste heat into which our energy recovery systems can be implemented and
integrated to capture such waste heat for direct reuse or, if connected with
steam-driven turbines, to produce electricity.
Global
Market Overview
The world
currently faces fundamental problems with its energy supply, which are due
primarily to the reliance on fossil fuels. The economic prosperity of the
wealthiest nations in the twentieth century was built on a ready supply of
inexpensive fossil fuel and developing nations have continued in the
twenty-first century to consume fossil fuel reserves at an ever increasing rate.
This has led to worldwide reserve depletions, indicating that both oil and gas
are likely to be effectively exhausted before the end of this century. Only coal
reserves are expected to last into the next century. Yet even if fossil fuel
supplies were unconstrained, their continued use poses its own problems. All
fossil fuel combustion produces carbon dioxide, which appears to result in the
warming of the earth's atmosphere with profound environmental implications
across the globe.
These
problems have resulted in the realization that the world must both increase the
efficiency of its utilization of fossil fuels and decrease its reliance upon
them. Environmental issues related to fossil fuel combustion arose first during
the 1980s with the advent of acid rain, a product of the sulfur and nitrogen
emissions from fossil fuel combustion. Power plants were forced by legislation
and economic measures to control these emissions. However it is the recognition
of global warming that presents the most serious challenge because carbon
dioxide exists at much higher levels in the flue gases of power plants and major
types of industrial manufacturing facilities than sulfur dioxide and nitrogen
oxides.
Although
renewable energy capacity offers a hedge against major price rises because most
renewable technologies exploit a source of energy that is freely available, many
renewable technologies today still rely on government subsidies to make them
competitive. Governments may also impose penalties upon companies, such as
carbon trading schemes, which discourage the use of fossil fuels or increase its
costs by imposing stringent emissions limits.
Given the
international concerns regarding global warming and pollution and the need to
more efficiently utilize fossil fuels, we believe that there exists massive
worldwide demand and a growing market for technologies that can enable companies
to generate greater amounts of energy from the same supply of fossil fuels and
that also reduce the amount of harmful emissions that would otherwise be
released from the combustion of those fossil fuels. These technologies,
including energy recovery systems, could benefit companies by both reducing
energy costs and mitigating possible emissions penalties.
China
Market Overview
Booming
economic growth and rapid industrialization has spurred demand for electric
power in China over the previous few years. By the end of 2006, China's total
installed generating capacity reached 622 GW, an increase of more than 20% over
the capacity at the end of 2005. Due to the expansion of energy intensive
industrial sectors such as steel, cement, and chemicals, China's energy
consumption has been growing faster than the country's gross domestic product
("GDP") and thus causing a shortage of electricity and coal and blackouts in
over 20 of the country's 32 provinces, autonomous regions and municipalities.
With the rapid modernization and industrialization of the country's economy,
China is the world's second largest consumer of energy after the United States
with its demand now accounting for over 15% of the world's energy consumption.
According to the International Energy Agency, China needs to add 1,300 GW to its
electricity-generating capacity, more than the total installed capacity
currently in the United States, to meet its demands over the next several years.
We predict that the result of this massive increase in electric generation
capacity will be a rapid rise in harmful emissions. China has already surpassed
the United States to become the world's largest emitter of greenhouse gases, and
the country faces enormous challenges from the pollution brought about by its
energy needs. Only 1% of China's 560 million city dwellers breathe air
considered safe by EU standards, environmental problems have led to industrial
cities where people rarely see the sun, and birth defects in infants have soared
nearly 40% since 2001. In addition, sulfur dioxide and nitrogen oxides released
by coal-fired power plants fall as acid rain on Seoul, South Korea and Tokyo,
Japan. A 2005 report by Chinese environmental experts, quoted in a New York
Times article ("As China Roars, Pollution Reaches Deadly Extremes," August 26,
2007), estimates that annual premature deaths attributable to outdoor air
pollution in China were likely to reach 380,000 in 2010 and 550,000 in
2020.
China has
set internal targets for energy efficiency to mitigate the negative impact of
growth in future energy demand on the country's environmental problems. China
aims to improve energy efficiency per unit of GDP in 2010 by 20% compared with
2005. To enable the implementation of China's recent climate change policy,
mayors across each province are required to develop local plans, and their
performance against implementing these plans will be measured. In order to meet
demand more efficiently and without further increasing pollution, significant
investment in alternative energy and clean technologies such as energy recovery
systems will be crucial.
Use of
alternative and renewable energy is expanding rapidly in China and currently
contributes approximately 16% to total electricity generation and 7.5% to total
primary energy supply. In China the generation capacity of electricity from
renewable energy is dominated by hydropower, which accounted for more than 95%
of the total electricity from renewable energy in 2005. Wind energy accounted
for 1.1% of the total renewable installed capacity at the end of 2005, but China
has more than doubled its total wind power capacity by installing additional
capacity of 1,347 MW of wind energy during 2006. To reduce the country's current
reliance on coal-fired generation, the Chinese government is stepping up efforts
to accelerate the development of renewable energy. The Renewable Energy Law,
which came into effect on January 1, 2006, along with a number of incentive
policies ranging from tax incentives to subsidies, have been introduced to
stimulate investment in renewable energy technologies. NDRC, a macroeconomic
management agency under the Chinese State Council, has set a target to source
16% of primary energy from renewable energy by 2020, up from a 7.5% actual share
in 2005. This includes development of 300 GW of hydropower, 30 GW of wind power,
30 GW of biomass power, 1.8 GW of solar photovoltaic systems, and smaller
amounts of solar thermal and geothermal power. Business Insights, a company
involved in providing strategic market and company analyses, estimates that
realizing this target would require approximately 130 GW of new renewable energy
capacity with an investment of up to $184 billion.
Competitive
Markets and Competition
Competition
in the energy recovery system industry generally is divided by segment following
the differentiation between low-grade energy recovery systems used for heat
recovery applications (lower power extraction/generation capacity) and
high-grade energy recovery systems used in industrial applications (higher power
extraction/generation capacity).
Most of
the players in the market are engineering firms that produce low-grade energy
recovery systems for heat recovery applications mainly used by schools,
hospitals and similar facilities. These products are generally undifferentiated
and require lower levels of capital to develop. This type of energy recovery
system is less complicated and requires significantly less technical
qualifications to build than high-grade industrial energy recovery systems. As a
result, this type of energy recovery system is cheaper to build and the barriers
to entry into this market are lower than in the market for industrial energy
recovery systems.
High-grade
energy recovery systems for industrial applications, like ours, require large
amounts of capital investment and high levels of expertise resulting in barriers
to entry to most prospective market entrants. Because energy recovery systems of
this type are highly customized based on the particular customer's need,
manufacturers mainly compete based on their respective engineering capabilities.
The manufacturers of industrial energy recovery systems generally fall into one
of the following classifications:
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Companies
that specialize exclusively in energy recovery systems and account for the
majority of the larger and more advanced production of energy recovery
systems; and
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Major
equipment manufacturers for which energy recovery systems are not a key
focus but that have the necessary resources to build effective
systems.
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Barriers
to entry for the production of high grade energy recovery systems have resulted
in a majority of the global sales for energy recovery systems being generated by
a few large players. These industry participants focus on large scale projects
leaving many intermediate opportunities for companies such as ours. The largest
of these players globally include Babcock-Hitachi (Japan), Foster Wheeler (USA),
and Mitsubishi Heavy Industries (Japan). The major players in China include Dong
Fang Boiler Group, Wuhan Boiler, Hangzhou Boiler Group, and Anshan
Boiler.
We are
principally engaged in designing, manufacturing, installing and servicing
fully-customized energy recovery systems. While most of our competitors only
offer one or two off-the-rack models, we develop products across varying
specifications to best suit each customer's needs and objectives. Our products
can recycle as much as 70% of the energy that would otherwise have been
lost.
We have
enabled our customers to achieve substantial gains in energy efficiency and we
continue to carry out research and development activities alongside with the
design and engineering activities for customers’ projects to enhance
efficiencies and decrease environmental impact. We employ approximately 90
highly trained engineers in our engineering team and are planning to expand
it.
We have
targeted our products at industrial sectors with significant amounts of waste
heat. These sectors include:
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Chemical
and Petrochemical Industries;
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Metallurgical
Industry.
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We
differentiate ourselves from our competitors by specializing in energy recovery
systems and being one of the few players in the market capable of providing
engineering, procurement and construction ("EPC") services for waste heat
recovery (as further described below under the caption "Products and
Technology"). Although we have the capacity and ability to provide EPC services,
it was relatively rare in the past that a customer requests such services. For
example, we did not enter into any EPC contracts in 2006 but entered into one
EPC contract upon a customer's request in 2007. However, we have recently seen
increasing interest from customers in EPC projects. We believe that we are
currently a dominant player in energy recovery systems to sulfuric acid
manufacturers in China. We believe that energy recovery systems for sulfuric
manufacturing are the most difficult to design and engineer due to the strong
erosive character of the sulfuric acid.
Design
and Engineering
Our
primary design and engineering facility is located in Shanghai, China. The
facility employs approximately 90 engineers. Approximately 65 of the engineers
engage in project design, customizing the energy recovery systems to meet the
individual needs of various industries. The balance of the engineers manage our
production processes at the facility. We believe that our engineering team is
highly experienced and accomplished in its field.
Manufacturing
We
operate a manufacturing facility, owned by Shanghai Si Fang and through Shanghai
Engineering as further described above, in Shanghai, China. The facility
occupies approximately 10 acres (4 hectares) of land with approximately 191,300
square feet of manufacturing space and storage. We employ a team of 230 skilled
workers, technicians and quality assurance personnel at the manufacturing
facility. Our employees utilize a vast array of equipment including lathes,
drills, metal cutting machines, forging equipment, handling equipment (cranes),
welding machines, and testing equipment. A majority of the equipment is leased
from Shanghai Si Fang pursuant to the cooperative manufacturing agreement
descried above. This equipment will remain the property of Shanghai Si Fang when
the agreement expires. Hi-tech does not own the facility but leases it from
Shanghai Si Fang.
Marketing
and Sales
We market
and sell our products worldwide through our direct sales force, which is based
in Shanghai, China. Our marketing programs include industrial conferences, trade
fairs, sales training, and trade publication advertising. Our sales and
marketing groups work closely with our design and engineering, and manufacturing
groups to coordinate our product development activities, product launches and
ongoing demand and supply planning. We sell our products primarily directly to
the end users of our energy recovery systems, but we also sell energy recovery
systems to leading engineering firms who in turn sell them to their end
users.
We are
also planning on entering into marketing partnerships and licensing deals that
will enable us to reach a boarder segment of the market. We believe that there
is significant opportunity in international markets such as the Middle East, the
United States, Europe and Latin America, and we intend to enter these markets
through partnerships. Additionally, we will look to expand into new industrial
sectors through partnerships with leading engineering firms that specialize in
specific industry verticals.
Products
and Technology
We have
four main service offerings available to our customers, of which the first three
generate the majority of our revenue stream:
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Fabrication.
We have highly-trained manufacturing teams capable of building high
quality energy recovery systems in a timely fashion. All of our energy
recovery systems are of modular design with a high degree of factory
assembly. With modular construction, site welds on heat exchanger pressure
parts are kept to a minimum. We design all energy recovery systems we
manufacture to protect our brand. We collect a one-time fee for the
fabrication of each of our units. Of the over 100 unique customers who
have purchased energy recovery systems from us, more than 25% of them have
also purchased some of the other three major services that we offer which
are auxiliary to our fabrication services, or have returned to us for new
projects.
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Design.
Our primary product line of energy recovery systems can be designed to
meet the specific needs of our customers. We typically focus on heavy
industrial applications. In addition to the designing of energy recovery
systems for our own customers, we occasionally are approached by and
contract with third party manufacturers or engineering firms to design
systems for their customers. This offers a peripheral revenue stream to
supplement our core operations. We employ a flexible pricing scheme when
designing for third parties that depends upon the size, application and
deadline of the proposed energy recovery
system.
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Implementation
and EPC Projects. Similar to the revenue model employed for our design
services, we either package the implementation (installation) of our
energy recovery system with the design and fabrication of our units, or
outsource this function to third party manufacturers for a service charge;
this allows smaller third party manufacturers to convert fixed costs to
variable costs, while offering us an ancillary revenue stream. We do not
perform implementation services on a stand-alone basis. We
also possess the
resources, expertise and capabilities to act as the lead engineering
procurement and construction contractor, overseeing the implementation of
energy recovery systems for our customers. EPC services involve the whole
process of the construction of projects from design, development,
engineering, manufacturing up to
installation.
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Maintenance.
Our team is responsible for the overall maintenance of the energy recovery
systems we install. In the event that major repairs are needed, the
maintenance team is capable of rebuilding the equipment in order to repair
or replace any necessary components. The maintenance team is contracted to
service our own as well as other manufacturers' energy recovery systems.
Our maintenance team charges an hourly fee for its
services.
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Our
energy recovery systems represent a fully-customizable technology capable of
meeting the varying needs of a diversified customer base. The systems are
capable of recycling up to 70% of the energy that would otherwise be lost in
customers' industrial processes, in many cases allowing our customers to recover
their costs of the energy recovery system in energy savings within one to three
years. The energy recovery systems can also capture and eliminate harmful
particles, carbon dioxide, sulfur dioxide and other pollutants where the main
industrial facilities release such harmful emissions.
Our
energy recovery systems are suitable for use in a wide range of industries,
including chemical processing, papermaking, and oil and ethanol refining. The
core technology is easily adaptable to meet a variety of different size
facilities and types of plant design. Below is an illustration of our technology
as it is implemented in the sulfuric acid production industry.
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Traditional
Sulfuric Acid Production Process . The production of sulfuric acid
involves highly exothermic chemical reactions. Most of the heat is
released into the atmosphere through cooling towers without capturing any
of the energy contained therein. Some of the heat from the production
process is captured as steam, which the manufacturer can use to, for
example, generate electricity. Without the use of an energy recovery
system, the production of one ton of sulfuric acid will produce
approximately one ton of steam.
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Sulfuric
Acid Production Process with Energy Recovery System. The incorporation of
an energy recovery system increases the manufacturer's ability to extract
energy from the production process such that the production of one ton of
sulfuric acid can produce between 1.3 and 1.65 tons of steam. In so doing,
94% of the heat that would have otherwise been released to the atmosphere
is utilized to provide a larger quantity of steam that can be used in
industrial applications. The harnessed steam can be used for various
applications, most commonly to drive generator turbines to produce
electricity. Doing so decreases the manufacturer's demand for externally
produced energy as the manufacturer instead can use internally produced
energy resulting from the energy recovery system's increased production
and utilization of steam.
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Customers
We have
provided over 100 unique customers with energy recovery systems, and more than
25% of these customers have purchased multiple other products and services from
us such as design and implementation services. Our customers are mainly
industrial manufacturers, such as chemical plants, paper manufacturers and
industrial engineering firms. Our energy recovery systems are currently deployed
and being deployed in a variety of international markets, including Egypt,
Pakistan, Korea, Vietnam and Malaysia, as well as in 20 of China's 32 provinces,
including Yunnan, Jiangsu, Shandong, Sichuan, Hunan and Hubei.
We
currently have a backlog of orders from a number of domestic Chinese and
international customers, most of which are expected to be completed in
2009.
Because
of the nature and long life of our energy recovery systems, a majority of our
sales are from new customers when comparing our customer base from year to year.
However, we do receive repeat business from previous customers, especially those
in China, when they are expanding their capacities or building new plants. For
the years ended December 31, 2008 and 2007, our five largest customers accounted
for 54% and 68% of our sales, respectively. Receivables from these five
customers were 63% and 61% of total accounts receivable at December 31, 2008 and
2007, respectively. Our large customers may not be the same from year to year.
Therefore, we do not believe that we are dependent upon a few major customers to
continue our current level of sales.
I
ntellectual Property and Other
Proprietary Rights
The
Chinese State IPR Office has authorized and granted the following patents to
Shanghai Engineering on various components of our energy recovery
systems:
Patent
Type
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Patent
Name
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Expiration
Date
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Utility
model
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Drum-type
sectional ache fire tube boiler made by sulphur
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5/6/2013
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Utility
model
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Double
drum-type fire tube exhaust-heat boiler which shares one steam
dome
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11/6/2013
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Utility
model
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Improvement
of tube compensator breed which makes ache fume
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11/6/2013
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Utility
model
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Improvement
of protective casing tube
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11/6/2013
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Utility
model
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Triple
drum-type fire tube exhaust-heat boiler which shares one steam
dome
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1/30/2015
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Shanghai
Engineering has, together with an unrelated company, Zhejiang Jia Hua Group
Joint Stock Co., Ltd., submitted the following patent applications to the
Chinese State IPR Office, which are currently pending
authorization:
Patent
Type
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Patent
Name
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Application
Date
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Utility
model
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Spray
pump synthesizing tower
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8/31/2007
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Invention
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Chlorosulfonic
acid preparation new craftwork and equipment
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8/31/2007
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The
patent application for “chlorosulfonic acid preparation new craftwork and
equipment” passed the publication period and entered into the examination period
in March 2009. If our application is successful, we expect that it will take
between two to three years until we are granted a patent for this invention, if
at all.
Research
and Development
We are
focused on a strategy of utilizing our research and development capabilities to
continuously improve the waste heat and emissions capture technology of our
energy recovery systems. Our research and development efforts focus specifically
on maximizing efficiency and reliability while minimizing the cost to customers.
We have currently been focusing our efforts on new products with immediate
demand in the markets such as capturing and reducing emissions released in
various industrial processes, such as sulfur dioxide (a byproduct in sulfuric
acid processes) and alkali (a byproduct in paper-making processes). We maintain
strong relationships with many professional engineering firms in China that can
provide technical support in the development process.
We employ
approximately 90 specialized engineers at our Shanghai, China facilities who are
engaged in refining the core technology for our energy recovery systems,
developing our intellectual property rights, enhancing energy efficiencies and
decreasing environmental impact for our customers. Our engineers carry out
development activities alongside with the design work for our customers’
projects and the expenses associated with our research and development
activities are passed along to our customers as part of the price paid for our
products and services. As a result, we do not record research and development
expenses as a separate line item in our financial statements. Shanghai
Engineering has a portfolio of core Chinese patents on various components of our
energy recovery systems as described above.
Our
Business Strategy
We have
established a three-phase growth strategy:
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Phase
One. During the first phase of our growth strategy, we will continue to
fulfill our current orders while growing our domestic Chinese business.
During this time, we intend to establish long-term strategic purchasing
agreements with suppliers that provide key raw
materials.
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Phase
Two. The second phase of our growth strategy involves increased
expenditures that will support our growth. We intend to complete the first
phase of the construction of our first owned manufacturing facility, which
we believe will increase our profit margins and efficiency. We also intend
to invest in specialized equipment to further increase the efficiency of
our manufacturing process. While these capital expenditures are underway,
we expect to incur separate (unrelated to any particular customer project)
research and development expenditures to support an expansion into new
sectors, such as coke refining and cement, including adding more
specialized talents to our engineering and design team. We also anticipate
recruiting an international sales and marketing team to assist in
international market expansion.
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Phase
Three. In the third phase of our growth strategy, we expect to complete
the second phase of the construction of our first owned manufacturing
facility to meet future demand. We also anticipate expanding our EPC
business by continuing to increase the size of our engineering and design
team. Finally, we expect to increase our international marketing efforts
in the Middle East, Europe and the United States during this
phase.
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Raw
Materials and Principal Suppliers
We do not
currently have any long term supply agreements. We do not believe that we are
reliant on our current suppliers. We believe that we could substitute other
suppliers if needed. Our five largest suppliers (by value) supplied
approximately 26% of our raw materials in 2008.
Employees
As of
December 31, 2008, we had approximately 340 employees, all of who are full time
employees. Of these, approximately 90 are engineering and technical personnel.
We expect to continue to add additional personnel, especially engineers, in 2009
and beyond to support our growth.
None of
our employees is covered by a collective bargaining agreement. Each of our
managerial, sales and administrative employees has entered into a standard form
of employment agreement. All of our personnel who have access to our
confidential information and technical know how have entered into a separate
agreement that contains covenants not to compete for 24 months following
termination of employment and to maintain the confidentiality of certain
proprietary information. We believe that our employee relations are
good.
Governmental
Regulation
The
manufacture of boilers and pressure vessels used in our energy recovery systems
is subject to licensing requirements imposed by the Chinese national government,
as well as regional and local governments, depending on the type of license
needed. Shanghai Si Fang conducts all our manufacturing operations and has
obtained all required licenses. Boilers and pressure vessels manufactured
without such licenses are not allowed to be sold in China. To qualify for a
license, a manufacturer must (a) be a legal entity registered with the local
government; (b) have a production facility, equipment, technical expertise, and
inspection and testing capabilities suitable for producing boilers and pressure
vessels; (c) establish and maintain an effective quality assurance system; and
(d) manufacture the boilers and pressure vessels in accordance with the
requirements of the applicable safety and technical standards.
Our
operations are also subject to governmental regulations applicable to any
business such as general permitting, licensing and registration. For example,
the installation of energy recovery systems at our clients' locations requires a
construction project building permit from the applicable regional
government.
Compliance
with Environmental Laws
We belong
to what is known as the "machinery manufacturing industry" in China which
industry is considered not to generate exhaust gas, waste liquor or waste
residue during manufacturing. Therefore, generally, our manufacturing operations
are not subject to any material environmental regulations.
The
installation and construction of our energy recovery systems at our clients'
locations are subject to environmental laws applicable to construction projects
generally. As part of the procedure for obtaining a construction project
building permit, we must submit an environmental impact statement for each
construction project which assesses the pollution the projects is likely to
produce, its impact on the environment, and stipulates preventive and curative
measures. The issuance of a building permit is conditioned on the approval of
the environmental impact statement.
There are
emissions standards applicable to the operation of coal-burning, oil-burning or
gas-fired boilers (China National General Standard GWPB 3-1999). We do not
believe that these emission standards are applicable to the boilers included
within our energy recovery systems because our boilers are not independently
emitting any emissions as they are being heated by industrial processes as
opposed to by coal, oil or gas.
There are
numerous and varied risks that may prevent us from achieving our goals,
including those described below. You should carefully consider the risks
described below and the other information included in this Annual Report on Form
10-K, including our financial statements and related notes. Our business,
financial condition and results of operations could be harmed by any of the
following risks. If any of the events or circumstances described below were to
occur, our business, financial condition and results of operations could be
materially adversely affected. As a result, the trading price of our common
stock could decline, and investors could lose part or all of their
investment.
Risks
Related to Our Business
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.
Our
limited operating history and the unpredictability of our industry make it
difficult for investors to evaluate our business and future operating results.
An investor in our securities must consider the risks, uncertainties and
difficulties frequently encountered by companies in new and rapidly evolving
markets. The risks and difficulties we face include challenges in accurate
financial planning as a result of limited historical data and the uncertainties
resulting from having had a relatively limited time period in which to implement
and evaluate our business strategies as compared to companies with longer
operating histories.
Our
dependence on a limited number of customer segments may cause significant
fluctuations or declines in our revenues.
We
currently sell a substantial portion of our energy recovery systems to companies
in either the chemical or paper manufacturing sectors. In the fiscal year ended
2008, approximately 70% and 9% of our total sales were attributable to the
chemical and paper manufacturing sectors, respectively. We anticipate that our
dependence on a limited number of customer sectors will continue for the
foreseeable future. Consequently, any one of the following events may cause
material fluctuations or declines in our revenues and have a material adverse
effect on our results of operations:
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Decreased
demand for the products of these manufacturing
sectors;
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Advances
in the manufacturing processes of these sectors that could eliminate the
economic feasibility of our technology;
and
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Failure
to successfully implement our systems for one or more customers within a
particular sector could adversely affect the reputation of our products
and services have as a viable option for other companies within that
sector.
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We
face risks associated with the marketing, distribution and sale of our energy
recovery systems, and if we are unable to effectively manage these risks, they
could impair our ability to expand our business.
The
marketing, distribution and sale of our products expose us to a number of risks,
including, but not limited to:
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Increased
costs associated with maintaining marketing efforts in various parts of
China and various countries;
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Marketing
campaigns that are either ineffective or negatively perceived in one or
more countries and/or across one or more industry
sectors;
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Difficulty
and cost relating to compliance with the different commercial and legal
requirements of the overseas markets in which we offer our
products;
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Inability
to obtain, maintain or enforce intellectual property rights;
and
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Trade
barriers such as export requirements, tariffs, taxes and other
restrictions and expenses, which could increase the prices of our products
and make us less competitive in some
countries.
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If we are
unable to manage these risks, we may be unable to expand our business into new
countries or industries, or expansion may become costlier than
expected.
The
success of our business depends on our ability to attract highly qualified
personnel without whom we would be unable to maintain the quality of our
services, and our ability to retain them, including senior management and other
key personnel who may terminate their employment with us at any time causing us
to lose experienced personnel and to expend resources in securing qualified
replacements.
We depend
substantially on the current and continued services and performance of our
senior management and other key personnel. Loss of the services of any of such
individuals would adversely impact our operations. In addition, we believe that
our technical personnel represent a significant asset and provide us with a
competitive advantage over many of our competitors and that our future success
will depend upon our ability to hire and retain these key employees and our
ability to attract and retain other skilled financial, engineering, technical
and managerial personnel. As our industry continues to grow, we expect increased
competition for qualified personnel. In the event that we are unable to retain
or attract the same level of qualified personnel as in the past on the current
terms of employment, we may face higher labor costs or lower productivity. If
our productivity or the quality of the services we provide decrease, our
business may suffer negative consequences such as a reduction in our rate of
securing and completing customer engagements. Increased costs of labor and
reduced throughput would negatively affect our profitability.
None of
our key personnel, including our Chief Executive Officer, is party to any
employment agreements with us and management and other employees may voluntarily
terminate their employment at any time. Our Chief Financial Officer is a
consultant to the company. There is no guarantee that we will be able to retain
the services of these, or other, individuals on reasonable terms or at all. We
do not currently maintain any "key man" life insurance with respect to any of
such individuals.
Our
inability to obtain capital, use internally generated cash, or use shares of our
capital stock or debt to finance future expansion efforts could impair the
growth and expansion of our business.
Reliance
on internally generated cash or debt to finance our operations or complete
business expansion efforts could substantially limit our operational and
financial flexibility. The extent to which we will be able or willing to use
shares of capital stock to consummate expansions will depend on the market value
of our capital stock from time to time and the willingness of potential
investors, sellers or business partners to accept it as full or partial payment.
Using shares of capital stock for this purpose also may result in significant
dilution to our then existing stockholders. To the extent that we are unable to
use capital stock to make future expansions, our ability to grow through
expansions may be limited by the extent to which we are able to raise capital
for this purpose through debt or equity financings. Raising external capital in
the form of debt could require periodic interest payments that could hinder our
financial flexibility in the future. No assurance can be given that we will be
able to obtain the necessary capital to finance a successful expansion program
or our other cash needs. If we are unable to obtain additional capital on
acceptable terms, we may be required to reduce the scope of any expansion. In
addition to requiring funding for expansions, we may need additional funds to
implement our internal growth and operating strategies or to finance other
aspects of our operations. Our failure to (a) obtain additional capital on
acceptable terms, (b) use internally generated cash or debt to complete
expansions because it significantly limits our operational or financial
flexibility, or (c) use shares of capital stock to make future expansions may
hinder our ability to actively pursue any expansion program we may decide to
implement. In addition, if we are unable to obtain necessary capital going
forward, our ability to continue as a going concern would be negatively
impacted.
Our
business has been and may continue to be adversely affected by disruptions in
the credit markets, including reduced access to credit and higher costs of
obtaining credit.
Widening
credit spreads, as well as significant declines in the availability of credit,
have adversely affected our ability to borrow on a secured and unsecured basis
and may continue to do so. Disruptions in the credit markets make it harder and
more expensive to obtain funding for our businesses. If our available funding is
limited or we are forced to fund our operations at a higher cost, these
conditions may require us to curtail our business activities and increase our
cost of funding, both of which could reduce our profitability and prevent or
hamper our growth through acquisitions.
Our
business has been and may continue to be adversely affected by conditions in the
global financial markets and economic conditions generally.
Our
business is materially affected by conditions in the global financial markets
and economic conditions generally. In the past seven months, these conditions
have changed suddenly and negatively. The ongoing financial crisis and the loss
of confidence in the stock market has increased our cost of funding and limited
our access to some of our traditional sources of liquidity, including both
secured and unsecured borrowings. Increases in funding costs and limitations on
our access to liquidity have negatively impacted our ability to grow our
business. In addition, the deteriorating general economic conditions globally
have caused a drop in corporate spending on non-essential capital improvements,
such as our energy recovery systems. This has caused a slow down in our order
volume and delays in acceptance of international orders. Overall, the business
environment has started to become adverse for our business and there can be no
assurance that these conditions will improve in the near term. Until they do, we
expect our results of operations to be adversely affected.
Our
future success substantially depends on our ability to significantly increase
our manufacturing capacity. Our ability to achieve our capacity expansion goals
is subject to a number of risks and uncertainties.
Our
future success depends on our ability to significantly increase our
manufacturing capacity. If we are unable to do so, we may be unable to expand
our business, decrease our average cost per watt, maintain our competitive
position and improve our profitability. Our ability to establish additional
manufacturing capacity is subject to significant risks and uncertainties. We may
be unable to raise the necessary capital to initiate and complete the
construction of a new manufacturing facility, acquire the appropriate permits to
allow construction of a new manufacturing facility, or engage a company
qualified to construct our manufacturing facility at a reasonable price, or at
all.
We
may not be able to manage our expansion of operations effectively and if we are
unable to do so, our profits may decrease.
We are in
the process of significantly expanding our business in order to meet the
increasing demand for our products and services, as well as to capture new
market opportunities. As we continue to grow, we must continue to improve our
operational and financial systems, procedures and controls, increase
manufacturing capacity and output, and expand, train and manage our growing
employee base. In order to fund our on-going operations and our future growth,
we need to have sufficient internal sources of liquidity or access to additional
financing from external sources. Furthermore, our management will be required to
maintain and strengthen our relationships with our customers, suppliers and
other third parties. As a result, our continued expansion has placed, and will
continue to place, significant strains on our management personnel, systems and
resources. We will also need to further strengthen our internal control and
compliance functions to ensure that we will be able to comply with our legal and
contractual obligations and minimize our operational and compliance risks. Our
current and planned operations, personnel, systems, internal procedures and
controls may not be adequate to support our future growth. If we are unable to
manage our growth effectively, we may not be able to take advantage of market
opportunities, execute our business strategies or respond to competitive
pressures. As a result, our results from operations may decline.
Our
failure to protect our intellectual property rights may undermine our
competitive position, and litigation to protect our intellectual property rights
or defend against third-party allegations of infringement may be
costly.
We rely
primarily on patent, trademark, trade secret, copyright law and other
contractual restrictions to protect our intellectual property. For example,
Shanghai Engineering holds five patents in China. Nevertheless, these afford
only limited protection and the actions we take to protect our intellectual
property rights may not be adequate. In addition, implementation of China's
intellectual property-related laws has historically been lacking, primarily
because of ambiguities in China's laws and difficulties in enforcement.
Accordingly, intellectual property rights and confidentiality protections in
China may not be as effective as in the United States or other countries. As a
result, third parties may infringe or misappropriate our proprietary
technologies or other intellectual property rights, which could have a material
adverse effect on our business, financial condition or operating results. In
addition, policing unauthorized use of proprietary technology can be difficult
and expensive. Litigation may be necessary to enforce our intellectual property
rights, protect our trade secrets or determine the validity and scope of the
proprietary rights of others. We cannot assure you that the outcome of such
potential litigation will be in our favor. Such litigation may be costly and may
divert management attention as well as expend our other resources away from our
business. An adverse determination in any such litigation will impair our
intellectual property rights and may harm our business, prospects and
reputation. In addition, we have no insurance coverage against litigation costs
and would have to bear all costs arising from such litigation to the extent we
are unable to recover them from other parties. The occurrence of any of the
foregoing could have a material adverse effect on our business, results of
operations and financial condition.
We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely to us, could cause us to pay significant damage
awards.
Our
success also depends largely on our ability to use and develop our technology
and know-how without infringing the intellectual property rights of third
parties. The validity and scope of claims relating to our technology patents
involve complex scientific, legal and factual questions and analysis and,
therefore, may be highly uncertain. We may be subject to litigation involving
claims of patent infringement or violation of intellectual property rights of
third parties. The defense and prosecution of intellectual property suits,
patent opposition proceedings and related legal and administrative proceedings
can be both costly and time consuming and may significantly divert the efforts
and resources of our technical and management personnel. An adverse
determination in any such litigation or proceedings to which we may become a
party could subject us to significant liability to third parties, require us to
seek licenses from third parties, to pay ongoing royalties, or to redesign our
products or subject us to injunctions prohibiting the manufacture and sale of
our products or the use of our technologies. Protracted litigation could also
result in our customers or potential customers deferring or limiting their
purchase or use of our products until resolution of such
litigation.
Although
we sell a substantial portion of our products outside of China, the patents
protecting parts of our energy recovery systems are issued in China. Our
business, results of operations and financial condition could be materially and
adversely affected if our sales outside China were to be restricted by
intellectual property claims by third parties.
As of
March 26, 2009, Shanghai Engineering held a total of five issued patents in
China. We do not have, and have not applied for, any patent for our proprietary
technologies outside of China although we have sold, and expect to continue to
sell, a substantial portion of our products outside of China. Because the
protection afforded by our patents is effective only in China, others may
independently develop substantially equivalent technologies, or otherwise gain
access to our proprietary technologies, and obtain patents for such intellectual
properties in other jurisdictions, including the countries to which we sell our
products. If any third parties are successful in obtaining patents for
technologies that are substantially equivalent or the same as the technologies
we use in our products in any of our markets before we do and enforce their
intellectual property rights against us, our ability to sell products containing
the allegedly infringing intellectual property in those markets will be
materially and adversely affected. If we are required to stop selling such
allegedly infringing products, seek license and pay royalties for the relevant
intellectual properties, or redesign such products with non-infringing
technologies, our business, results of operations and financial condition may be
materially and adversely affected.
We
also sell or install other types of energy recovery systems
manufactured by a third party and our inability to continue to do so may make us
less competitive in the market and decrease our revenues.
We do not
manufacture all types of the energy recovery systems that we sell or install. In
the sulfuric acid industry, our proprietary energy recovery systems are used for
high and middle temperature applications. We also sell or install low
temperature energy recovery systems manufactured by a third party specifically
for sulfuric acid manufacturing facilities. Also, in the future, we may sell or
install energy recovery systems that we manufacture under licenses from third
parties owning the proprietary rights to such energy recovery systems. These
energy recovery systems allow us to serve the low temperature market segment in
the sulfuric acid manufacturing sector that we are unable to serve with our own
proprietary energy recovery systems. Our current arrangement with this third
party is on a project-by-project basis. If we are unable to continue offering
these energy recovery systems to our customers, we may be unable to serve the
low temperature market segment in the sulfuric acid manufacturing sector,
thereby harming our competitive position and likely decreasing our
revenues.
Fluctuations
in exchange rates could adversely affect our business and your
investment.
A portion
of our sales is currently denominated in U.S. dollars, with the remainder in
Renminbi, while our costs and expenses are denominated in U.S. dollars and
Renminbi. Therefore, fluctuations in currency exchange rates could have a
material adverse effect on our financial condition and results of operations.
Fluctuations in exchange rates, particularly among the U.S. dollar and Renminbi,
affect our gross and net profit margins and could result in foreign exchange and
operating losses.
Our
financial statements are expressed in U.S. dollars but our functional currency
is Renminbi. The value of your investment in our stock will be affected by the
foreign exchange rate between U.S. dollars and Renminbi. To the extent we hold
assets denominated in U.S. dollars, any appreciation of the Renminbi against the
U.S. dollar could result in a change to our income statement. On the other hand,
a decline in the value of Renminbi against the U.S. dollar could reduce the U.S.
dollar equivalent amounts of our financial results, the value of your investment
in our company and the dividends we may pay in the future, if any, all of which
may have a material adverse effect on the prices of our stock.
The
change in value of the Renminbi against the U.S. dollar and other currencies is
affected by, among other things, changes in China's political and economic
conditions. On July 21, 2005, the Chinese government changed its policy of
pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the
Renminbi is permitted to fluctuate within a narrow and managed band against a
basket of certain foreign currencies. This change in policy has resulted in
approximately 21% appreciation of the Renminbi against the U.S. dollar as of
March 26, 2009 since the change in policy. While the international reaction to
the Renminbi revaluation has generally been positive, there remains significant
international pressure on the Chinese government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the Renminbi against the U.S. dollar. As we rely entirely on
dividends paid to us by our operating subsidiaries, any significant revaluation
of the Renminbi may have a material adverse effect on our revenues and financial
condition, and the value of, and any of our dividends payable on our ordinary
shares in foreign currency terms. For example, to the extent that we need to
convert U.S. dollars we received in the Financing into Renminbi for our
operations, appreciation of the Renminbi against the U.S. dollar would have an
adverse effect on the Renminbi amount we receive from the conversion.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our ordinary shares or for other
business purposes, appreciation of the U.S. dollar against the Renminbi would
have a negative effect on the U.S. dollar amount available to us.
We
do not believe that our energy recovery systems are subject to emission
standards applicable to fuel-burning boilers but if they were to be subject to
such emission standards, we may incur additional costs in complying with them
which may negatively impact our profitability.
There are
emissions standards applicable to the operation of coal-burning, oil-burning or
gas-fired boilers (China National General Standard GWPB 3-1999). We do not
believe that these emission standards are applicable to the boilers included
within our energy recovery systems because our boilers are not independently
emitting any emissions as they are being heated by industrial processes as
opposed to by coal, oil or gas. If our energy recover systems were to become
subject to these emission standards, we may need to change the design of our
energy recovery systems to bring them into compliance with the emission
standards which may increase our costs and negatively impact our
profitability.
We
operate in a competitive industry with several established and more horizontally
integrated companies. It may be difficult to sustain our market share in the
event of a decline in market conditions.
Our
industry is competitive and rapidly changing. Future competitors may include
international engineering companies and large domestic engineering companies.
These competitors may have a material advantage in their financial, technical
and marketing resources. Competition in the energy recovery industry may
increase in the future, which could result in reduced pricing power and
declining margins. We may be unable to successfully compete against future
competitors, which would adversely affect our business and
operations.
In
our course of business, we expose ourselves to possible litigation associated
with performing services on our customers' properties.
We
perform installation services on our customers' properties and doing so can
result in claims of property damage, breach of contract, harassment, theft, and
other such claims. These claims may become time consuming and expensive, which
would adversely affect our financial condition and the reputation of our
business.
We
are subject to risks related to warranty claims whereby we may not be able to
collect the full purchase price of sold products or which are greater than
anticipated due to the unenforceability of liability limitations.
We
warrant the majority of our products for periods of one or two years. Defects
may not become apparent until after the products have been sold and installed.
As a normal practice in the industry, we allow our customers to retain 5% to 10%
of the contract prices as retainage during the warranty period for any future
warranty claims. We record the retainage as deferred revenue and do not
recognize it until our customers pay it after the warranty period expires. When
a warranty claim occurs and we determine that the product in question is
defective, we repair the product at our expenses, which could increase our costs
and adversely affect our business. Also, if we are unable to repair the product
to the customer's satisfaction or for other reasons, we may not have the right
or be able to collect the whole or part of the retainage at the end of the
warranty period, thus losing related deferred revenue that we otherwise would
have recognized as earned. Further, our standard warranties contain limits on
damages and exclusions of liability for consequential damages and for misuse,
alteration, accident or mishandling after the sale and installation. If these
limitations are ineffective or found to be unenforceable, we may be subject to
greater than anticipated warranty claims.
We
have limited insurance coverage and may incur losses resulting from product
liability claims or business interruptions.
While we
historically have not been subject to any product liability claims, we are
exposed to risks associated with such claims in the event that the use of the
products we sell results in injury. We do not have any product liability
insurance and may not have adequate resources to satisfy a judgment in the event
of a successful claim against us. The successful assertion of product liability
claims against us could result in potentially significant monetary damages and
require us to make significant payments. In addition, because the insurance
industry in China is still in its early stages of development, business
interruption insurance available in China offers limited coverage compared to
that offered in many other countries. We do not have any business interruption
insurance. Any business disruption or natural disaster could result in
substantial costs and diversion of resources.
A
drop in the price of conventional energy sources may decrease the demand for our
energy recovery systems and may negatively impact our sales and
profitability.
Our
energy recovery systems capture industrial waste energy which then can be reused
in industrial processes or used to produce electricity and thermal power. An
energy recovery system is expensive to purchase and install. We believe that our
customers make purchasing decisions based on the economic feasibility of
installing one of our energy recovery systems relative to using conventional
energy and other alternative energy sources. Decreases in the prices of oil and
other fossil fuels, utility electric rates, and other alternative energy sources
could cause the demand for energy recovery systems to substantially decline,
which would negatively impact our profitability. Specifically, the significant
decrease in energy prices globally during the past six months has caused a slow
down in our order volume and delays in acceptance of international orders. There
can be no assurance that these conditions will improve in the near
term.
If
we do not generate the anticipated demand for our energy recovery systems, we
may not continue to realize the necessary sales levels needed to reach or
maintain profitability.
The
market for energy recovery systems is relatively new and still evolving. The
success of our products and services will depend on the cost effectiveness and
the relative performance of our systems relative to conventional and other
alternative energy technologies. If our products and services do not capture the
necessary industry market share, we may not be able to generate sufficient
revenue or sustain profitability.
Risks
Related to Our Corporate Structure
In
order to comply with Chinese laws limiting foreign ownership of Chinese
companies, we currently conduct our business by means of contractual
arrangements with Chinese companies that we do not own. If the Chinese
government determines that these contractual arrangements do not comply with
applicable regulations, our business could be adversely affected.
The
Chinese government restricts foreign investment in the manufacturing business in
China. Accordingly, we operate our business in China through our indirect
wholly-owned Chinese subsidiary, CER Hong Kong, which in turn has entered into
contractual arrangements with Shanghai Engineering and Shanghai Environmental
for the design, manufacturing and installation of energy recovery systems.
Shanghai Engineering, in turn, has entered into contractual agreements with
Shanghai Si Fang, an entity owned and controlled by the Chinese government,
pursuant to which Shanghai Engineering leases Vessel Works Division, a
subsidiary of Shanghai Si Fang, which manufactures our energy recovery systems.
Vessel Works Division holds the licenses and approvals necessary for such
manufacturing. CER Hong Kong has contractual arrangements with Shanghai
Engineering and Shanghai Environmental, and their respective shareholders, that
allow CER Hong Kong to substantially control Shanghai Engineering and Shanghai
Environmental. However, we cannot assure you that we will be able to enforce,
retain or renew these contracts. Any failure to enforce, retain or renew these
contracts or to enter into satisfactory substitute agreements with other
manufacturers would likely mean that we would be unable to continue to
manufacture and install energy recovery systems. Before December 3, 2008, we
operated in a similar arrangement through our indirect wholly owned subsidiary
Hi-tech.
Although
we believe that we comply with current Chinese laws and regulations related to
foreign ownership of manufacturing operations, we cannot assure you that the
Chinese government would agree that our contractual arrangements comply with
Chinese licensing, registration or other regulatory requirements, with existing
policies or with requirements or policies that may be adopted in the future. If
the Chinese government determines that we do not comply with applicable law, it
could revoke our business and operating licenses, require us to discontinue or
restrict our operations, restrict our right to collect revenues, require us to
restructure our operations, impose additional conditions or requirements with
which we may not be able to comply, impose restrictions on our business
operations or on our customers, or take other regulatory or enforcement actions
against us that could be harmful to our business.
Our
contractual arrangements with Shanghai Engineering and Shanghai Environmental
and their respective shareholders may not be as effective in providing control
over these entities as direct ownership.
Because
Chinese law limits foreign equity ownership in companies in China, we operate
our business through affiliated Chinese companies, Shanghai Engineering and
Shanghai Environmental. We have no equity ownership interest in Shanghai
Engineering or Shanghai Environmental and rely on contractual arrangements to
control and operate such entities and their business. These contractual
arrangements may not be as effective in providing control as direct ownership.
For example, Shanghai Engineering or Shanghai Environmental could fail to take
actions required for our business despite their contractual obligation to do so.
If Shanghai Engineering or Shanghai Environmental fail to perform under their
agreements with us, we may have to rely on legal remedies under Chinese law to
enforce them, which may not be effective. In addition, we cannot assure you that
Shanghai Engineering or Shanghai Environmental's respective shareholders would
always act in our best interests.
If
the reorganization we began in August 2008 was ineffective, we may not have
obtained direct control over the assets and operations as intended.
In August
2008 we began a corporate reorganizing process to transfer our assets and
operations from affiliated entities with which we have only contractual
relationships into wholly-owned subsidiaries. Until our reorganization is
complete, our corporate structure will reflect a combination of control via
direct ownership and contractual arrangements. Once the reorganization is
complete, we intend to terminate the contractual arrangements. If our
reorganization was found to have been ineffective, for example because of
inadvertent failure to comply with Chinese laws and regulations or contractual
obligations, we may not have obtained control over the assets and operations as
intended and we may be unable to continue to manufacture and install energy
recovery systems.
Risks
Related to Doing Business in China
Our
business is exposed to risks associated with the economic, environmental and
political conditions in China because the substantial majority of our assets are
located in China and the majority of our revenues are derived from our
operations in China.
Because
our headquarters and manufacturing facilities are located in China, our business
is disproportionately exposed to the economic, environmental and political
conditions of the region. The country's political and economic systems are very
different from more developed countries and uncertainties may arise with
changing of governmental policies and measures. China also faces many social,
economic and political challenges that may produce instabilities in both its
domestic arena and in its relationship with other countries. These instabilities
may significantly and adversely affect our performance. In addition, as the
Chinese legal system develops, we cannot assure that changes in laws and
regulations and their interpretation or their enforcement will not have a
material adverse effect on our business operations. As a large portion of our
target customers are also located in China and are subject to the aforementioned
risks, our business may also be adversely affected by the effects of the
conditions within the region upon them.
Adverse
changes in political and economic policies of the Chinese government could have
a material adverse effect on the overall economic growth of China, which could
reduce the demand for our products and materially and adversely affect our
competitive position.
A
majority of our business operations and sales are conducted and made in China.
Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The Chinese economy differs from the economies of most
developed countries in many respects, including:
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The
amount of government involvement;
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The
level of development;
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The
control of foreign exchange; and
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The
allocation of resources.
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While the
Chinese economy has grown significantly in the past 20 years, the growth has
been uneven, both geographically and among various sectors of the economy. The
Chinese government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the
overall Chinese economy, but may also have a negative effect on us. For example,
our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.
The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the
Chinese government. The continued control of these assets and other aspects of
the national economy by the Chinese government could materially and adversely
affect our business. The Chinese government also exercises significant control
over Chinese economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or companies. Efforts
by the Chinese government to slow the pace of growth of the Chinese economy
could result in decreased capital expenditure by companies in our target markets
for energy recovery systems, which in turn could reduce demand for our
products.
Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
investments and expenditures in China, which in turn could lead to a reduction
in demand for our products and consequently have a material adverse effect on
our businesses.
Uncertainties
with respect to the Chinese legal system could have a material adverse effect on
us.
We
conduct substantially all of our business through subsidiaries and affiliated
entities in China. These entities are generally subject to laws and regulations
applicable to foreign investment in China. China's legal system is based on
written statutes. Prior court decisions may be cited for reference but have
limited precedential value. Since 1979, Chinese legislation and regulations have
significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since these laws and regulations are relatively
new and China's legal system continues to rapidly evolve, the interpretations of
many laws, regulations and rules are not always uniform and enforcement of these
laws, regulations and rules involve uncertainties, which may limit legal
protections available to us. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and
management attention.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues and expenses are denominated in Renminbi. If our
revenues denominated in Renminbi increase or expenses denominated in Renminbi
decrease in the future, we may need to convert a portion of our revenues into
other currencies to meet our foreign currency obligations, including, among
others, payment of dividends declared, if any, in respect of our common
stock.
Due to
the recent global financial crisis, the Chinese government has strengthened
measures to control exchange of Renminbi into foreign currencies and outbound
payments by, among other things, requiring prior approval from the Chinese State
Administration of Foreign Exchange ("SAFE") before taking such actions in some
cases. As a result, it has become more difficult for us to exchange Renminbi
into foreign currencies and to make payments to entities and individuals outside
of China. In some cases we need SAFE's prior approval to do so. If these
measures are not loosened in the near future, our ability to pay dividends in
foreign currencies is restricted and if we are unable to obtain SAFE's prior
approval when needed, we will not be able to pay dividends in foreign currencies
at all. We cannot assure you that that the Chinese government will not further
restrict access to foreign currencies for current account transactions in the
future.
Foreign
exchange transactions by our subsidiaries and affiliated entities or under the
capital account continue to be subject to significant foreign exchange controls
and require the approval of China's governmental authorities, including the
SAFE. In particular, if our subsidiaries and affiliated entities borrow foreign
currency loans from us or other foreign lenders, these loans must be registered
with the SAFE, and if we finance our subsidiaries and affiliated entities by
means of additional capital contributions, these capital contributions must be
approved by certain government authorities including the Chinese Ministry of
Commerce or its local counterparts. These limitations could affect the ability
of our subsidiaries and affiliated entities to obtain foreign exchange through
debt or equity financing.
Our
business benefits from certain Chinese government incentives. Expiration of, or
changes to, these incentives could have a material adverse effect on our
operating results.
The
Chinese government has provided various incentives to high technology companies,
including our affiliate Shanghai Engineering, in order to encourage development
of the high technology industry. Such incentives include reduced tax rates and
other measures. For example, Shanghai Engineering has been qualified as a "high
or new technology enterprise." As a result, we are entitled to a preferential
enterprise income tax rate of 15% so long as Shanghai Engineering continues to
maintain its "high or new technology enterprise" status. A new Enterprise Income
Tax ("EIT") law replaced the old laws for Domestic Enterprises ("DEs") and
Foreign Invested Enterprises ("FIEs") in 2008. The key changes are: (a) the new
standard EIT rate of 25% replaces the 33% rate originally applicable to both DEs
and FIEs, except for companies with high or new technology enterprise status,
which will pay a reduced rate of 15%, and (b) companies established before March
16, 2007 will continue to enjoy tax holiday treatment approved by local
government for a grace period of the next five years or until the tax holiday
term is completed, whichever is sooner. These companies will pay the standard
tax rate as defined in point (a) above during the grace period. Because Shanghai
Engineering was established before March 16, 2007, it is qualified to continue
enjoying the reduced tax rate as described above. Any increase in our enterprise
income tax rate in the future could have a material adverse effect on our
financial condition and results of operations.
We
face risks related to health epidemics and other outbreaks.
Our
business could be adversely affected by the effects of avian flu, severe acute
respiratory syndrome ("SARS") or another epidemic or outbreak. China has
reported a number of cases of SARS in the past few years. There have also been
reports on the occurrences of avian flu in various parts of China, including a
few confirmed human cases. One reported case of avian flu occurred in January
2009. Any prolonged recurrence of avian flu, SARS or other adverse public health
developments in China may have a material adverse effect on our business
operations. These could include our ability to travel or ship our products
outside of China, as well as temporary closure of our manufacturing facilities.
Such closures or travel or shipment restrictions would severely disrupt our
business operations and adversely affect our results of operations. We have not
adopted any written preventive measures or contingency plans to combat any
future outbreak of avian flu, SARS or any other epidemic.
Risks
Related to our Common Stock
There
is not an active trading market for our common stock, and if a market for our
common stock does not develop, our investors may be unable to sell their
shares.
Our
common stock is currently quoted on the OTC BB trading system. The OTC BB is not
a listing service or exchange, but is instead a dealer quotation service for
subscribing members. The OTC BB tends to be highly illiquid, in part because
there is no national quotation system by which potential investors can track the
market price of shares except through information received or generated by a
limited number of broker-dealers that make markets in particular stocks. There
is a greater chance of market volatility for securities that trade on the OTC BB
as opposed to a national exchange or quotation system. This volatility may be
caused by a variety of factors including:
|
·
|
The
lack of readily available price
quotations;
|
|
·
|
The
absence of consistent administrative supervision of "bid" and "ask"
quotations;
|
|
·
|
Technological
innovations or new products and services by us or our
competitors;
|
|
·
|
Regulatory,
legislative or other developments affecting us or our industry
generally;
|
|
·
|
Limited
availability of freely-tradable "unrestricted" shares of our common stock
to satisfy purchase orders and
demand;
|
|
·
|
Our
ability to execute our business
plan;
|
|
·
|
Operating
results that fall below
expectations;
|
|
·
|
Economic
and other external factors; and
|
|
·
|
Period-to-period
fluctuations in our financial
results.
|
In
addition, the value of our common stock could be affected by:
|
·
|
Actual
or anticipated variations in our operating
results;
|
|
·
|
Changes
in the market valuations of other companies operating in our
industry;
|
|
·
|
Announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
·
|
Adoption
of new accounting standards affecting our
industry;
|
|
·
|
Additions
or departures of key personnel;
|
|
·
|
Introduction
of new services or technology by our competitors or
us;
|
|
·
|
Sales
of our common stock or other securities in the open
market;
|
|
·
|
Changes
in financial estimates by securities
analysts;
|
|
·
|
Conditions
or trends in the market in which we
operate;
|
|
·
|
Changes
in earnings estimates and recommendations by financial
analysts;
|
|
·
|
Our
failure to meet financial analysts' performance expectations;
and
|
|
·
|
Other
events or factors, many of which are beyond our
control.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also significantly affect
the market price of our common stock.
In a
volatile market, you may experience wide fluctuations in the market price of our
securities. These fluctuations may have an extremely negative effect on the
market price of our securities and may prevent you from obtaining a market price
equal to your purchase price when you attempt to sell our securities in the open
market. In these situations, you may be required either to sell our securities
at a market price which is lower than your purchase price, or to hold our
securities for a longer period of time than you planned. An inactive market may
also impair our ability to raise capital by selling shares of capital stock and
may impair our ability to acquire other companies or technologies by using
common stock as consideration.
Because
we do not intend to pay any dividends on our common stock, purchases of our
common stock may not be suited for investors seeking dividend
income.
We do not
currently anticipate declaring and paying dividends to our stockholders in the
near future. It is our current intention to apply any net earnings in the
foreseeable future to the internal needs of our business. Prospective investors
seeking or needing dividend income or liquidity from our common stock should,
therefore, not purchase our common stock. There can be no assurance that we will
ever have sufficient earnings to declare and pay dividends to the holders of our
shares, and in any event, a decision to declare and pay dividends is at the sole
discretion of our board of directors, who currently do not intend to pay any
dividends on our common shares for the foreseeable future.
We
cannot assure you that we will list our common stock on NASDAQ or any other
national securities system or exchange.
Although
we intend to apply to list our common stock on NASDAQ or the American Stock
Exchange in the future, we do not currently meet the initial listing standards
of either of those markets and we cannot assure you that we will be able to
qualify for and maintain a listing of our common stock on either of those
markets or any other stock system or exchange in the future. Furthermore, in the
case that our application is approved, there can be no assurance that trading of
our common stock on such market will reach or maintain desired liquidity. If we
are unable to list our common stock on NASDAQ, the American Stock Exchange or
another national securities system or exchange, or to maintain the listing, we
expect that our common stock will be eligible to trade on the OTC BB, maintained
by NASDAQ, another over-the-counter quotation system, or on the "pink sheets,"
where an investor may find it more difficult, or impossible, to dispose of
shares or obtain accurate quotations as to the market value of our common stock.
Under such circumstances, the probability of reduced liquidity would hinder
investors' ability to obtain accurate quotations for our common stock, and our
common stock could become substantially less attractive to
investors.
Securities
analysts may not continue to cover our common stock, and this may have a
negative impact on our common stock's market price.
The
trading market for our common stock will depend, in part, on the research and
reports that securities analysts publish about us and our business. We do not
have any control over these analysts. Currently, two analysts are covering our
common stock and there is no guarantee that these analysts, or others, will
cover our common stock in the future. If securities analysts do not cover our
common stock, the lack of research coverage may adversely affect its market
price. If we are covered by securities analysts, and our stock is downgraded,
our stock price would likely decline. If one or more of these analysts ceases to
cover us or fails to publish regular reports on us, we could lose visibility in
the financial markets, which could cause our stock price or trading volume to
decline.
We
have raised substantial amounts of capital in private placements, and if we fail
to comply with the applicable securities laws, ensuing rescission rights or
lawsuits would severely damage our financial position.
Our
private placements consist of securities that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any state "blue
sky" law as a result of exemptions from such registration requirements. Such
exemptions are highly technical in nature and if we inadvertently failed to
comply with any of such exemptive provisions, investors could have the right to
rescind their purchase of our securities and also sue for damages. If any
investors were to successfully seek such rescission or prevail in any such suit,
we could face severe financial demands that could have significant, adverse
affects on our financial position. Future financings may involve sales of our
common stock at prices below prevailing market prices on the OTC BB or exchange
on which our common stock is quoted or listed at that time, as well as the
issuance of warrants or convertible securities at a discount to market
price.
The
application of the "penny stock" rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
The SEC
has adopted regulations which generally define a "penny stock" to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. The last
reported trade of our common stock on the OTC BB was at a price below $5.00 per
share, and, accordingly, our common stock is currently considered a penny stock.
The SEC's penny stock rules require a broker-dealer, before a transaction in a
penny stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer must also provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and the salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that before a
transaction in a penny stock, the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's agreement to the transaction. If applicable in the
future, these rules may restrict the ability of brokers-dealers to sell our
common stock and may affect the ability of investors to sell their shares, until
our common stock no longer is considered a penny stock.
A
significant amount of our common stock may be eligible for sale under
registration statements or Rule 144 promulgated under the Securities Act at
different times in the future, and its sale could depress the market price of
our common stock.
We do not
believe that our stockholders are currently eligible to sell shares of our
common stock under Rule 144 promulgated under the Securities Act but we expect
that they may become eligible at different times during the year.
We
estimate that stockholders holding approximately 3,894,000 shares of our common
stock are currently eligible to sell their shares without restrictions. Provided
that all applicable Rule 144 conditions are satisfied, we believe that
stockholders holding the balance of our currently outstanding shares of common
stock, approximately 26,066,000 shares, are eligible to sell their shares as
early as April 21, 2009.
In
addition, we have registered an aggregate of 10,921,329 shares of our common
stock, subject to future adjustments in accordance with the terms of our Series
A Convertible Preferred Stock and outstanding warrants, under a registration
statement on Form S-1 that because effective on September 8, 2009 and have
granted registration rights to stockholders holding an additional 561,197 shares
of our common stock. So long as a registration statement covering these shares
is effective, if any, such shares of our common stock may be sold
immediately.
Sales
of a significant number of shares of common stock in the public market could
lower the market price of our common stock.
A
significant amount of common stock is subject to issuance upon the conversion of
our Series A Convertible Preferred Stock and upon exercise of warrants to
purchase common stock. The conversion, exercise and sale of these financial
instruments could depress the market price of our common stock.
As of
March 19, 2009, we had 667,963 shares of our Series A Convertible Preferred
Stock currently exercisable into 333,982 shares of common stock outstanding.
Also, all of the warrants issued in the Financing, currently exercisable into
1,968,561 shares of common stock, remain outstanding.
We also
issued warrants to purchase our common stock to a party that provided us with
bridge financing on August 27, 2007. The warrants issued to the bridge lender on
August 27, 2007 are exercisable at any time prior to their expiration
date.
Further,
on June 20, 2008 we entered into a Consulting Agreement with ARC China, Inc.
pursuant to which we issued to ARC China, Inc. a warrant to purchase 750,000
shares of our common stock at an exercise price of $2.16 per share. The warrant
is exercisable in a cashless manner. The warrant will vest and be exercisable
according to the following schedule: (a) warrants to purchase 250,000 shares of
our common stock vested and became exercisable upon execution of the Consulting
Agreement, (b) warrants to purchase 5,000 shares of shares of our common stock
will vest and be exercisable on the date of our receipt of each $1,000,000 in
gross proceeds in each financing during the term of the Consulting Agreement, up
to a maximum of 250,000 shares of our common stock (provided that warrants shall
not vest for increments of less than $1,000,000 in gross proceeds received in a
financing), and (c) warrants to purchase 250,000 shares of our common stock will
vest and become exercisable upon a transfer of the quotation of our common stock
from the OTC BB to the NASDAQ Stock Market or the American Stock Exchange. ARC
China, Inc. exercised the vested portion of the warrant on June 23, 2008 in a
cashless manner and we issued 195,454 shares of our common stock to ARC China,
Inc. on such date. On August 11, 2008, the parties amended the Consulting
Agreement to reduce the aggregate number of shares of our common stock which may
be purchased by ARC China, Inc. upon exercise of the warrant from 750,000 to
250,000 shares, all of which shares were immediately vested and exercisable upon
issuance of the warrant and all of which shares were purchased by ARC China,
Inc. on a cashless basis on June 23, 2008 as described above.
The
following table sets forth the number of underlying shares of our common stock,
the exercise price and the expiration date of all warrants outstanding as of
March 19, 2009:
Number
of shares underlying warrants
|
|
Exercise
Price
|
|
Expiration
Date
|
57,870
|
|
$
|
2.16
|
|
August
27, 2010
|
1,968,561
|
|
$
|
2.58
|
|
April
15, 2013
|
Sales of
a significant number of shares of our common stock in the public market after
the conversion or exercise of these securities could lower the market price of
our common stock.
Risks
Related to Our Company
Mr.
Qinghuan Wu, one of our directors and our Chairman of the Board and Chief
Executive Officer, may have potential conflicts of interest with us, which may
adversely affect our business, and beneficially owns a significant number of
shares of our common stock, which will have an impact on all major decisions on
which our stockholders may vote and which may discourage an acquisition of our
Company.
Mr. Wu,
who is one of our directors, a significant stockholder, and our Chairman of the
Board and Chief Executive Officer, is also an Executive Director of each of
Shanghai Engineering and Shanghai Environmental. Shanghai Engineering is owned
jointly by Mr. Wu and his spouse, Mrs. Jialing Zhou, who is one of our
directors. Shanghai Environmental is wholly-owned by Mr. Wu. Conflicts of
interest may arise between his duties to our company and his duties to Shanghai
Engineering or Shanghai Environmental, or his interest as an owner of Shanghai
Engineering and Shanghai Environmental. As Mr. Wu is a director and executive
officer of our company, he has a duty of loyalty and care to us under Delaware
law when there are any potential conflicts of interest between our company and
Shanghai Engineering and Shanghai Environmental. We cannot assure you that when
conflicts of interest arise, Mr. Wu will act completely in our interests or that
conflicts of interest will be resolved in our favor. In addition, Mr. Wu could
violate his legal duties by diverting business opportunities from us to others.
If we cannot resolve any conflicts of interest between us and Mr. Wu, we would
have to rely on legal proceedings, which could disrupt our
business.
Further,
the design, manufacturing and installation of energy recovery systems are
conducted by Shanghai Engineering. We do not own Shanghai Engineering but
instead rely on contractual arrangements between our wholly-owned subsidiary CER
Hong Kong and it to control the company and to participate in its profitability
(prior to December 3, 2008, Hi-tech instead of CER Hong Kong was the party to
these agreements). Shanghai Engineering, in turn, has entered into contractual
agreements with Shanghai Si Fang for the manufacture of our energy recovery
systems. The agreements constituting these contractual arrangements provide that
CER Hong Kong may assign them to other parties, in some cases freely, and that
Shanghai Engineering may assign them to other parties with CER Hong Kong's
consent. Mr. Wu, as an owner and member of management of Shanghai Engineering,
and as our Chairman of the Board and Chief Executive Officer, has the power to
direct the operations of Shanghai Engineering and CER Hong Kong and to cause
them to terminate, fail to renew, assign or consent to the assignment of the
agreements constituting these contractual arrangements, even if contrary to Mr.
Wu's duties to us. If these agreements were terminated, not renewed or assigned
to a party unaffiliated with us, and we were unable to enter into satisfactory
substitute agreements with other design firms, manufacturers, installers and
sales firms, we would likely be unable to continue to design, manufacture,
install and sell energy recovery systems and our stockholders would hold stock
in a company without meaningful business operations.
Currently,
Mr. Qinghuan Wu directly owns approximately 42% of our currently outstanding
common stock (including the shares escrowed in the Share Exchange; and
beneficially together with his spouse approximately 72%). In addition, he is
also one of our directors and our Chairman of the Board and Chief Executive
Officer. The interests of Mr. Wu may differ from the interests of other
stockholders. As a result, Mr. Wu will have the ability to significantly impact
virtually all corporate actions requiring stockholder approval, vote, including
the following actions:
|
·
|
Election
of our directors;
|
|
·
|
The
amendment of our organizational
documents;
|
|
·
|
The
merger of our company or the sale of our assets or other corporate
transaction; and
|
|
·
|
Controlling
the outcome of any other matter submitted to the stockholders for
vote.
|
Mr. Wu's
beneficial stock ownership may discourage potential investors from investing in
shares of our common stock due to the lack of influence they could have on our
business decisions, which in turn could reduce our stock price.
If
we fail to implement effective internal controls required by the Sarbanes-Oxley
Act of 2002, to remedy any material weaknesses in our internal controls that we
may identify, or to obtain the attestation required by Section 404 of the
Sarbanes-Oxley Act of 2002, such failure could result in material misstatements
in our financial statements, cause investors to lose confidence in our reported
financial information and have a negative effect on the trading price of our
common stock.
Section
404 of the Sarbanes-Oxley Act of 2002 requires management of public companies to
develop and implement internal controls over financial reporting and evaluate
the effectiveness thereof, and the independent auditors to attest to the
effectiveness of such internal controls and the evaluation performed by
management. We have not yet been required to obtain the independent auditor
attestation required by the Sarbanes-Oxley Act of 2002.
During
our assessment of the effectiveness of our disclosure controls and procedures
and internal controls over financial reporting as of December 31, 2008, our
management identified material weaknesses. We found that our accounting staff
lacked sufficient accounting skills and experience necessary to fulfill our
public reporting obligations according to accounting principles generally
accepted in the United States and the SEC's rules and regulations. We also lack
qualified resources to perform our internal audit functions properly. In
addition, we have not yet fully developed the scope and effectiveness of our
internal audit function.
Our management is in the process of
implementing remediation procedures for these identified material
weaknesses as further described in Item 9A(T) of this Annual Report on Form
10-K.
Any
failure to complete our assessment of our internal controls over financial
reporting, to remediate any material weaknesses that we may identify, including
those identified above, or to implement new or improved controls, or
difficulties encountered in their implementation, could harm our operating
results, cause us to fail to meet our reporting obligations or result in
material misstatements in our financial statements. Any such failure also could
adversely affect the results of the periodic management evaluations of our
internal controls and, in the case of a failure to remediate any material
weaknesses that we may identify, would adversely affect our ability to obtain
the annual auditor attestation reports regarding the effectiveness of our
internal controls over financial reporting that may be required under Section
404 of the Sarbanes-Oxley Act in the future. Inadequate disclosure controls and
procedures and internal controls over financial reporting could also cause
investors to lose confidence in our public disclosures and reported financial
information, which could have a negative effect on the trading price of our
common stock.
Further,
because some members of our management team have limited or no experience
operating a publicly-traded company, we may need to recruit, hire, train and
retain additional financial reporting, internal controls and other personnel in
order to develop and implement appropriate internal controls and reporting
procedures. This may be time consuming, difficult and costly for
us.
Our
Amended and Restated Certificate of Incorporation authorizes our board of
directors to create new series of preferred stock without further approval by
our stockholders, which could adversely affect the rights of the holders of our
common stock or delay or prevent a change in control.
Our board
of directors has the authority to fix and determine the relative rights and
preferences of our preferred stock. Our board of directors also has the
authority to issue preferred stock without further stockholder approval. As a
result, our board of directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of
the shares, together with a premium, prior to the redemption of our common
stock. In addition, our board of directors could authorize the issuance of a
series of preferred stock that has greater voting power than our common stock or
that is convertible into our common stock, which could decrease the relative
voting power of our common stock or result in dilution to our existing
stockholders. In addition, our issuing preferred stock could have the effect of
delaying or preventing a change in control.
Item
1B.
|
Unresolved
Staff Comments.
|
Not
applicable.
Our
corporate headquarters are currently located at 7F, No. 267 Qu Yang Road,
Hongkou District, Shanghai 200081, China. The telephone number of our corporate
headquarters is +86 (0)21 5556-0020. We have leased new facilities to serve as
our main office and design and engineering center in China. We have not yet
moved to these new facilities but expect to do so during 2009.
Through a
contractual arrangement with Shanghai Engineering, our subsidiary CER Hong Kong
currently operates a manufacturing facility in Shanghai, China. The facility
occupies approximately 10 acres (4 hectares) of land with 191,300 square feet of
manufacturing space and storage. The manufacturing equipment includes cranes,
press bending machines, cutting machines, welding machines, lathes, air
compressors and other equipment. Shanghai Engineering does not own the
manufacturing facility but operates it pursuant to the terms of a cooperative
manufacturing agreement with Shanghai Si Fang. Pursuant to the agreement,
Shanghai Si Fang leases its subsidiary Vessel Works Division to Shanghai
Engineering. The manufacturing facility and equipment are in good working
condition and we expect them to meet our capacity need for 2009. We are planning
to build a new manufacturing plant to meet an anticipated growing capacity need
but have not yet commenced construction.
Item
3.
|
Legal
Proceedings.
|
We are
not a party to any pending material legal proceedings and are not aware of any
threatened or contemplated proceeding by any governmental authority against
us.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
None.
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Market
Information
Our
common stock is currently quoted under the symbol "CGYV.OB" on the OTC BB
(previous stock symbols include "MMAI.OB" and "CRCV.OB"). The following table
sets forth, for the periods indicated, the high and low bid prices of our common
stock as reported on the OTC BB, adjusted for stock splits.
Period
|
|
High
|
|
|
Low
|
|
2008
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
2.00
|
|
|
$
|
0.95
|
|
Third
Quarter
|
|
$
|
10.01
|
|
|
$
|
2.00
|
|
Second
Quarter
|
|
$
|
12.50
|
|
|
$
|
3.00
|
|
First
Quarter
|
|
$
|
6.50
|
|
|
$
|
0.54
|
|
2007
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
4.32
|
|
|
$
|
0.45
|
|
Third
Quarter
|
|
$
|
26.00
|
|
|
$
|
1.98
|
|
Second
Quarter
|
|
|
n/a
|
|
|
|
n/a
|
|
First
Quarter
|
|
|
n/a
|
|
|
|
n/a
|
|
As of
March 20, 2009, the last reported sales price on the OTC BB for our common stock
was $1.50 per share. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Stockholders
As of
March 19, 2009, we had approximately 125 stockholders of record of our common
stock.
Dividends
We have
not declared any cash dividends on our common stock since our inception and do
not anticipate paying such dividends in the foreseeable future. We plan to
retain any future earnings for use in our business. Any decisions as to future
payments of dividends will depend on our earnings and financial position and
such other facts as the board of directors deems relevant.
Recent
Sales of Unregistered Securities
On
January 3, 2008, we entered into a Contract - Video/Film Production Services
with Aviatech, LLC pursuant to which we issued 12,500 shares of our common stock
to Aviatech, LLC in consideration for services to be rendered.
On
January 15, 2008, we entered into a Consulting Agreement with Stara Zagora
Kompanija, LTD, a Bulgarian limited liability company, pursuant to which we
issued an aggregate of 50,000 shares of our common stock to two designees of
Stara Zagora Kompanija, Ltd. in consideration for public relations consulting
services to be rendered.
On
January 29, 2008, we issued a warrant to purchase 231,664 shares of our common
stock at an exercise price of $19.44 per share to ARC Investment Partners, LLC.
This warrant was subsequently cancelled.
On
February 4, 2008, we entered into an Investor Relations Agreement with American
Capital Ventures, Inc., a Florida corporation, pursuant to which we issued an
aggregate of 75,000 shares of our common stock to American Capital Ventures,
Inc. and its designee, Maplehurst Investment Group, LLC, in consideration for
public relations consulting services to be rendered.
On
February 5, 2008, we entered into a Consulting Agreement with Pacific Shores
Investments LLC, a California limited liability company, pursuant to which we
issued 50,000 shares of our common stock to Pacific Shores Investments LLC in
consideration for public relations consulting services to be
rendered.
On
February 5, 2008, we entered into a Stockwire Multimedia Report Consulting
Agreement with Stockwire Research Group, Inc. pursuant to which we issued
100,000 shares of our common stock to Stockwire Research Group, Inc. in
consideration for public relations consulting services to be
rendered.
On
February 10, 2008, we entered into a Consulting Agreement with Sean Mahoney
pursuant to which we agreed to grant Mr. Mahoney options to purchase 25,000
shares of our common stock at an exercise price of $2.54 equal to the fair
market value on the grant date provided that (a) we adopt an equity incentive
plan, (b) our board of directors approves the grant, and (c) the grant will be
subject to other conditions set forth in an option agreement. On September 18,
2008, our board of directors awarded 25,000 options to Mr. Mahoney. The awarded
options are exercisable into one share of our common stock at an exercise price
of $2.90 per share, the last sale price of our common stock on the date of
grant. The term of the options is 10 years. The options are fully vested upon
grant.
On
February 10, 2008, we entered into a Consulting Agreement with MarketByte LLC, a
California limited liability company, pursuant to which we issued 100,000 shares
of our common stock to MarketByte LLC in consideration for public relations
consulting services to be rendered.
On
February 10, 2008, we entered into a Consulting Agreement with TGR Group LLC, a
Nevada limited liability company, pursuant to which we issued 100,000 shares of
our common stock to TGR Group LLC in consideration for public relations
consulting services to be rendered.
On March
17, 2008, we entered into a Client Service Agreement with PR Financial
Marketing, LLC pursuant to which we issued 175,000 shares of our common stock to
PR Financial Marketing in consideration for public relations consulting services
to be rendered.
On April
15, 2008, we effected the Share Exchange pursuant to which we acquired all of
the issued and outstanding shares of Poise Profit's common stock in exchange for
the issuance of 20,757,090 shares of our common stock to the stockholders of
Poise Profit.
We closed
the Financing on April 15, 2008 and entered into identical Securities Purchase
Agreements with 25 accredited investors pursuant to which we issued and sold an
aggregate of 7,874,241 units at a price per unit of $1.08 with each unit
consisting of one share of our Series A Convertible Preferred Stock, par value
$0.001 per share, and one warrant to purchase one-quarter (one half on a
pre-stock split basis) of one share of our common stock at an exercise price of
$2.58 per share ($1.29 on a pre-stock split basis). Thus, at the closing, we
issued 7,874,241 shares of our Series A Convertible Preferred Stock to the
investors and we also issued warrants to the investors for the purchase of an
aggregate of 1,968,561 (3,937,121 on a pre-stock split basis) shares of our
common stock for an aggregate purchase price of $8,504,181. Part of the purchase
price consisted of the conversion of a loan to Shanghai Engineering into a
subscription for the Company's Series A Convertible Preferred Stock and
warrants. We agreed with RMK Emerging Markets, LLC to allow it to convert its
loan to Shanghai Engineering in the principal amount of $1,268,750 into
securities by participating in the Financing on the terms described above. Thus,
at the closing of the Financing, we issued 587,384 shares of our Series A
Convertible Preferred Stock and warrants to purchase an aggregate of 293,692
shares of our common stock to RMK Emerging Markets, LLC. The terms of this
agreement is further described under the caption "Certain Relationships and
Related Transactions, and Director Independence" in Part III of this Annual
Report on Form 10-K.
On April
15, 2008, we entered into a consulting arrangement with Mr. Richard Liu, our
Chief Financial Officer, pursuant to which we agreed to grant Mr. Liu options to
purchase 25,000 shares of our common stock at an exercise price of $2.16 equal
to the fair market value on the grant date provided that (a) we adopt an equity
incentive plan, (b) our board of directors approves the grant, and (c) the grant
will be subject to other conditions set forth in an option agreement. When
extending the consulting arrangement, we agreed to grant Mr. Liu additional
options to purchase 25,000 shares of our common stock at an exercise price of
$2.16 equal to the fair market value on the grant date on the same terms and
conditions. On September 18, 2008, our board of directors awarded Mr. Liu 50,000
options. The awarded options are exercisable into one share of our common stock
at an exercise price of $2.90 per share, the last sale price of our common stock
on the date of grant. The term of the options is 10 years. The options are fully
vested upon grant.
On June
20, 2008 and in connection with entering into a Consulting Agreement with ARC
China, Inc., we issued to ARC China, Inc. a warrant to purchase 750,000 shares
of our common stock at an exercise price of $2.16 per share. The warrant is
exercisable in a cashless manner. The warrant will vest and be exercisable
according to the following schedule: (a) warrants to purchase 250,000 shares of
our common stock vested and became exercisable upon execution of the Consulting
Agreement, (b) warrants to purchase 5,000 shares of shares of our common stock
will vest and be exercisable on the date of our receipt of each $1,000,000 in
gross proceeds in each financing during the term of the Consulting Agreement, up
to a maximum of 250,000 shares of our common stock (provided that warrants shall
not vest for increments of less than $1,000,000 in gross proceeds received in a
financing), and (c) warrants to purchase 250,000 shares of our common stock will
vest and become exercisable upon a transfer of the quotation of our common stock
from the OTC BB to the NASDAQ Stock Market or the American Stock Exchange. ARC
China, Inc. exercised the vested portion of the warrant on June 23, 2008 in a
cashless manner and we issued 195,454 shares of our common stock to ARC China,
Inc. on such date. On August 11, 2008, the parties amended the Consulting
Agreement to reduce the aggregate number of shares of our common stock which may
be purchased by ARC China, Inc. upon exercise of the warrant from 750,000 to
250,000 shares, all of which shares were immediately vested and exercisable upon
issuance of the warrant and all of which shares were purchased by ARC China,
Inc. on a cashless basis on June 23, 2008 as described above.
On
September 18, 2008, our board of directors awarded an aggregate of 260,000 stock
options to certain of our non-employee directors and made them subject to the
terms of a to-be adopted China Energy Recovery Stock Option Plan, which was
subsequently adopted by our board of directors on October 29, 2008 (the "Option
Plan"). Each of the awarded stock options is exercisable into one share of our
common stock at an exercise price of $2.90 per share, the last sale price of our
common stock on the date of grant. The term of the options is 10 years. The
options will vest and become exercisable in eight equal quarterly installments
on each October 1, January 1, April 1 and July 1, starting in 2008.
Between
June 2008 and March 19, 2009, various investors in the Financing converted an
aggregate of 7,206,278 shares of our Series A Convertible Preferred Stock into
an aggregate of 3,603,139 shares of our common stock. As of March 19, 2009,
667,963 shares of our Series A Convertible Preferred Stock remain
outstanding.
Except as
noted below, the offers and sales of the securities described above were exempt
from registration under Section 4(2) of the Securities Act and pursuant to the
rules of Regulation D promulgated thereunder, insofar as: (a) each investor
represented to us that it was accredited within the meaning of Rule 501(a); (b)
we restricted the transfer of the securities in accordance with Rule 502(d); (c)
there were no more than 35 non-accredited investors in any transaction within
the meaning of Rule 506(b), after taking into consideration all prior investors
under Section 4(2) of the Securities Act within the 12 months preceding the
transaction; (d) none of the offers and sales were effected through any general
solicitation or general advertising within the meaning of Rule 502(c); (e) each
investor agreed to hold the securities for its own account and not on behalf of
others; and (f) each investor represented to us that it acquired the securities
for investment purposes only and not with a view to sell them.
The
issuance of the securities in the Share Exchange was exempt from registration
under Section 4(2) of the Securities Act and Regulation S promulgated
thereunder, insofar as: (a) the offer and sale was made in an offshore
transaction; (b) no direct selling efforts was made in the United States; (c) we
implemented necessary offering restrictions; (d) no offer and sale was made to a
U.S. person or for the account or benefit of a U.S. person, and the Poise Profit
stockholders provided the necessary certifications to that effect; (e) the Poise
Profit stockholders agreed to the resale limitation imposed by Regulation S; (f)
the issued securities contained the necessary restrictive legend; and (g) we
provided the Poise Profit stockholders with the necessary notice about the
restrictions on offer or sale of the securities.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table sets forth, as of December 31, 2008, certain information related
to our compensation plans under which shares of our common stock are authorized
for issuance.
Plan
Category
|
|
Number
of Securities to be Issued upon Exercise of Outstanding Options Warrants
and Rights
(a)
|
|
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
|
|
Number
of Securities Remaining Available For Future Issuance Under Equity
Compensation Plans (excluding securities reflected in column
(a))
|
|
Equity
compensation plans approved by security holders
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
335,000
|
|
|
$
|
2.90
|
|
|
|
3,415,000
|
|
Total
|
|
|
335,000
|
|
|
$
|
2.90
|
|
|
|
3,415,000
|
|
On
September 18, 2008, our board of directors awarded an aggregate of 260,000 stock
options to certain of our non-employee directors and made them subject to the
terms of our Option Plan, which was subsequently adopted by our board of
directors on October 29, 2008. Each of the awarded stock options is exercisable
into one share of our common stock at an exercise price of $2.90 per share, the
last sale price of our common stock on the date of grant. The term of the
options is 10 years. The options will vest and become exercisable in eight equal
quarterly installments on each October 1, January 1, April 1 and July 1,
starting in 2008.
Also on
September 18, 2008, our board of directors awarded 50,000 options to Richard
Liu, a consultant to the Company serving as our Chief Financial Officer, and
25,000 options to Sean Mahoney, a consultant to the Company. Each of the awarded
options is exercisable into one share of our common stock at an exercise price
of $2.90 per share, the last sale price of our common stock on the date of
grant. The term of the options is 10 years. The options are fully vested upon
grant.
No
options have been exercised as of the date of this Annual Report on Form
10-K.
Description
of Option Plan
On
October 29, 2008, our board of directors adopted the Option Plan. We expect to
submit the Option Plan for approval by our stockholders at the next annual
meeting of our stockholders.
The
purpose of the Option Plan is to benefit our stockholders by assisting us to
attract, retain and provide incentives to employees and directors of, and
non-employee consultants to, the Company and its affiliates, and to align the
interests of such employees, directors and consultants with those of our
stockholders.
The
Compensation Committee of our board of directors (the "Compensation Committee")
administers the Option Plan.
Under the
Option Plan, the Compensation Committee in its sole discretion may grant stock
options to our employees, directors and consultants (or those of our
affiliates). We have reserved a total of 3,750,000 shares of common stock for
issuance under the Option Plan.
The
Compensation Committee may grant two types of options under the Option Plan: (a)
options qualifying as "incentive stock options" under the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended (the "IRC"), or any
successor provision, and designated as such ("ISOs"), and (b) non-qualified
stock options.
The
Compensation Committee determines the vesting schedule, the exercise price per
share and other terms and conditions for each option. In the case of options
intended to constitute ISOs or performance-based compensation within the meaning
of Section 162(m) of the IRC, the exercise price may not be less than the fair
market value of our common stock on the date of grant. The Compensation
Committee will determine the term of each option, which may not exceed ten years
and is subject to further limitations as described herein.
ISOs may
be granted only to employees. To the extent required by
Section 422(d) of the IRC, the aggregate fair market value of shares
of common stock with respect to which ISOs are exercisable for the first time by
any individual during any calendar year may not exceed $100,000. ISOs granted to
a person considered to own more than 10% of the total combined voting power of
all classes of our outstanding stock, or the stock of any subsidiary or
affiliate, may not be exercisable after the expiration of five years from the
grant date and the option exercise price must be at least 110% of the fair
market value of the common stock subject to the option.
Each
option shall be evidenced by an option agreement. An option agreement may
provide for the payment of the exercise price, in whole or in part, by the
delivery of a number of shares of our common stock (plus cash if necessary)
having a fair market value equal to such exercise price. Moreover, an option
agreement may provide for a "cashless exercise" of the option by establishing
procedures whereby the holder, by a properly-executed written notice, directs
(a) an immediate market sale or margin loan respecting all or a part of the
shares of common stock to which he or she is entitled upon exercise pursuant to
an extension of credit by us to the holder equal to the exercise price, (b) the
delivery of shares of our common stock from us directly to a brokerage firm, and
(c) the delivery of the exercise price from sale or margin loan proceeds from
the brokerage firm directly to us.
To the
extent any option or award expires unexercised or is canceled, terminated or
forfeited in any manner without the issuance of common stock, such shares shall
again be available for issuance under the Option Plan.
Our board
of directors has the right to alter or amend the Option Plan and the
Compensation Committee has broad authority to administer the Option Plan,
including the right to amend the terms of any granted option, whether or not
vested. However, the Compensation Committee may not lower the exercise price of
any outstanding option other than in specified situations provided for in the
Option Plan. The Option Plan prohibits terms, adjustments or actions by the
Compensation Committee that that would result in an option being considered
"nonqualified deferred compensation," within the meaning of Section 409A of the
IRC, so as to cause an option or the Option Plan to become subject to the
requirements of Section 409A of the IRC. Our board of directors in its
discretion may terminate the Option Plan at any time with respect to any shares
of our common stock for which an option has not yet been granted.
Item
6.
|
Selected
Financial Data.
|
Not
applicable.
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following discussion and analysis of the results of operations and financial
condition for the fiscal years ending December 31, 2008 and 2007 should be read
in conjunction with our financial statements and the notes to those financial
statements that are included elsewhere in this report. Our discussion
includes forward-looking statements based upon current expectations that involve
risks and uncertainties, such as our plans, objectives, expectations, and
intentions. Actual results and the timing of events could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including those set forth under the Risk Factors,
Cautionary Statement Regarding Forward-Looking Information, and Business
sections in this report. We use words such as "anticipate,"
"estimate," "plan," "project," "continuing," "ongoing," "expect," "believe,"
"intend," "may," "will," "should," "could," and similar expressions to identify
forward-looking statements.
Immediately
before the closing of the Share Exchange, we were considered to be in the
development stage because our operations principally involved market research
and other business planning activities.
As a
result of the closing of the Share Exchange on April 15, 2008, our new business
operations consist of those of Poise Profit's Chinese subsidiary, Hi-tech, which
were subsequently transferred to CER Hong Kong on December 3, 2008 as described
in Item 1 Business - Organizational Structure and Subsidiaries. CER Hong Kong is
principally engaged in designing, marketing, licensing, fabricating,
implementing and servicing industrial energy recovery systems capable of
capturing industrial waste energy for reuse in industrial processes or to
produce electricity and thermal power.
CER Hong
Kong carries out its operations mainly through its subsidiary CER Shanghai and
an affiliated entity with which CER Hong Kong has a contractual relationship,
Shanghai Engineering. This arrangement with Shanghai Engineering reflects
Chinese limitations on foreign investments and ownership in Chinese businesses.
Shanghai Engineering's manufacturing activities are carried out by Vessel Works
Division located in Shanghai, China through a lease agreement with Vessel Works
Division's owner.
The
energy recovery systems that we produce capture industrial waste energy for
reuse in industrial processes or to produce electricity and thermal power,
thereby allowing industrial manufacturers to reduce their energy costs, shrink
their emissions and generate sellable emissions credits. We have primarily sold
energy recovery systems to chemical manufacturing plants to reduce their energy
costs by increasing the efficiency of their manufacturing equipment. We have
installed more than 100 energy recovery systems throughout China and in a
variety of international markets.
For a
more complete discussion of our history and operational structure, please refer
to Item 1 Business – Our History and Item 1 Business - Organizational Structure
and Subsidiaries.
Critical
Accounting Policies and Estimates
Our
management's discussion and analysis of our financial condition and results of
operations is 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 in this Annual Report on Form 10-K, we believe
that the accounting policies described below are the most critical to aid you in
fully understanding and evaluating this management discussion and
analysis.
Consolidation
of Variable Interest Entities
In
accordance with the Financial Accounting Standards Board ("FASB") Interpretation
No. 46(R), "Consolidation of Variable Interest Entities" ("FIN 46R"), variable
interest entities are generally entities that lack sufficient equity to finance
their activities without additional financial support from other parties or
whose equity holders lack adequate decision making ability. Each variable
interest entity with which the Company is affiliated must be evaluated to
determine who the primary beneficiary of the risks and rewards of ownership of
the variable interest entity. The primary beneficiary is required to consolidate
the variable interest entity's financial information for financial reporting
purposes.
We have
concluded that Shanghai Engineering, Vessel Works Division (the leased
manufacturing facilities), Shanghai Zhuyi Industry Co., Ltd. ("Zhuyi"), a former
affiliated company liquidated in July 2007 originally formed to derive tax
benefits, Shanghai Haiyin Hi-Tech Engineering Co., Ltd. ("Haiyin") a former
affiliated company liquidated in January 2008 originally formed to derive tax
benefits, and Shanghai Environmental are variable interest entities and that
Poise Profit and CER Hong Kong are the primary beneficiaries. Under the
requirements of FIN 46R, Poise Profit and CER Hong Kong consolidated the
financial statements of Shanghai Engineering, Vessel Works Division, Zhuyi,
Haiyin and Shanghai Environmental. As all companies are under common control
(see Note 1 to our consolidated financial statements), the consolidated
financial statements have been prepared as if the arrangements by which these
entities became variable interest entities had occurred retroactively. We have
eliminated inter-company items from our consolidated financial
statements.
We derive
revenues principally from (a) sales of our energy recovery systems; (b)
provision of design services; and (c) provision of EPC services, which are
essentially turnkey contracts where we provide all services in the whole
construction process from design, development, engineering, manufacturing to
installation. In providing design services, we design energy recovery systems
and other related systems based on a customer's requirements and the deliverable
consists of engineering drawings. The customer may elect to engage us to
manufacture the designed system or choose to present our drawings to other
manufacturers for manufacturing and installation. In contrast, when providing
EPC services, the customer is purchasing a turnkey energy recovery system and we
are involved throughout the entire process from design to
installation.
Sales of
our energy recovery systems and related products are essentially product sales.
The products consist mainly of waste heat boilers and other related equipment
manufactured according to specific customers' specifications. Once manufactured,
we ship the products to our customers in their entirety in one
batch.
We
generally recognize revenues from product sales when (a) persuasive evidence of
an arrangement exists, which is generally represented by a contract between us
and the customer; (b) products are shipped; (c) title and risk of ownership have
passed to the customer, which generally occurs at the time of delivery; (d) the
customer accept the products upon quality inspection performed by the customer;
(e) the purchase price is agreed to between us and the customer; and (f)
collectability is reasonably assured. Sales revenues represent the invoiced
value of products, less returns and discounts, and net of value added
tax.
We
recognize revenues from design services when (a) the services are provided; (b)
the design drawings are delivered; (c) invoices are issued; and (d)
collectability is reasonably assured. We generally deliver the drawings in one
batch.
The
energy recovery system involved in an EPC project is highly customized to the
specific customer's facilities and essentially not transferable to any other
facilities without significant modification and cost. It would be difficult, if
not impossible, to beneficially use a single element of a specific EPC project
on a standalone basis other than in connection with the facilities for which it
was intended. Statement of Position (SOP) 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (1981)" issued by the
American Institute of Certified Public Accountants ("SOP 81-1") requires use of
the percentage of completion method in lieu of the completed contract method
when: (a) it is possible to make reasonably reliable estimates of revenues and
costs for the construction project; (b) the contract specifies the parties'
rights as to the goods, consideration to be paid and received, and the resulting
terms of payment or settlement; (c) the purchaser has the ability and
expectation to perform all contractual duties; and (d) the contractor has the
same ability and expectation to perform. In contrast, SOP 81-1 provides that the
completed contract method should be used in rare circumstances where: (a) the
contract is of a short duration; (b) the contract violates any one of the prongs
described above for the percentage of completion method; or (c) the project
involves documented extraordinary, nonrecurring business risks. EPC contracts
are by nature long-term construction-type contracts, usually lasting more than
one accounting period, and we are able to reasonably estimate the progress
toward completion, including contracts revenues and contracts costs. EPC
contacts specify the customers' rights to the goods, the consideration to be
paid and received, and the terms of payment. Specifically, we have the right to
require a customer to make progress payments upon completion of determined
stages of the project which serve as evidence of the customer's approval and
acceptance of the work completed to date as complying with the terms of the
particular EPC contract and upon which we recognize revenues. The risks and
rewards of ownership of the installed goods pass to the customer upon completion
of each stage of the project. Hence, EPC contracts involve a continuous sale and
transfer of ownership rights that occurs as the work progresses as described in
paragraph 22 of SOP 81-1. Further, a customer has the right to require specific
performance of the contract and the contracts do not involve any documented
extraordinary nonrecurring business risks. Finally, according to Accounting
Research Bulletin Opinion No. 45, "Long-Term Construction-Type Contracts" ("ARB
45"), paragraph 15, the percentage of completion method is preferable when
recognizing revenues when the estimates of costs of completion and the extent of
progress toward completion of long-term contracts are reasonably dependable. For
the above-mentioned reasons, we recognize revenues from EPC contracts using the
percentage of completion method based on the guidance provided by SOP 81-1 and
on the percentage of actual costs incurred to date in relation to total
estimated costs for each contract in accordance with ARB 45.
We offer
a limited warranty to our customers pursuant to which our customers retain
between 5% and 10% of the particular contract price as retainage during the
limited warranty period (usually one to two years). We record the retainage as
deferred revenue until our customers pay it after the warranty period expires,
at which time we recognize it as revenue.
Recent
Accounting Pronouncements
In
February 2007, FASB issued Statement of Financial Accounting Standards ("SFAS")
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 is
expected to expand the use of fair value accounting but does not affect existing
standards which require certain assets or liabilities to be carried at fair
value. The objective of SFAS 159 is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. Under SFAS 159, a company may choose,
at specified election dates, to measure eligible items at fair value and report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. SFAS 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We adopted SFAS 159 on January 1,
2008. We chose not to elect the option to measure the fair value of eligible
financial assets and liabilities.
In
December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51" ("SFAS 160"), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. We have not
determined the effect that the application of SFAS 160 will have on our
consolidated financial statements.
In
December 2007, FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS
141R"). SFAS 141R replaces SFAS No. 141, "Business Combinations" ("SFAS 141").
SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition
method of accounting (which SFAS 141 called the "purchase method") be used and
an acquirer to be identified for each business combination. SFAS 141R requires
an acquirer to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. This replaces SFAS
141's cost-allocation process, which required the cost of an acquisition to be
allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values. SFAS 141R also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to
recognize the identifiable assets and liabilities, as well as the noncontrolling
interest in the acquiree, at the full amounts of their fair values (or other
amounts determined in accordance with SFAS 141R). SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. An entity may not apply it before that date. We are currently
evaluating the impact that adopting SFAS 141R will have on our financial
statements.
In March
2008, FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and
Hedging Activities - An Amendment of SFAS No. 133" ("SFAS 161"). SFAS 161 seeks
to improve financial reporting for derivative instruments and hedging activities
by requiring enhanced disclosures regarding the impact on financial position,
financial performance, and cash flows. To achieve this increased transparency,
SFAS 161 requires (a) the disclosure of the fair value of derivative instruments
and gains and losses in a tabular format; (b) the disclosure of derivative
features that are credit risk-related; and (c) cross-referencing within the
footnotes. SFAS 161 is effective on January 1, 2009. We are in the process of
evaluating the new disclosure requirements under SFAS 161.
In May
2008, FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting
Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with accounting principles generally accepted in the
United States. We do not expect that SFAS 162 will have an impact on our
financial statements.
In May
2008, FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60" ("SFAS 163"). The scope
of SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in SFAS 163, issued by enterprises included within the
scope of SFAS No. 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of SFAS No. 60
or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). We do not expect that SFAS 165
will have an impact on our financial statements.
In June
2008, FASB issued EITF 07-5 "Determining whether an Instrument (or Embedded
Feature) is indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS 133 specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company's own stock; and (b) classified in stockholders'
equity in the statement of financial position would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer's own stock and thus able to qualify for the SFAS 133
paragraph 11(a) scope exception. This standard will trigger liability accounting
on all options and warrants exercisable at strike prices denominated in any
currency other than the functional currency of the operating entity in China
(Renminbi). We are currently evaluating the impact of adoption of
EITF 07-5 on our consolidated financial statements.
In June
2008, FASB issued EITF 08-4, "Transition Guidance for Conforming Changes to
Issue No. 98-5" ("EITF 08-4"). The objective of EITF 08-4 is to provide
transition guidance for conforming changes made to EITF 98-5, that result from
EITF 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments",
and SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". EITF 08-4 is effective for
financial statements issued for fiscal years ending after December 15, 2008.
Early application is permitted. EITF 08-4 will not have an impact on the
Company's financial statements.
On
October 10, 2008, the FASB issued FSP 157-3, "Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active" ("FSP 157-3"),
which clarifies the application of SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. FSP 157-3 became
effective on October 10, 2008, and its adoption did not have a material impact
on the Company's financial position or results for the years ended December 31,
2008.
Earlier,
on January 1, 2008, the Company adopted SFAS 157, which defines fair value,
establishes a three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosure requirements for fair value measurements.
The carrying amounts reported in the balance sheets for current assets and
current liabilities qualify as financial instruments and are a reasonable
estimate of fair value because of the short period of time between the
origination of such instruments and their expected realization and if applicable
the stated interest rate is equivalent to rates currently available. The three
levels are defined as follow:
|
·
|
Level
1 - Inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
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 assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
|
·
|
Level
3 - Inputs to the valuation methodology are unobservable and significant
to the fair value.
|
The
Company did not identify any assets and liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
157.
In
January 2009, the FASB issued FSP EITF 99-20-1, "Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets" ("FSP EITF 99-20-1"). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on "market
participant" estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
"market participant" view to a holder's estimate of whether there has been a
"probable" adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our
consolidated financial statements.
Comparison
of the Fiscal Years Ended December 31, 2008 and December 31, 2007
The
following table sets forth the results of our operations for the years indicated
as a percentage of revenues:
|
|
|
Fiscal
Year ended December 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
Amount
|
|
|
|
%
of
Revenues
|
|
|
|
Amount
|
|
|
|
%
of
Revenues
|
|
|
|
|
(in
dollars, except percentages)
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
23,178,075
|
|
|
|
100.0
|
%
|
|
|
11,846,892
|
|
|
|
100.0
|
%
|
Third
parties
|
|
|
19,793,175
|
|
|
|
85.4
|
%
|
|
|
10,923,338
|
|
|
|
92.2
|
%
|
Related
party
|
|
|
3,384,900
|
|
|
|
14.6
|
%
|
|
|
923,554
|
|
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
18,107,111
|
|
|
|
78.1
|
%
|
|
|
9,718,424
|
|
|
|
82.0
|
%
|
Third
parties
|
|
|
16,155,562
|
|
|
|
69.7
|
%
|
|
|
8,929,769
|
|
|
|
75.4
|
%
|
Related
party
|
|
|
1,951,549
|
|
|
|
8.4
|
%
|
|
|
788,655
|
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
5,070,964
|
|
|
|
21.9
|
%
|
|
|
2,128,468
|
|
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND
ADMINISTRATIVE
EXPENSES
|
|
|
3,463,682
|
|
|
|
14.9
|
%
|
|
|
1,365,321
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
1,607,282
|
|
|
|
6.9
|
%
|
|
|
763,147
|
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income, net
|
|
|
126,512
|
|
|
|
0.5
|
%
|
|
|
11,259
|
|
|
|
0.1
|
%
|
Interest
(expense) income, net
|
|
|
(57,411
|
)
|
|
|
-0.2
|
%
|
|
|
(42,446
|
)
|
|
|
-0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE PROVISION
FOR
INCOME TAXES
|
|
|
1,676,383
|
|
|
|
7.2
|
%
|
|
|
731,960
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
565,720
|
|
|
|
2.4
|
%
|
|
|
91,041
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
1,110,663
|
|
|
|
4.8
|
%
|
|
|
640,919
|
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(57,717
|
)
|
|
|
-0.2
|
%
|
|
|
(201,560
|
)
|
|
|
-1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
1,052,946
|
|
|
|
4.5
|
%
|
|
|
439,359
|
|
|
|
3.7
|
%
|
Revenues
. Our revenues
include revenues from sales of energy recovery systems, and provision of design
services and EPC services. Revenues increased to $23,178,075 for the year ended
December 31, 2008 as compared to $11,846,892 for the year ended December 31,
2007, an increase of $11,331,183 or 95.6%. The increase is mainly attributable
to an increase in sales of energy recovery systems and services provided, and
also an increase in revenue per contract during the year ended December 31,
2008. The detailed changes are as follows:
|
|
2008
|
|
|
2007
|
|
|
Change
($)
|
|
|
Change
(%)
|
|
Average
Revenue per Contract
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
264,224
|
|
|
$
|
195,147
|
|
|
$
|
69,077
|
|
|
|
35.4
|
%
|
Design
Services
|
|
$
|
158,205
|
|
|
$
|
48,861
|
|
|
$
|
109,344
|
|
|
|
223.8
|
%
|
EPC
|
|
$
|
3,416,746
|
|
|
$
|
3,210,984
|
|
|
$
|
205,762
|
|
|
|
6.4
|
%
|
Average
Revenue per Contract
|
|
$
|
293,393
|
|
|
$
|
227,825
|
|
|
$
|
65,568
|
|
|
|
28.8
|
%
|
Number
of Contracts Completed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
70
|
|
|
|
42
|
|
|
|
28
|
|
|
|
66.7
|
%
|
Design
Services
|
|
|
8
|
|
|
|
9
|
|
|
|
-1
|
|
|
|
-11.1
|
%
|
EPC
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Total
Number of Contracts Completed
|
|
|
79
|
|
|
|
52
|
|
|
|
27
|
|
|
|
51.9
|
%
|
Management
expects that sales will continue to grow in 2009 in spite of the recent
deteriorating economic conditions as we have back-log orders for 2009 and we
believe that we are among the few competitors in the industry with the necessary
design and engineering capabilities to satisfy the recent growing market demand
for larger energy recovery systems and to undertake EPC projects.
Cost of Sales
. Cost of sales
increased to $18,107,111 for the year ended December 31, 2008, as compared to
$9,718,424 for the year ended December 31, 2007, an increase of $8,388,687, or
86.3%. As a percentage of revenues, cost of sales decreased from 82.0% for the
year ended December 31, 2007 to 78.1% for the same period in 2008, a decrease of
3.9%. Compared to the growth rate of revenues, the increase rate in the cost of
sales was lower. This is mainly attributable to our efforts to attempt to offset
the increase in raw material prices by gradually increasing contract prices for
our products and projects and offering larger size design service contracts
which have much higher gross margin. During the year ended December 31, 2008,
the prices of various steel-made raw materials increased throughout the year
until September 2008 and then started to decrease significantly thereafter.
Overall, the prices of various steel-made raw materials that the company uses,
on an annually average basis, increased by between 3.1% and 62.4% during the
year ended December 31, 2008. Based on the current market situation, management
expects that the prices of steel-made raw materials, which are the main raw
materials for manufacturing our products, will remain relatively stable, if not
decreasing further in 2009. Management also expects that the prices of other raw
materials will remain stable in 2009 as a result of recent changes in the
overall market conditions. Thus, it is anticipated that the overall cost of
sales will remain relatively stable for 2009.
Gross Profit
. Gross profit
was $5,070,964 for the year ended December 31, 2008 as compared to $2,128,468
for the year ended December 31, 2007, an increase of $2,942,496 or 138.2%. The
respective gross margins are 21.9% and 18.0% for the years ended December 31,
2008 and 2007. Gross profit from third party contracts was $3,637,613 with a
gross margin of 18.4% and gross profit from a related party contract was
$1,433,351 with a gross margin of 42.3% for the year ended December 31, 2008.
Gross profit from third party contracts was $1,993,569 with a gross margin of
18.3% and gross profit from contracts with the related party mentioned in the
previous sentence was $134,899 with a gross margin of 14.6% for the year ended
December 31, 2007. The increase in our gross margin the year ended December 31,
2008 is mainly due to an increase of licensing and design service contracts,
which have better margins, better management of product costs, and our obtaining
higher margin orders leveraging our special technical expertise. The related
party contract completed in 2008 mentioned above required special process
technologies and expertise that we possess, for which we have applied for an
invention patent, and therefore allowed us to realize a higher
margin.
Selling, General and Administrative
Expenses
. Selling, general and administrative expenses increased to
$3,463,682 for the year ended December 31, 2008, as compared to $1,365,321 for
the year ended December 31, 2007, an increase of $2,098,361 or 153.7%. Selling,
general and administrative expenses, as a percentage of revenue, increased from
11.5% for the year ended December 31, 2007 to 14.9% for the same period in 2008,
an increase of 3.4%. In the year ended December 31, 2008, the company incurred
an aggregate of $1,417,524 of expenses related to public company operations,
including $662,853 of non-cash expenses related to the issuance of shares of our
common stock for services rendered to investor relations consultants, the
issuance of shares of our common stock upon exercise of a warrant issued to a
consultant, and stock options issued for services rendered to our non-employee
directors and certain consultants. We did not incur public company expenses in
2007. If such expenses were excluded to make our selling, general and
administrative expenses for 2008 comparable to those of 2007, our selling,
general and administrative expenses would be $2,046,158 for the year ended
December 31, 2008, representing a percentage of revenues of 8.8%, compared to
$1,365,321 for the year ended December 31, 2007, representing a percentage of
revenues of 11.5%, an increase of $680,837 or 49.9%. The increase is mainly
attributable to the increase of salaries (by $287,162) as a result of
company-wide gradual salary increases beginning in April 2008 and the addition
of senior management members and staff, and the increase in travel and shipping
expenses (by $220,290) as a result of increased sales efforts.
Income from Operations
. As a
result of the above, income from operations totaled $1,607,282 for the year
ended December 31, 2008 as compared to $763,147 for the year ended December 31,
2007, an increase of $844,135 or 110.6%. As a percentage of revenues, income
from operations was 6.9% for the year ended December 31, 2008 as compared to
6.4% for the year ended December 31, 2007. The increase is mainly attributable
to increased sales, the higher margin realized on one related party project that
required special technological expertise and an increase in licensing and design
service contracts with higher margins.
Non-operating Income
.
Non-operating income increased to $126,512 for the year ended December 31, 2008
as compared to $11,259 for the year ended December 31, 2007, an increase of
$115,253 or 1,023.7%. Non-operating income mainly consisted of disposal of
customer deposits carried over from prior year.
Interest Expense
. Interest
expense increased to $57,411 for the year ended December 31, 2008, as compared
to $42,446 for the year ended December 31, 2007, an increase of $14,965 or
35.3%. The increase in interest expenses is mainly attributable
the
non-cash finance expense related to warrants issued with a convertible
promissory note in the aggregate principal amount of $250,000 related to
previous financing activities, the value of which was determined to be
$52,279 upon closing of the Financing on April 15,
2008.
Income before Provision for Income
Taxes
. As a result of the foregoing, income before provision for income
taxes was $1,676,383 for the year ended December 31, 2008, representing 7.2% of
the revenues, as compared to $731,960, representing 6.2% of the revenues, for
the year ended December, 2007, an increase of $944,423 or 129.0%.
Provision for Income Taxes
.
Provision for income taxes was $565,720 for the year ended December 31, 2008,
representing 33.7% of the income before provision for income taxes, as compared
to $91,041, representing 12.4% of the income before provision for income taxes,
for the year ended December 31, 2007, an increase of $474,679 or 521.4%. The
normal applicable income tax rates for the operating entities in China are 15%
and 25%. Pursuant to Chinese income tax laws, Shanghai Engineering is subject to
enterprise income tax at a statutory rate of 15% as a high technology entity and
Vessel Works Division’s statutory income tax rate in China is 25%. The
significant increase and the higher effective income tax rate in 2008 resulted
from our inability to offset the net operating loss incurred in the United
States against the income generated by our Chinese subsidiaries and affiliated
entities. Such net operating loss will be carried forward for U.S.
income tax purposes and will be available to reduce future years' taxable income
in the US, if any. Management is evaluating strategies to minimize the impact of
such net operating losses should they occur again in the future, and expects
that our effective income tax rate will improve in the future.
Net Income
. As a result of
the foregoing, net income increased to $1,110,663, representing a net margin of
4.8%, for the year ended December 31, 2008 as compared to $640,919, representing
a net margin of 5.4%, for the year ended December 31, 2007, an increase of
$469,744 or 73.3%. The increase in net income is mainly attributable to the
increased sales volume represented by number of contracts completed, the
increase in revenue per contract, and an increased number of contracts with
better margins, such as licensing and design service contracts and those that
require special know how and technologies to undertake. Management expects that
the current global recession will slow down our growth in 2009 compared to prior
years. However, management anticipates that our sales revenues will continue to
grow in 2009 as we currently have back-log orders and continue to see an
increasing awareness and demands for our energy efficiency solutions and systems
both in China and in other countries.
Liquidity
and Capital Resources
Cash
Flows
The
following table sets forth a summary of our cash flows for the periods indicated
below:
|
|
Year
ended December, 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
dollars)
|
|
Net
cash (used in) provided by operating activities
|
|
|
(335,612
|
)
|
|
|
1,335,116
|
|
Net
cash (used in) provided by investing activities
|
|
|
241,311
|
|
|
|
(953,267
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
5,874,018
|
|
|
|
(249,661
|
)
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
50,536
|
|
|
|
26,357
|
|
Net
increase in cash and cash equivalents
|
|
|
5,830,253
|
|
|
|
158,545
|
|
Cash
and cash equivalents at the beginning of period
|
|
|
306,150
|
|
|
|
147,605
|
|
Cash
and cash equivalents at the end of period
|
|
|
6,136,403
|
|
|
|
306,150
|
|
Operating
Activities
Net cash
used in operating activities was $335,612 for the year ended December 31, 2008
compared with net cash provided by operating activities of $1,335,116 for the
same period in 2007. Compared to the year ended December 31, 2007, an increase
in the amount of orders and projects towards the end of 2008 resulted in a
significant increase in accounts receivable. In addition, we increased our
spending on inventory purchases related to the increased number of orders and
projects, also affected by the increased purchase price for steel-made raw
materials in 2008 compared to 2007.
Investing
Activities
Net cash
provided by investing activities was $241,311 for the year ended December 31,
2008 compared to net cash used in investing activities of $953,267 for the same
period in 2007. The change of $1,194,578 resulted mainly from advances made by
variable interest entities to Mr. Qinghuan Wu for business convenience purposes
in 2007 before the Share Exchange, and Mr. Wu's paying off these advances in
2008.
Financing
Activities
Net cash
provided by financing activities was $5,874,018 for the year ended December 31,
2008 compared to net cash used in financing activities of $249,661 for the same
period in 2007, an increase of $6,123,679. The increase is mainly attributable
to the closing of the Financing on April 15, 2008 with net proceeds of
$6,619,278.
We
incurred the following bank loans during the years ended December 31, 2008 and
2007, respectively:
On
January 15, 2008, we borrowed RMB 2,600,000 (approximately $381,420 as of
December 31, 2008) on a short-term bank loan for working capital purposes from
Shenzhen Development Bank, Shanghai Branch, Baoshan Sub-branch. The term of the
loan is one year. The loan agreement provides for monthly interest payments at
an interest rate of 7.47% per annum, maturing in January 2009. We repaid the
loan in January 2009.
On
January 8, 2007, we borrowed RMB 2,200,000 (approximately $282,040 on the loan
issuance date) on a short-term bank loan for working capital purposes from Bank
of Shanghai, Baiyu Branch. The term of the loan was less than one year. The loan
agreement provided for quarterly interest payments at an interest rate of 7.04%
per annum, maturing in December 2007. We repaid the loan before December 31,
2007.
In April
2008, we received net proceeds of approximately $6.6 million upon closing of the
Financing on April 15, 2008. We believe that our current cash and cash
equivalents, anticipated cash flow from operations and net proceeds from the
April 15, 2008 financing will be sufficient to meet our anticipated working
capital needs for at least 12 months after the closing of the financing. The
proceeds from the financing has been used and will continually primarily be used
for general working capital purposes, including funding the purchase of raw
materials for our products, the purchase of necessary additional equipment for
our current manufacturing facility, sales and marketing expenses, and research
and development expenses that we will need for the planned operations. As of
December 31, 2008, approximately $5.8 million of the cash proceeds from the
Financing remained. However, we cannot provide any assurances that the proceeds
raised in the Financing will be sufficient for the planned expansion of our
operations. Further, we would require additional capital to finance any future
manufacturing facility expansion, changes in business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
To the extent it becomes necessary to raise additional capital in the future, we
may seek to raise it through the sale of debt or equity securities, funding from
joint-venture or strategic partners, debt financing or loans, or a combination
of the foregoing. Management believes that raising additional capital on
reasonable terms in the current depressed economic conditions would be difficult
but nevertheless possible, if necessary. We currently do not have any binding
commitments for, or readily available sources of, additional financing. We
cannot provide any assurances that we will be able to secure the additional cash
or working capital we may require to continue our operations, either now or in
the future.
In
January 2009, we entered into an EPC contract for a retrofit project to build a
new low temperature heat recovery system for the sulfuric acid plant of Jiangsu
Sopo Chemical Group. We will purchase the low temperature heat recovery system
for the project from MECS, Inc., a leading US-based company specializing in
sulfuric acid manufacturing equipment and systems. The total contract value is
estimated to be approximately $8.9 million. According to the terms of the
contract, Jiangsu Sopo Chemical Group made a part-payment at the beginning of
the project and will pay the balance of the purchase price over 48 months
starting on completion of the project, which is estimated to occur some time in
the spring of 2010. Unlike our typical sales contracts (pursuant to which we
customarily are paid 1/3 of the purchase price up front, 1/3 in progress
payments upon completion of determined stages of the project, and 1/3 upon
completion of the project) and except for the project costs offset by the
part-payment, we will bear all project costs until fully paid. We may attempt to
obtain project financing for the project from a third party.
On March
19, 2009, CER Shanghai entered into an office lease agreement with Shanghai
Zhangjiang Integrated Circuit Industrial Zone Development Co., Ltd. to lease
space to serve as our new main office and design and engineering center in
China. The lease term begins on March 1, 2009 and ends on February 28, 2011. Our
annual rent payments will be approximately $146,300 for the first year and
approximately $849,900 for the second year. We are also required to make a
safety deposit of approximately $292,600 in addition to the annual rent
payments. CER Shanghai has an option to purchase the office space for
approximately $7,831,500 if purchasing before December 31, 2009 and $8,221,500
if purchasing before December 31, 2010. If CER Shanghai were to exercise the
purchase option, the deposit and lease payments made would be credited towards
the purchase price.
Bank
indebtedness increased to approximately $381,420 as of December 31, 2008
compared to $0 as of December 31, 2007 as a result of our borrowing RMB
2,600,000 (approximately $381,420 as of December 31, 2008) on a short-term bank
loan for working capital purposes from Shenzhen Development Bank, Shanghai
Branch, Baoshan Sub-branch.
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholder's equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
We are
exposed to certain market risks from transactions that we enter into in the
normal course of business. Our primary market risk exposure relates to interest
rate risk and foreign exchange rate risk.
We do not
use derivative financial instruments in our investment portfolio and have no
foreign exchange contracts. We consider investments in highly liquid instruments
purchased with a remaining maturity of 90 days or less at the date of purchase
to be cash equivalents. However, in order to manage the foreign exchange risks,
we may engage in hedging activities to manage our financial exposure related to
currency exchange fluctuation. In these hedging activities, we might use
fixed-price, forward, futures, financial swaps and option contracts traded in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible.
Interest
Rates
Our
exposure to market risk for changes in interest rates relates primarily to our
short-term investments and short-term obligations; thus, fluctuations in
interest rates would not have a material impact on the fair value of these
securities. As of December 31, 2008, we had $6,734,352 in cash. A hypothetical
5% increase or decrease in interest rates would not have a material impact on
our earnings or loss, or the fair market value or cash flows of these
instruments.
Foreign
Exchange Rates
A
substantial portion of our sales is denominated in Renminbi or other currencies.
As a result, changes in the relative values of U.S. Dollars, Renminbi and other
currencies affect our reported levels of revenues and profitability as the
results are translated into U.S. Dollars for reporting purposes. In particular,
fluctuations in currency exchange rates could have a significant impact on our
financial stability due to a mismatch among various foreign currency-denominated
sales and costs. Fluctuations in exchange rates, particularly between the U.S.
dollar and Renminbi, affect our gross and net profit margins and could result in
foreign exchange and operating losses.
Our
exposure to foreign exchange rate risk primarily relates to currency gains or
losses resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into Renminbi, the functional
currency of our operating business. Our results of operations and cash flow are
translated at average exchange rates during the period, and assets and
liabilities are translated at the unified exchange rate as quoted by the
People's Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in our statement of stockholders' equity. We recorded net foreign
currency loss of $57,717 and net foreign currency loss of $201,560 in the years
ended December 31, 2008 and 2007, respectively. We have not used any forward
contracts, currency options or borrowings to hedge our exposure to foreign
currency exchange risk. We cannot predict the impact of future exchange rate
fluctuations on our results of operations and may incur net foreign currency
losses in the future. As our sales denominated in foreign currencies, continue
to grow, we will consider using arrangements to hedge our exposure to foreign
currency exchange risk.
Our
financial statements are expressed in U.S. dollars but the functional currency
of our operating subsidiary is Renminbi. The value of your investment in our
stock will be affected by the foreign exchange rate between U.S. dollars and
Renminbi. To the extent we hold assets denominated in U.S. dollars, any
appreciation of the Renminbi against the U.S. dollar could result in a change to
our statement of operations and a reduction in the value of our U.S. dollar
denominated assets. On the other hand, a decline in the value of Renminbi
against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our
financial results, the value of your investment in our company and the dividends
we may pay in the future, if any, all of which may have a material adverse
effect on the price of our stock.
Item
8.
|
Financial
Statements and Supplementary
Data.
|
|
CHINA
ENERGY RECOVERY, INC. AND
SUBSIDIARIES
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31,
2007
|
Index
to Financial Statements
|
Page
No.
|
China
Energy Recovery, Inc. and Subsidiaries Report of Independent Registered
Public Accounting Firm
|
F-2
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Consolidated Balance Sheets as of
December 31, 2008 and 2007
|
F-3
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Consolidated Statements
of Income and Other Comprehensive Income for Years Ended December 31,
2008 and 2007
|
F-4
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Consolidated Statements of
Shareholders' Equity
|
F-5
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Consolidated Statements of Cash
Flows for Years Ended December 31, 2008 and 2007
|
F-6
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Notes to the Consolidated Financial
Statements
|
F-7
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and
Stockholders of
China Energy Recovery, Inc. and Subsidiaries
We have audited the
accompanying consolidated balance sheets of China Energy Recovery, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of income and other comprehensive income, shareholders’ equity, and
cash flows for each of the years in the two-year period ended December 31,
2008. China Energy Recovery, Inc. and Subsidiaries’ management is responsible
for these financial statements. Our responsibility is to express an opinion on
these 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects,
the financial position of China Energy Recovery, Inc. and Subsidiaries as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Moore Stephens
Wurth Frazer and Torbet, LLP
Walnut, California
March 23,
2009
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
AS
OF DECEMBER 31, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
6,136,403
|
|
|
$
|
306,150
|
|
Restricted
cash
|
|
|
597,949
|
|
|
|
89,115
|
|
Notes
receivable
|
|
|
120,749
|
|
|
|
351,799
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$151,094
|
|
|
|
|
|
|
|
|
and
$237,475 as of December 31, 2008 and 2007, respectively
|
|
|
4,935,142
|
|
|
|
577,005
|
|
Accounts
receivable - related party
|
|
|
1,006,060
|
|
|
|
572,036
|
|
Inventories
|
|
|
7,774,775
|
|
|
|
5,262,329
|
|
Costs
and estimated earnings in excess of billings
|
|
|
-
|
|
|
|
1,155,909
|
|
Other
receivables
|
|
|
98,271
|
|
|
|
37,852
|
|
Advances
on inventory purchases
|
|
|
1,044,807
|
|
|
|
1,995,345
|
|
Total
current assets
|
|
|
21,714,156
|
|
|
|
10,347,540
|
|
|
|
|
|
|
|
|
|
|
EQUIPMENT,
net
|
|
|
850,888
|
|
|
|
649,392
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Long
term accounts receivable, retainage
|
|
|
377,368
|
|
|
|
588,433
|
|
Due
from shareholder
|
|
|
-
|
|
|
|
463,663
|
|
Total
other assets
|
|
|
377,368
|
|
|
|
1,052,096
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
22,942,412
|
|
|
$
|
12,049,028
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,331,293
|
|
|
$
|
2,196,508
|
|
Other
payables
|
|
|
466,392
|
|
|
|
275,591
|
|
Other
payables - related party
|
|
|
65,078
|
|
|
|
60,819
|
|
Accrued
liabilities
|
|
|
21,228
|
|
|
|
27,851
|
|
Customer
deposits
|
|
|
7,044,234
|
|
|
|
8,052,570
|
|
Taxes
payable
|
|
|
2,282,621
|
|
|
|
719,132
|
|
Deferred
revenue
|
|
|
1,518,431
|
|
|
|
930,546
|
|
Deferred
revenue - related party
|
|
|
208,270
|
|
|
|
-
|
|
Short
term loans payable
|
|
|
381,420
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
15,318,967
|
|
|
|
12,263,017
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 50,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
714,963
and 0 issued and outstanding as of December 31, 2008 and
2007
|
|
|
715
|
|
|
|
-
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
29,912,573
issued and outstanding as of December 31, 2008
|
|
|
|
|
|
|
|
|
20,757,090
issued and outstanding as of December 31, 2007
|
|
|
29,913
|
|
|
|
20,757
|
|
Paid-in-capital
|
|
|
7,645,404
|
|
|
|
870,787
|
|
Accumulated
deficit
|
|
|
(363,147
|
)
|
|
|
(1,270,165
|
)
|
Statutory
reserves
|
|
|
408,403
|
|
|
|
204,758
|
|
Accumulated
other comprehensive loss
|
|
|
(97,843
|
)
|
|
|
(40,126
|
)
|
Total
shareholders' equity
|
|
|
7,623,445
|
|
|
|
(213,989
|
)
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
22,942,412
|
|
|
$
|
12,049,028
|
|
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these consolidated
statements.
|
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
|
|
FOR
YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
Third
parties
|
|
$
|
19,793,175
|
|
|
$
|
10,923,338
|
|
Related
party
|
|
|
3,384,900
|
|
|
|
923,554
|
|
Total
revenue
|
|
|
23,178,075
|
|
|
|
11,846,892
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
|
|
|
|
|
|
Third
parties
|
|
|
16,155,562
|
|
|
|
8,929,769
|
|
Related
party
|
|
|
1,951,549
|
|
|
|
788,655
|
|
Total
cost of sales
|
|
|
18,107,111
|
|
|
|
9,718,424
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
5,070,964
|
|
|
|
2,128,468
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
3,463,682
|
|
|
|
1,365,321
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
1,607,282
|
|
|
|
763,147
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE), NET:
|
|
|
|
|
|
|
|
|
Non-operating
income, net
|
|
|
126,512
|
|
|
|
11,259
|
|
Interest
expense, net
|
|
|
(57,411
|
)
|
|
|
(42,446
|
)
|
Total
other income (expense), net
|
|
|
69,101
|
|
|
|
(31,187
|
)
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS BEFORE
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
1,676,383
|
|
|
|
731,960
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
565,720
|
|
|
|
91,041
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
1,110,663
|
|
|
|
640,919
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(57,717
|
)
|
|
|
(201,560
|
)
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
1,052,946
|
|
|
$
|
439,359
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
25,705,500
|
|
|
|
20,757,090
|
|
Earnings
per share
|
|
$
|
0.043
|
|
|
$
|
0.031
|
|
Diluted
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
27,033,819
|
|
|
|
20,757,090
|
|
Earnings
per share
|
|
$
|
0.041
|
|
|
$
|
0.031
|
|
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these consolidated
statements.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
|
Accumulated
other
|
|
|
|
|
|
|
Preferred
stock
|
|
|
Common
stock
|
|
|
Paid-in
|
|
|
|
|
|
Statutory
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Unrestricted
|
|
|
reserves
|
|
|
income
(loss)
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2006
|
|
|
-
|
|
|
$
|
-
|
|
|
|
20,757,090
|
|
|
$
|
20,757
|
|
|
$
|
3,797,393
|
|
|
$
|
(1,871,567
|
)
|
|
$
|
165,241
|
|
|
$
|
161,434
|
|
|
$
|
2,273,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Shareholder
contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,150
|
|
Shareholder
distribution from VIE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,993,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,993,756
|
)
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,517
|
)
|
|
|
39,517
|
|
|
|
|
|
|
|
-
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
640,919
|
|
|
|
|
|
|
|
|
|
|
|
640,919
|
|
Foreign
currency translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201,560
|
)
|
|
|
(201,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007
|
|
|
-
|
|
|
$
|
-
|
|
|
|
20,757,090
|
|
|
$
|
20,757
|
|
|
$
|
870,787
|
|
|
$
|
(1,270,165
|
)
|
|
$
|
204,758
|
|
|
$
|
(40,126
|
)
|
|
$
|
(213,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock issued for cash at $1.08
|
|
|
7,874,241
|
|
|
|
7,874
|
|
|
|
|
|
|
|
|
|
|
|
6,636,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,644,278
|
|
Shares
issued for reorganization on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
April
15, 2008
|
|
|
|
|
|
|
|
|
|
|
4,717,890
|
|
|
|
4,718
|
|
|
|
3,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,416
|
|
Common
stock issued for service
|
|
|
|
|
|
|
|
|
|
|
662,500
|
|
|
|
663
|
|
|
|
468,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469,631
|
|
Warrants
issued for service at $2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,524
|
|
Value
of option granted to directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,698
|
|
Cashless
exercise of warrant
|
|
|
|
|
|
|
|
|
|
|
195,454
|
|
|
|
195
|
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Conversion
of preferred stock
|
|
|
(7,159,278
|
)
|
|
|
(7,159
|
)
|
|
|
3,579,639
|
|
|
|
3,580
|
|
|
|
3,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Shareholder
distribution from VIE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(531,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(531,059
|
)
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203,645
|
)
|
|
|
203,645
|
|
|
|
|
|
|
|
-
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,110,663
|
|
|
|
|
|
|
|
|
|
|
|
1,110,663
|
|
Foreign
currency translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,717
|
)
|
|
|
(57,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2008
|
|
|
714,963
|
|
|
$
|
715
|
|
|
|
29,912,573
|
|
|
$
|
29,913
|
|
|
$
|
7,645,404
|
|
|
$
|
(363,147
|
)
|
|
$
|
408,403
|
|
|
$
|
(97,843
|
)
|
|
$
|
7,623,445
|
|
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these consolidated
statements.
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
FOR
YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,110,663
|
|
|
$
|
640,919
|
|
Adjustments
to reconcile net income to cash
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
92,885
|
|
|
|
51,715
|
|
Change
in allowance for uncollectible accounts
|
|
|
55,549
|
|
|
|
164,445
|
|
Common
stock issued for services
|
|
|
469,631
|
|
|
|
-
|
|
Stock
based compensation
|
|
|
193,222
|
|
|
|
-
|
|
Value
of warrants related to convertible notes
|
|
|
52,279
|
|
|
|
|
|
Loss
on fixed assets disposal
|
|
|
13,186
|
|
|
|
-
|
|
Change
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Notes
receivable
|
|
|
251,239
|
|
|
|
(201,663
|
)
|
Accounts
receivable
|
|
|
(4,298,231
|
)
|
|
|
1,390,834
|
|
Accounts
receivable - related party
|
|
|
(387,120
|
)
|
|
|
(549,380
|
)
|
Inventories
|
|
|
(2,106,701
|
)
|
|
|
(2,296,726
|
)
|
Costs
and estimated earnings in excess of billings
|
|
|
1,215,348
|
|
|
|
(1,110,127
|
)
|
Other
receivables
|
|
|
(57,199
|
)
|
|
|
65,151
|
|
Advances
on inventory purchases
|
|
|
1,072,567
|
|
|
|
(1,229,206
|
)
|
Long
term accounts receivable, retainage
|
|
|
221,919
|
|
|
|
(565,128
|
)
|
Other
assets
|
|
|
(2,018
|
)
|
|
|
1,211
|
|
Accounts
payable
|
|
|
946,615
|
|
|
|
207,593
|
|
Other
payables
|
|
|
168,521
|
|
|
|
(4,565
|
)
|
Other
payables - related party
|
|
|
-
|
|
|
|
(370,764
|
)
|
Accrued
liabilities
|
|
|
(8,225
|
)
|
|
|
23,899
|
|
Customer
deposits
|
|
|
(1,544,864
|
)
|
|
|
5,005,764
|
|
Customer
deposits - related party
|
|
|
-
|
|
|
|
(190,186
|
)
|
Taxes
payable
|
|
|
1,486,832
|
|
|
|
137,740
|
|
Deferred
revenue
|
|
|
718,290
|
|
|
|
163,590
|
|
Net
cash provided by (used in ) operating activities
|
|
|
(335,612
|
)
|
|
|
1,335,116
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
equipment
|
|
|
(246,196
|
)
|
|
|
(246,264
|
)
|
Repayment
of loans to shareholder
|
|
|
487,507
|
|
|
|
(707,003
|
)
|
Net
cash provided by (used in ) investing activities
|
|
|
241,311
|
|
|
|
(953,267
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(587,555
|
)
|
|
|
(89,115
|
)
|
Cash
received from re-orgnization
|
|
|
119
|
|
|
|
-
|
|
Capital
contribution
|
|
|
-
|
|
|
|
67,150
|
|
Proceeds
from issuing preferred stock, net of offering costs
|
|
|
6,619,278
|
|
|
|
-
|
|
Shareholder
distribution from VIE
|
|
|
(519,744
|
)
|
|
|
(210,756
|
)
|
Cash
proceeds from short term bank loans
|
|
|
361,920
|
|
|
|
282,040
|
|
Repayment
of short term bank loans
|
|
|
-
|
|
|
|
(298,980
|
)
|
Net
cash provided by (used in ) financing activities
|
|
|
5,874,018
|
|
|
|
(249,661
|
)
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
50,536
|
|
|
|
26,357
|
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH
|
|
|
5,830,253
|
|
|
|
158,545
|
|
|
|
|
|
|
|
|
|
|
CASH,
beginning
|
|
|
306,150
|
|
|
|
147,605
|
|
|
|
|
|
|
|
|
|
|
CASH,
ending
|
|
$
|
6,136,403
|
|
|
$
|
306,150
|
|
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these consolidated
statements.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
Note
1 – Organization
China
Energy Recovery, Inc. ("CER" or the "Company"), formerly known as MMA Media Inc.
and Commerce Development Corporation Ltd., was incorporated under the laws of
the State of Maryland in May, 1998. From inception to March 31, 2002, the
Company was a wholly-owned subsidiary of The Majestic Companies, Ltd.
("Majestic"), and in March, 2002, Majestic's Board of Directors approved a plan
to spin-off the Company to an entity controlled by Majestic's former Chief
Executive Officer and to Majestic's stockholders. On September 24, 2002, the
Company acquired USM Financial Solutions, Inc. through a Capital Stock Exchange
Agreement (the "USM Agreement"). Pursuant to the USM Agreement, USM Financial
Solutions, Inc. became a wholly-owned subsidiary of the Company. On April 7,
2006, the Company entered into an Agreement and Plan of Merger with its
wholly-owned subsidiary, Commerce Development Corporation, Ltd., a Delaware
corporation, for purposes of changing the Company's state of incorporation from
Maryland to Delaware. On June 5, 2007, the Company changed its name to MMA
Media, Inc. The Company was considered to be in the development
stage, immediately before the closing of the Share Exchange (as defined
below), because its operations principally involved market research and other
business planning activities. In addition, no revenue was generated from its
operations. On February 5, 2008, the Company changed its name to China Energy
Recovery, Inc.
On
January 24, 2008, the Company entered into a Share Exchange Agreement with Poise
Profit International, Ltd. ("Poise Profit"), a company incorporated on November
23, 2007, under the laws of the British Virgin Islands, and the shareholders of
Poise Profit. The share exchange transaction (the "Share Exchange") closed on
April 15, 2008 and resulted in Poise Profit becoming a wholly-owned subsidiary
of the Company. On April 16, 2008, the Company conducted a 1-for-2 reverse stock
split pursuant to which each two shares of CER's common stock, issued and
outstanding on the record date of April 15, 2008, converted into one share of
CER's common stock. Pursuant to the Share Exchange Agreement, the Company agreed
to acquire all of the issued and outstanding shares of Poise Profit's common
stock in exchange for the issuance of 20,757,090 shares, or 81.5% of the
Company's common stock on a post 1-for-2 reverse stock split basis, to the
shareholders of Poise Profit. Because the acquisition is treated as a reverse
acquisition and recapitalization whereby Poise Profit is deemed to be the
accounting acquirer (legal acquiree) and the Company to be the accounting
acquiree (legal acquirer), the financial statements of the Company have been
retroactively adjusted to reflect the acquisition from the beginning of the
reported period. The historical financial statements for periods prior to April
15, 2008 are those of Poise Profit except that the equity section and earnings
per share have been retroactively restated to reflect the reverse acquisition
and recapitalization.
On April
15, 2008 and as a condition to closing of the Share Exchange, CER entered into
Securities Purchase Agreements with 25 accredited investors pursuant to which
CER issued and sold an aggregate of 7,874,241 units at a unit price of $1.08
(the "Financing"). Each unit consists of one share of CER's Series A convertible
preferred stock, par value of $0.001, and one warrant to purchase one-half of
one share of CER's common stock at an exercise price of $1.29 per share for
$8,504,181. After the 1-for-2 reverse stock split conducted on April 16, 2008,
the 7,874,241 shares of the Company’s Series A convertible preferred stock are
convertible into 3,937,120 shares of common stock and the warrants exercisable
into 1,968,561 shares of the Company's common stock at an exercise price of
$2.58 per share. The issuance costs, including commissions, legal fees and
transaction expenses were $1,884,902.
See report of independent registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
Poise
Profit is an off-shore holding company and has no operating business activities.
The majority shareholders of Poise Profit before the closing of the Share
Exchange were Chinese citizens. Poise Profit owns 100% of HAIE Hi-tech
Engineering (Hong Kong) Company, Limited ("Hi-tech"). Hi-tech was incorporated
in Hong Kong on January 4, 2002 and has a capital of approximately $1,280
(HK$10,000). Poise Profit also owns 100% of CER (Hong Kong) Holdings
Limited (“CER Hong Kong”). CER Hong Kong was incorporated in Hong
Kong on August 13, 2008 and has a capital of approximately $1,280 (HK$10,000).
CER Hong Kong was owned by Mr. Qinghuan Wu, the Company’s Chief Executive
Officer and the Chairman of the Board, and Mr. Wu’ wife Mrs. Jialing Zhou. Both
Mr. Wu and Mrs. Zhou are the Company’s directors. In order to restructure the
holding structure of the Company (the “Restructuring”), on December 3,
2008,
|
a)
|
100%
of the shares of CER Hong Kong were transferred to Poise Profit from Mr.
Wu and Mrs. Zhou, and
|
|
b)
|
all
the contracts between Hi-tech and Shanghai Engineering (as defined below)
and between Hi-tech and Shanghai Environmental (as defined below) were
transferred to CER Hong Kong.
|
Thereafter,
CER Hong Kong, through its variable interest entities located in the People's
Republic of China ("PRC"), designs, develops, manufactures and markets waste
heat boilers and pressure vessels in the fields of chemical industry,
petrochemical industry, oil refinery, fine chemicals, water and power
conservancy, metallurgical, environmental protection, waste heat utilization and
power generation from waste heat recovery. As of December 31, 2008, Poise Profit
had not contributed the capital to Hi-tech and CER Hong Kong.
Shanghai
Hai Lu Kun Lun Hi-tech Engineering Co., Ltd ("Shanghai Engineering") was
established in July 1999 and has a registered capital of approximately $805,000
(RMB 6,500,000). The owners of Shanghai Engineering are Mr. Qinghuan Wu (60%),
the Company’s Chief Executive Officer and the Chairman of the Board, and
his wife, Mrs. Jialing Zhou (40%), a member of the Board of Directors. Mr. Wu is
the executive director of Shanghai Engineering.
On
December 28, 2005 and effective January 1, 2006, Hi-tech entered into a series
of contractual arrangements with Shanghai Engineering and its shareholders
comprised of a series of agreements, including a Consulting Services Agreement
and an Operating Agreement, through which Hi-tech has the right to advise,
consult, manage and operate Shanghai Engineering, and collect and own all of its
net profits. Additionally, Shanghai Engineering's shareholders have granted
their voting rights over Shanghai Engineering to Hi-tech. In order to further
reinforce Hi-tech's rights to control and operate Shanghai Engineering, Shanghai
Engineering and its shareholders have granted Hi-tech the exclusive right and
option to acquire all of their equity interests in Shanghai Engineering.
Further, Shanghai Engineering shareholders have pledged all of their rights,
titles and interests in Shanghai Engineering to Hi-tech. As both companies are
under common control, this has been accounted for as a reorganization of
entities and the financial statements have been prepared as if the
reorganization had occurred retroactively. Poise Profit consolidates Shanghai
Engineering's results, assets and liabilities in its financial
statements. On December 3, 2008, these contracts were transferred
from Hi-tech to CER Hong Kong.
Shanghai
Xin Ye Environmental Protection Engineering Technology Co., Ltd ("Shanghai
Environmental") was incorporated in Shanghai on May 23, 2007. Shanghai
Environmental has a registered capital of approximately $67,150 (RMB 500,000).
The owners of Shanghai Environmental originally were Mr. Qi Chen (60%), one of
the Company's directors and its General Manager, and Mrs. Yajun Liu (40%).
According to the share transfer meeting on November 6, 2007, the shares of
Mr. Qi Chen and Mrs. Yajun Liu were transferred to Mr. Qinghuan Wu, who
became the sole shareholder of Shanghai Environmental. Shanghai Environmental is
not an operating company but serves as a vehicle for arranging sales and
maximizing tax benefits.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
On
December 28, 2005 and effective May 23, 2007, Hi-tech entered into a series of
contractual arrangements with Shanghai Environmental and its shareholders
comprised of a series of agreements, including a Consulting Services Agreement
and an Operating Agreement, through which Hi-tech has the right to advise,
consult, manage and operate Shanghai Environmental, and collect and own all of
its net profits. Additionally, Shanghai Environmental's shareholder has granted
his voting rights over Shanghai Environmental to Hi-tech. In order to further
reinforce Hi-tech's rights to control and operate Shanghai Environmental,
Shanghai Environmental and its shareholder have granted Hi-tech the exclusive
right and option to acquire all of the shareholders' equity interest in Shanghai
Environmental. Further, Shanghai Environmental's shareholder has pledged all of
his rights, titles and interests in Shanghai Environmental. As both companies
are under common control, this has been accounted for as a reorganization of
entities and the financial statements have been prepared as if the
reorganization had occurred retroactively. Poise Profit consolidates Shanghai
Environmental's results, assets and liabilities in its financial statements. On
December 3, 2008, these contracts were transferred from Hi-tech to CER Hong
Kong.
Through
CER Hong Kong, Poise Profit operates and controls Shanghai Engineering and
Shanghai Environmental through the contractual arrangements described above. The
reasons that Poise Profit used the contractual arrangements to acquire control
over Shanghai Engineering and Shanghai Environmental, instead of acquiring
Shanghai Engineering and Shanghai Environmental's assets or equity, are that (i)
new PRC laws governing share exchanges with foreign entities, which became
effective on September 8, 2006, make the consequences of such acquisitions
uncertain and (ii) other than by share exchange, PRC law requires Shanghai
Engineering and Shanghai Environmental to be acquired for cash and Poise Profit
was not able to raise sufficient funds to pay the full appraised value of
Shanghai Engineering and Shanghai Environmental's assets or equity as required
under PRC law.
On May 1,
2003, Shanghai Engineering entered into a cooperative manufacturing agreement
with a PRC state-owned enterprise, Shanghai Si Fang Boiler Factory ("Shanghai Si
Fang"). Pursuant to the agreement, Shanghai Si Fang leases one of its
manufacturing facilities and obtains use of the Si Fang brand, Shanghai Si Fang
Boiler Factory-Vessel Works Division ("Vessel Works Division") to Shanghai
Engineering. Vessel Works Division is a separate legal entity. The agreement is
renewed every one to two years and expires on December 31, 2009. According to
the agreement, Shanghai Engineering has the following rights: (i)
complete control over the operations of Vessel Works Division; (ii) right
of use of the property, plant and equipment of Vessel Works Division; (iii) use
of the "Si Fang" brand name and license for pressure vessels; and (iv) right to
the net profit of Vessel Works Division. Shanghai Si Fang provides quality
control for the manufactured products. Shanghai Engineering pays Shanghai Si
Fang rent and a management fee. Although Shanghai Engineering owns none of the
outstanding equity interests in Vessel Works Division, the agreement provides
Shanghai Engineering control over Vessel Works Division and the risks and
rewards associated with equity ownership. Shanghai Engineering and Vessel Works
Division are the primary operating entities owned or controlled by Poise
Profit.
Shanghai
Zhuyi Industry Co. Ltd. ("Zhuyi") was incorporated in Shanghai on April 10,
2006. The business scope of Zhuyi was trading in construction materials, metal
materials, mechanical equipment, and computers hardware, and providing
mechanical equipment design and consultation services. Zhuyi had a registered
capital of approximately $63,900 (RMB 500,000). The owners of Zhuyi were Mr. Qi
Chen (60%) and Mrs. Jialing Zhou (40%). According to the meeting of shareholders
and the revised bylaws dated November 8, 2006, the registered capital was
increased to RMB1,000,000. Zhuyi was dissolved in July, 2007. Capital of
$127,650 (RMB1,000,000) was returned to the owners in January,
2008.
See report of independent registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
Shanghai
Haiyin Hi-Tech Engineering Co. Ltd. ("Haiyin") was incorporated in Shanghai on
December 3, 2003 with registered capital of approximately $2,904,000 (RMB
24,000,000). The owners of Haiyin were Mr. Qinghuan Wu (60%) and Mrs. Jialing
Zhou (40%). Haiyin was engaged in four technology services (development,
transfer, consultation and other technology services) in chemical engineering,
energy saving, computer and other professional technical fields. Haiyin also was
engaged in processing, selling and installing computer hardware, heat recovery
boiler and auxiliary equipment, and chemical engineering devices. In
accordance with a shareholders meeting and revision of the company bylaws, the
registered capital was decreased to approximately $1,452,000 (RMB 12,000,000) on
February 28, 2007 and approximately $121,000 (RMB 1,000,000) on May 28, 2007,
separately. Haiyin's application for dissolution was approved by the PRC
government authority in December 2007. Haiyin had no business activity after
December of 2007, and on April 18, 2008, the remaining registered capital of
$121,000 had been returned as the result of a distribution from another variable
interest entity.
On March
5, 2008, Hi-tech and Shanghai Engineering jointly formed Shanghai Haie
Investment Consultation Co., Ltd. ("JV Entity"). JV Entity was 10% owned by
Shanghai Engineering and 90% owned by Hi-tech with registered capital of
approximately $9.23 million (RMB 65,000,000). On March 21, 2008, JV Entity
received an Enterprise Corporation Business License from the Shanghai
Administration for Industry and Commerce. On April 25, 2008, $6 million
registered capital was injected, and contribution receivable amounted to $3.23
million as of June 30, 2008. In compliance with the new Chinese regulation
effective January, 2008, on June 16, 2008, JV Entity's Board of Director
approved the plan to dissolve the JV Entity. The business closure application
was approved by the PRC government in July, 2008. JV Entity was dissolved on
September 1, 2008. The paid-in portion of registered capital of $6 million was
returned to Hi-tech on September 19, 2008.
On
November 11, 2008, CER Energy Recovery (Shanghai) Co., Ltd. (“CER Shanghai”) was
incorporated. CER Shanghai has a registered capital of $5,000,000
which is scheduled to be injected over the subsequent two years. CER
Hong Kong owns 100% of CER Shanghai and contributed $1,000,000 on December 12,
2008 and $2,000,000 on February 10, 2009, respectively. CER Shanghai
is mainly engaged in development of energy recovery and environmental protection
technologies, and design, installation and servicing of waste heat recovery
systems.
As all
the above entities are under common control, the arrangements described above
have been accounted for as a reorganization of entities and the financials
statements have been prepared as if the reorganization had occurred
retroactively. CER, Poise Profit, CER Hong Kong, Hi-tech, Shanghai Engineering,
CER Shanghai, Vessel Works Division, Zhuyi, Haiyin, Shanghai Environmental, JV
Entity, and CER Shanghai are collectively hereinafter referred to as the
“Company".
Note
2 – Summary of Significant Accounting Policies
(a)
Consolidation of variable interest entities
In
accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities
that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate
decision making ability. All VIEs with which the Company is involved must be
evaluated to determine the primary beneficiary of the risks and rewards of the
VIE. The primary beneficiary is required to consolidate the VIE for financial
reporting purposes.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
The
Company has concluded that Shanghai Engineering, Vessel Works Division, Zhuyi,
Haiyin and Shanghai Environmental are VIEs and that the Company is the primary
beneficiary. Under the requirements of FIN 46R, the Company consolidated the
financial statements of Shanghai Engineering, Vessel Works Division, Zhuyi,
Haiyin and Shanghai Environmental. As all companies are under common control,
the financial statements have been prepared as if the arrangements described
above had occurred retroactively. Intercompany items have been
eliminated.
(b) Use
of estimates
In
preparing financial statements in conformity with generally accepted accounting
principles in the United States of America, management is required 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 and revenues and expenses during the reported
periods. Significant estimates include depreciation and allowance for doubtful
accounts receivable. Actual results could differ from those
estimates.
(c) Cash
and concentration of risk
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with state owned banks within the PRC. Certain financial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains balances at financial institutions or state owned
banks within the PRC which amounts are not covered by insurance. Balances at
financial institutions within the United States are covered by the Federal
Deposit Insurance Corporation for $250,000 per depositor per
institution. The first HK$100,000 per depositor per
institution with the financial institutions within Hong Kong is covered by
insurance. As of December 31, 2008 and December 31, 2007, the Company had
deposits totaling $6,673,587 and $395,265 that are not covered by insurance,
respectively. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risks on its cash in bank
accounts.
For the
years ended December 31, 2008 and 2007, the Company’s five top customers
accounted for 54% and 68% of the Company's sales, respectively. Receivables
from the five customers were 63% and 61% of total accounts receivable at
December 31, 2008 and 2007, respectively.
For
the years ended December 31, 2008, two suppliers provided approximately 14%
of the Company's purchases of raw materials. Payables to the two suppliers were
6% of accounts payable at December 31, 2008. Four suppliers provided
approximately 14% of the Company’s raw materials purchases for the years ended
December 31, 2007. There was no payable to the four suppliers at December 31,
2007.
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the country, and by the general
state of the country's economy. The Company's operations in the PRC are subject
to specific considerations and significant risks not typically associated with
companies carrying out operations in the United States. 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.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
Restricted
cash represents a cash portion of the purchase price deposited in a separate
bank account subject to withdrawal restrictions controlled by the customer to
secure the Company’s performance of the projects in question. The deposit cannot
be drawn or transferred by the Company until the restriction period has expired.
The amounts of restricted cash were $597,949 and $89,115 as of December 31,
2008 and December 31, 2007, respectively.
(e)
Allowance for doubtful accounts
Management
regularly reviews aging of receivables and changes in payment trends by its
customers, and records a reserve when they believe collection of amounts due are
at risk. The following table consists of allowance for doubtful
accounts.
Allowance for bad debt, December 31,
2006
|
|
$
|
61,948
|
|
Addition
|
|
|
171,556
|
|
Recovery
|
|
|
(7,111
|
)
|
Translation
adjustment
|
|
|
11,082
|
|
Allowance
for bad debt, December 31, 2007
|
|
$
|
237,475
|
|
Addition
|
|
|
56,366
|
|
Recovery
|
|
|
(159,375
|
)
|
Translation
adjustment
|
|
|
16,628
|
|
Allowance
for bad debt, December 31, 2008
|
|
$
|
151,094
|
|
(f)
Inventories
Inventories
are comprised of raw materials and work in progress and are stated at the lower
of cost or market value. Costs of work in progress include direct labor, direct
materials, and production overhead before the goods are ready for sale.
Management reviews inventories for obsolescence or cost in excess of net
realizable value periodically. The obsolescence is recorded as a reserve against
the inventory. The cost in excess of net realizable value is written off and
recorded as additional cost of goods sold.
(g)
Equipment, net
Fixed
assets are stated at cost. Depreciation is provided principally by use of the
straight-line method over the useful lives of the related assets. Expenditures
for maintenance and repairs, which do not improve or extend the expected useful
lives of the assets, are expensed to operations while major repairs are
capitalized.
Management
established a 5% residual value for equipment. The estimated useful lives are as
follows:
Transportation equipment
|
10
years
|
Machinery
equipment
|
10
years
|
Office
equipment
|
5-10
years
|
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
The gain
or loss on disposal of fixed assets is the difference between the net sales
proceeds and the carrying amount of the relevant assets; gains or losses, if
any, are recognized in the statement of operations. For the years ended December
31, 2008 and 2007, loss from disposition of fixed assets amounted to $13,186 and
$0, respectively.
(h)
Impairment of assets
In
accordance with SFAS 144, "Accounting for Impairment or Disposal of Long-Lived
Assets", the Company evaluates its long-lived assets to determine whether later
events and circumstances warrant revised estimates of useful lives or a
reduction in carrying value due to impairment. If indicators of impairment exist
and if the value of the assets is impaired, an impairment loss would be
recognized. As of December 31, 2008 and 2007, management believes there were no
impairments of long-lived assets.
(i)
Income taxes
The
Company accounts for income taxes under SFAS 109, "Accounting for Income Taxes".
Under SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
The
Company adopted Financial Accounting Standards Board ("FASB") Interpretation 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"), on January 1, 2007. A
tax position is recognized as a benefit only if it is "more likely than not"
that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the "more likely than not" test, no tax benefit is
recorded. The adoption had no effect on the Company's financial
statements.
The
Company reviewed the differences between the tax bases under PRC tax laws and
financial reporting under US GAAP, and no material differences were found, thus,
there were no deferred tax assets or liabilities as of December 31, 2008 and
2007.
Under
current PRC tax laws, no tax is imposed in respect to distributions paid to
owners except for individual income tax.
(j) Value
added tax
Sales
revenue represents the invoiced value of goods, net of a value-added tax
("VAT"). All of the Company's products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price. This VAT may
be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing their finished product. The Company recorded
VAT payable and VAT receivable net of payments in the financial statements.
The VAT tax return is filed offsetting the payables against the
receivables.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
(k) Stock
based compensation to other than employees
The
Company accounts for equity instruments issued in exchange for the receipt of
goods or services from other than employees in accordance with SFAS 123R,
"Accounting for Stock-Based Compensation," and the conclusions reached by EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services." Costs
are measured at the estimated fair market value of the consideration received or
the equity instruments issued, whichever is more reliably determinable. The
value of equity instruments issued for consideration other than employee
services is determined on the earlier of a performance commitment or completion
of performance by the provider of goods or services as defined by EITF 96-18. In
the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting
service.
(l)
Revenue recognition
The
Company derives revenues principally from
(a)
|
sales
of energy recovery systems, and
|
(b)
|
provision
of design services, and
|
(c)
|
provision
of Engineering, Procurement and Construction ("EPC") services, which are
essentially turnkey contracts where the Company provides all services in
the whole construction process from design, development, engineering,
manufacturing to installation.
|
In
providing design services, the Company designs energy recovery systems and other
related systems based on a customer's requirements and the deliverable consists
of engineering drawings. The customer may elect to engage the Company to
manufacture the designed system or choose to present the Company's drawings to
other manufacturers for manufacturing and installation. In contrast, when
providing EPC services, the customer is purchasing a turnkey energy recovery
system and the Company is involved throughout the entire process from design to
installation.
Sales of
the Company's energy recovery systems and related products are essentially
product sales. The products consist mainly of waste heat boilers and other
related equipment manufactured according to specific customers' specifications.
Once manufactured, the Company ships the products to its customers in their
entirety in one batch. The Company generally recognizes revenues from product
sales when (i) persuasive evidence of an arrangement exists, which is generally
represented by a contract between the Company and the customer; (ii) products
are shipped; (iii) title and risk of ownership have passed to the customer,
which generally occurs at the time of delivery; (iv) the customer accepts the
products upon quality inspection performed by them; (v) the purchase price is
agreed to between the Company and the customer; and (vi) collectability is
reasonably assured. Net revenues represent the invoiced value of products, less
returns and discounts, and net of value-added tax.
The
Company recognizes revenues from design services when the services are provided,
the design drawings are delivered, invoices are issued and collectability is
reasonably assured. The Company generally delivers the drawings in one
batch.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
In
accordance with Statement of Position (SOP) 81-1 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" and (1981) and
Accounting Research Bulletin Opinion No. 45, Long-Term Construction-Type
Contracts ("ARB 45"), the Company adopted the percentage of completion method to
recognize revenues and cost of sales for EPC contracts. EPC contracts are
long-term, complex contracts involving multiple elements, such as design,
manufacturing and installation, which all form one integral EPC project. The
energy recovery system involved in an EPC project is highly customized to the
specific customer's facilities and essentially not transferable to any other
facilities without significant modification and cost. It would be difficult, if
not impossible, to beneficially use a single element of a specific EPC project
on a standalone basis other than in connection with the facilities for which it
was intended EPC contracts are by nature long-term construction-type contracts,
usually lasting more than one accounting period, and the Company is able to
reasonably estimate the progress toward completion, including contracts revenues
and contracts costs. EPC contacts specify the customers' rights to the goods,
the consideration to be paid and received, and the terms of payment.
Specifically, the Company has the right to require a customer to make progress
payments upon completion of determined stages of the project which serve as
evidence of the customer's approval and acceptance of the work completed to date
as complying with the terms of the particular EPC contract and upon which we
recognize revenue.
The
Company offers a limited warranty to its customers pursuant to which the
customers retain between 5% and 10% of the particular contract price as
retainage during the limited warranty period (usually one to two years).
Pursuant to paragraph 14 of FIN 45, “Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others”, when disclosing product warranties, the guarantor is required to
disclose: (i) the guarantor's accounting policy and methodology used in
determining its liability for product warranties, and (ii) a tabular
reconciliation of the changes in the guarantor's aggregate product warranty
liability for the reporting period. The Company records the retainage as
deferred revenue until the customers pay it after the warranty period expires,
at which time the Company recognizes revenue. Further, a tabular reconciliation
of the changes in the company's aggregate product warranty liability for the
reporting period is included in note 7 to these consolidated financial
statements.
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs which totaled $355,451 and $130,789 for the
years ended December 31, 2008 and 2007, respectively.
(m)
Foreign currency translations
The
reporting currency of the Company is the U.S. dollar. Shanghai Engineering,
Vessel Works Division, CER Shanghai, Zhuyi, Haiyin and Shanghai Environmental
use their local currency, Renminbi ("RMB") as their functional currency. Hi-tech
and CER Hong Kong uses its local currency, Hong Kong dollar ("HK$") as its
functional currency. Results of operations and cash flow are translated at
average exchange rates during the period, and assets and liabilities are
translated at the end of period exchange rates. Cash flows are also translated
at average translation rates for the period, therefore, amounts reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in
stockholders' equity. Transaction gains and losses that arise from exchange rate
fluctuations from transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred. For
the years ended December 31, 2008 and 2007, foreign currency translation loss
amounted to $57,717 and $201,560, respectively.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Company because it has not engaged in any
significant transactions that are subject to the restrictions.
Accumulated
other comprehensive loss in the consolidated statement of shareholders' equity
amounted to $97,843 and $40,126 as of December 31, 2008 and 2007, respectively.
The balance sheet accounts with the exception of equity at December 31, 2008
were translated at RMB6.82 to $1.00 or HK$7.75 to $1.00, and were
translated at RMB7.29 to $1.00 or HK$7.80 to $1.00 at December 31,
2007.
The
average translation rates applied to income and cash flow statement amounts for
the years ended December 31, 2008 and 2007 were RMB6.94 to $1.00 or HK$7.79 to
$1.00, and RMB7.59 to $1.00 or HK$7.78 to $1.00, respectively.
(n) Fair
value of financial instruments
On
January 1, 2008, the Company adopted SFAS 157, "Fair Value Measurements" which
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for
fair value measurements. The carrying amounts reported in the balance sheets for
current assets and current liabilities qualify as financial instruments and are
a reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and if
applicable the stated interest rate is equivalent to rates currently available.
The three levels are defined as follow:
·
|
Level
1
|
Inputs
to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
|
·
|
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
assets or liability, either directly or indirectly, for substantially the
full term of the financial instruments.
|
·
|
Level
3
|
Inputs
to the valuation methodology are unobservable and significant to the fair
value.
|
The
Company's long term accounts receivable retainage amounted to $377,368 and
$588,433 at December 31, 2008 and 2007, respectively. Because there is no
quoted or observable market price for the fair value of retainage, the Company
used the level 3 inputs for its valuation methodology. The determination of the
fair value was based on the contracted amount. The contracted amount of the long
term accounts receivable, retainage approximated the fair value as of December
31, 2008.
Short
term loans payable amounted to $381,420 and $0 at December 31, 2008 and 2007,
respectively. In accordance with SFAS 157, the Company determined that the
carrying value of this loan approximated the fair value using the level 2 inputs
by comparing the stated loan interest rate to the rate charged by the ShenZhen
Development bank to similar loans.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
|
|
Carrying
Value
|
|
Fair
Value Measurements
Using
Fair Value Hierarchy
|
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Long
term accounts receivable, retainage
|
|
$
|
377,368
|
|
|
|
|
|
$
|
377,368
|
|
Liabilities
|
|
|
-
|
|
|
|
|
|
|
|
|
Short
term loans payable
|
|
$
|
381,420
|
|
|
$
|
381,420
|
|
|
|
|
The
Company did not identify any assets and liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
157.
(o) Costs
and estimated earnings in excess of billings
The
current assets, "Costs and estimated earnings in excess of billings", represent
revenue recognized in excess of amounts billed for the EPC contracts recognized
using the percentage of completion method.
|
|
2008
|
|
|
2007
|
|
Contracts
costs incurred plus profits less recognized losses to date
|
|
$
|
-
|
|
|
$
|
2,991,865
|
|
Less
progress billings
|
|
|
-
|
|
|
|
1,835,956
|
|
Costs
and estimated earnings in excess of billings
|
|
$
|
-
|
|
|
$
|
1,155,909
|
|
(p)
Beneficial conversion feature of Series A Convertible Preferred
Stock
The
Company determined that the Series A Convertible Preferred Stock contains a
beneficial conversion feature and should be accounted for using EITF 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" and EITF 00-27 ''Application of
Issue 98-5 to Certain Convertible Instruments'' because the Series A Convertible
Preferred Stock was issued at a price below the per share price for the
Company’s common share price at the date of issuance.
In
accordance with EITF 00-27 and EITF 98-5, the Company used the Black-Scholes
option-pricing model in calculating the fair value of detachable warrants at the
date of issuance based on the following assumptions and resulted in the total
value of warrants was $8,023,271:
Number of
Shares Valued
|
|
Expected
Life (years)
|
|
Exercise
Price
|
|
Expected
Volatility
|
|
Dividend
Yield
|
|
Stock Price at
valuation date
|
|
Risk Free Interest
Rate
|
|
3,937,122
|
|
5.00
|
|
$
|
1.29
|
|
125%
|
|
-
|
|
$
|
2.30
|
|
1.84%
|
|
The
Company then used the relative value to allocate the value of the warrants and
the value of the Series A Convertible Preferred Stock. Based on this method, the
amount allocated to the Series A Convertible Preferred Stock and the warrants
was $2,992,296 and $ 3,626,982, respectively, out of the net proceeds of
$6,619,278 that the Company received in the Financing.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
(q)
Recent accounting pronouncements
In
February 2007, the FASB issued SFAS 159, "The Fair Value
Option for Financial Assets and Financial Liabilities—including an amendment of
FASB Statement No. 115". SFAS 159 is expected to expand the use of fair
value accounting but does not affect existing standards which require certain
assets or liabilities to be carried at fair value. The objective of SFAS 159 is
to improve financial reporting by providing companies with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. Under SFAS 159, a company may choose, at specified election dates,
to measure eligible items at fair value and report unrealized gains and losses
on items for which the fair value option has been elected in earnings at each
subsequent reporting date. SFAS 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company adopted SFAS 159 on January 1,
2008, and chose not to elect the option to measure the fair value of eligible
financial assets and liabilities.
In
December, 2007, the FASB issued SFAS 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51", which establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent's ownership interest and the valuation of
retained non-controlling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. SFAS 160 is effective
for fiscal years beginning after December 15, 2008. The Company has not
determined the effect that the application of SFAS 160 will have on its
consolidated financial statements.
In
December, 2007, SFAS 141(R), "Business Combinations",
was issued. SFAS No.
141R replaces SFAS 141, "Business Combinations"
.
SFAS 141R retains the
fundamental requirements in SFAS 141 that the acquisition method of accounting
(which SFAS 141 called the purchase method
) be used for all
business combinations and for an acquirer to be identified for each business
combination. SFAS 141R requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. This replaces SFAS 141's cost-allocation process, which required the
cost of an acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values. SFAS 141R also
requires the acquirer in a business combination achieved in stages (sometimes
referred to as a step acquisition) to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree, at the full
amounts of their fair values (or other amounts determined in accordance with
SFAS 141R). SFAS 141R applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. An entity may not apply it
before that date. The Company is currently evaluating the impact that adopting
SFAS 141R will have on its consolidated financial statements.
In March,
2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments
and Hedging Activities - An Amendment of SFAS No. 133". SFAS 161 seeks to
improve financial reporting for derivative instruments and hedging activities by
requiring enhanced disclosures regarding the impact on financial position,
financial performance, and cash flows. To achieve this increased transparency,
SFAS 161 requires (1) the disclosure of the fair value of derivative
instruments and gains and losses in a tabular format; (2) the disclosure of
derivative features that are credit risk-related; and (3) cross-referencing
within the footnotes. SFAS 161 is effective on January 1, 2009. The Company
is in the process of evaluating the new disclosure requirements under SFAS
161.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
In May,
2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting
Principles." This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). This Statement will not have an impact on the
Company's financial statements.
In May,
2008, the FASB issued SFAS 163, "Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60." The scope of this
Statement is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivable). This Statement also
does not apply to financial guarantee insurance contracts that are derivative
instruments included within the scope of FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement will not have an
impact on the Company's financial statements.
In June,
2008, the FASB issued EITF 07-5 "Determining whether an Instrument (or Embedded
Feature) is indexed to an Entity's Own Stock". This Issue is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early application is not
permitted. Paragraph 11(a) of SFAS 133 "Accounting for Derivatives and Hedging
Activities" specifies that a contract that would otherwise meet the definition
of a derivative but is both (a) indexed to the Company's own stock and
(b) classified in stockholders' equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer's own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard
will trigger liability accounting on all options and warrants exercisable at
strike prices denominated in any currency other than the functional currency of
the operating entity in Chinese (Renminbi). The Company is currently evaluating
the impact of adoption of EITF 07-5 on the consolidated financial
statements.
In June,
2008, FASB issued EITF 08-4, "Transition Guidance for Conforming Changes to
Issue No. 98-5". The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios", that result from EITF 00-27 "Application of Issue No. 98-5
to Certain Convertible Instruments", and SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. This Statement will not
have an impact on the Company's financial statements.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on the Company’s financial position or results for the years
ended December 31, 2008.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
In
January, 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our
consolidated financial statements.
Note
3 – Earnings per Share
The
Company reports earnings per share in accordance with the provisions of SFAS
128, "Earnings Per Share." SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock. The following is a reconciliation of the basic and diluted
earnings per share computations for the years ended December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
Net
income for basic and diluted earnings per share
|
|
$
|
1,110,663
|
|
|
$
|
640,919
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - basic
|
|
|
25,705,500
|
|
|
|
20,757,090
|
|
Diluted
effect of convertible preferred stocks and warrants
|
|
|
1,328,319
|
|
|
|
-
|
|
Weighted
average shares - diluted
|
|
|
27,033,819
|
|
|
|
20,757,090
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.043
|
|
|
$
|
0.031
|
|
Diluted
|
|
$
|
0.041
|
|
|
$
|
0.031
|
|
Note
4 – Accounts Receivable
|
|
December
31,
2008
|
|
|
December
31,
2007
|
|
Accounts
receivable
|
|
$
|
5,463,604
|
|
|
$
|
1,402,913
|
|
Accounts
receivable – related party
|
|
|
1,006,060
|
|
|
|
572,036
|
|
Total
accounts receivable
|
|
|
6,469,664
|
|
|
|
1,974,949
|
|
Allowance
for bad debts
|
|
|
(151,094
|
)
|
|
|
(237,475
|
)
|
Accounts
receivable, net
|
|
|
6,318,570
|
|
|
|
1,737,474
|
|
Long
term accounts receivable, retainage
|
|
|
(377,368
|
)
|
|
|
(588,433
|
)
|
Accounts
receivable - current, net
|
|
$
|
5,941,202
|
|
|
$
|
1,149,041
|
|
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
The
Company offers a limited warranty to its customers pursuant to which the
customers retain between 5% and 10% of the particular contract price as
retainage for pending completion of quality inspection during the limited
warranty period. Generally, the Company provides most of its customers with a
limited one to two years warranty period during which to complete the quality
inspection. The Company records the retainage as deferred revenue (see note 8).
When the products pass the quality inspection or the warranty period expires,
customers pay the retainage fee and the Company recognizes sales revenue. As of
December 31, 2008 and 2007, amounts billed under contracted retainage provisions
were $1,726,701 and $930,546, respectively. These amounts are included in
deferred revenue until earned.
The
following table consists of long term retainage receivables expected to be
collected in 2010.
|
|
Amount
|
|
For
the year ended December 31, 2010
|
|
$
|
377,368
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
377,368
|
|
Note
5 – Related Party Transactions
As of
December 31, 2008 and 2007, the Company had the following amounts due from/to
Mr. Qinghuan Wu, the Company's Chief Executive Officer, Chairman of the Board
and majority shareholder of Poise Profits before the Share Exchange acquisition
and is currently a significant shareholder of all of the Company's variable
interest entities.
|
|
2008
|
|
|
2007
|
|
Due
from officer, Mr. Wu
|
|
$
|
-
|
|
|
$
|
463,663
|
|
In 2005,
Shanghai Engineering entered into agreements with the son of Mr. Wu to lease an
office. For the years ended December 31, 2008 and 2007, the Company incurred
approximately $2,000 each quarter to Mr. Wu's son for rental
expense.
Mr.
Qinghuan Wu was the director of Zhejiang Jiahua Industry Park Investment
Development Co., Ltd (“Jiahua”) before August, 2008. Jiahua is one of the
Company’s major customers. For the years ended December 31, 2008 and 2007, sales
revenue from Jiahua were $3,384,900 and $923,554, respectively. Receivables and
payables related to Jiahua were related to sales and will be collected according
to the contract terms. Payables related to Jiahua were for business purposes and
will be settled with cash. As of December 31, 2008 and 2007, due from/to Jiahua
were as follows:
|
|
2008
|
|
|
2007
|
|
Accounts
receivable
|
|
$
|
1,006,060
|
|
|
$
|
572,036
|
|
Other
payables
|
|
$
|
65,078
|
|
|
$
|
60,819
|
|
Deferred
revenue
|
|
$
|
208,270
|
|
|
$
|
-
|
|
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
Note 6 – Inventories
As of
December 31, 2008 and 2007, inventories consist of the following:
|
|
2008
|
|
|
2007
|
|
Raw
materials
|
|
$
|
2,013,311
|
|
|
$
|
1,228,140
|
|
Work
in progress
|
|
|
5,761,464
|
|
|
|
4,034,189
|
|
Total
inventories
|
|
$
|
7,774,775
|
|
|
$
|
5,262,329
|
|
As of
December 31, 2008, management determined that the carrying amount of raw
materials exceeded prices currently available; therefore, $98,251 was written
off and the amount has been included in cost of goods sold for
2008.
Note 7 – Equipment, Net
As of
December 31, 2008 and 2007, equipment consist of the following:
|
|
2008
|
|
|
2007
|
|
Machinery
equipment
|
|
$
|
602,728
|
|
|
$
|
461,466
|
|
Transportation
equipment
|
|
|
249,177
|
|
|
|
232,871
|
|
Office
equipment
|
|
|
390,398
|
|
|
|
232,514
|
|
Subtotal
|
|
|
1,242,303
|
|
|
|
926,851
|
|
Accumulated
depreciation:
|
|
|
(391,415
|
)
|
|
|
(277,459
|
)
|
Equipment,
net
|
|
$
|
850,888
|
|
|
$
|
649,392
|
|
Depreciation
expense for the years ended December 31, 2008 and 2007 was $92,885 and $51,715,
respectively.
Note 8 – Deferred Revenue
Deferred
revenue represents the retainage held by customers during the quality inspection
process. When the products pass the inspection, customers pay the retainage fee
and the Company recognizes sales revenue (See note 4). As of December 31, 2008
and 2007, deferred revenue amounted to $1,726,701 and $930,546,
respectively.
Deferred
revenue, 1/1/2007
|
|
$
|
710,859
|
|
Addition
|
|
|
532,220
|
|
Collection
|
|
|
(368,626
|
)
|
Translation
adjustment
|
|
|
56,093
|
|
Deferred
revenue, 12/31/2007
|
|
$
|
930,546
|
|
Addition
|
|
|
1,262,855
|
|
Collection
|
|
|
(531,859
|
)
|
Translation
adjustment
|
|
|
65,159
|
|
Deferred
revenue, 12/31/2008
|
|
$
|
1,726,701
|
|
See report of independent registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
Note
9 – Short Term Bank Loans
The
Company had a total of $381,420 and $0 in short term loans from one bank in
China at December 31, 2008 and 2007, respectively. This loan matured in
January 15, 2009. The average interest rate was approximately 7.47%. The bank
loan was collateralized by Shanghai Engineering leased office space, which is
owned jointly by Mr. Wu and his son. The full amount of $381,420 was repaid on
January 16, 2009.
Interest
expense for the years ended December 31, 2008 and 2007 were $27,997 and $43,533
respectively.
Note
10 – Taxation
Effective
January 1, 2008, the New Enterprise Income Tax ("EIT") law replaced the existing
laws for Domestic Enterprises ("DEs") and Foreign Invested Enterprises ("FIEs")
in the PRC. The new standard EIT rate of 25% has replaced the 33% rate
previously applicable to both DEs and FIEs. Companies established before March
16, 2007 will continue to enjoy tax holiday treatment approved by local
government for a grace period of the next 5 years or until the tax holiday term
is completed, whichever is sooner.
Pursuant
to the PRC income tax laws, Shanghai Engineering is subject to enterprise income
tax at a statutory rate of 15% as a high technology entity.
Vessel
Works Division was subject to enterprise income tax at a statutory rate of 33%
before January 1, 2008, and is subject to a 25% income tax rate
thereafter.
CER
Shanghai will be subject to enterprise income tax at a statutory rate of 25%
from January 1, 2009.
No
provision for taxation has been made for Hi-tech, CER Hong Kong and
CER Shanghai for the years ended December 31, 2008 and 2007, as it did not
generate any taxable profits during the periods.
Zhuyi was
subject to enterprise income tax at a statutory rate of 6% on design service
revenue and 0.6% on products revenue.
Haiyin
was subject to enterprise income tax at a statutory rate of 4% on service
revenue and 0.5% on products revenue.
Shanghai
Environmental enjoyed a tax exemption from June 2007 to December 2008 according
to tax bureau declaration.
|
|
2008
|
|
|
2007
|
|
Provision
for China income tax
|
|
$
|
514,291
|
|
|
$
|
82,019
|
|
Provision
for China local tax
|
|
|
51,429
|
|
|
|
9,022
|
|
Total
provision for taxes
|
|
$
|
565,720
|
|
|
$
|
91,041
|
|
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
The
following table reconciles the statutory rates to the Company's effective tax
rate for the years ended December 31, 2008 and 2007.
|
|
2008
|
|
|
2007
|
|
U.S.
Statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign
income not recognized in USA
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
China
income taxes
|
|
|
25.0
|
|
|
|
33.0
|
|
China
income tax exemption
|
|
|
(3.8
|
)
|
|
|
(25.5
|
)
|
Effective
tax rate
|
|
|
21.2
|
%
|
|
|
7.5
|
%
|
The
estimated tax savings from the tax exemptions for the years ended December 31,
2008 and 2007 amounted to $102,295 and $170,028, respectively. For the year
ended December 31, 2008, the net effect had the income tax been applied
would decrease the basic earnings per share from $0.043 to $0.039, and
the diluted earnings per share from $0.041 to $0.037. For the year ended
December 31, 2007, the net effect had the income tax been applied would decrease
the basic and diluted earnings per share from $0.031 to $0.023.
The
Company was incorporated in the United States and has incurred a net operating
loss for 2008. The net operating loss carry forwards for United States income
tax purposes amounted to approximately $831,000 which may be available to reduce
future years' taxable income. These carry forwards will expire, if not utilized,
through 2027. Management believes that the realization of the benefits arising
from this loss appears to be uncertain due to Company's limited operating
history and continuing losses for United States income tax purposes.
Accordingly, the Company has provided a 100% valuation allowance at December 31,
2008. The net change in the valuation allowance for the year ended December 31,
2008 was an increase of approximately $497,000. Management will review this
valuation allowance periodically and make adjustments as warranted.
Value added
tax
VAT on
sales and VAT on purchases amounted to $5,711,514 and $4,488,490 for the year
ended December 31, 2008 and $2,999,140 and $1,922,615 for the years ended
December 31, 2007, respectively.
Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
Taxes
payable at December 31, 2008 and 2007 consisted of the following:
|
|
2008
|
|
|
2007
|
|
VAT
tax
|
|
$
|
1,516,896
|
|
|
$
|
490,875
|
|
Other
taxes
|
|
|
765,725
|
|
|
|
228,257
|
|
Total
tax payable
|
|
$
|
2,282,621
|
|
|
$
|
719,132
|
|
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
Note 11 – Commitments and
Contingencies
Capital
contribution to CER Shanghai
As
described in Note 1, CER Shanghai has a registered capital of $5,000,000 of
which $1,000,000 was injected before December 31, 2008, $2,000,000 was injected
in February, 2009, and the remaining $2,000,000 is scheduled to be injected
within two years of November 11, 2008, the issuance date of CER Shanghai’s
business license.
Note 12 – Segment
Information
The
Company derives revenue from the following sources (i) manufacture and sale of
products; (ii) design services and (iii) EPC contracts that involve the whole
process of the construction of projects from design, development, engineering,
manufacturing up to installation. Revenue by the above categories for the
years ended December 31, 2008 and 2007 are summarized as
follows:
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
Product
|
|
$
|
18,495,692
|
|
|
$
|
8,196,163
|
|
Services
|
|
|
1,265,637
|
|
|
|
439,745
|
|
EPC
contracts
|
|
|
3,416,746
|
|
|
|
3,210,984
|
|
Totals
|
|
$
|
23,178,075
|
|
|
$
|
11,846,892
|
|
Note
13 – Supplemental Disclosure of Cash Flow
Total
interest paid amounted to $27,997and $43,533 for the years ended December 31,
2008 and 2007, respectively.
Total
income tax paid amounted to $91,572 and $91,041 for the years ended December 31,
2008 and 2007, respectively.
Note
14 – Retirement Benefits
As
stipulated by the relevant laws and regulations applicable to enterprises
operating in the PRC, the Company and its PRC subsidiary and affiliates are
required to maintain a defined contribution retirement plan for all of its
employees who are residents of the PRC. All retired employees of the Company are
entitled to an annual pension equal to their basic annual salary upon
retirement. The Company contributes to a state sponsored retirement plan
approximately 22% of the base salary of each of its employees and has no further
obligations for the actual pension payments or post-retirement benefits beyond
the annual contributions. The state sponsored retirement plan is responsible for
the entire pension obligations payable for all past and present
employees.
The
Company made contributions of $53,721 and $60,423 for employment benefits,
including pension for the years ended December 31, 2008 and 2007,
respectively.
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
Note
15 – Statutory Reserve
As
stipulated by the relevant laws and regulations applicable to enterprises
operating in the PRC, the Company and its PRC subsidiary and affiliates are
required to make annual appropriations to a statutory surplus reserve fund.
Specifically, the Company is required to allocate 15% (10% starting from January
1, 2007) of its profits after taxes, as determined in accordance with the PRC
accounting standards applicable to the Company, to a statutory surplus reserve
until such reserve reaches 50% of the registered capital of the Company. As of
December 31, 2008 and 2007, 50% of the registered capital of the Company
amounted to $926,825 and $551,150, respectively.
The
transfer to this reserve must be made before distribution of any dividend to
shareholders. For the years ended December 31, 2008 and 2007, the Company
transferred $203,645 and $39,517, respectively, representing 10% of the year's
net income determined in accordance with PRC accounting rules and regulations,
to this reserve. As of December 31, 2008 and 2007, statutory reserve amounted to
$408,403 and $204,758, respectively.
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 shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 50% of the registered
capital. The remaining contributions to statutory reserve required
were $313,664 and $346,392 as of December 31, 2008 and 2007,
respectively.
Note
16 – Shareholders' equity
Se
ries A Convertible Preferred
Stock
On April
15, 2008, the Company issued 7,874,241 shares of Series A Convertible Preferred
Stock as a result of closing of the Share Exchange disclosed in Note 1.
7,159,278 shares of Series A Convertible Preferred Stock had been converted
into 3,579,639 shares of the Company's common stock as
of December 31, 2008.
Common
stock
On April
15, 2008, as the result of closing of the Share Exchange disclosed in Note 1,
the Company acquired all of the issued and outstanding shares of Poise Profit's
common stock in exchange for the issuance of 20,757,090 (on a post-stock split
basis) shares of the Company's common stock.
At the
closing of the Share Exchange, the Company placed 1,779,180 shares of its common
stock into an escrow account. Those shares are to be released to the former
Poise Profit shareholders if Hi-tech meets certain financial targets described
below for the year ending December 31, 2008:
|
(i)
|
gross
revenue is at least RMB 150 million (approximately $21.3 million),
and
|
|
(ii)
|
gross
margin is at least RMB 30 million (approximately $4.3
million).
|
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
As of
December 31, 2008, Hi-tech has achieved the aforementioned financial
targets, and the escrowed shares will be released to the former Poise Profit
shareholders. The 1,779,180 common shares were considered outstanding and
included in the computation of basic and diluted earnings per share as of
December 31, 2008 since all necessary conditions have been
satisfied.
In
February, 2008, the Company entered into several agreements with five third
party companies and agreed to issue a total of 475,000 shares (post the 1-for-2
reverse stock conducted on April 16, 2008) of common stock in exchange for
investor relationship services. Market value of the services to be received
amounted to $950,000. 475,000 shares were issued in May 2008.
On March
17, 2008, the Company entered into an agreement with a third party company and
agreed to issue 175,000 shares (post the 1-for-2 reverse stock conducted on
April 16, 2008) of the Company's common stock in exchange for consulting
services which are worth $350,000. 175,000 shares of common stock were issued in
June 2008.
On June
6, 2008, the Company issued 12,500 shares of common stock as payment for
service. The agreement was entered into in January 2008 while the market value
of the service to be received was approximately $9,000.
On June
20, 2008, the Company issued 250,000 warrants to ARC China, Inc., a company
controlled by Mr. Adam Roseman, whose affiliates are shareholders of the
Company, in exchange for consulting services. Total value of the services to be
received was $338,093. 250,000 warrants were exercised in a cashless manner, and
195,454 shares of common stock were issued on June 23, 2008.
Distribution from
variable
interest entities
For the
years ended December 31, 2008 and 2007, distributions from the variable interest
entities prior to the Share Exchange amounted to $531,059 and $2,993,756,
respectively.
Warrants
On August
27, 2007, the Company issued 57,870 warrants at an exercise price of $2.16 with
expected life of 3 years as a condition to making a Convertible Promissory Note.
The fair values of the warrants were estimated using the Black-Scholes
option-pricing model at the closing date of the Financing on April 15, 2008 per
the Share Exchange Agreement disclosed in Note 1.
Pursuant
to the Securities Purchase Agreements executed on April 15, 2008 as disclosed in
Note 1, the Company issued 7,874,241 warrants exercisable six months after
issuance into 3,937,121 shares of common stock with expected life of five
years at an exercise price of $1.29. One warrant is to purchase one-half of one
share of CER's common stock. The fair values of the warrants were
estimated at the grant date using the Black-Scholes option-pricing model.
After the April 16, 2008 1-for-2 reverse stock split, the warrants are
exercisable into 1,968,561 shares of common stock at an exercise price of
$2.58.The fair values of the warrants were estimated at the grant date using the
Black-Scholes option-pricing model.
On June
20, 2008, the Company entered into a consulting agreement with ARC China, Inc.,
a company controlled by Adam Roseman, whose affiliates are shareholders of the
Company. Pursuant to the agreement, 250,000 warrants were vested and became
exercisable upon execution of the consulting agreement. The fair values of the
warrants were estimated at the grant date using the Black-Scholes option-pricing
model.
See report of independent registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
The
Company has granted the holders of certain of the Company's warrants
registration rights for the underlying shares of the Company's common stock. The
Company has complied with the registration requirements through December 31,
2008, and therefore, has not accrued any penalties under the applicable
registration rights.
The
following table summarizes the assumptions used in the Black-Scholes
option-pricing model when calculating the fair value of the
warrants:
Number of
Warrants Valued
|
|
Expected
Life (Years)
|
|
Exercise
Price
|
|
Expected
Volatility
|
|
Dividend
Yield
|
Risk Free
Interest Rate
|
|
Grant Date Fair
Value
|
57,870
|
|
1.00
|
|
$
|
2.16
|
|
125%
|
|
-
|
1.49%
|
|
$
|
52,279
|
3,937,122
|
|
5.00
|
|
$
|
1.29
|
|
125%
|
|
-
|
1.84%
|
|
$
|
3,626,982
|
250,000
|
|
2.50
|
|
$
|
2.16
|
|
125%
|
|
-
|
2.91%
|
|
$
|
338,093
|
Due to
the short trading history of the Company's common stock, the Company used the
market price of the common stock of similar public companies (similar industry,
similar size, length of operating) to calculate the volatility, which was
125%.
ARC China
exercised 250,000 warrants listed in above table into 195,454 shares of the
Company's common stock on June 23, 2008 in a cashless manner.
Following
is a summary of the warrant activity:
Outstanding as of December 31,
2006
|
|
|
-
|
|
Granted
|
|
|
57,870
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of December 31, 2007
|
|
|
57,870
|
|
Granted
|
|
|
4,187,122
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
250,000
|
|
Outstanding
as of December 31, 2008
|
|
|
3,994,992
|
|
Following
is a summary of the status of warrants outstanding at December 31,
2008:
|
Outstanding Warrants
|
|
Exercisable Warrants
|
|
Exercise Price
|
|
Number
|
|
Average
Remaining
Contractual Life
|
|
Average Exercise
Price
|
|
Number
|
|
Average
Remaining
Contractual Life
|
$
|
2.16
|
|
|
57,870
|
|
1.65
years
|
|
$
|
2.16
|
|
57,870
|
|
1.65
years
|
$
|
1.29
|
|
|
3,937,122
|
|
4.29
years
|
|
|
1.29
|
|
3,937,122
|
|
4.29
years
|
|
Total
|
|
|
3,994,992
|
|
|
|
|
|
|
3,994,992
|
|
|
See report of independent
registered public accounting firm.
CHINA
ENERGY RECOVERY, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31 , 2008
Stock
Options
On
September 18, 2008, the Company appointed three new independent directors and
granted them stock options to purchase an aggregate of 260,000 shares of the
Company’s common stock. The options will vest and become exercisable in eight
equal installments on each October 1, January 1, April 1 and July 1 beginning in
2008. Unvested options shall be terminated and forfeited upon the termination of
a holder’s director status. Also on September 18, 2008, the Company granted
options to purchase an aggregate of 75,000 shares of the Company’s common stock
to two consultants who contract with the Company on a month-to-month basis.
Those options are vested immediately upon being granted. All stock options
granted are subject to the Company’s stock option plan which was approved by the
Board of the Company on October 29, 2008.
The
Company used the Black-Scholes option pricing model to value the options at the
time they were granted, based on volatility of 125%, dividend yield of 0%, the
stated exercise price of $2.90, the risk free rate of 2.67%, and the expected
life of 1.69 years for the options granted to directors and 0.38 years for the
ones granted to consultants.
Note
17 – Subsequent Events
On
January 1, 2009, Shanghai Engineering renewed the lease agreement with the son
of Mr. Wu to continue the lease of the current office space (approximately 375
square meters) for one year until December 31, 2009 and the monthly rental
is increased to $4,380, approximately the market level in the locality in
Shanghai. After moving into the new office space in Zhangjiang (as
described below), this lease agreement will be terminated.
On March
19, 2009, CER Shanghai entered into an office lease agreement with Shanghai
Zhangjiang Integrated Circuit Industrial Zone Development Co., Ltd., to lease an
office space (approximately 2,664 square meters) in the Shanghai Zhangjiang
Hi-tech Park (“Zhangjiang”) to be the new office space and the design and
engineering center of the Company in China. The lease is for two
years from March 1, 2009 through February 28, 2011. CER Shanghai is
also required to make a safety deposit of approximately $292,600 in addition to
the annual lease payment. The lease payments are as follows:
|
|
Amount
|
|
For
the twelve months from March 1, 2009 through February 28,
2010
|
|
$
|
146,300
|
|
For
the twelve months from March 1, 2010 through February 28,
2011
|
|
$
|
849,900
|
|
CER
Shanghai has an option to purchase the office space with the pre-determined
prices as follows:
|
|
Total
Purchase Price
|
|
If
purchasing before December 31, 2009
|
|
$
|
7,831,500
|
|
If
purchasing before December 31, 2010
|
|
$
|
8,221,500
|
|
If CER
Shanghai would exercise the above purchase option, all the lease payments and
the deposit payment made can be credited against the purchase price and counted
as partial purchase payments.
See report of independent
registered public accounting firm.
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
Effective
July 19, 2007, our board of directors approved a resolution dismissing our then
independent registered public accounting firm, Lawrence Scharfman & Co., CPA
P.C., and retaining in its place the accounting firm AJ Robbins P.C. Our
relationship with Lawrence Scharfman & Co. ended on July 19, 2007. We have
not and do not expect to use the services of Lawrence Scharfman & Co.
thereafter.
Lawrence
Scharfman & Co. issued its report on our financial statements for the fiscal
years ended December 31, 2006 and December 31, 2005. Neither report contained an
adverse opinion nor disclaimer of opinion or was qualified or modified as to
uncertainty, audit scope or accounting principles.
During
the two most recent fiscal years and the interim period through July 19, 2007,
we did not have any disagreements with Lawrence Scharfman & Co. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure and there were no reportable events, as described in
Item 304(a)(1)(v) of Regulation S-K.
Also
effective July 19, 2007, our board of directors approved a resolution to retain
AJ Robbins as our independent registered public accounting firm. During our two
most recent fiscal years and through July 19, 2007, we did not consult with AJ
Robbins regarding either the application of accounting principles to a specific
completed or proposed transaction or the type of audit opinion that might be
rendered on our financial statements, and neither a written report nor oral
advice was provided to us that was an important factor considered by us in
reaching a decision as to an accounting, auditing or financial reporting issue.
During our two most recent fiscal years and through July 19, 2007, we have not
consulted with AJ Robbins regarding any matter that was either subject to a
disagreement as described in Item 304(a)(1)(iv) of Regulation S- K or a
reportable event as described in Item 304(a)(1)(v) of Regulation S-K
.
Effective
June 11, 2008, our board of directors approved a resolution dismissing AJ
Robbins as our independent registered public accounting firm and retaining in
its place the accounting firm Moore Stephens Wurth Frazer and Torbet, LLP. Our
relationship with AJ Robbins ended on June 11, 2008.
AJ
Robbins's report on the Company's financial statements for the fiscal year ended
December 31, 2007 did not contain an adverse opinion nor disclaimer of opinion
or was qualified or modified as to uncertainty, audit scope or accounting
principles. However, the report contained an explanatory paragraph relating to
our ability to continue as a going concern.
During
the two most recent fiscal years (we retained AJ Robbins on July 19, 2007) and
the interim period through June 11, 2008, the date of dismissal, we did not have
any disagreements with AJ Robbins on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure and
there were no reportable events, as described in Item 304(a)(1)(v) of Regulation
S-K.
Also
effective June 11, 2008, our board of directors approved a resolution to retain
Moore Stephens Wurth Frazer and Torbet as our independent registered public
accounting firm. During our two most recent fiscal years and through June 11,
2008, we did not consult with Moore Stephens Wurth Frazer and Torbet regarding
either the application of accounting principles to a specific completed or
proposed transaction or the type of audit opinion that might be rendered on our
financial statements, and neither a written report nor oral advice was provided
to us that was an important factor considered by us in reaching a decision as to
an accounting, auditing or financial reporting issue. During the two most recent
fiscal years and through June 11, 2008, we have not consulted with Moore
Stephens Wurth Frazer and Torbet regarding any matter that was either subject to
a disagreement as described in Item 304(a)(1)(iv) of Regulation S-K or a
reportable event as described in Item 304(a)(1)(v) of Regulation S-K. Moore
Stephens Wurth Frazer and Torbet also serves as the independent accountant
engaged as the principal accountant to audit the financial statements of our
wholly-owned subsidiary Poise Profit, a position it has held since January 10,
2008.
Item
9A(T).
|
Controls
and Procedures.
|
(a)
Evaluation of Disclosure Controls and Procedures.
Our
principal executive officer and principal financial officer, based on their
evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the
period covered by this Annual Report on Form 10-KSB, have concluded that, due to
the material weakness identified below, our disclosure controls and procedures
are not effective.
(b)
Management's Annual Report on Internal Control over Financial
Reporting.
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) promulgated
under the Exchange Act. Management conducted an evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2008 using
the framework established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The
COSO framework summarizes each of the components of a company's internal control
system, including (a) the control environment, (b) risk assessment, (c) control
activities, (d) information and communication, and (e) monitoring. In the course
of the controls evaluation, we reviewed any errors or control problems
identified and sought to confirm that appropriate corrective actions, including
process improvements, were being undertaken.
Management
concluded that in light of the material weaknesses described below, we did not
maintain effective internal control over financial reporting as of December 31,
2008 based on the criteria set forth in Internal Control—Integrated Framework
issued by COSO. In assessing the effectiveness of our internal control over
financial reporting, management identified the following material
weaknesses:
|
·
|
Insufficient
U.S. GAAP Accounting Skills and Experience - We found that our accounting
staff lacked sufficient accounting skills and experience necessary to
fulfill our public reporting obligations according to accounting
principles generally accepted in the United States and the SEC's rules and
regulations.
|
|
·
|
Lack
of Internal Audit Function - We lack qualified resources to perform our
internal audit functions properly. In addition, we have not yet fully
developed the scope and effectiveness of our internal audit
function.
|
Our
management is in the process of implementing remediation procedures and
anticipates remediating these material weaknesses by the end of 2009.
Management has taken the following actions to improve internal controls over
financial reporting:
|
·
|
Recruiting
qualified staff and training our new and existing staff to assist in
financial reporting procedures.
|
|
·
|
Establishing
more detailed policies and procedures on preparation of consolidated
financial statements.
|
|
·
|
Establishing
an internal audit function and relevant policies and procedures to
strengthen the fraud risk assessment and anti-fraud
system.
|
|
·
|
Implementing
more comprehensive document control policies and procedures allowing us to
evaluate whether our controls in this respect are
effective.
|
|
·
|
Implementing
more comprehensive information technology policies and procedures, and
improving our financial computer
systems.
|
|
·
|
Improving
our formal contract review process to establish and document revenue
recognition events and methodologies at the inception of revenue
generating contracts.
|
|
·
|
Eliminating
manual processes by adopting contract management functionality within our
enterprise resource planning system, facilitating proper reconciliation of
unbilled and unearned amounts with outstanding contracts, and eliminating
prior issues related to lack of transparency of certain transaction
details associated with manual
billings.
|
In
addition, since the fourth quarter of 2008, management has hired a consulting
firm experienced in handling compliance with the requirements of the
Sarbanes-Oxley Act of 2002 with respect to internal control over financial
reporting in order to assist the Company with improving its internal controls
and meet the requirements of Sarbanes-Oxley Act of 2002. We also hired and will
continue to hire more experienced personnel with expertise in U.S. public
company financial reporting.
We are
continuously reviewing our efforts to improve our internal control over
financial reporting and may in the future identify additional deficiencies.
Should we discover any additional deficiencies, we will take appropriate
measures to correct or improve our internal control over financial
reporting.
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 temporary rules of the
SEC that permit the company to provide only management's report in this Annual
Report on Form 10-K.
(c)
Changes in Internal Control over Financial Reporting.
Other
than the remediation efforts described above, there were no changes in our
internal control over financial reporting that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
(d)
Certifications
We have
attached as exhibits to this Annual Report on Form 10-K the certifications of
our Chief Executive Officer and Chief Financial Officer, which are required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. We recommend that
this Item 9A(T) be read in conjunction with the certifications for a more
complete understanding of the subject matter presented.
Item
9B.
|
Other
Information.
|
None.
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The
information required by this Item 10 is incorporated herein by reference to our
proxy statement for the 2009 annual meeting of stockholders.
Item
11.
|
Executive
Compensation.
|
The
information required by this Item 11 is incorporated herein by reference to our
proxy statement for the 2009 annual meeting of stockholders.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
information required by this Item 12 is incorporated herein by reference to our
proxy statement for the 2009 annual meeting of stockholders.
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The
information required by this Item 13 is incorporated herein by reference to our
proxy statement for the 2009 annual meeting of stockholders.
Item
14.
|
Principal
Accountant Fees and Services.
|
The
information required by this Item 14 is incorporated herein by reference to our
proxy statement for the 2009 annual meeting of stockholders.
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
|
(a)
We have filed the following documents as part of this Annual Report on
Form 10-K:
|
|
Page
No.
|
China
Energy Recovery, Inc. and Subsidiaries Report of Independent Registered
Public Accounting Firm
|
F-2
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Consolidated Balance Sheets as of
December 31, 2008 and 2007
|
F-3
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Consolidated Statements
of Income and Other Comprehensive Income for Years Ended December 31,
2008 and 2007
|
F-4
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Consolidated Statements of
Shareholders' Equity
|
F-5
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Consolidated Statements of Cash
Flows for Years Ended December 31, 2008 and 2007
|
F-6
|
|
|
China
Energy Recovery, Inc. and Subsidiaries Notes to the Consolidated Financial
Statements
|
F-7
|
2. Financial
Statement Schedules
All
financial statement schedules are omitted because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or the notes thereto.
Exhibit
#
|
Description
|
2.1
|
Agreement
and Plan of Merger dated as of April 7, 2006 by and between the Registrant
and its wholly-owned subsidiary Commerce Development Corporation, Ltd.
(1)
|
2.2
|
Share
Exchange Agreement made effective as of January 24, 2008 by and among the
Registrant, Poise Profit International, Ltd. and the selling stockholders
of Poise Profit International, Ltd. as set out in the Share Exchange
Agreement (2)
|
2.3
|
Asset
Purchase Agreement dated as of January 25, 2008 between the Registrant and
MMA Acquisition Company (2)
|
2.4
|
First
Amendment to Share Exchange Agreement, dated as of April 15, 2008, by and
among the Registrant, Poise Profit International, Ltd. and the undersigned
shareholders of Poise Profit International, Ltd. (3)
|
3.1
|
Amended
and Restated Certificate of Incorporation (13)
|
3.2
|
Corrected
Certificate of Designation of the Preferences, Rights, Limitations,
Qualifications and Restrictions of the Series A Convertible Preferred
Stock of China Energy Recovery, Inc. (13)
|
3.3
|
Bylaws
(13)
|
3.4
|
First
Amendment to the Bylaws (13)
|
4.1
|
Form
of Warrant issued under the Consulting Agreement (2)
|
4.2
|
Form
of Warrant issued in the Financing (3)
|
4.3
|
Registration
Rights Agreement dated as of January 18, 2008 by and among the Registrant
and certain stockholders signatory thereto (3)
|
4.4
|
Form
of Registration Rights Agreement dated as of April 15, 2008 by and among
the Registrant and the investors in the Financing (3)
|
4.5
|
Warrant
issued under the Consulting Agreement between China Energy Recovery, Inc.
and ARC China, Inc. (6)
|
10.1
|
Securities
Purchase Agreement dated as of January 9, 2006 by and among the Registrant
and the purchasers signatory thereto (7)
|
10.2
|
Securities
Purchase Agreement dated as of April 13, 2006 by and among the Registrant
and the purchasers signatory thereto (8)
|
10.3
|
Stock
Purchase Agreement dated as of April 18, 2006 by and among the selling
stockholders and purchasers signatory thereto (8)
|
10.4
|
Form
of Securities Purchase Agreement dated as of April 15, 2008 by and among
the Registrant and the purchasers signatory thereto (3)
|
10.5
|
Amended
and Restated Senior Secured Promissory Note dated as of January 9, 2008
(9)
|
10.6
|
Escrow
Agreement dated as of April 15, 2008 by and among the Registrant, Poise
Profit International, Ltd., Qinghuan Wu and Jialing Zhou
(3)
|
10.7
|
Loan
and Transaction Expenses Agreement dated as of December 18, 2007 between
Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. and RMK Emerging
Markets, LLC (3)
|
10.8
|
Loan
Conversion Agreement dated as of April 15, 2008 between RMK Emerging
Markets, LLC, Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. and
China Energy Recovery, Inc. (3)
|
10.9
|
Leasing
and Operating Agreement dated as of April 22, 2004 between Shanghai Hai Lu
Kun Lun Hi-tech Engineering Co., Ltd. and Shanghai Si Fang Boiler Factory,
together with Amendment dated as of November 21, 2005, Amendment dated as
of December 28, 2006 and Amendment dates as of June 25, 2007
(3)
|
10.10
|
Consulting
Services Agreement dated as of December 28, 2005 between Haie Hi-tech
Engineering (Hong Kong) Company Limited and Shanghai Hai Lu Kun Lun
Hi-tech Engineering Co., Ltd. (3)
|
10.11
|
Operating
Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering
(Hong Kong) Company Limited, Shanghai Hai Lu Kun Lun Hi-tech Engineering
Co., Ltd. and the shareholders of Shanghai Hai Lu Kun Lun Hi-tech
Engineering Co., Ltd. (3)
|
10.12
|
Proxy
Agreement dated as of December 28, 2005 between Haie Hi-tech Engineering
(Hong Kong) Company Limited and the shareholders of Shanghai Hai Lu Kun
Lun Hi-tech Engineering Co., Ltd. (3)
|
10.13
|
Option
Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering
(Hong Kong) Company Limited, Shanghai Hai Lu Kun Lun Hi-tech Engineering
Co., Ltd. and the shareholders of Shanghai Hai Lu Kun Lun Hi-tech
Engineering Co., Ltd. (3)
|
10.14
|
Equity
Pledge Agreement dated as of December 28, 2005 among Haie Hi-tech
Engineering (Hong Kong) Company Limited, Shanghai Hai Lu Kun Lun Hi-tech
Engineering Co., Ltd. and the shareholders of Shanghai Hai Lu Kun Lun
Hi-tech Engineering Co., Ltd. (3)
|
10.15
|
Consulting
Services Agreement dated as of December 28, 2005 between Haie Hi-tech
Engineering (Hong Kong) Company Limited and Shanghai Xin Ye Environmental
Protection Engineering Co., Ltd. (3)
|
10.16
|
Operating
Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering
(Hong Kong) Company Limited, Shanghai Xin Ye Environmental Protection
Engineering Co., Ltd. and the sole shareholder of Shanghai Xin Ye
Environmental Protection Engineering Co., Ltd. (3)
|
10.17
|
Proxy
Agreement dated as of December 28, 2005 between Haie Hi-tech Engineering
(Hong Kong) Company Limited and the sole shareholder of Shanghai Xin Ye
Environmental Protection Engineering Co., Ltd. (3)
|
10.18
|
Option
Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering
(Hong Kong) Company Limited, Shanghai Xin Ye Environmental Protection
Engineering Co., Ltd. and the sole shareholder of Shanghai Hai Lu Kun Lun
Hi-tech Engineering Co., Ltd. (3)
|
10.19
|
Equity
Pledge Agreement dated as of December 28, 2005 among Haie Hi-tech
Engineering (Hong Kong) Company Limited, Shanghai Xin Ye Environmental
Protection Engineering Co., Ltd. and the sole shareholder of Shanghai Xin
Ye Environmental Protection Engineering Co., Ltd. (3)
|
10.20*
|
Employment
Contract dated as of January 1, 2006 between Shanghai Hai Lu Kun Lun,
Hi-Tech Engineering Co., Ltd. and Qinghuan Wu (3)
|
10.21
|
Consulting
Agreement dated as of June 20, 2008 between China Energy Recovery, Inc.
and ARC China, Inc.(6)
|
10.22
|
Amendment
dated as of August 20, 2008 to Leasing and Operating Agreement dated as of
April 22, 2004 between Shanghai Hai Lu Kun Lun Hi-tech Engineering Co.,
Ltd. and Shanghai Si Fang Boiler Factory, as amended
(10)
|
10.23
|
First
Amendment to Consulting Agreement dated as of August 11, 2008 between
China Energy Recovery, Inc. and ARC China, Inc. (10)
|
10.24*
|
Stock
Option Plan (12)
|
21.1
|
List
of Subsidiaries (13)
|
23.1
|
Consent
of Independent Certified Public Accountants (13)
|
31.1
|
Certification
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
(13)
|
31.2
|
Certification
Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
(13)
|
32.1
|
Certification
Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of
The Sarbanes-Oxley Act Of 2002
(13)
|
* Indicates
management contract, compensatory plan or arrangement.
1.
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed on April
13, 2006.
|
2.
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed on
January 30, 2008.
|
3.
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed on April
21, 2008.
|
4.
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed on
February 7, 2008.
|
5.
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed on May
9, 2008.
|
6.
|
Incorporated
by reference to Amendment No. 2 to the Registrant's Registration Statement
on Form S-1 filed on July 31, 2008.
|
7.
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed on
January 13, 2006.
|
8.
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed on April
18, 2006.
|
9.
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed on
January 15, 2008.
|
10.
|
Incorporated
by reference to Amendment No. 3 to the Registrant’s Registration Statement
on Form S-1 filed on August 25,
2008.
|
11.
|
Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on
September 24, 2008.
|
12.
|
Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on
November 4, 2008.
|
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
ENERGY RECOVERY, INC.
|
|
|
|
|
|
March
30, 2009
|
By:
|
/s/ Qinghuan
Wu
|
|
|
|
Qinghuan
Wu
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Principal Executive Officer and
Director:
|
|
|
|
|
|
/s/
Qinghuan Wu
|
|
Chief
Executive Officer and Director
|
Qinghuan
Wu
|
|
March
30, 2009
|
|
|
|
Principal
Financial and Accounting Officer
|
|
|
|
|
|
/s/
Richard Liu
|
|
Chief
Financial Officer
|
Richard
Liu
|
|
March
30, 2009
|
|
|
|
Directors:
|
|
|
|
|
|
/s/
Roger Ballentine
|
|
Director
|
Roger
Ballentine
|
|
March
30, 2009
|
|
|
|
/s/
Qi Chen
|
|
General
Manager and Director
|
Qi
Chen
|
|
March
30, 2009
|
|
|
|
/s/
Mengjiao Jiang
|
|
Director
|
Mengjiao
Jiang
|
|
March
30, 2009
|
|
|
|
/s/
Fred J. Krupica
|
|
Director
|
Fred
J. Krupica
|
|
March
30, 2009
|
|
|
|
/s/
Jialing Zhou
|
|
Director
|
Jialing
Zhou
|
|
March
30, 2009
|
|
|
|
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