UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to _________
0-12536
(Commission File Number)
CHINA RECYCLING ENERGY CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada
(State or Other jurisdiction of Incorporation or Organization)
90-0093373
(IRS Employer Identification No.)
429 Guangdong Road
Shanghai, People's Republic of China 200001
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (86 21) 6336-8686
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for at least the past 90 days. [X]Yes [ ]No
Page 1
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ]Yes [X]No
As of August 15, 2007, there were 17,147,268 shares of $.001 par value common
stock outstanding.
Transitional Small Business Disclosure Format: [ ]Yes [X] No
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION 3
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2007 (UNAUDITED) 5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE
MONTHS ENDED JUNE 30, 2007 AND 2006 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND 2006 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 16
ITEM 3. CONTROLS AND PROCEDURES 20
PART II - OTHER INFORMATION 21
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 22
ITEM 6. EXHIBITS 22
SIGNATURES 22
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Page
Condensed Consolidated Balance Sheet as of June 30, 2007 5
Condensed Consolidated Statements of Operations And Comprehensive
Income (loss) for the Three and Six Months Ended
June 30, 2007 and 2006 6
Condensed Consolidated 7
Notes to Condensed Consolidated Financial Statements 9
Page 3
CHINA RECYCLING ENERGY CORPORATION
(FORMERLY CHINA DIGITAL WIRELESS INC.)
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2007
(Currency expressed in United States Dollars ("US$"),
except for number of shares)
June 30, 2007
-------------
ASSETS (unaudited
Current assets:
Cash and cash equivalents $ 3,600
Value-added tax recoverable 144,848
Due from a third party 4,021,183
Other receivables 121
-----------
Total current assets 4,169,752
-----------
Non current assets:
Investment in direct financing leases, net 3,595,648
Construction-in-progress 1,368,902
-----------
TOTAL ASSETS $ 9,134,302
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,043,364
Advance from customers 26,361
Due to a related party 825,752
Due to a director 36,751
Income tax payable 46,614
Accrued liabilities and other payables 1,005,203
-----------
Total current liabilities 4,984,045
-----------
Stockholders' equity:
Common stock, $0.001 par value; 100,000,000 shares
authorized; 17,147,268 shares issued and outstanding 17,148
Additional paid-in capital 4,229,845
Statutory reserves 574,666
Accumulated other comprehensive income 1,565,852
Accumulated deficits (2,237,254)
-----------
Total stockholders' equity 4,150,257
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,134,302
===========
See accompanying notes to condensed consolidated
financial statements.
Page 4
CHINA RECYCLING ENERGY CORPORATION
(FORMERLY CHINA DIGITAL WIRELESS INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30,
2007 AND 2006 (Currency expressed in United States
Dollars ("US$"), except for number of shares)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Revenues from direct
financing leases $ 206,561 $ -- $ 397,277 $ --
Cost of revenues 19,383 -- 32,153 --
--------- --------- --------- ---------
Gross profit 187,178 -- 365,124 --
Operating expenses:
General and
administrative 37,699 20,082 76,471 156,267
--------- --------- --------- ---------
Total operating expenses 37,699 20,082 76,471 156,267
========= ========= ========= =========
Income (loss) from
operations 149,479 (20,082) 288,653 (156,267)
--------- --------- --------- ---------
Other income:
Interest income 59 -- 104 120
--------- --------- --------- ---------
Income (loss) before income
taxes 149,538 (20,082) 288,757 (156,147)
Income tax expense (46,614) -- (46,614) --
--------- --------- --------- ---------
Net income (loss) from
continuing operations 102,924 (20,082) 242,143 (156,147)
--------- --------- --------- ---------
Discontinued operations
Income from operations of
discontinued components
-- -- 33,299 204,199
--------- --------- --------- ---------
Net income (loss) 102,924 (20,082) 275,442 48,052
--------- --------- --------- ---------
Other comprehensive income:
- Foreign currency
translation gain 264,539 12,803 528,178 50,798
--------- --------- --------- ---------
Comprehensive income (loss)
$ 367,463 $ (7,279) $ 803,620 $ 98,850
========= ========= ========= =========
See accompanying notes to condensed consolidated
financial statements.
Page 5
CHINA RECYCLING ENERGY CORPORATION
(FORMERLY CHINA DIGITAL WIRELESS INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30,
2007 AND 2006 (Currency expressed in United States
Dollars ("US$"), except for number of shares)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net income (loss) from
continuing operations
per common share - Basic
and diluted $ 0.01 $ (0.00) $ 0.01 $ (0.01)
========== ========== ========== ===========
Net income from
discontinuing operations
per common share - Basic
and diluted
$ -- $ -- $ 0.00 $ 0.01
========== ========== ========== ===========
Weighted average number of
common shares outstanding
- Basic and diluted 17,147,268 17,147,268 17,147,268 17,147,268
========== ========== ========== ==========
See accompanying notes to condensed consolidated
financial statements.
Page 6
CHINA RECYCLING ENERGY CORPORATION
(FORMERLY CHINA DIGITAL WIRELESS INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 and 2006
(Currency expressed in United States Dollars ("US$"))
(Unaudited)
Six Months Ended June 30,
-------------------------
2007 2006
---------- ----------
Cash flows from operating activities:
Net income 275,442 48,052
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Income from operations of discontinued components (33,299) (204,199)
Changes in operating assets and liabilities:
Advances and deposits to suppliers 755,635 --
Due from related parties 3,446,275 --
Due from a related party (4,021,183) --
Value-added tax recoverable (144,848) --
Other receivables (121) --
Accounts payable 3,043,364 --
Advance from customers (115,471) --
Amount due to a director 36,751 --
Income tax payable 46,614 --
Accrued liabilities and other payables 62,796 --
---------- ----------
Net cash provided by (used in) operating
activities of continuing operations 3,351,955 (156,147)
Net cash provided by operating activities
of discontinued operations 10,265 116,400
---------- ----------
Net cash provided by (used in) operating activities 3,362,220 (39,747)
---------- ----------
Cash flows from investing activities:
Investment in direct financing lease (3,595,648) --
Increase in construction-in-progress (1,368,902) --
Due to a related party 825,752 --
---------- ----------
Net cash used in investing activities of
continuing operations (4,138,798) --
Net cash used in investing activities of
discontinued operations -- (2,494,699)
---------- ----------
(4,138,798) (2,494,699)
Net cash used in investing activities
---------- ----------
Foreign currency translation adjustment 528,178 41,410
---------- ----------
(248,400) (2,493,036)
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 252,000 3,578,367
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 3,600 1,085,331
========== ==========
See accompanying notes to condensed consolidated
financial statements.
Page 7
CHINA RECYCLING ENERGY CORPORATION
(FORMERLY CHINA DIGITAL WIRELESS INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 and 2006
(Currency expressed in United States Dollars ("US$"))
(Unaudited)
Six Months Ended June 30,
-------------------------
2007 2006
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ -- $156,911
=========== ========
Cash paid for interest expenses $ -- $ --
=========== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Investment in direct financing lease $ 2,465,770 $ --
=========== ========
Rental income offset with due to a related party $ 916,383 $ --
=========== ========
See accompanying notes to condensed consolidated
financial statements
.
Page 8
NOTE-1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with both generally accepted accounting principles for
interim financial information, and the instructions to Form 10-QSB and Item
310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited condensed
consolidated financial statements reflect all adjustments (consisting of normal
recurring accruals) that are, in the opinion of management, considered necessary
for a fair presentation of the results for the interim periods presented.
Interim results are not necessarily indicative of results for a full year.
These unaudited condensed consolidated financial statements and related
disclosures have been prepared with the presumption that users of the interim
financial information have read or have access to our annual audited condensed
consolidated financial statements for the preceding fiscal year. Accordingly,
these unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the related notes
thereto contained in our Annual Report on Form 10-KSB for the year ended
December 31, 2006.
NOTE-2 ORGANIZATION AND BUSINESS BACKGROUND
On May 8, 1980, China Recycling Energy Corporation (the "Company") (formerly
China Digital Wireless, Inc.) was incorporated under the laws of the State of
Colorado.
On September 6, 2001, the Company re-domiciled its state of incorporation from
Colorado to Nevada.
On June 23, 2004, the Company entered into a stock exchange agreement with
Sifang Holdings Co. Ltd. ("Sifang Holdings") and certain shareholders. Pursuant
to the stock exchange agreement, the Company issued 13,782,636 shares of its
common stock in exchange for a 100% equity interest in Sifang Holdings, making
Sifang Holdings a wholly owned subsidiary of the Company. Sifang Holdings was
established under the laws of the Cayman Islands on February 9, 2004 for the
purpose of holding a 100% equity interest in Shanghai TCH Data Technology Co.,
Ltd. ("TCH"). TCH was established as a foreign investment enterprise in Shanghai
under the laws of the People's Republic of China (the "PRC") on May 25, 2004.
Since January 2007, the Company has gradually phased out and substantially scale
down most of its business of mobile phone distribution and provision of pager
and mobile phone value-added information services. In the first and second
quarter of 2007, the Company did not engage in any substantial transaction and
activity in connection to these businesses. On May 10, 2007, the Company
approved and announced that it completely ceased and discontinued these
businesses. These businesses are reflected in continuing operations for all
periods presented as the criteria for discontinued operations prescribed by
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets".
On February 1, 2007, the Company's subsidiary, TCH, entered into a TRT Project
Joint-Operation Agreement ("Joint-Operation Agreement") with Xi'an Yingfeng
Science and Technology Co., Ltd. ("Yingfeng"). Yingfeng is a joint stock company
registered in Xi'an, Shaanxi Province, the PRC, and engages in the business of
designing, installing, and operating TRT systems and sales of other renewable
energy products.
Under the Joint-Operation Agreement, TCH and Yingfeng jointly operate a top gas
recovery turbine project ("Project") which is to design, construct, install and
operate a TRT system in Xingtai Iron and Steel Company, Ltd. ("Xingtai"). This
project was originally initiated by a Contract to Design and Construct TRT
Page 9
System ("Project Contract") entered into between Yingfeng and Xingtai on
September 26, 2006. TCH provides various forms of investments and properties
into the Project including cash, hardware, software, equipments, major
components and devices. In return, TCH becomes entitled to all the rights,
titles, benefits and interests that Yingfeng originally had under the Project
Contract, including but not limited to the cash payment made by Xingtai on
regular basis and other property rights and interests.
On March 8, 2007, the Company changed its name to "China Recycling Energy
Corporation" and commences the recycling energy business in the provision of
energy saving and recycling products and services. Consequently, the businesses
of mobile phone distribution and provision of pager and mobile phone value-added
information services were discontinued.
Except as indicated, amounts reflected in the condensed consolidated financial
statements or the notes thereto relate to our continuing operations.
NOTE-3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
o Basis of presentation
These accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America ("US GAAP") and pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC") for annual financial
statements.
o Use of estimates
In preparing these condensed consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities in the balance sheets and revenues and expenses during the year
reported. Actual results may differ from these estimates.
o Basis of consolidation
The condensed consolidated financial statements include the accounts of CREG,
its wholly owned subsidiary, Sifang Holdings, and its wholly owned subsidiary
TCH. Substantially all of the Company's revenues are derived from the operations
of TCH, which represents substantially all of the Company's consolidated assets
and liabilities as of June 30, 2007.
Subsidiaries are those entities in which the Company, directly or indirectly,
controls more than one half of the voting power; has the power to govern the
financial and operating policies; to appoint or remove the majority of the
members of the board of directors; or to cast majority of votes at the meeting
of directors.
All significant inter-company balances and transactions within the Company have
been eliminated on consolidation.
o Cash and cash equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand
deposits placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
o Accounts receivable and concentration of credit risk
Accounts receivable are recorded at the invoiced amount and do not bear
interest. The Company extends unsecured credit to its customers in the ordinary
course of business but mitigates the associated risks by performing credit
Page 10
checks and actively pursuing past due accounts. An allowance for doubtful
accounts is established and determined based on managements' assessment of known
requirements, aging of receivables, payment history, the customer's current
credit worthiness and the economic environment. As of June 30, 2007 and 2006,
the Company recorded an allowance for doubtful accounts of $nil and $4,387
respectively.
o Construction-in-progress
Construction-in-progress includes construction costs of a TRT system other than
the one operated in Xingtai. Construction-in-progress is not depreciated until
such time as the assets are completed and put into operational use.
o Impairment of long-life assets
In accordance with SFAS No.121, "Accounting for the impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", a long-lived assets and
certain identifiable intangible assets held and used by the Company are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For the purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows related to the long-lived assets.
The Company reviews long-lived assets, if any, to determine the carrying values
are not impaired, as fully explained in Note 4.
o Revenue recognition
The Company derives revenues from leasing TRT system to Xingtai under direct
financing lease contract. Such lease transfers substantially all benefits and
risks of TRT system ownership to Xintai. The Company's investment in direct
financing lease are recorded in accordance with SFAS No. 13, "Accounting for
Leases" and its various amendments and interpretations. The investment in direct
financing lease consists of the sum of the total future minimum contracted
payments receivable and the estimated unguaranteed residual value of lease
equipment, less unearned finance income. Unearned finance income, which is
recognized as revenue over the term of the financing by the effective interest
method, represents the excess of the total future minimum lease payments plus
the estimated unguaranteed residual value expected to be realized at the end of
the lease term over the cost of the relate equipment.
o Cost of revenue
Cost of revenue consists primarily of related business tax of 5% on revenues
from direct financing lease.
o Comprehensive income
SFAS No.130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income as defined includes all changes in equity during
a period from non-owner sources. Accumulated comprehensive income, as presented
in the accompanying statement of changes in stockholders' equity consists of
changes in unrealized gains and losses on foreign currency translation. This
comprehensive income is not included in the computation of income tax expense or
benefit.
o Income taxes
The Company accounts for income taxes in interim periods as required by
Accounting Principles Board Opinion No.28, "Interim Financial Reporting" and as
interpreted by FASB Interpretation No.18, "Accounting for Income Taxes in
Page 11
Interim Periods". The Company has determined an estimated annual effective tax
rate. The rate will be revised, if necessary, as of the end of each successive
interim period during the Company's fiscal year to the Company's best current
estimate.
The estimated annual effective tax rate is applied to the year-to-date ordinary
income (or loss) at the end of the interim period.
o Net income (loss) per share
The Company calculates net income (loss) per share in accordance with SFAS
No.128, "Earnings per Share". Basic net income (loss) per share is computed by
dividing the net income (loss) by the weighted-average number of common shares
outstanding. Diluted net income (loss) per share is computed similar to basic
net income (loss) per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the
potential common stock equivalents had been issued and if the additional common
shares were dilutive. The Company did not have any potentially dilutive common
share equivalents as of June 30, 2007 and 2006.
o Foreign currencies translation
The functional and reporting currency of the Company is the United States
dollars ("U.S. dollars"). The accompanying condensed condensed consolidated
financial statements have been expressed in U.S. dollars.
The functional currency of the Company's foreign subsidiaries is the Renminbi
Yuan ("RMB"). The balance sheet is translated into United States dollars based
on the rates of exchange ruling at the balance sheet date. The statement of
operations is translated using a weighted average rate for the year. Translation
adjustments are reflected as cumulative translation adjustments in stockholders'
equity.
o Segment reporting
SFAS No.131 "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments on a basis consistent with the Company's internal organization
structure as well as information about geographical areas, business segments and
major customers in financial statements. The Company operates in one reportable
operating segment.
o Fair value of financial instruments
The carrying value of the Company's financial instruments, which include cash
and cash equivalents, accounts receivables, inventories, advances and deposits
to suppliers, accounts payable, other current liabilities, approximate their
fair values due to the short-term maturity of these instruments.
o Related parties
Parties, which can be a corporation or individual, are considered to be related
if the Company has the ability, directly or indirectly, to control the other
party or exercise significant influence over the other party in making financial
and operating decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
o Recently issued accounting standard
The Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
Page 12
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in the Company's financial statements in accordance with
SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement
attributes for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Company adopted
FIN48 on January 1, 2007. The adoption of FIN 48 did not have an effect on the
results of operations or financial condition. The Company did not have any
unrecognized tax benefits as of June 30, 2007.
On February 15, 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an Amendment of FASB
Statement No.115" ("SFAS 159"). This standard permits an entity to measure
financial instruments and certain other items at estimated fair value. Most of
the provisions of SFAS No.159 are elective; however, the amendment to FASB
No.115, "Accounting for Certain Investments in Debt and Equity Securities,"
applies to all entities that own trading and available-for-sale securities. The
fair value option created by SFAS 159 permits an entity to measure eligible
items at fair value as of specified election dates. The fair value option (a)
may generally be applied instrument by instrument, (b) is irrevocable unless a
new election date occurs, and (c) must be applied to the entire instrument and
not to only a portion of the instrument. SFAS 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of the previous fiscal year provided
that the entity (i) makes that choice in the first 120 days of that year, (ii)
has not yet issued financial statements for any interim period of such year, and
(iii) elects to apply the provisions of FASB 157. Management is currently
evaluating the impact of SFAS 159, if any, on the Company's financial
statements.
NOTE-4 DISCONTINUED OPERATIONS
Since January 2007, the Company has gradually phased out and substantially scale
down most of its business of mobile phone distribution and provision of pager
and mobile phone value-added information services. In the first and second
quarter of 2007, the Company did not engage in any substantial transaction and
activity in connection to these businesses. On May 10, 2007, the Company
approved and announced that it completely ceased and discontinued these
businesses. Accordingly, the results of the discontinued operations have been
segregated from continuing operations in the consolidated statements of
operations and cash flows for the six-month periods ended June 30, 2007 and
2006. The discontinued operations incurred an income of $33,299 and the basic
income per share from discontinued operations was $0.00. The income represented
the written back of deferred revenue generated from the provision of pager
value-added information services.
NOTE-5 ACCOUNTS RECEIVABLE
The majority of the Company's sales are on open credit terms and in accordance
with terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible. If
actual collections experience changes, revisions to the allowance may be
required. Based upon the aforementioned criteria, management has determined no
allowance for doubtful accounts for the three and six months ended June 30,
2007.
NOTE-6 DUE FROM A THIRD PARTY
The amount due from a third party, a Shanghai-based privately owned enterprise
Page 13
established under the laws of the PRC, is unsecured, non-interest bearing and
repayable in the next twelve months.
NOTE-7 INVESTMENT IN DIRECT FINANCING LEASES
Under direct financing lease, TCH leases the TRT system to Xintai with a term of
five years. Unguaranteed residuals for direct financing leases represent the
estimated amounts recoverable at lease termination from lease extension or
disposition of the equipment.
The components of the net investment in direct financing leases as of June 30,
2007 are as follows:
Total future minimum lease payments $ 6,524,317
Estimated executory costs (217,477)
Unearned rental income (4,688,258)
Residuals, net of unearned residual income 1,977,066
-----------
$ 3,595,648
===========
As of June 30, 2007, the future minimum rentals to be received on non-cancelable
direct financing leases are as follows:
Six months ending December 31, 2007 $ 830,365
Year ending December 31, 2008 1,423,488
2009 1,423,488
2010 1,423,488
2011 1,423,488
-----------
$ 6,524,317
===========
NOTE-8 DUE TO A DIRECTOR
The amount due to Yingfeng represented the capital investment in TRT project
paid by Yingfeng on behalf of the Company during the six months ended June 30,
2007. The amount due is unsecured, non-interest bearing and repayable in the
next twelve months.
NOTE-9 DUE TO A DIRECTOR
The balances due to a director represented unsecured advances which are interest
free and repayable in the next twelve months.
NOTE-10 ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consist of the following:
June 30, 2007
-------------
Other payables $ 78,127
Employee welfare payable 236,346
Accruals 690,730
-----------
$ 1,005,203
===========
Page 14
NOTE-11 INCOME TAXES
The Company is registered in the United States of America and has operations in
the United States of America and the PRC. For the three and six months ended
June 30, 2007, the operation in the United States of America had not incurred
any operating cost.
The Company's subsidiary generated substantially all of its net income from its
PRC operation and has recorded income tax provision of $46,614 for the three and
six months ended June 30, 2007. Its effective income tax rates for the three and
six months ended June 30, 2007 were 15%. There were no effective income tax
rates for the three and six months ended June 30, 2006 since the PRC operation
incurred net operating losses.
NOTE-12 CHINA CONTRIBUTION PLAN
The PRC has been undergoing significant reforms with regard to its employee
welfare and fringe benefits administration. Any enterprise operating in the PRC
is subject to government-mandated employee welfare and retirement benefit
contributions. In accordance with PRC laws and regulations, TCH participates in
a multi-employer defined contribution plan pursuant to which TCH is required to
provide employees with certain retirement, medical and other fringe benefits.
PRC regulations require TCH to pay the local labor administration bureau a
monthly contribution at a stated contribution rate based on the monthly basic
compensation of qualified employees. The local labor administration bureau,
which manages various investment funds, will take care of employee retirement,
medical and other fringe benefits. TCH has no further commitments beyond its
monthly contribution. TCH contributed a total of $nil and $26,664 for the six
months ended June 30, 2007 and 2006 respectively.
NOTE-13 CONCENTRATION AND RISK
(a) Major customers
For the six months ended June 30, 2007, 100% of the Company's assets were
located in the PRC and 100% of the Company's revenues were derived from
customers located in the PRC.
For the six months ended June 30, 2007, customer who accounts for 10% or more of
revenues is presented as follows:
Customer Percentage Accounts
Revenue of revenue receivable
Customer A $ 397,277 100% $ 191,238
============ ============ ============
(b) Credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company performs ongoing credit evaluations of its customers'
financial condition, but does not require collateral to support such
receivables.
Page 15
NOTE-14 CAPITAL COMMITMENT
As of June 30, 2007, the Company has contracted to invest in a TRT System
project amounting to approximately $3,900,000 (RMB 30,000,000), of which
$3,790,000 (RMB 28,722,145) was paid to purchase the project equipments.
NOTE-15 COMPARATIVE FIGURES
Comparative figures included in prior year's consolidated balance sheet and the
consolidated statements of operations and cash flows have not been included in
these condensed consolidation financial statements as they were not comparable
because the Company had discontinued its business in mobile phone distribution
and provision of pager and mobile phone value-added information services and
changed to recycling energy business in the provision of energy saving and
recycling products and services.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report contains certain forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "could," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "predict," "potential," or "continue," or
the negative of such terms or other comparable terminology. These statements are
only predictions and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein.
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. We do not undertake to publicly update or
revise any of its forward-looking statements even if experience or future
changes show that the indicated results or events will not be realized. You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
Overview of Business Background
On May 8, 1980, China Recycling Energy Corporation (the "Company")
(formerly known as China Digital Wireless, Inc.) was incorporated under the laws
of the State of Colorado.
On September 6, 2001, the Company re-domiciled its state of incorporation
from Colorado to Nevada.
On June 23, 2004, the Company entered into a stock exchange agreement with
Sifang Holdings Co. Ltd. ("Sifang Holdings") and certain shareholders. Pursuant
to the stock exchange agreement, the Company issued 13,782,636 shares of its
common stock in exchange for a 100% equity interest in Sifang Holdings, making
Sifang Holdings a wholly owned subsidiary of the Company. Sifang Holdings was
established under the laws of the Cayman Islands on February 9, 2004 for the
purpose of holding a 100% equity interest in Shanghai TCH Data Technology Co.,
Ltd. ("TCH"). TCH was established as a foreign investment enterprise in Shanghai
under the laws of the PRC on May 25, 2004.
From May 2004 to December 2006, the Company through TCH engaged in the
business of mobile phone distribution, advertising services and other provisions
of pager and mobile phone value-added information services under the Company's
previous name "China Digital Wireless, Inc."
Since January 2007, the Company has gradually phased out and substantially
scaled down most of its business of mobile phone distribution and provision of
pager and mobile phone value-added information services. In the first quarter of
Page 16
2007, the Company did not engage in any substantial transaction and activity in
connection to these businesses.
On February 1, 2007, the Company's subsidiary, TCH, entered into a TRT
Project Joint-Operation Agreement ("Joint-Operation Agreement") with Xi'an
Yingfeng Science and Technology Co., Ltd. ("Yingfeng"). Yingfeng is a Chinese
company that is located in Xi'an, Shaanxi Province, China, and is engaging in
the business of designing, selling, installing, and operating TRT systems and
other renewable energy products.
Under the Joint-Operation Agreement, TCH and Yingfeng will jointly pursue a
top gas recovery turbine project ("Project") which is to design, construct,
install and operate a TRT system in Xingtai Iron and Steel Company, Ltd.
("Xingtai"). This project was originally initiated by a Contract to Design and
Construct TRT System ("Project Contract") entered by Yingfeng and Xingtai on
September 26, 2006. TCH provides various forms of investments and properties
into the Project including cash, hardware, software, equipments, major
components and devices. In return, TCH becomes entitled to all the rights,
titles, benefits and interests that Yingfeng originally had under the Project
Contract, including but not limited to the cash payment made by Xingtai on
regular basis and other property rights and interests. TCH also entered direct
financing lease with Xingtai. Under the direct financing lease, TCH provides
various forms of investments and properties into the Project including cash,
hardware, software, equipments, major components and devices to complete a TCH
system and leases the TRT system to Xingtai with a term of five years. The total
future minimum lease receivables under the direct financing lease are $
6,781,863. In February and March 2007, the Company and TCH have taken several
preliminary actions in preparation for the full pursuit of the Project,
including selecting and purchasing necessary components and software for TRT
system, organizing and training the technician team for the Project and
developing the construction and installation plan for the TRT system. On April
08, 2007, the Board of the Company approved and made effective this
Joint-Operation Agreement.
On March 8, 2007, the name of the Company was changed to "China Recycling
Energy Corporation" and engages in recycling energy business, providing energy
saving and recycling products and services. Consequently, the businesses of
mobile phone distribution and provision of pager and mobile phone value-added
information services were discontinued.
On May 10, 2007, the Company officially announced that it changed its main
business operations to energy saving and recycling systems and services. The new
business operations include developing and constructing recovered energy power
systems such as TRT(Blast-Furnace Top Pressure Recovery Turbine Unit), CHPG
(Power generation by recovering cement residual heat without additional fuel),
GTPG(Gas turbine power generation) and CGGE(Comprehensive utilization of coal
gangue generating electricity);selling the electricity generated by the
recovered energy power systems to steel plants and other customers; constructing
power plants on a turnkey - EPC (Engineering, Procurement and Construction)
basis for developers, industrial users and public facilities; developing
flexible, custom-tailored ECO-Energy solutions that enable customers to quickly
and easily improve energy efficiency and educe fossil fuel consumption and Green
House Gases emission.
In connection with the change of business operations, the Company has
established a technical team that is composed of recognized experts and
technicians specialized in the development and construction of energy saving and
recycling systems.
Discussion and Analysis of Operating Results
Six months ended June 30, 2007 Compared to Six months Ended June 30, 2006
Discontinued Operation
Since January 2007, the Company has gradually phased out and substantially
Page 17
scaled down most of its business of mobile phone distribution, advertising
services and provision of pager and mobile phone value-added information
services. On May 10, 2007, the Company approved and announced that it completely
ceased and discontinued these businesses. For the six months ended June 30,
2007, the Company did not engage in any transaction and activity in connection
to these businesses. Accordingly, the results of the discontinued operations
have been segregated from continuing operations in the consolidated statements
of operations and cash flows for the six-month periods ended June 30, 2007 and
2006. For the six months ended June 30, 2007, there was no sales revenue from
product sales, product sales to related parties, and net information and
advertising service revenue related to the discontinued operations and there was
no cost of goods sold and cost of service related to discontinued operations,
either. The discontinued operations incurred an income of $33,299 and $204,199
for the six month periods ended June 30, 2007 and 2006, respectively and the
basic income per share from discontinued operations was $0.00 and $0.01 for the
respective periods. This income represented the write down of deferred revenue
generated from the provision of pager value-added information services.
Revenues from direct financing lease
Revenues for the six months ended June 30, 2007 were $397,277, which
represents the revenue received from Xingtai under the direct financing lease.
Cost of Revenues
Total cost of revenue for the six months ended June 30, 2007 consists
primarily of related business tax of 5% on revenues from direct financing lease
between the Company and Xingtai. Total cost of revenue for the six months ended
June 30, 2007 was $32,153.
Gross profit
After taking into account the cost of revenues, our gross profit for the
six months ended June 30, 2007 was $365,124. The gross profit consists of the
gross profits from the operation in the business of energy saving and recycling
systems and services for the six months ended June 30, 2007.
General and administrative expenses
General and administrative expenses for the six months ended June 30, 2007
decreased by $79,796 to $76,471 compared to $156,267 for the same period of the
prior year, representing a 51.1% decrease. The decrease was mainly due to the
discontinuance of the business of mobile phone distribution advertising services
and provision of pager and mobile phone value-added information services.
Interest income, net
During the six months ended June 30, 2007, the interest income derived from
bank deposits decreased by $16 to $104, compared to $120 for the same period of
the prior year.
Income from operations of discontinued components
Since January 2007, the Company has gradually phased out and substantially
scaled down most of its business of mobile phone distribution and provision of
pager and mobile phone value-added information services. For the six months
ended June 30, 2007, the Company did not engage in any substantial transaction
and activity in connection to these businesses. On May 10, 2007, the Company
approved and announced that it completely ceased and discontinued these
businesses. Accordingly, the results of the discontinued operations have been
segregated from continuing operations in the statements of operations and cash
flows for the six-month periods ended June 30, 2007 and 2006. The discontinued
operations incurred an income of $33,299 and $204,199 for the six month periods
ended June 30, 2007 and 2006, respectively and the basic income per share from
discontinued operations was $0.00 and $0.01 for the respective periods. The
income represented the write down of deferred revenue generated from the
provision of pager value-added information services.
Page 18
Net income from continuing operation in energy saving and recycling businesses
For the six months ended June 30, 2007, we recorded a net income of
$242,143 received from our new operations in energy saving and recycling
businesses. Compared to the first quarter of 2007 when we first started to
engage in energy saving and recycling businesses, the net income from these new
operations was increased by $ 139,219, due to the growth of our energy saving
and recycling businesses.
Foreign currency translation gain
Foreign currency translation gain for the six months ended June 30, 2007
increased by $477,380 to $528,178 compared to $50,798 for the same period of the
prior year, representing a 939.8% increase. The increase was mainly due to the
continuous appreciation of RMB Yuan against US Dollars.
Comprehensive income.
We recorded comprehensive income of $803,620 for the six months ended June
30, 2007, a $704,770 increase in comprehensive income compared to comprehensive
income of $98,850 for the same period of the prior year, representing an
increase of approximately 712.97%. The increase in comprehensive income was
attributable to (i) the revenues received from the direct financing lease
related to the Company's continuing operation in energy saving and recycling
businesses and (ii) the increase of foreign currency translation.
Net income from continuing operations per share
For the six months ended June 30, 2007, our net income from continuing
operation per share was $0.01 compared to the $0.01 net loss from continuing
operation per share for the same period of the prior year, representing a net
increase of $ 0.02 per share. The increase in net income per share is
attributable to the revenues and earnings received from our new operations in
energy saving and recycling business.
Liquidity and Capital Resources
Our net cash used during the six months ended June 30, 2007 was $ 248,400
compared to net cash of $ 2,483,648 used during the same period in 2006, which
represents a net change of $2,235,248.
Net cash flows provided by operating activities including the discontinued
operations and continued operations was $3,362,220 during the six months ended
June 30, 2007 compared to net cash flows used in operating activities of $39,747
during the same period of the prior year.
Net cash flows used in investing activities related to the continuing
operations in energy saving and recycling business for the six months ended June
30, 2007, including was $4,138,798.
Net cash provided by financing activities for the six months ended June 30,
2007 was nil.
We believe that current cash balance and cash flows from operations, if
any, will be sufficient to meet present growth strategies and related working
capital. In regards to the capital expenditures, we have sufficient funds to
expand our operations. We plan to utilize a combination of internally generated
funds from operations with potential debt and/or equity financings to fund our
longer-term growth over a period of two to five years. The availability of
future financings will depend on market conditions. There is no assurance that
the future funding will be available.
The forecast of the period of time through which our financial resources
will be adequate to support operations is a forward-looking statement that
involves risks and uncertainties.
Off-Balance Sheet Arrangements
Page 19
We have never entered into any off-balance sheet financing arrangements and
have not formed any special purpose entities. We have not guaranteed any debt or
commitment of other entities or entered into any options or non-financial
assets.
Recent Accounting Pronouncements
The Company has reviewed all recently issued, but not yet effective,
accounting pronouncements and do not believe the future adoption of any such
pronouncements may be expected to cause a material impact on its financial
condition or the results of its operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the Company's financial statements in
accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and
measurement attributes for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. The Company
adopted FIN48 on January 1, 2007. The adoption of FIN 48 did not have an effect
on the results of operations or financial condition. The Company did not have
any unrecognized tax benefits as of June 30, 2007.
On February 15, 2007, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No.159, "The Fair Value
Option for Financial Assets and Financial Liabilities -- Including an Amendment
of FASB Statement No.115" ("SFAS 159"). This standard permits an entity to
measure financial instruments and certain other items at estimated fair value.
Most of the provisions of SFAS No.159 are elective; however, the amendment to
FASB No.115, "Accounting for Certain Investments in Debt and Equity Securities,"
applies to all entities that own trading and available-for-sale securities. The
fair value option created by SFAS 159 permits an entity to measure eligible
items at fair value as of specified election dates. The fair value option (a)
may generally be applied instrument by instrument, (b) is irrevocable unless a
new election date occurs, and (c) must be applied to the entire instrument and
not to only a portion of the instrument. SFAS 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of the previous fiscal year provided
that the entity (i) makes that choice in the first 120 days of that year, (ii)
has not yet issued financial statements for any interim period of such year, and
(iii) elects to apply the provisions of FASB 157. Management is currently
evaluating the impact of SFAS 159, if any, on the Company's financial
statements.
ITEM 3. CONTROLS AND PROCEDURES
Prior to the conclusion of the period covered by this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13(a)-14(c). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings.
There were no changes in our internal controls over financial reporting
that materially affected or are reasonably likely to materially affect our
internal control over financial reporting during the quarter ended June 30,
2007.
Page 20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any material pending legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 24, 2007, a group of individual purchasers entered a share
purchase agreement with a group of shareholders of China Digital Wireless, Inc.
("Company") to purchase 12,911,835 shares of Company's common stocks owned by
Sellers, $ 0.001 par value, for an aggregate purchase price of $ 490, 000.00.
Purchasers are Guohua Ku, Hanqiao Zheng, Ping Sun, Qianping Huang, Xiaohong
Zhang and Lixia Zhang. Sellers are Caihua Tai, Ming Mao, Ying Shi, Sixing Fu,
Xiaodong Zhang, Tianqi Huang, Wei Huang, Jing Song, Ruijie Yu, and Weiping Jing,
all of whom are shareholders of Company. In accordance with the share purchase
agreement, Guohua Ku acquired 9,073,700 shares. Hanqiao Zheng acquired 2,406,365
shares. Ping Sun acquired 745,880 shares. Qianping Huang acquired 157,755
shares. Xiaohong Zhang acquired 72,018 shares. Lixia Zhang acquired 456,117
shares. This sale was a sale of restricted shares between the shareholders of
the Company and the individual purchasers under Rule 144A of the Securities Act
of 1933. Therefore, the Company did not issue any new share to purchasers and
this sale did not change the total number of issued and outstanding shares of
the Company. The proceeds of the sale were directly paid by the purchasers to
the sellers and Company neither was entitled to nor received the proceeds of the
sale.
On June 21, 2007, two of Company's major shareholders, Guohua Ku and
Hanqiao Zheng executed and consummated a share exchange agreement with a group
of individual purchasers all of whom are shareholders of Xi'an Yingfeng Science
and Technology Co. Ltd ("Yingfeng"). Guohua Ku and Hanqiao Zheng sold 289,427
and 2,406,365 shares of CREG's common stocks ("CREG shares") they owned,
respectively, to the purchasers for a total of 8,087,376 shares of Yingfeng's
common stocks ("Yingfeng Shares"), at the exchange rate of one CREG share for
three Yingfeng shares. The share exchange agreement was initially negotiated and
signed by Guohua Ku, Hanqiao Zheng and the representative of the purchasers on
February 22, 2007. On June 21, 2007, the agreement was executed and consummated
when all Purchasers and Sellers received the physical stock certificates of CREG
shares and Yingfeng Shares delivered by the other party, pursuant to the
Execution and Closing Clause of the share exchange agreement. As the result of
this share exchange transaction, the purchasers, who are 472 individual
shareholders of Yingfeng, acquired in total 2,695,792 shares of CREG's common
stocks. None of the purchasers acquired more than 1% of the total issued and
outstanding common stocks of CREG in this transaction. Guohua Ku and Hanqiao
Zheng own 8,784,273 and 0 shares of CREG's common stocks, respectively, upon the
consummation of this transaction. None of the purchasers in this share exchange
transaction is a U.S Person, as such term is defined in Rule 902(k) of
Regulation S, or located within the United States. This transaction is between
non-U.S. Persons and takes place outside of the United States. Therefore, this
transaction is exempt from registration under the Securities Act of 1933 in
reliance upon the exemption from registration pursuant to Regulation S of the
rules and regulations promulgated by the Securities and Exchange Commission
under the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
The following documents are filed as part of this report:
31.1 Chief Executive Officer Certification furnished pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification furnished pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer Certification furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer Certification furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
China Recycling Energy Corporation (Registrant)
Date: August 14, 2007
/s/ Guohua Ku
----------------------------------
Guohua Ku,
President and Chairman
Date: August 14, 2007
/s/ Guangyu Wu
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Guangyu Wu
Chief Executive Officer
Date: August 14, 2007
/s/ Mingda Rong
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Mingda Rong
Chief Financial Officer