China Recycling Energy Corporation Reports Third Quarter 2011 Financial Results

Project Portfolio Grows with 12MW Biomass Power Generation System & Interest Income on Sales-Type Leasing Increases

Nov 15, 2011, 00:37 ET from China Recycling Energy Corp.

XI'AN, China, Nov. 15, 2011 /PRNewswire-Asia/ -- China Recycling Energy Corp. (NASDAQ: CREG; "CREG" or "the Company"), a leading industrial waste-to-energy solution provider in China, today announced results for the three months and nine months ended September 30, 2011.

Highlights:

  • Interest income on sales-type leases increased by 55.2% to $16.09 million as compared to $10.37 million in the nine months ended September 30, 2010.
  • Net income grew 65.3% to $16.91 million as compared to $10.23 million recorded in the nine months ended September 30, 2010.
  • Fully diluted earnings per share ("EPS") of $0.33, up 57.1% from fully diluted EPS of $0.21 in the nine months ended September 30, 2010.

Summary of Financial Results:

(In millions, except for per share data)

THREE MONTHS ENDED SEPT 30

NINE MONTHS  ENDED SEPT 30

USD

2011

2010

2011

2010

Total Sales (1) + (2)

18.84

11.12

30.77

43.78

(1) System Sales

18.58

10.55

29.93

42.48

(2) Contingent Rental Income

0.26

0.56

0.85

1.31

Gross profit

4.52

2.96

7.92

11.02

Interest Income on Sales-Type Leases          

5.47

3.95

16.09

10.37

Net income

8.66

3.05

16.91

10.23

Diluted EPS

0.16

0.06

0.33

0.21

Mr. Guohua Ku, Chairman and CEO of CREG commented, "Our third quarter 2011 showed great growth in net income, interest income from the leasing of our systems and earnings for our shareholders. CREG booked net income growth of 65.3% and interest income growth on sales type leasing of 55.2% in the first nine months of 2011 as compared to the corresponding period of last year. We were pleased to also add to our project portfolio with the reconstruction, sale and lease back of a biomass power generation system for our new customer, Shenqiu – whom we've engaged in a leasing arrangement with for an 11-year term. With this addition, we now have an estimated annual capacity of approximately 133 MW going into fourth quarter 2011."

Mr. Ku continued, "As for projects in the development stage, Erdos Phase III, a 25 MW heat power generation system, is currently under construction. Construction for Erdos Phase IV, a 25 MW heat power generation system will be re-started after the delivery of the Phase III system, as we focus our effort on Phase III, which has been delayed. In addition, we are also in the process of constructing a 23 MW system for our customer Shanxi Datong Coal.  Revenue on these systems is recognized at the point of system delivery and monthly lease payments, based on our off-take agreements with the customers, begin thereafter. "

"Due to our first mover advantage and stringent efforts by the government to curb industrial energy usage and waste, CREG's position in the waste-to-energy market in China is unparalleled. While waste-to-energy technology is not new globally, the market for these solutions in China is relatively immature and growing with numerous heavy industrial companies scrambling to reduce their energy usage and comply by government-issued mandates. With our proven track record of successful system integration and reliability, as well as our symbiotic partnership with Cinda to provide energy saving solutions to their industrial portfolio companies, we have the ability to grow tremendously in the coming years. In addition to evaluating new projects to take on, we are continuously seeking more cost-effective financing options for our company and our customers in an effort to better grow our business organically and via acquisition. CREG's business is designed to not only help customers comply with energy savings reform and grow their core business, but also to increase our company's profitability and further grow our recurring revenue stream derived from accruing interest income on sales-type leasing. We look forward to announcing the completion of projects currently under development now and in the future and bringing more savings to our company and our customers," concluded Mr. Ku.

Financial Results for Three Months Ended September 30, 2011

Total sales for the three months ended September 30, 2011, comprised of system sales and contingent rental income, was $18.84 million, as compared to $11.12 million recorded in the same period of 2010, an increase of $7.73 million. The increase was primarily attributed to an increase in system sales and contingent rental income during the third quarter of 2011, as compared to the same 2010 period. In the three months ended September 30, 2011, the Company recorded the completion and sale of the 12MW Shenqiu biomass power generation system ("BMPG") in addition to receiving $0.26 million in contingent rental income, as compared to the same period of 2010 in which sales included the 7MW Zhongbao waste heat power generation ("WHPG") system and $0.56 million in contingent rental income. The contingent rental income resulted from actual usage of the electricity in addition to the minimum lease payments received in the third quarter of 2011 from our Shengwei Group - Tongchuan Project and Erdos Project.  For sales-type leases, sales and cost of sales are recorded at the time of system delivery. Interest income from the sales-type leases is our other major revenue source in addition to system sales revenue

Cost of sales for the third quarter of 2011 was $14.33 million while cost of sales for the comparable period of 2010 was $8.16 million, an increase of $6.15 million. The increase was attributed to the sales-type lease of the Shenqiu BMPG system in the third quarter of 2011, as compared to the same period of 2010 when the Zhongbao WHPG system lease was entered into at a cost of $8.16 million.

Gross profit was $4.52 million for the three months ended September 30, 2011, as compared to $2.96 million for the same period of 2010, reflecting a gross margin of 24% and 27% for the comparable period of 2011 and 2010, respectively. The increase in gross profit was mainly from the sales-type lease of the Shenqiu BMPG system that has a gross profit margin of approximately 23%, and the contingent rental income accounted for 1% of total sales. While in the comparable period of 2010, gross profit was derived from the sales-type lease of the Zhongbao WHPG system that has a profit margin of approximately 23%, and the contingent rental income that accounted for 5% of total sales. Note that due to the uneven sales of our systems in any given year and our recurring revenue stream from sales-type leasing, gross margin can fluctuate significantly and therefore is not the best indicator of our company's profitability.

Interest income on sales-type leases for the three months ended September 30, 2011 was $5.47 million, representing a $1.52 million increase from $3.95 million recorded in the comparable period of 2010.  During the third quarter of 2011, interest income was derived from twelve systems:  two blast furnace top gas recovery turbine ("TRT") systems, two cement heat power generation ("CHPG") systems, one waste gas power generation ("WGPG") system, two WHPG systems associated with our Erdos Phase I project and two WHPG systems of Erdos Phase II project, the Pucheng BMPG system and Zhongbao WHPG system, and the 3rd 9MW WHPG system of Erdos Phase II project. During the third quarter of 2010, interest income was generated from eight systems: two TRT systems, two CHPG systems, one WGPG system, one BMPG system, and two WHPG systems associated with our Erdos Phase I project.

Operating expenses consisted of selling, general and administrative expenses totaled $0.38 million for the third quarter of 2011, as compared to $1.80 million for the same period of 2010, a decrease of $1.41 million or 78%. The decrease was mainly due to $0.16 million for stock option compensation incurred during the nine months ended September 30, 2011, as compared to $1.11 million for the same period of 2010, in addition to decreased expenses in our rental, low value consumable goods and insurance as a result of the improvement on cost control by management in the effort of further growing the business.

Net income for the three months ended September 30, 2011 was $8.66 million, as compared to $3.05 million for the same period of 2010, an increase of $5.61 million. This increase in net income was mainly due to the sale of the Shenqiu biomass power generation system during the third quarter, and increased interest income from lease payments for energy saving systems as compared to the third quarter of 2010.

For the three months ended September 30, 2011, GAAP diluted EPS was $0.16 with approximately 54.95 million shares of common stock outstanding, as compared with $0.06 in the same period of 2010 when the Company had 49.25 million shares of common stock outstanding.

Financial Results for Nine Months Ended September 30, 2011

Total sales for the nine months ended September 30, 2011, comprised of system sales and contingent rental income, was $30.77 million, as compared to $43.78 million recorded in the same period of 2010, a decrease of $13.01 million. The decrease was a result of lower system sales and a decrease in contingent rental income during the nine-month period of 2011, as compared to the same 2010 period. In the nine months ended September 30, 2011, the company recorded the completion and sale of the 3rd 9MW capacity power station of the Erdos Phase II project and the Shenqiu BMPG system through sales-type leasing arrangement in addition to receiving $0.85 million from contingent rental income. In comparison, for the same period in fiscal year 2010, the company recorded the completion and sale of the second 9MW capacity power station of the Erdos Phase I project, the completion of the transformation and sale of the Pucheng BMPG system, the completion of the transformation and sale of the Zhongbao WHPG system and contingent rental income of $1.31 million from actual usage of the electricity in addition to the minimum lease payments received from our Shengwei Group - Tongchuan Project, Erdos Project and Shenmu Project. For the sales-type leases, sales and cost of sales are recorded at the time of system delivery. Interest income from the sales-type leases is our other major revenue source in addition to sales revenue. 

Cost of sales for the nine months ended September 30, 2011 was $22.85 million while cost of sales for the comparable period of 2010 was $32.76 million, a decrease of $9.91 million. The 3rd 9MW capacity power station of the Erdos Phase II project and Shenqiu BMPG system were completed and sold during the nine months ended September 30, 2011, as compared to the same period of 2010 when cost of sales consisted of the second 9MW capacity power station of Erdos Phase I project, the Pucheng BMPG system and the Zhongbao WHPG System.

Gross profit was $7.92 million for the nine months ended September 30, 2011, as compared to $11.02 million for the same period of 2010, reflecting a gross margin of 26% and 25% for the comparable period of 2011 and 2010, respectively.

Interest income on sales-type leases for the nine months ended September 30, 2011 was $16.09 million, a $5.72 million increase from $10.37 million recorded in the comparable period of 2010.  During the nine months ended September 30, 2011, interest income was derived from twelve systems:  two TRT systems, two CHPG systems, one WGPG system, two WHPG systems associated with our Erdos Phase I project and two systems of the Erdos Phase II project, the Pucheng BMPG system, the Zhongbao WHPG system, and the 3rd 9MW WHPG system of Erdos Phase II project. During the nine months ended September 30, 2010, interest income was generated from eight systems: two TRT systems, two CHPG systems, one WGPG system, two WHPG systems associated with Erdos Phase I project, and the Pucheng BMPG system.

Operating expenses consisting of selling, general and administrative expenses totaled $3.83 million for the nine months ended September 30, 2011 as compared to $4.54 million for the same period of 2010, a decrease of $0.71 million or 16%. The decrease was mainly due to $1.61 million stock option compensation incurred during the nine months ended September 30, 2011, as compared to $2.52 million for the same period of 2010, partially offset by proportional increases in our payroll, welfare, travel and marketing expenses as a result of the continuous expansion of our business.

Net income for the nine months ended September 30, 2011 was $16.91 million, as compared to $10.23 million for the same period of 2010, an increase of $6.68 million. This increase in net income was mainly due to a decrease in operating expenses and an increase in interest income from lease payments for energy saving systems, as compared to the same period of 2010.

For the nine months ended September 30, 2011, GAAP diluted EPS was $0.33 with approximately 55.08 million shares of common stock outstanding, as compared with $0.21 in the same period of 2010 when the Company had 49.37 million shares of common stock outstanding.

Financial Position as of September 30, 2011

The Company had cash and cash equivalents of $19.70 million, other current assets of $11.68 million, non-current assets of $180.12 million, current liabilities of $33.81 million and noncurrent liabilities of $72.77 million. Total shareholders' equity was $99.51 million, as compared to $70.81 million as of December 31, 2010.

Net Investment in Sales-Type Leases as of September 30, 2011

The Company, through its subsidiary, Shanghai TCH Energy Technology Co., Ltd ("Shanghai TCH"), sells and leases energy saving systems and equipment. Under sales-type leases, Shanghai TCH leased the following: TRT systems to Xingtai and Zhangzhi with terms of 5 and 13 years, respectively; CHPG systems to Tong Chuan Shengwei and Jin Yang Shengwei for 5 years, respectively; WGPG systems to Shenmu for 10 years; BMPG systems to Pucheng and Shenqiu for terms of 15 years and 11 years, respectively; and a power and steam generating system from waste heat from metal refining to Erdos for 20 years. The components of the net investment in sales-type leases as of September 30, 2011 and December 31, 2010 are as follows:  

2011

2010

Total future minimum lease payments receivable              

$452,765,015

$379,641,671

Less: executory cost

(114,018,386)

(99,866,170

Less: unearned interest income

(183,062,575)

(154,564,733)

Net investment in sales-type leases

155,684,054

125,210,768

      Current portion

9,365,951

7,624,637

      Noncurrent portion

$146,318,103

$117,586,131

As of September 30, 2011, the future minimum rentals to be received on non-cancelable sales-type leases by years are as follows: 

2012

$40,834,910

2013

39,734,306

2014

35,858,665

2015

31,423,265

2016

31,423,265

Thereafter                                                                        

273,490,604

Total

$452,765,015

Non-GAAP Financial Measures

The Company believes that "adjusted net income" and "adjusted earnings per share" information, when taken in conjunction with reported results, provide a useful measure of financial performance since they eliminate the impact of certain non-recurring, non-cash charges. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Additionally, the non-GAAP financial measures used by CREG may not be comparable to non-GAAP financial measures used by other companies.

Non-GAAP net income was $8.65 million in the three months ended September 30, 2011, as compared to $3.05 million in the same period of 2010. For the nine months ended September 30, 2011, Non-GAAP net income was $16.91 million, as compared to 10.23 million in the same nine-month period of 2010.

(In '000s of U.S. Dollars, except for per share data)

THREE MONTHS  ENDED SEPT 30

NINE MONTHS  ENDED SEPT 30

Adjusted Net Income and EPS

2011

2010

2011

2010

Net Income

8,655

3,047

16,913

10,227

Adjustments

Deferred Income Taxes

1,408

664

2,016

2,496

Interest expense related to beneficiary conversion feature of convertible debentures

1,075

446

4,420

1,326

Stock based compensation expenses

166

1,114

1,611

2,521

Interest expense from changes in conversion liability

575

----

(5,558)

----

Adjusted Net Income (1)

11,878

5,271

19,401

16,570

Basic Weighted Average Shares Outstanding (Shares)

43,533

49,246

41,659

49,372

Adjusted EPS in Non-GAAP (1)

0.27

0.11

0.47

0.34

  (1) CREG provides adjusted net income and earnings per share on a non-GAAP basis that excludes non-cash, share-based compensation expense and non-cash interest expense on the amortization of the beneficial conversion feature for the convertible notes and non-cash deferred income tax expenses, as described below, to enable investors to better assess the Company's operating performance. The non-GAAP measures are described below and reconciled to the corresponding GAAP measure in the section below titled "About Non-GAAP Financial Measures."

Third Quarter 2011 Financial Results Conference Call

The Company will host a conference call at 8:30 a.m. ET on Tuesday, November 15, 2011, to discuss the Company's third quarter 2011 financial results. Mr. Guohua Ku, Chief Executive Officer, and Mr. David Chong, Chief Financial Officer, will be hosting the call.

Investors are invited to participate on the live call by dialing 1-877-407-4018 for domestic and. 1-201-689-8471 for international.  For investors that would like to listen to the webcast, please log on to http://viavid.net/dce.aspx?sid=00008F7E approximately 5 minutes before the start of the call. Please reference event ID: 382472.

If you are unable to participate in the call at this time, a replay of the call will be available for one week following the call starting at 11:30 a.m. ET November 15, 2011 and ending at 11:59 p.m. ET on November 22, 2011. To list to the replay, domestic investors can dial +1 (877) 870-5176 and International investors can dial +1 (858) 384-5517.  The pass code for the replay is: 382472.

For more information regarding China Recycling Energy Corp's financial performance during the three and nine months ended September 30, 2011, please refer to the Quarterly Report on Form 10-Q to be filed with the Securities and Exchange Commission.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude the effect of non-cash, non-operating expenses related to the Convertible Notes issued in April 2008, and the compensation expenses for the fair value of stock options, as well as deferred income tax expenses. The Company uses non-GAAP financial measures when it internally evaluates the performance of its business and makes operating decisions, including internal budgeting and performance measurement. The Company believes that providing the non-GAAP measures is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand CREG's financial performance in comparison to historical periods, and it allows investors to evaluate CREG's performance using the same methodology and information as that used by the Company's management. However, investors need to be aware that non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP, and they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure.

About China Recycling Energy Corp.

China Recycling Energy Corp. (NASDAQ: CREG or "the Company") is based in Xi'an, China and provides environmentally friendly waste-to-energy technologies to recycle industrial byproducts for steel mills, cement factories and coke plants in China. Byproducts include heat, steam, pressure, and exhaust to generate large amounts of lower-cost electricity and reduce the need for outside electrical sources. The Chinese government has adopted policies to encourage the use of recycling technologies to optimize resource allocation and reduce pollution. Currently, recycled energy represents only an estimated 1% of total energy consumption and this renewable energy resource is viewed as a growth market due to intensified environmental concerns and rising energy costs as the Chinese economy continues to expand. The management and engineering teams have over 20 years of experience in industrial energy recovery in China. For more information about CREG, please visit http://www.creg-cn.com.

Safe Harbor Statement

This press release may contain certain "forward-looking statements" relating to the business of China Recycling Energy Corp. and its subsidiary companies. All statements, other than statements of historical fact included herein are "forward-looking statements." These forward-looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website at http://www.sec.gov. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

For more information, please contact:

In China: Mr. Leo Wu Investor Relations China Recycling Energy Corp. Tel:   +86-29-8765-1096 Email: tch@creg-cn.com

In USA: Mr. Howard Gostfrand American Capital Ventures, Inc. Tel:   +1-305-918-7000 Email: info@amcapventures.com

CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

2011

2010

ASSETS

(UNAUDITED)

CURRENT ASSETS

    Cash & equivalents

$   19,696,711

$   11,072,250

    Restricted cash

-

2,151,690

    Current portion of investment in sales type leases, net

9,365,951

7,624,637

    Interest receivable on sales type leases

1,906,795

554,930

    Prepaid expenses

6,043

33,274

    Other receivables

399,105

393,015

   Prepaid loan fees - current

78,492

-

       Total current assets

31,453,097

21,829,796

NON-CURRENT ASSETS

    Prepaid interest

807,251

774,609

    Prepaid loan fees - noncurrent

302,710

-

    Investment in sales type leases, net

146,318,103

117,586,131

    Long term deposit

384,265

-

    Property and equipment, net

126,586

159,968

    Construction in progress

32,179,180

25,377,983

       Total non-current assets

180,118,095

143,898,691

TOTAL ASSETS

$ 211,571,192

$ 165,728,487

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

    Accounts payable

$   11,053,151

$     5,012,640

    Notes payable - bank acceptances

-

2,868,921

    Taxes payable

1,145,042

1,631,900

    Interest payable on Trust loans

3,990,907

380,524

    Accrued liabilities and other payables

2,631,243

2,874,058

    Advance from related parties

1,245,913

1,365,877

    Convertible notes - current

3,000,000

4,403,078

    Accrued interest on convertible notes - current

108,000

191,828

    Deferred tax liability - current

1,563,843

1,188,504

    Bank loans payable - current

3,776,613

1,811,950

    Trust loans payable - current

5,295,127

5,081,010

    Current portion of long term payable

1,149,448

-

        Total current liabilities

34,959,287

26,810,290

NONCURRENT LIABILITIES

     Shares to be issued

11,780,471

11,780,471

     Deferred tax liability, net

8,435,634

6,429,139

     Long term liability

298,982

286,892

     Long term payable

5,265,491

-

     Convertible notes, net of discount due to beneficial conversion feature

5,565,156

4,095,356

     Conversion liability

2,920,892

6,438,035

     Accrued interest on long term convertible notes

341,573

419,922

     Bank loans payable

3,776,613

2,264,937

     Trust loans payable

34,382,917

32,992,586

        Total noncurrent liabilities

72,767,729

64,707,338

        Total liabilities

107,727,016

91,517,628

CONTINGENCIES AND COMMITMENTS

-

-

STOCKHOLDERS' EQUITY

    Common stock, $0.001 par value; 100,000,000 shares

         authorized, 43,533,174 and 39,198,982 shares issued and outstanding as of

         September 30, 2011 and December 31, 2010, respectively

43,533

39,200

    Additional paid in capital

52,045,454

44,666,824

    Statutory reserve

6,756,077

5,203,605

    Accumulated other comprehensive income

10,488,937

6,083,840

    Retained earnings

30,173,358

14,812,630

        Total Company stockholders' equity

99,507,359

70,806,099

        Noncontrolling interest

4,336,817

3,404,760

        Total equity

103,844,176

74,210,859

TOTAL LIABILITIES AND EQUITY

$ 211,571,192

$ 165,728,487

CHINA RECYCLING ENERGY CORPORATION  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30,

THREE MONTHS ENDED SEPTEMBER 30,

2011

2010

2011

2010

Revenue

    Sales of systems

$ 29,927,036

$ 42,477,423

$ 18,583,238

$ 10,556,114

    Contingent rental income

846,579

1,305,836

261,556

563,198

Total revenue

30,773,615

43,783,259

18,844,794

11,119,312

Cost of sales

    Cost of systems

22,850,068

32,763,130

14,325,396

8,162,970

Total cost of sales

22,850,068

32,763,130

14,325,396

8,162,970

Gross profit

7,923,547

11,020,129

4,519,398

2,956,342

Interest income on sales-type leases

16,093,099

10,371,093

5,466,295

3,952,830

    Total operating income

24,016,646

21,391,222

9,985,693

6,909,172

Operating expenses

    General and administrative

3,834,242

4,542,859

387,786

1,796,686

Income from operations

20,182,404

16,848,363

9,597,907

5,112,486

Non-operating income (expenses)

    Interest income

84,966

44,444

26,324

23,010

    Interest expense

(8,146,088)

(1,826,547)

(2,534,629)

(638,098)

    Changes in conversion liability fair value

9,978,573

-

3,845,667

-

    Other income (expenses)

(43,597)

1,523

(1,846)

5,091

    Financial expense

(2,530)

-

(592)

-

    Total non-operating income (expenses), net

1,871,324

(1,780,580)

1,334,924

(609,997)

Income before income tax

22,053,728

15,067,783

10,932,831

4,502,489

Income tax expense

4,369,257

4,250,562

2,189,626

1,352,519

Income before noncontrolling interest

17,684,471

10,817,221

8,743,205

3,149,970

Less: Income attributable to noncontrolling interest

771,271

589,819

87,973

103,246

Net income attributable to China Recycling Energy Corp

16,913,200

10,227,402

8,655,232

3,046,724

Other comprehensive items

    Foreign currency translation gain        attributable to China Recycling Energy Corp

4,405,097

1,220,304

2,045,695

876,356

    Foreign currency translation gain        attributable to noncontrolling interest

160,786

37,934

73,953

27,384

Comprehensive income attributable to China Recycling Energy Corp

$ 21,318,297

$ 11,447,706

$ 10,700,927

$   3,923,080

Comprehensive income attributable to noncontrolling interest

$      932,057

$      627,753

$      161,926

$      130,630

Basic weighted average shares outstanding

41,659,787

38,778,035

43,533,174

38,778,035

Diluted weighted average shares outstanding *

55,078,137

49,371,944

54,950,761

49,246,265

Basic earnings per share

$            0.41

$            0.26

$            0.20

$            0.08

Diluted earnings per share *

$            0.33

$            0.21

$            0.16

$            0.06

*   Interest expense on convertible notes is added back to net income for the computation of diluted EPS.

CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30,

2011

2010

CASH FLOWS FROM OPERATING ACTIVITIES:

   Income including noncontrolling interest

$ 17,684,471

$ 10,817,221

   Adjustments to reconcile income including noncontrolling

     interest to net cash used in operating activities:

   Changes in sales type leases receivables

(29,927,036)

(30,724,470)

   Depreciation and amortization

43,918

9,298

   Amortization of prepaid loan fees

19,623

-

   Amortization of discount related to conversion feature of convertible note

4,420,353

1,326,274

   Interest expense from changes in conversion liability

(9,978,574)

-

   Stock compensation expense

-

602,000

   Stock options and warrants expenses

1,610,897

1,919,102

   Changes in deferred tax

2,015,593

2,495,828

           (Increase) decrease in current assets:

           Interest receivable on sales type lease

(1,299,323)

(315,675)

           Collection of principal on sales type leases

5,283,212

3,267,917

           Prepaid expenses

28,005

294,464

           Other receivables

10,242

(1,163,901)

           Construction in progress

(5,605,957)

(10,226,469)

           Long term deposit

(375,832)

-

   Increase (decrease) in current liabilities:

           Accounts payable

5,701,341

4,004,280

           Taxes payable

(543,434)

996,753

           Interest payable

3,515,463

2,470,914

           Long term liability

292,420

-

           Accrued liabilities and other payables

(632,332)

112,574

           Accrued interest on convertible notes

(154,021)

121,583

   Net cash used in operating activities

(7,890,971)

(13,992,307)

CASH FLOWS FROM INVESTING ACTIVITIES:

   Restricted cash

2,193,151

(752,116)

   Acquisition of property & equipment

(4,676)

(81,526)

   Net cash provided by (used in) investing activities

2,188,475

(833,642)

CASH FLOWS FROM FINANCING ACTIVITIES:

   Issuance of convertible notes

7,583,801

-

   Cash contribution from noncontrolling interest

-

908,279

   Notes payable - bank acceptances

(2,924,202)

-

   Proceeds from loans

4,155,444

15,800,376

   Repayment of loans

(923,432)

-

   Long term payable

6,274,151

-

   Prepaid loan fees

(392,459)

   Advance to related parties

(466,141)

-

   Advance from related parties

300,839

3,504,613

   Net cash provided by financing activities

13,608,001

20,213,268

EFFECT OF EXCHANGE RATE CHANGE ON CASH & EQUIVALENTS

718,956

(10,744)

NET INCREASE IN CASH & EQUIVALENTS

8,624,461

5,376,575

CASH & EQUIVALENTS, BEGINNING OF PERIOD

11,072,250

1,111,943

CASH & EQUIVALENTS, END OF PERIOD

$ 19,696,711

$   6,488,518

Supplemental Cash flow data:

  Income tax paid

$   2,825,975

$   1,307,901

  Interest paid

$   1,726,085

$      269,083

SOURCE China Recycling Energy Corp.



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