China Energy Recovery (PINK:CGYV)

CHINA ENERGY RECOVERY, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2012

On January 14, 2013, CER Energy Recovery (Shanghai) Co., Ltd. (“CER Shanghai”), a wholly-owned subsidiary of China Energy Recovery, Inc. (“CER”), entered into a guaranty contract with Bank of Jiangsu Co., Ltd. Zhenjiang Branch (“Bank of Jiangsu”) to guaranty borrowings made by Kailin Energy Zhenjiang, Ltd. (“Zhenjiang Kailin”) under a comprehensive facility contract between Bank of Jiangsu and Zhenjiang Kailin. The maximum amount of guaranty is RMB 30,000,000 (approximately $4.8 million).

On January 14, 2013, Zhenjiang Kailin and Bank of Jiangsu entered into a six month comprehensive facility contract. The loan bears an annual interest rate of 7.8%. The term of the comprehensive line of credit is from January 09, 2013 to July 09, 2013. During this period, if there is any default by Zhenjiang Kailin, CER Shanghai will provide Bank of Jiangsu with an unconditional and irrevocable guarantee with joint responsibility to ensure that Zhenjiang Kailin will fulfill the duties and responsibilities to repay any amounts of principal and interest due and all other related expenses on time under the facility contract. In addition, Jiangsu SOPO (Group) Company Limited (“Jiangsu SOPO”), a third party customer of CER and related party of Zhenjiang Kailin, also guaranteed this loan and assumed the equal responsibility with CER Shanghai.

Item 1.01 — Entry into a Material Definitive Agreement

On September 5, 2012, Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. (“Shanghai Engineering”), a consolidated variable interest entity of China Energy Recovery, Inc. (“CER”), entered into a short-term loan contract with Bank of Shanghai. The total amount borrowed is RMB 15,000,000 (approximately $2,364,625) and can be used for working capital or similar purposes. This amount is due in one year and carries an annual interest rate of 7.2%. The loan is guaranteed by Mr. Qinghuan Wu, the Company’s Chief Executive Officer and Mrs. Jialing Zhou, Mr. Wu’s wife, and among which RMB 5,000,000 is collateralized by a building located in Shanghai, which is owned by Mr. Qinghuan Wu and his son. In addition, the balance, amounting to RMB 10,000,000, of this loan is guaranteed by Shanghai Chuang Ye Jie Li Financing Guarantee Co., Ltd (“Shanghai Chuangye”), after making a cash deposit of 5% of the total guarantee amount to Shanghai Chuangye. Shanghai Chuangye charged a 3% fee and required a counter-guarantee by CER Energy Recovery (Yangzhou) Co., Ltd. and CER Energy Recovery (Shanghai) Co., Ltd., which are both wholly-owned subsidiaries of CER. Shanghai Chuangye also required a second tier collateralization by the aforementioned building owned by Mr. Wu and his son and 60% of Mr. Wu’s ownership interest in Shanghai Engineering. Since this building had previously been collateralized under a facility agreement entered into with Ningbo Bank, Shanghai branch, this borrowing with the Bank of Shanghai will replace the existing Ningbo Bank facility.

CHINA ENERGY RECOVERY, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2012

(UNAUDITED)

Item 1.01 – Entry into a Material Definitive Agreement

On March 6, 2012, China Energy Recovery (Shanghai) Co., Ltd. (“CER Shanghai”), a wholly-owned subsidiary of China Energy Recovery, Inc. (the “Company”), entered into a short-term comprehensive loan facility with the Bank of Communication, Shanghai Branch. The facility consists of RMB 40,000,000 (approximately $6,300,000) for trade financing or similar purposes. CER Shanghai is entitled to draw down RMB 40,000,000 (approximately $6,300,000) as a short-term loan or RMB 57,000,000 (approximately $9,000,000) as bank acceptance notes after making cash deposit of RMB 17,000,000 (approximately $2,700,000) to the bank. Any amounts due under the loan are repayable no later than January 20, 2013. The loan has been secured by a mortgage on the Company’s new office building in Zhangjiang, Shanghai and guaranteed by Qinghuan Wu, the Company’s Chief Executive Officer.

Item 1.01 – Entry into a Material Definitive Agreement

In December 2011, China Energy Recovery (Shanghai) Co., Ltd., a wholly-owned subsidiary of  China Energy Recovery, Inc. (”CER”), borrowed $789,639 (RM 5,000,000) from Shanghai Pudong Zhanjiang  Micro-credit Co., Ltd. The loan is secured by a mortgage of a building in Shanghai, which is held by Jiangsu SOPO (Group) Company Limited and guaranteed by Mr. Qinghuan Wu, the Chairman and Chief Executive Office of CER. The loan carries an annual interest rate of 12% and the due date of the loan is June 9, 2012.

The loan was drawn down in two installments, with $315,353 (RMB 2,000,000) and $474,286 (RMB 3,000,000) being drawn down on December 15, 2011 and December 22, 2011, respectively.

Third Quarter 2011 Results

SHANGHAI, Nov. 9, 2011 /PRNewswire-Asia/ -- China Energy Recovery Inc. (CGYV.PK) ("CER"), an international leader in the design, fabrication and installation of waste heat recovery systems, announced today that it signed a contract with Jiangsu SOPO Group to manufacture and install the quay's pot area project and exterior tube rack which located in Zhenjiang City.

The contract is valued at 50 million RMB or $7.84 million (US).  The system is scheduled to be completed in 75 days.

"We are happy to see that our long-term customer, Sopo Group, choosing us again!"  Commented Mr. Qinghuan Wu, CER's CEO, "the successful company needs not only the more and more new customers, but also the old friends"

Highlights for the 2nd quarter 2011, compared with the same quarter 2010:

• Revenues increased 154% to $18.3 million.
• Gross profit increased 217% to $3,142,000.
• Net income increased 294% to $1,067,000.
• EPS was $0.03 vs $0.01

Highlights for the half year, compared with first half year 2010:

• Revenues increased 127% to $25.6 million.
• Gross profit increased 172% to $4,381,000.
• Net income increased 48% to $681,000.
• EPS was $0.02 vs $0.02

"Revenue growth in the second quarter and first half of the year reflects our marketing efforts and new manufacturing facility and, in particular, one significant EPC contract," CER Chief Executive Officer Qinqhuan Wu said. Mr. Wu continued, "In the first half of 2011, with our new manufacturing facility in operation and our ability to perform more EPC contracts, we saw improvements in our revenues and gross profits. For the second half of 2011, based on our current contracts and production schedule, we anticipate positive results in line with the first half of the year."

In October 2010, the State Council announced that China will continue to focus on supporting and developing the strategic new industries, such as energy-saving, new energy, high-side equipment manufacturing industries. The government encourages energy recycling and recovery to increase the efficiency of energy utilization. The goal is to increase the GDP of such strategic new industries to 8% and 15% of the total GDP, for the years 2015 and 2020, respectively. In February 2011, Ministry of Industry and Information Technology announced that China will continue to encourage energy-saving industries, to accelerate the development of recycling economics, recovery industries and energy-saving equipment. The supporting measures will be launched to achieve reductions in energy utilization and to mitigate the release of harmful emissions.

Facing a possible large market opportunity and potential government supports, we decided to enlarge our production capacity by setting up new production base. Our plan is to establish CER Yangzhou as a world-class international manufacturing facility of waste heat equipment, in both products and technology. We plan to make highly efficient energy-saving products, make using advanced manufacturing processes and equipment. We intend, for this manufacturing facility to embody a completely new look of a modern factory, thus making the Company more competitive; while promoting the development of the local economy and further exploiting the manufacturing advantages in renewable energy equipment and waste heat recovery core equipment. During the last years, production constraints limited our growth and affected our financial profitability. Thus in 2010, we focused much of our energies on the construction of our new manufacturing facility in,  Yangzhou, China, and completed the first phase of construction of the plant by January 2011. As a result, our production facilities are currently held in both Vessel Works Division and CER Yangzhou. We will complete the transfer of the remaining production function from Vessel Works Division to CER Yangzhou by end of April 2011. Phase two of the facility is still under construction and is anticipated to be complete in 2012.
 
In order to close down our existing manufacturing facility at Vessel Works Division in Shanghai, we deliberately accepted fewer product orders beginning in June 2010. However, with the factors mentioned above and the world economy beginning to recover, we took more orders than anticipated from existing and new customers. In year 2010, the Company doubled the amount of sales contracts to $65 million. The main reason is that we focused more attention and efforts on EPC contracts, which consolidated our leadership position in these sectors and contributed to higher revenue. All the EPC contracts are signed for projects with HRS techniques, which have been developed into the mature period in China. These techniques have been fully accepted by most of our customers. With the upward trend in energy price, we expect HRS techniques will have a bright future in the next five to ten years. Besides, with our widely recognized brand name and reputation for quality goods in the sulfuric acid industry, we believe we will benefit from this advantage and will have more opportunities in the future to put our expertise to good use.
 
With phase one of the new facility complete, we are prepared to expand our customer base and enter into more sectors. 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 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 and we intend to enter these markets through partnerships.

China Energy Recovery files 2009 10K:

• Our revenues include revenues from sales of energy recovery systems, provision of design services and EPC services. Revenues decreased to $22,194,443 for the year ended December 31, 2009 as compared to $24,904,776 for the year ended December 31, 2008, a decrease of $2,710,333 or 10.9%. This decrease was mainly due to the decrease in the overall amount of revenue under our outstanding contracts which is consistent with the worldwide economic crisis.

• Net loss was $886,480, for the year ended December 31, 2009 as compared to net income of $1,374,902, for the year ended December 31, 2008, a decrease of $2,261,382 or 164.5%. The decrease in net income is mainly due to the decrease of gross profit and the increase in operating expenses, offset by the change in fair value of the warrants and derivative liability.

• EPS was $(0.03) vs. $0.05.

• Non-GAAP EPS was $(0.03) vs. $0.11.

With the recovery of the economy and the Chinese government’s emphasis on energy efficiency and pollution reduction, it is anticipated that the business will continue to grow in future periods. We believe we are among the few companies in the industry with the necessary design and engineering capability to satisfy the growing market demand for larger energy recovery systems. Further, we have been expanding our marketing efforts to win new contracts by attending trade events both inside China and overseas, hosting focused industry seminars, increasing selling efforts to repeat customers and actively pursuing new customer prospects, and partnering with large engineering houses and foreign industry leaders. We are also building a new state-of-the-art manufacturing facility expected to be partly completed and into operation in late 2010, which is designed to expand our production capacity and solve the capacity limitations we experience at our current leased facility. The new plant with its higher efficiency and greater capacity, once in place, is expected to enable us to increase our sales and gross margin.

Management believes that as a result of our ongoing efforts to improve operational efficiency and implement stricter cost controls and cost reduction measures, including attempts to minimize those expenses related to public company operations, enhance accounts receivable collection to reduce bad debt expenses, and control headcount and salary costs, our operating expenses will not necessarily increase in proportion to the anticipated increase in our sales, and we will also benefit from economies of scale as we grow our sales and secure orders with larger contract values in the future periods. Management expects that the current global recession will adversely affect the demand for our products and thus slow our growth in 2010 as compared to prior years. However, management anticipates that our sales revenues will continue to grow in future as we currently have back-log orders and continue to see an increasing awareness and demand for our energy efficiency solutions and systems both in China and in other countries.

We believe that funds generated from our operations and available from our credit facilities will be sufficient to fund current business operations over at least the next twelve months. Notwithstanding our resources for operations on a going forward basis at current operating levels, we will need capital for our expansion plans, including funding for the building of our proposed new plant. To improve our cash and cash requirement position, we will take steps to improve the collection of receivables, examine costs in an attempt to control or reduce expenses and use non-cash compensation, such as stock grants, where appropriate, all of which should have a positive effect on our working capital and increase our cash resources.

On May 21, 2009, the Company entered into a series of agreements for an unsecured term loan arrangement with a private investor. In connection with this financing, we agreed to issue a two-year 9.5% Unsecured Convertible Promissory Note in the principal amount of $5 million, which may be converted into common stock at a conversion price of $1.80 per share. The Convertible Note Agreement permitted the Company to draw down up to $5,000,000 in principal amount, within six months of the making. Any amount borrowed bears interest at 9.5%, payable every six months, calculated and compounded quarterly. Each draw is due twenty-four months after the draw down date, together with any accrued and unpaid interest. The Company may pre-pay the note at any time, at its option. On September 28, 2009, the Company drew down $5,000,000, the full amount available. The proceeds of this loan are restricted to only the expenses related to the acquisition and construction of a new plant to be located in China to expand our production capacity, including the purchase of land for the plant, buildings and equipment and for facilitating loans from one or more in-China banks and institutional lenders for the plant. We have used $3,510,000 of the Convertible Note Agreement proceeds for the purchase of land use rights and design and construction costs for the plant, and we will use the balance of the proceeds for the commitments to the local government to purchase more land use rights and other costs associated with the plant. No interest was paid in 2009.

On February 1, 2010, the Company entered into a series of agreements for a loan arrangement with two lenders. The proceeds of this loan are generally for construction of a new plant in China. The aggregate principal amount of the loan under the two Loan Agreements is $4,000,000. The principal is due January 15, 2013, and bears interest at the annual rate of 15.1%. As security for this Loan Agreement and the other loan agreements of all the lenders, Mr. Qinghuan Wu, the Chairman and Chief Executive Officer of CER pledged 8,000,006 shares of common stock of CER, which shares will be held in escrow for the benefit of all the lenders.

As a result of the Company not filing its reports with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended, on a timely basis for the fiscal year ended December 31, 2009 and the quarters ended March 31, 2010 and June 30, 2010, the Company was in violation of various loan covenants and default terms with respect its obligation to file SEC reports and comply with applicable laws under the terms of the loan for $4,000,000 in principal amount due January 15, 2013. The violation of the covenants and default permit the note holders to accelerate the repayment of the full amount of the principal and interest due on the loan. To date, the lenders have not delivered any notice of acceleration and have not indicated that they intend to give such a notice. One of the lenders representing $2,000,000 in principal amount of the loans provided to the Company on November 1, 2010, a waiver of the covenant and default terms and also provided sufficient time to make the necessary past due filings and the report for the quarter ended September 30, 2010, before a covenant violation or default would result again concerning these issues.

'After the temporary slowdown in the first quarter, the second quarter topline results have put us back on the track we are used to being on and we expect to continue to improve our bottomline results to our regular levels by controlling our operating expenses while continuing to achieve expansion of our revenues,' commented Mr. Qinghuan Wu, Chairman and CEO of China Energy Recovery. 'Though we experienced a temporary impact from the recent economic downturn in the first quarter, we have seen that many Chinese industrial customers have resumed their facility expansion or retrofit plans as a result of the recent China's economic stimulus package. With our strong design and engineering capabilities, we are well equipped to capture the trend of the growing market demand for larger sized, more sophisticated energy recovery systems which we believe will ensure us a sustained growth in the years to come. With our current growing order backlog, we also expect to see an improved annual performance in 2009 compared to that in 2008.'

Source: PR Newswire (August 13, 2009)

China Energy Recovery has updated previous guidance information.  The company did not provide pre-tax margin information as is has in the past.

-- Q2 2009 sales expected to exceed average 2008 level of $5.8 million

-- 2009 annual performance expected to be an improvement on 2008

Source: see release

The company lowers guidance for full year 2009 in its First Quarter Release.  Revenue is expected to be between 94 and 98 million and net income between 26.8 to 28 million.  Also did not provide any specific eps guidance.

Previous guidance from Fourth Quarter release was  Revenue of 107.5 million and Net Income of 32.9 million with eps of .70

China Energy Recovery backlog increases 86% to RMB223 million in contract value (approximately US$32.7 million based on the exchange rate as of April 28, 2009).  These orders are expected to be completed in the next 12 months with the majority to be completed by the end of 2009.

Using 2008 year end data of:

• Pre-tax margins, 10.34% (Adjusted for non-cash expenses of $720K)
• Tax rate 34% 
• Diluted shares outstanding, 27,033,819

The backlog figure translates into $0.08.  In 2008 the company reported EPS of $0.04 ($0.07 non-GAAP, after adding back non-cash expenses ).