UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________________ to _____________________________
Commission File Number: 000-53283
CHINA ENERGY RECOVERY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 90-0459730 |
(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | Identification No.) |
Building#26, No. 1388 Zhangdong Road, | |
Zhangjiang Hi-tech Park | |
Shanghai, China | 201203 |
(Address of Principal Executive Offices) | (Zip Code) |
+86 (0)21 2028-1866
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | £ | Accelerated filer £ | |
Non-accelerated filer | £ | Smaller reporting company | S |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares outstanding of the registrant's common stock as of May 31, 2012:
31,085,859 shares of Common Stock, $0.001 par value per share
TABLE OF CONTENTS
Page | |||
Part I | Financial Information | ||
Item 1. | Unaudited Consolidated Financial Statements | 3 | |
Consolidated Balance Sheets as of December 31, 2011 and March 31, 2012 | 3 | ||
Consolidated Statements of Operations and Other Comprehensive (Loss) Income for the Three Months Ended March 31, 2011 and 2012 | 4 | ||
Consolidated Statements of Shareholders' Equity for the Year ended December 31,2011 and Three Months Ended March 31, 2012 | 5 | ||
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2012 | 6 | ||
Notes to the Consolidated Financial Statements | 7 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 38 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 52 | |
Item 4. | Controls and Procedures | 52 | |
Part II | Other Information | ||
Item 1. | Legal Proceedings | 52 | |
Item 1A. | Risk Factors | 53 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 53 | |
Item 3. | Defaults Upon Senior Securities | 54 | |
Item 4. | Mine Safety Disclosures | 54 | |
Item 5. | Other Information | 54 | |
Item 6. | Exhibits | 54 |
2 |
PART I
FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
CHINA ENERGY RECOVERY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2011 AND MARCH 31, 2012
(UNAUDITED)
December 31, | March 31, | |||||||
2011 | 2012 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 3,579,446 | $ | 919,048 | ||||
Restricted cash | 882,428 | 930,509 | ||||||
Notes receivable | 1,779,233 | 2,918,428 | ||||||
Accounts receivable, net - third parties | 11,639,138 | 13,788,006 | ||||||
Accounts receivable, net - related party | 9,088,157 | 4,763,700 | ||||||
Inventories, net | 14,678,312 | 15,346,281 | ||||||
Other current assets and receivables | 333,376 | 339,914 | ||||||
Advances on purchases | 21,276,652 | 15,934,168 | ||||||
Short-term investment | 79,355 | 79,395 | ||||||
Total current assets | 63,336,097 | 55,019,449 | ||||||
NON-CURRENT ASSETS: | ||||||||
Property, plant, and equipment, net | 26,159,602 | 27,391,061 | ||||||
Deferred tax assets | 621,940 | 945,973 | ||||||
Intangible assets | 4,999,883 | 4,972,541 | ||||||
Long term accounts receivable, net - third parties | - | 3,638,024 | ||||||
Long term accounts receivable, net - related party | - | 7,920,686 | ||||||
Total non-current assets | 31,781,425 | 44,868,285 | ||||||
Total Assets | $ | 95,117,522 | $ | 99,887,734 | ||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 21,625,205 | $ | 23,191,789 | ||||
Notes payable | 1,396,648 | 2,826,462 | ||||||
Accrued expenses and other liabilities | 1,269,950 | 3,092,100 | ||||||
Advances from customers | 42,742,078 | 42,048,490 | ||||||
Taxes payable | 1,220,334 | 2,559,486 | ||||||
Long term loan, current portion | 4,850,945 | 4,896,982 | ||||||
Short term loans | 14,388,649 | 13,646,413 | ||||||
Derivative liability, current | 21,274 | 35,918 | ||||||
Total current liabilities | 87,515,083 | 92,297,640 | ||||||
NON-CURRENT LIABILITIES: | ||||||||
Warrant liability | 22,806 | 49,557 | ||||||
Deferred revenue | 89,068 | 197,154 | ||||||
Total non-current liabilities | 111,874 | 246,711 | ||||||
Total Liabilities | 87,626,957 | 92,544,351 | ||||||
SHAREHOLDERS' EQUITY: | ||||||||
Preferred stock($0.001 par value; 50,000,000 shares authorized, 200,000 shares issued and outstanding as of both December 31, 2011 and March 31, 2012) | 189 | 189 | ||||||
Common stock($0.001 par value; 100,000,000 shares authorized, 31,085,859 and 31,085,859 shares issued and outstanding as of December 31, 2011 and March 31, 2012, respectively) | 31,085 | 31,085 | ||||||
Additional paid-in-capital | 8,758,236 | 8,765,303 | ||||||
Accumulated deficit | (3,094,667 | ) | (3,288,943 | ) | ||||
Statutory reserves | 509,596 | 509,596 | ||||||
Accumulated other comprehensive income | 1,286,126 | 1,326,153 | ||||||
Total shareholders' equity | 7,490,565 | 7,343,383 | ||||||
Total liabilities and shareholders' equity | $ | 95,117,522 | $ | 99,887,734 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3 |
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)
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
(Note 2(v)) | ||||||||
REVENUES | ||||||||
Third parties: | ||||||||
Engineering, procurement, and construction - third parties | $ | 4,441,880 | $ | 19,411,694 | ||||
Engineering, procurement, and construction - related party (Note 16) | 1,774,657 | 5,830,916 | ||||||
Total EPC revenues | 6,216,537 | 25,242,610 | ||||||
Products - third parties | 1,163,522 | 3,597,488 | ||||||
Total revenue | 7,380,059 | 28,840,098 | ||||||
COST OF REVENUES | ||||||||
Cost of revenues – EPC (Note 16) | (4,979,718 | ) | (23,458,867 | ) | ||||
Cost of revenues - products | (1,161,423 | ) | (2,639,161 | ) | ||||
Total cost of revenues | (6,141,141 | ) | (26,098,028 | ) | ||||
GROSS PROFIT | 1,238,918 | 2,742,070 | ||||||
Selling, general, and administrative expenses | (1,813,081 | ) | (2,053,335 | ) | ||||
(LOSS) INCOME FROM OPERATIONS | (574,163 | ) | 688,735 | |||||
OTHER INCOME (EXPENSE): | ||||||||
Change in fair value of derivative liability for warrant | 477,889 | (26,751 | ) | |||||
Change in fair value of derivative liability for loan | 162,217 | (14,644 | ) | |||||
Subsidy income | - | 90,679 | ||||||
Other non-operating expenses, net | (190,617 | ) | (30,622 | ) | ||||
Interest expense, net | (369,525 | ) | (430,789 | ) | ||||
Total other income (expense), net | 79,964 | (412,127 | ) | |||||
(LOSS) INCOME BEFORE INCOME TAXES | (494,199 | ) | 276,608 | |||||
Income Tax Benefit (Expense) | 17,752 | (470,884 | ) | |||||
NET LOSS | (476,447 | ) | (194,276 | ) | ||||
OTHER COMPREHENSIVE INCOME: | ||||||||
Foreign currency translation adjustment | 220,769 | 40,027 | ||||||
COMPREHENSIVE LOSS | $ | (255,678 | ) | $ | (154,249 | ) | ||
LOSS PER SHARE: | ||||||||
Basic | $ | (0.02 | ) | $ | (0.01 | ) | ||
Diluted | $ | (0.02 | ) | $ | (0.01 | ) | ||
WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||
Basic | 30,930,949 | 31,033,148 | ||||||
Diluted | 30,930,949 | 31,033,148 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4 |
CHINA ENERGY RECOVERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||||||||||||||
Preferred Stock | Common stock | paid-in | Statutory | Accumulat | comprehensive | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | reserves | ed deficit | income/(loss) | Total | ||||||||||||||||||||||||||||
(Note 2(v)) | (Note 2(v)) | |||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 | 200,000 | 189 | 30,906,266 | 30,906 | 8,313,385 | 132,802 | (4,713,541 | ) | 410,646 | 4,174,387 | ||||||||||||||||||||||||||
Common stock issued for consulting services | - | - | 50,385 | 50 | 40,258 | - | - | - | 40,308 | |||||||||||||||||||||||||||
Restricted common stock issued related to long-term loan | - | - | 129,208 | 129 | 144,369 | - | - | - | 144,498 | |||||||||||||||||||||||||||
Stock based compensation | - | - | - | - | 260,224 | - | - | - | 260,224 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 1,995,668 | - | 1,995,668 | |||||||||||||||||||||||||||
Appropriations to statutory reserves | - | - | - | - | - | 376,794 | (376,794 | ) | - | - | ||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | 875,480 | 875,480 | |||||||||||||||||||||||||||
Balance at December 31, 2011 | 200,000 | 189 | 31,085,859 | 31,085 | 8,758,236 | 509,596 | (3,094,667 | ) | 1,286,126 | 7,490,565 | ||||||||||||||||||||||||||
Stock based compensation | - | - | - | - | 7,067 | - | - | - | 7,067 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (194,276 | ) | - | (194,276 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | 40,027 | 40,027 | |||||||||||||||||||||||||||
Balance at March 31, 2012 | 200,000 | $ | 189 | 31,085,859 | 31,085 | 8,765,303 | 509,596 | (3,288,943 | ) | 1,326,153 | 7,343,383 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5 |
CHINA ENERGY RECOVERY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2012
(UNAUDITED)
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
(Note 2(v)) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (476,447 | ) | $ | (194,276 | ) | ||
Adjustments to reconcile to cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 224,790 | 543,323 | ||||||
Discount reflected in revenue for payment extensions on long-term accounts receivable (Note 3) | - | 1,509,668 | ||||||
Reversal of allowance for doubtful accounts credited to income | (19,783 | ) | - | |||||
Provision for inventories | 26,141 | - | ||||||
Stock based compensation | 35,253 | 7,067 | ||||||
Common stock for consulting services | 40,308 | - | ||||||
(Gain) loss from changes in fair value of warrant and derivative liabilities | (640,106 | ) | 41,395 | |||||
Accretion interest on convertible note and long term loan | 126,710 | 46,037 | ||||||
Cancellation of warrants | (15,547 | ) | - | |||||
Capitalized interest | - | (25,040 | ) | |||||
Deferred tax benefit | (191,458 | ) | (324,033 | ) | ||||
Changes in operating assets and liabilities: | - | - | ||||||
Notes receivable | (1,991,767 | ) | (1,139,195 | ) | ||||
Accounts receivable | (5,617,755 | ) | (2,149,721 | ) | ||||
Accounts receivable - related party | - | 4,324,457 | ||||||
Inventories | (964,337 | ) | (673,245 | ) | ||||
Other receivables | 308,414 | (6,538 | ) | |||||
Advances on purchases | (13,559,288 | ) | 5,342,484 | |||||
Long term accounts receivable-related party | 4,679,121 | (9,430,354 | ) | |||||
Long term accounts receivable | - | (3,638,024 | ) | |||||
Accounts payable | 2,466,559 | 2,336,766 | ||||||
Notes payable | - | 1,429,814 | ||||||
Other payables and accrued liabilities | (595,747 | ) | 1,822,144 | |||||
Advances from customers | 11,882,315 | (693,588 | ) | |||||
Advances from customers – related party | 7,300,894 | - | ||||||
Taxes payable | (1,063,832 | ) | 1,339,152 | |||||
Deferred revenue | - | 108,086 | ||||||
Effects of exchange rate change in operating activities | 188,019 | 38,304 | ||||||
Net cash provided by operating activities | 2,142,457 | 614,683 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property, plant, and equipment | (1,711,487 | ) | (2,476,959 | ) | ||||
Purchase of intangible assets | (40,763 | ) | (8,211 | ) | ||||
Change in restricted cash | - | (48,081 | ) | |||||
Net cash used in investing activities | (1,752,250 | ) | (2,533,251 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayment of long term loans | (398,793 | ) | - | |||||
Cash proceeds from short term loans | - | 7,200,117 | ||||||
Repayment of short term loans | (319,578 | ) | (7,942,353 | ) | ||||
Net cash used in financing activities | (718,371 | ) | (742,236 | ) | ||||
EFFECTS OF EXCHANGE RATE CHANGES ON CASH | 11,184 | 406 | ||||||
DECREASE IN CASH | (316,980 | ) | (2,660,398 | ) | ||||
CASH, beginning balance | $ | 2,996,076 | $ | 3,579,446 | ||||
CASH, ending balance | $ | 2,679,096 | $ | 919,048 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash paid for income taxes | 115,441 | 116,283 | ||||||
Cash paid for interest | 511,254 | 240,961 | ||||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||
Accounts payable relating to purchase of buildings and equipment | 10,271,871 | 770,182 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 – Organization and Basis of Presentation
China Energy Recovery, Inc. ("CER" or the "Company"), formerly known as MMA Media Inc. and Commerce Development Corporation Ltd., was incorporated under the laws of the State of Maryland in May, 1998. On February 5, 2008, the Company changed its name to China Energy Recovery, Inc. On January 24, 2008, the Company entered into a Share Exchange Agreement with Poise Profit International, Ltd. ("Poise Profit"), a company incorporated on November 23, 2007, under the laws of the British Virgin Islands, and the shareholders of Poise Profit. Pursuant to the Share Exchange Agreement, the Company agreed to acquire all of the issued and outstanding shares of Poise Profit's common stock in exchange for the issuance of 20,757,090 shares, or 81.5% of the Company's common stock on a post 1-for-2 reverse stock split basis, to the shareholders of Poise Profit. The share exchange transaction (the "Share Exchange") was consummated on April 15, 2008 and Poise Profit became a wholly-owned subsidiary of the Company. On April 16, 2008, the Company conducted a 1-for-2 reverse stock split pursuant to which each two shares of CER's common stock, issued and outstanding on the record date of April 15, 2008, converted into one share of CER's common stock.
Poise Profit is an off-shore holding company and has no operating business activities. Poise Profit owns 100% of HAIE Hi-tech Engineering (Hong Kong) Company, Limited ("Hi-tech") and CER (Hong Kong) Holdings Limited (“CER Hong Kong”), which were incorporated in Hong Kong on January 4, 2002 and August 13, 2008, respectively.
In order to restructure the holding structure of the Company, on December 2, 2008, 100% of the shares of CER Hong Kong were transferred to Poise Profit from Mr. Qinghuan Wu, the Company’s Chairman and Chief Executive Officer, and his wife, Mrs. Jialing Zhou, and all the contracts between Hi-tech and Shanghai Engineering were transferred to CER Hong Kong. Thereafter, CER Hong Kong, through its wholly owned subsidiaries and a consolidated variable interest entity (Shanghai Engineering) located in the People's Republic of China ("PRC"), designs, develops, manufactures and markets waste heat boilers and pressure vessels in the fields of chemical industry, petrochemical industry, oil refining, fine chemicals, water and power conservancy, metallurgical industry, environmental protection, waste heat utilization ,and power generation from waste heat recovery.
On November 11, 2008, CER Energy Recovery (Shanghai) Co., Ltd. (“CER Shanghai”) was incorporated in Shanghai by CER Hong Kong. CER Shanghai’s registered capital is $5,000,000. As of December 31, 2010, CER Hong Kong had contributed all the registered capital. CER Shanghai is mainly engaged in the development of energy recovery and environmental protection technologies, and design, installation and servicing of waste heat recovery systems.
CER Energy Recovery (Yangzhou) Co., Ltd. (“CER Yangzhou”) was incorporated on August 28, 2009 in Yangzhou by CER Hong Kong. CER Yangzhou’s registered capital is $20,000,000. As of December 31, 2011, CER Hong Kong had contributed all the registered capital. CER Yangzhou is mainly engaged in the development and manufacturing of waste heat recovery systems and other related energy efficiency equipment.
CER, Poise Profit, CER Hong Kong, Hi-tech, Shanghai Engineering, CER Shanghai, and CER Yangzhou are collectively hereinafter referred to as the “Group”.
The basis of presentation for the Group’s financial statements is accounting principles generally accepted in the United States of America (U.S. GAAP) and the reporting currency is the U.S. dollar.
7 |
Note 2 – Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 have been prepared by the Company, in accordance with generally accepted accounting principles, or GAAP, for interim financial reports and the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles have been condensed or omitted pursuant to such regulations. In the opinion of the Company’s management, the unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations and cash flows. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results of operations for the year ending December 31, 2012. The balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date. The unaudited interim financial statements and footnotes do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below:
(a) | Principle of consolidation |
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries Poise Profit, CER Hong Kong, Hi-tech, CER Shanghai, and CER Yangzhou; and its variable interest entity (“VIE”) Shanghai Engineering. All significant inter-company transactions and balances among the Company, its subsidiaries and VIEs are eliminated upon consolidation.
In accordance with U.S. GAAP, variable interest entities are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. Each variable interest entity with which the Company is affiliated must be evaluated to determine who the primary beneficiary of the risks and rewards of ownership of the variable interest entity. The primary beneficiary is required to consolidate the variable interest entity's financial information for financial reporting purposes.
We have concluded that Shanghai Engineering is a variable interest entity and that CER Hong Kong is the primary beneficiary thereof. Pursuant to the contractual arrangements described elsewhere in this filing on Form 10-Q, the Company recovered (recovers) substantially all of the profits of its VIE through service fees charged (particularly under a consulting and service agreement) and has the unilateral ability to do so through its wholly owned subsidiaries. Through such contractual arrangements, the Company (as applicable, through wholly-owned subsidiaries) has the power to direct the activities most significant to the economic performance of the VIE and absorbs all, or substantially all, of the profits or losses. Accordingly, the Company is the primary beneficiary of such arrangements. Under the requirements of the FASB’s accounting standard regarding VIEs, the Company consolidates the financial statements of Shanghai Engineering. We have eliminated inter-company items from our consolidated financial statements.
8 |
Under the contractual arrangements with Shanghai Engineering, the Company has the power to direct its activities, and can have assets transferred freely out of the entity without any restrictions. Therefore the Company considers that there is no asset of a consolidated VIE that can be used only to settle obligations of the VIE, except for registered capital and PRC statutory reserves of the VIE amounting to a total of $1.39 million as of March 31, 2012. As the consolidated VIE is incorporated as a limited liability company under the PRC Company Law, creditors of the VIE do not have recourse to the general credit of the Company for any of the liabilities of the consolidated VIE, which consisted of receipts in advance of $8.2 million, accrued liabilities to suppliers and agents of $10.8 million, other accrued liabilities of $2.1 million, totaling $21.1 million. As of March 31, 2012, the VIE held a cash balance of $10,000. Currently there is no contractual arrangement that could require the Company to provide additional financial support to the consolidated VIE. As the Company is conducting certain business in the PRC mainly through the VIE, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.
(b) | Use of estimates |
In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Significant estimates include useful lives of equipment, allowances for doubtful accounts, deferred tax assets and related valuation allowances, and the completion percentage of construction contracts. Actual results could differ from those estimates.
(c) | Concentrations of risk |
The Company maintains cash balances at financial institutions within the U.S. Hong Kong and PRC. Balances at financial institutions or state owned banks within the PRC are not covered by insurance. Balances at financial institutions within the United States are covered by the Federal Deposit Insurance Corporation for $250,000 per depositor per institution. Balances at financial institutions within Hong Kong are insignificant. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on its cash in bank accounts.
For the three months ended March 31, 2011 and 2012, the Company’s five top customers accounted for 87% and 76% of the Company's sales, respectively. Receivables from these five top customers were 14% and 66% of total accounts receivable at March 31, 2011 and 2012, respectively. Among those customers, the two largest included Kailin Energy Zhenjiang, Ltd. (“Zhenjiang Kailin”), which accounted for 20% of revenue for the quarter ended March 31, 2012 and 40% of receivables as of March 31, 2012 and Jiangsu SOPO (Group) Company Limited (“Jiangsu SOPO”), which accounted for 18% of revenue for the quarter ended March 31, 2012 and 19% of receivables as of March 31, 2012.
For the three months ended March 31, 2011 and 2012, the five top suppliers provided approximately 48.0% and 70.0% of the Company's purchases of raw materials, respectively. Payables to these five suppliers were approximately 38.6% and 29.2% at March 31, 2011 and 2012, respectively.
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the country, and by the general state of the country's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies carrying out operations in the United States. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
9 |
(d) | Foreign currency translations |
The reporting and functional currency of the parent Company and of CER Hong Kong is the U.S. dollar. Our subsidiaries Shanghai Engineering, CER Shanghai, and CER Yangzhou use the Chinese yuan Renminbi ("RMB") as their functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the end of period exchange rates. Cash flows are also translated at average exchange rates for the period, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation adjustments resulting from this process are included in accumulated other comprehensive income (loss) in stockholders' equity. For the three months ended March 31, 2011 and 2012, foreign currency translation gains amounted to $220,769 and $40,027, respectively.
Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the consolidated statements of operations and other comprehensive loss as incurred within “non-operating income (expenses), net.”
The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
Accumulated other comprehensive income amounted to $1,286,126 and $1,326,153 as of December 31, 2011 and March 31, 2012, respectively. The balance sheet accounts with the exception of equity at December 31, 2011 and March 31, 2012 were translated at RMB6.30 to $1.00 and RMB6.298 to $1.00 respectively.
The average translation rates applied to income and cash flow statement amounts for the three months ended March 31, 2011 and 2012 were RMB6.57 to $1.00 and RMB6.31 to $1.00 respectively.
(e) | Cash and restricted cash |
Cash includes cash on hand and demand deposits with banks, which are unrestricted as to withdrawal and use, and which have original maturities less than three months.
Restricted cash represents a cash portion of the guaranty for the bids on contracts and is deposited in a separate bank account subject to withdrawal restrictions controlled by the customer to secure the Company’s performance of the project in process. The deposit cannot be drawn or transferred by the Company until the restriction period has expired. The Company also classified certain cash as restricted that is not available for immediate use due to its collateralization on certain short term borrowings.
(f) | Notes receivable |
Notes receivable represent trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment of the receivables. The notes are non-interest bearing and normally paid within three to six months. The Company has the ability to submit a request for payment to the customer’s bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee.
(g) | Receivables and allowances for doubtful accounts |
Receivables include trade accounts due from customers and revenues earned in excess of amounts billed on EPC contracts (unbilled receivables). Pursuant to ASC Topic 850, such amounts attributable to related parties are separately presented in the balance sheet. Management regularly reviews the aging of receivables and changes in payment trends, and records a reserve when collection of amounts due is at risk.
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Allowance for doubtful accounts, December 31, 2010 | $ | 625,014 | ||
Additions charged to income | 1,047,926 | |||
Reversals credited to income | (37,824 | ) | ||
Translation adjustment | 56,358 | |||
Allowance for doubtful accounts, December 31, 2011 | $ | 1,691,474 | ||
Additions charged to income | - | |||
Reversals credited to income | - | |||
Translation adjustment | 852 | |||
Allowance for doubtful accounts, March 31, 2012 | $ | 1,692,326 |
Accounts receivable which are expected to be collected after one year are reclassified as long-term accounts receivable. The provision for accounts receivable balances described above is further described in Note 3).
(h) | Inventories |
Inventories are comprised of raw materials, work in progress and finished goods and are stated at the lower of cost or market value. Costs of work in progress include direct labor, direct materials, and production overhead before the goods are ready for sale. Management reviews inventories for obsolescence or cost in excess of market value periodically. The obsolescence, if any, is recorded as a reserve against the inventory. The cost in excess of market value is written off and recorded as cost of revenues.
Provision for inventory, December 31, 2010 | $ | 93,195 | ||
Additions charged to income | 26,763 | |||
Realized | (5,471 | ) | ||
Translation adjustment | 5,276 | |||
Provision for inventory, December 31, 2011 | $ | 119,763 | ||
Additions charged to income | - | |||
Realized | - | |||
Translation adjustment | 61 | |||
Provision for inventory, March 31, 2012 | 119,824 |
(i) | Advances on purchases |
Advances on purchases are money advanced to outside vendors for inventory purchases and property, plant and equipment purchases. This amount is refundable and bears no interest.
(j) | Property, plant and equipment, net |
Property, plant and equipment are stated at cost. Depreciation is calculated principally by use of the straight-line method over the estimated useful lives of the related assets. Expenditures for maintenance and repairs, which do not improve or extend the expected useful lives of the assets, are charged to operations as incurred, while renewals and betterments are capitalized.
Management established a 5% residual value for property, plant and equipment. The estimated useful lives of the property, plant and equipment are as follows:
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Plant and buildings | 20-38 years |
Transportation equipment | 3-10 years |
Machinery equipment | 5-10 years |
Office equipment | 3-5 years |
The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets’ gains or losses, if any, are recognized in the consolidated statement of income and other comprehensive income. There were no disposal of assets during the three months ended March 31, 2011 and 2012.
(k) | Impairment of assets |
The Company assesses the carrying value of long-lived assets each reporting period, more often when factors indicating impairment are present, and reduces the carrying value of such assets by the amount of the impairment. The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the net asset carrying value. An impairment loss, if it exists, is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value generally means based on either quoted market price, if available, or discounted cash flow analysis. There were no impairments of long lived assets recognized for the three months ended March 31, 2011 and 2012.
(l) | Advances from customers |
Advances from customers represent amounts advanced by customers on product or service orders. The product (service) normally is shipped (rendered) within one year after receipt of the advance payment, and the related sales are recognized in accordance with the Company’s revenue recognition policy.
(m) | Income taxes |
Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rate in the year in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
In assessing uncertain tax positions, the Company applies a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is greater than 50% likely to be realized upon settlement. As of March 31, 2012, the Company does not have any uncertain tax positions required to be recognized and measured under the accounting standard for income taxes.
(n) | Value added tax |
Sales revenue represents the invoiced value of goods, net of a value-added tax ("VAT"). All of the Company's products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials. The Company records VAT payable and VAT receivable, net of payments, in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.
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(o) | Operating leases |
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the statement of operations and comprehensive (loss) income on a straight line basis over the lease periods.
(p) | Stock based compensation |
In accordance with ASC 718, Compensation-Stock Compensation, the Company measures the cost of employee services received in exchange for stock based compensation at the grant date fair values of the awards.
The Company recognizes stock based compensation costs, net of a forfeiture rate, on a straight-line basis over the requisite service period for each award. ASC 718 requires forfeitures to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. There were no stock options granted in the three months ended March 31, 2011 and 2012.
Cost of goods acquired or services received from non-employees is measured based on the fair value of the awards issued on the measurement date as defined in ASC 505, “Equity.” Awards granted to non-employees are remeasured at each reporting date using the fair value as at each period end. Changes in fair values between the interim reporting dates are attributed consistent with the method used in recognizing the original stock based compensation costs.
(q) | Shipping and handling costs |
Shipping and handling costs are included in selling, general and administrative expenses which totaled $98,048 and $53,108 for the three month periods ended March 31, 2011 and 2012, respectively.
(r) Revenue recognition
The Company derives revenues principally from:
(a) | Provision of Engineering, Procurement and Construction ("EPC") services, which are essentially turnkey contracts where the Company provides all services in the whole construction process from design, development, engineering, manufacturing, and procurement to installation; |
(b) | Sales of energy recovery systems; and |
(c) | Provision of design services. |
In accordance with the accounting standard regarding performance of construction-type and certain production-type contracts, and long-term construction-type contracts, the Company adopted the percentage of completion method to recognize revenues and cost of sales for EPC contracts. EPC contracts are long-term, complex contracts involving multiple elements, such as design, manufacturing and installation, which all form one integral EPC project. The energy recovery system involved in an EPC project is highly customized to the specific customer's facilities and essentially not transferable to any other facilities without significant modification and cost. It would be difficult, if not impossible, to beneficially use a single element of a specific EPC project on a standalone basis other than in connection with the facilities for which it was intended. EPC contracts are by nature long-term construction-type contracts, usually lasting more than one accounting period, and the Company is able to reasonably estimate the progress toward completion, including contract revenues and contract costs. EPC contacts specify the customers' rights to the goods, the consideration to be paid and received, and the terms of payment. Specifically, the Company has the right to require a customer to make progress payments upon completion of determined stages of the project which serve as evidence of the customer's approval and acceptance of the work completed to date as complying with the terms of the particular EPC contract.
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Sales of the Company's energy recovery systems and related products are essentially product sales. The products consist mainly of waste heat boilers and other related equipment manufactured according to specific customers' specifications. Once manufactured, the Company ships the products to its customers in their entirety in one batch. The Company’s service arrangement also includes a limited warranty to its customers pursuant to which the customers retain between 5% and 10% of the particular contract price as retainage during the limited warranty period (usually 12-18 months). The Company generally recognizes revenues including retainage from product sales when (i) persuasive evidence of an arrangement exists, which is generally represented by a contract between the Company and the customer; (ii) products are shipped; (iii) title and risks of ownership have passed to the customer, which generally occurs at the time of delivery; (iv) the customer accepts the products upon a quality inspection performed by them; (v) the purchase price is agreed to between the Company and the customer; and (vi) collectability is reasonably assured. Net revenues represent the invoiced value of products, less returns and discounts, and are net of value-added tax.
In providing design services, the Company designs energy recovery systems and other related systems based on a customer's requirements and the deliverable consists of engineering drawings. The customer may elect to engage the Company to manufacture the designed system or choose to present the Company's drawings to other manufacturers for manufacturing and installation. The Company recognizes revenues from design services when the services are provided, the design drawings are delivered, invoices are issued and collectability is reasonably assured. The Company generally delivers the drawings in one batch.
(s) | Fair value of financial instruments |
The accounting standard regarding fair value measurements defines financial instruments and requires fair value disclosures for those financial instruments. The fair value standard also establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measurements. The carrying amounts reported in the accompanying consolidated balance sheets for current assets and current liabilities such as cash, restricted cash, accounts and notes receivable, short term loans, accounts payable, and other payables qualify as financial instruments. Management concluded the carrying values of these financial instruments are reasonable approximations of their respective fair values because of the short period of time between the origination of such instruments and their expected realization and the current market rates of interest. The three levels of the valuation hierarchy are defined as follows:
£ Level 1 | Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. At December 31, 2011 and March 31 2012, the Company did not have any fair value assets or liabilities classified as Level 1. |
£ Level 2 | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. At December 31, 2011 and March 31, 2012, the Company did not have any fair value assets or liabilities classified as Level 2. |
£ Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value. Inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
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The measurement basis for current assets and current liabilities such as cash, restricted cash, accounts and notes receivable, short term loans, accounts payable, and other payables is carrying value, which approximates fair value. All such current assets with the exception of cash and restricted cash (Level 1) and short term loans (Level 2) would be classified as Level 3 measurements due to the presence of Company-specific unobservable inputs. The following table presents information about the company’s fair value financial liabilities classified as Level 3 as of December 31, 2011 and March 31, 2012.
Balance as of March 31, 2012 | ||||||||||||
Fair Value Measurements | ||||||||||||
Using Fair Value Hierarchy | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Derivative liability related to loan (Note 12) | - | - | $ | 35,918 | ||||||||
Derivative liability related to warrant (Note 12) | - | - | $ | 49,557 |
Balance as of December 31, 2011 | ||||||||||||
Fair Value Measurements | ||||||||||||
Using Fair Value Hierarchy | ||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||
Derivative liability related to loan (Note 12) | - | - | $ | 21,274 | ||||||||
Derivative liability related to warrant (Note 12) | - | - | $ | 22,806 |
A summary of changes in the Level 3-classified derivative liabilities related to stock purchase warrants and a loan for the year ended December 31, 2011 and for the three months ended March 31, 2012 is as follows:
Balance at December 31, 2010 | $ | 1,756,067 | ||
Warrant cancellation (Note 12) | (15,547 | ) | ||
Change in fair value of derivative liability for warrant | (1,294,407 | ) | ||
Change in fair value of derivative liability for loan | (402,033 | ) | ||
Balance at December 31, 2011 | $ | 44,080 | ||
Change in fair value of derivative liability for warrant | 26,751 | |||
Change in fair value of derivative liability for loan | 14,644 | |||
Balance at March 31, 2012 | $ | 85,475 |
(t) | Segment reporting |
The Group reports its segments in accordance with ASC 280. The Group primarily operates in China and measures its business as a single operating segment.
(u) | Subsidy income |
The Company, in connection with its occupancy and use of certain industrial park land, receives from time to time certain subsidies wholly at the discretion of the management authority of a third party research and development fund related to the industrial park which are not tied to future tenancy or performance by the Company; receipt of such subsidy income is not contingent upon any further actions or performance by the Company and the amounts do not have to be refunded under any circumstances. These amounts are not tied to land use rights or any other transactions. Upon receipt, these incentives are recognized within other income (loss) in the consolidated statements of operations and other comprehensive (loss) income.
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(v) Restatements and reclassifications
The Company, effective with the annual 2011 financial statements included in Form 10-K, reclassified its presentation of revenue and costs of revenue in the consolidated statements of (loss) income and other comprehensive (loss) income to depict engineering, procurement, and construction (“EPC”) revenue attributable to third party customers, EPC revenue attributable to related parties, and product revenue given the growth in the number and per-contract revenue associated with EPC contracts. First quarter 2011 amounts have been reclassified to conform to the current presentation.
On March 30, 2012 the Company filed, on Form 8-K, a report announcing the pending restatement of its unaudited quarterly financial statements for the first three quarters of 2011. The root cause of the necessary adjustments to the quarterly interim unaudited financial information for the first three quarters of 2011 was identified during the preparation of the Company’s annual 2011 financial statements as reported in Form 10-K filed March 30, 2012. The Company determined that transaction losses resulting from variations in foreign currency exchange rates on certain purchase transactions denominated in U.S. dollars involving the Company’s onshore PRC subsidiaries (which use the yuan renminbi, or RMB as their functional currency) were incorrectly classified as translation losses and were incorrectly included in other comprehensive income (loss). These losses should have been reported in the statement of operations within other income (expense). Such transaction losses only impacted the first three quarters of 2011 as the underlying business activity involving purchasing of raw materials related to the Group’s then-under-construction Yangzhou production facility started in 2011 and was substantially completed by the end of 2011. The transaction losses arose as a result of cash advances made for purchase transactions in which goods were acquired outside of mainland China and imported to the Company’s onshore PRC subsidiaries. Continued weakening of the U.S. dollar against the RMB led to a decrease in the RMB value of purchased goods subsequently received relative to the asset already recorded for the refundable purchase advance made in cash.
Accordingly, the Company undertook further evaluation to identify and quantify the necessary adjustments to restate the previously issued unaudited financial information for the first three quarters of 2011. Adjustments were limited to the reclassification of foreign exchange transaction losses from other comprehensive income to non-operating income (loss), net in the consolidated unaudited statement of operations. Such adjustments were reported in amended Forms 10-Q for the first three quarters of 2011 filed with the SEC on May 15, 2012. The comparative amounts for the first quarter of 2011 included in this Form 10-Q reflect the restated financial information.
(w) Recent accounting pronouncements
Recently issued pronouncements
In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). Key provisions of the amendments in ASU 2011-04 include: (1) a prohibition on grouping financial instruments for purposes of determining fair value, except in limited cases; (2) an extension of the prohibition against the use of a blockage factor to all fair value measurements; and (3) a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used, and qualitative details about the sensitivity of the measurements. For items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurements disclosed. This ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance, effective with the quarter ended March 31, 2012, did not have a material impact to CER’s financial statements as management concluded CER’s Level 3 fair value measurements were not material for purposes of additional disclosure.
16 |
In June 2011, the FASB issued Accounting Standards Update 2011-05, “Comprehensive Income: Presentation of Comprehensive Income.” The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective retrospectively for interim periods and annual periods beginning after December 15, 2011 and has been adopted by CER. Further, the requirement for presentation of reclassifications from other comprehensive income to net income on a line item basis contained in the new accounting standards update is presently subject to indefinite deferral by the FASB pending further evaluation. The adoption of this guidance has not impacted CER’s financial statements as the company presently prepares, and continues to prepare, a consolidated statement of operations and comprehensive income (loss).
Note 3 – Accounts Receivable, Net
(a) | Accounts Receivable, Net |
December 31, | March 31, | |||||||
2011 | 2012 | |||||||
Current accounts receivable - third parties | $ | 11,639,138 | $ | 13,788,006 | ||||
Current accounts receivable - related party | 9,088,157 | 4,763,700 | ||||||
Current accounts receivable | 20,727,295 | 18,551,706 | ||||||
Subtract: Allowance for doubtful accounts | - | - | ||||||
Current accounts receivable, net | $ | 20,727,295 | $ | 18,551,706 |
Current receivables also include revenue recognized in excess of amounts billed for EPC contracts. As of December 31, 2011 and March 31, 2012, revenue recognized in excess of amounts billed amounted to approximately $18,085,048 and $15,100,978, respectively.
(b) | Long-term Accounts Receivable, Net |
The Company classifies accounts receivable and revenue recognized in excess of amounts billed which are to be collected after one year as long-term accounts receivable.
Long-term accounts receivable, net, which are presented in the below table net of the discounting effect for interest (see Note 16 for further description), included revenue recognized in excess of amounts billed of approximately $0 and $11,558,710 as of December 31, 2011 and March 31, 2012, respectively. As of March 31, 2012, an amount of $173,632 was re-classified to current receivables due to a change in contractual term.
December 31, | March 31, | |||||||
2011 | 2012 | |||||||
Long term accounts receivable, net - third parties | 2,345,910 | 5,503,982 | ||||||
Long term accounts receivable, net - related party | - | 7,920,686 | ||||||
Long-term receivables | $ | 2,345,910 | 13,424,668 | |||||
Subtract: Allowance for doubtful accounts | (1,691,474 | ) | (1,692,326 | ) | ||||
Net long-term receivables | $ | 654,436 | 11,732,342 | |||||
Subtract: Current portion | (654,436 | ) | (173,632 | ) | ||||
Total | $ | - | 11,558,710 |
Long-term accounts receivables consisted of two customers, Zhenjiang Kailin and Jiangsu SOPO, for both periods presented.
17 |
Subsequent to the balance sheet date of March 31, 2012, CER and Zhenjiang Kailin, related party, agreed to revise the payment schedule of receivables related to a project originally entered into in January 2011, which was near completion at the balance sheet date of March 31, 2012, from all remaining amounts due by August 31, 2012 to 4 installments due by December 31, 2013 with no interest to be earned (refer to note 16 for more details about the Zhenjiang Kailin receivable collection schedule). As of March 31, 2012, the accounts receivable (including both current and non-current portions) from Zhenjiang Kailin under the contract was $12,684,386 after discounting for the time value of money pursuant to applicable accounting guidance (the discount rate was determined as 10.65% considering the risk free rate and Zhenjiang Kailin’s credit risk). The discount reflected as a reduction to revenue in the statement of operations arising from this extension of payment terms was $1,509,668. Of the total balance of $12,684,386, $7,920,686 represented the non-current balance due from Zhenjiang Kailin which is to be collected over one year; the remaining $4,763,700 is included in current receivables due from a related party.
Long term accounts receivable, net due from third parties of $3,638,024 represents a balance due from Jiangsu SOPO. On October 18, 2011, CER signed a contract for the manufacture, design, and installation of a major dock storage and tube project with Jiangsu SOPO, a third party customer of CER and related party of Zhenjiang Kailin. The contract was valued at RMB 50 million (approximately $7.9 million), including the procurement part of RMB 40 million (approximately $6.3 million) and construction part of RMB 10 million (approximately $1.6 million). On April 15, 2012, CER and Jiangsu SOPO entered into a repayment agreement. Pursuant to the agreement, the total contract price depends on final settlement, and the current best assessment of this amount is RMB 50 million. Jiangsu SOPO will pay the original project price of RMB 50 million, plus interest over time of RMB 6 million, for a total of RMB 56 million (approximately $8.9 million) in exchange for an extension of the payment terms involving 36 installments due on a monthly basis starting from April, 2012. The discount rate used to discount these receivable cash flows under the applicable accounting guidance for Jiangsu SOPO was 8% (considering its stated-owned background and AA credit rating), which is same as the contractual rate of interest included in the contract. For the three months ended March 31, 2012, $5,355,174 in revenue was recognized in relation to this EPC project and the receivable as of March 31, 2012 was $6,076,529, among which $3,638,024 was classified as long-term accounts receivable.
Both of the arrangements described above regarding extensions of payment terms for these two particular customers were recognized in the March 31, 2012 balances and revenue for the quarter then ended as the underlying facts and circumstances leading to the arrangements existed, or were in the early stages of negotiation, at that time.
Note 4 – Inventories, Net
As of December 31, 2011 and March 31, 2012, inventories consist of the following:
December 31, | March 31, | |||||||
2011 | 2012 | |||||||
Raw materials | $ | 1,485,293 | $ | 2,095,005 | ||||
Work in progress | 12,975,360 | 13,033,507 | ||||||
Finished goods | 217,659 | 217,769 | ||||||
Total inventories | $ | 14,678,312 | $ | 15,346,281 |
For the three month periods ended March 31, 2011 and 2012, the Group accrued inventory provisions of $ 26,141 and $0, respectively, through charges to income.
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Note 5 –Property, plant and equipment, Net
As of December 31, 2011 and March 31, 2012, property, plant and equipment, net consisted of the following:
December 31, | March 31, | |||||||
2011 | 2012 | |||||||
Plants | $ | 21,416,681 | $ | 21,417,239 | ||||
Machinery equipment | 4,496,365 | 4,264,027 | ||||||
Transportation equipment | 366,270 | 859,457 | ||||||
Office equipment | 839,790 | 366,454 | ||||||
Accumulated depreciation | (2,137,381 | ) | (2,392,102 | ) | ||||
Subtotal | 24,981,725 | 24,515,075 | ||||||
Construction in progress | 1,177,877 | 2,875,986 | ||||||
Property, plant and equipment, net | $ | 26,159,602 | $ | 27,391,061 |
Depreciation expense for the three months ended March 31, 2011 and 2012 was $213,375, and $505,298, respectively.
Note 6 – Intangible Assets
Intangible assets mainly represent purchase of land usage rights in Yangzhou where the Company’s sole manufacturing plant is located and software. The Company obtained the usage title of its first land parcel in December 2009. The land use right was recorded at cost of $2,438,632 and is being amortized over the lease term of 50 years starting from November 2009 when it was acquired. In July 2011, the Company obtained the usage title of another parcel of land. The land use right was recorded at cost of $2,331,869 and is being amortized over the lease term of 50 years starting from July 2011. Amortization expense for intangible assets recorded for three months ended March 31, 2011 and 2012 amounted to $11,415 and $38,025, respectively. The remaining balance of intangible assets represents the net value of purchased software.
Note 7 – Short Term Loans
Short-term borrowings and letter of credit
A tabular reconciliation of the Company’s short term borrowings including balances outstanding at December 31, 2011 and March 31, 2012 and activity during the period (including letters of credit) is as follows. Where borrowings were originally denominated in Renminbi, the U.S. dollar outstanding balance at the respective period end, translated at the applicable period-end exchange rate, is included in the tabular presentation.
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Borrowing | Borrowing date |
Interest rate |
Maturity date |
Balance at Dec. 31, 2011 |
Balance at Mar. 31, 2012 |
Pledge or guarantee | ||||||
RMB 29 million – Shanghai Pudong Development Bank, Shanghai Branch | Aug. 31, 2011 | 7.544% | May 31, 2012 | RMB 29,000,000 (USD 4,602,590) |
RMB 0 (repaid March 28, 2012) |
Collateralized by CER’s office building in Zhangjiang, Shanghai. | ||||||
RMB 9.5 million – Bank of China, Yizheng Branch | Nov. 17, 2011 | 7.216% | Oct. 24, 2012 | RMB 9,500,000 (USD 1,507,745) |
RMB 9,500,000 (USD 1,508,505) |
Guaranteed by Qinghuan Wu, Jialing Zhou, CER Shanghai, Shanghai Engineering, and Yizheng Auto | ||||||
RMB 11.5 million – Bank of China, Yizheng Branch | Nov. 23, 2011 | 7.216% | Nov. 16, 2012 | RMB 11,500,000 (USD 1,825,165) |
RMB 11,500,000 (USD 1,826,085) |
Industrial Park Investment and Development Co., Ltd., and pledged by a land use right in Yizheng, China. | ||||||
RMB 6.68 million - Industrial and Commercial Bank of China Limited, Zhangjiang Branch | Dec. 29, 2011 | 6.405% | June 28, 2012 | RMB 6,680,000 (USD 1,060,183) |
RMB 6,680,000 (USD 1,060,717) |
Collateralized by a pledge of several bank acceptance notes* owned by CER Shanghai in the amount of RMB 7,430,000. | ||||||
RMB 5 million - Shanghai Pudong Zhanjiang Micro-credit Co. | Dec. 2011 | 12.000% | June 9, 2012 | RMB 5,000,000 (USD 793,550) |
RMB 5,000,000 (USD 793,950) |
Collateralized by a building in Shanghai owned by Jiangsu SOPO; guaranteed by Mr. Qinghuan Wu. | ||||||
RMB 21 million letter of credit – China Construction Bank | Sept. 30, 2011 | 5.02% | Jan. 6, 2012 | RMB 21,000,000 (USD 3,332,910) |
- | Collateralized by machineries of CER Yangzhou. | ||||||
RMB 7.98 million letter of credit – Industrial and Commercial Bank of China | Dec. 12, 2011 | 6.71% | May 28, 2012 | RMB 7,980,000 (USD 1,266,506) |
RMB 7,980,000 (USD 1,267,144) |
Collateralized by a building in Shanghai owned by Jiangsu SOPO. | ||||||
RMB 1.28 million - Industrial and Commercial Bank of China Limited, Zhangjiang Branch | Jan. 16, 2012 | 6.405% | July 15, 2012 | - | RMB 1,280,000 (USD 203,252) |
Collateralized by a pledge of several bank acceptance notes* owned by CER Shanghai in the amount of RMB 1,530,000. | ||||||
RMB 10 million - Shanghai Pudong Zhanjiang Micro-credit Co., Ltd. | Feb. 29, 2012 | 12.000% | Feb. 20, 2013 | - | RMB 10,000,000(USD 1,587,900) | Collateralized by accounts receivable from Zhenjiang Kailin; also collateralized by CER’ office building in Zhangjiang Shanghai in case of default in repayment. | ||||||
RMB 29 million - Bank of Communication, Shanghai Branch | Mar. 20, 2012 | 7.544% | Mar. 15, 2013 | - | RMB 29,000,000 (USD 4,604,910) |
Collateralized by CER’s office building in Zhangjiang, Shanghai and guaranteed by Qinghuan Wu. | ||||||
RMB 5 million - Industrial and Commercial Bank of China Limited, Zhangjiang Branch. | Mar. 23, 2012 | 6.405% | Sept. 28, 2012 | - | RMB 5,000,000 (USD 793,950) |
Collateralized by several bank acceptance notes* owned by CER Shanghai in the amount of RMB 5,600,000 (approximately $890,000). |
*The Group’s bank acceptance notes are reported in “Notes receivable” in the consolidated balance sheet and represent short-term notes receivable typically received from customers as a form of payment. The Group can discount such notes receivable for early payment, typically at a small percentage discount to face value. The Group typically uses the notes to collateralize short-term borrowings as a means of matching timing of cash inflows and outflows, or transfers the notes to settle payables to suppliers.
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Descriptions of short-term borrowings
On August 31, 2011, CER Shanghai borrowed RMB 29,000,000 (approximately $4,500,000 at the then-existing exchange rate) from the Shanghai Pudong Development Bank, Luwan Branch. The loan is collateralized by CER’s office building in Zhangjiang, Shanghai. The term of the loan was 9 months. The loan agreement provided for quarterly interest payments at an annual interest rate of 7.544% and the total principal and interest were repaid on March 20, 2012.
On December 9, 2010, CER Yangzhou entered into a three-year loan facility with the Bank of China, Yizheng Branch. The facility is RMB 30,000,000 (approximately $4,500,000 at the then-existing exchange rate). Any amounts due under the loan are repayable no later than November 24, 2013. The loan facility has been guaranteed by Qinghuan Wu, the Company’s Chief Executive Officer; Jialing Zhou, a former director of the Company and wife of Mr. Wu; one of the Group’s subsidiaries and one of the Group’s VIEs, CER Shanghai and Shanghai Engineering, respectively; and Yizheng Auto Industrial Park Investment and Development Co., Ltd. The Company has also collateralized the loan facility with its land use right in Yizheng. By the end of 2010, the Company drew down RMB 21,000,000 (approximately $3,171,000 at the then-existing exchange rate) under the facility as a short-term loan, due in one year, with an annual interest rate of 5.838%. On June 20, 2011, the Company drew down RMB 9,152,782 (approximately $1,414,288 at the then-existing exchange rate) under the facility as a short-term loan, due in six months, with an annual interest rate of 5.56%. On November 15, 2011 and November 18, 2011, CER Yangzhou repaid RMB 9,500,000 (approximately $1,497,572) and RMB 11,500,000 (approximately $1,809,656), respectively. On December 20, 2011, CER Yangzhou repaid RMB 9,152,782 (approximately $1,444,773). On November 17, 2011 and November 23, 2011, CER Yangzhou drew down RMB 9,500,000 (approximately $1,497,000 at the then-existing exchange rate) and RMB 11,500,000 (approximately $1,810,000 at the then-existing exchange rate), respectively, under the three-year loan facility. The loans are due in one year and carry an annual interest rate of 7.216%.
On December 29, 2011, CER Shanghai borrowed RMB 6,680,000 (approximately $1,057,682 at the then-existing exchange rate) from Industrial and Commercial Bank of China Limited, Zhangjiang Branch. The loan carries an annual interest rate of 6.405%. The term of the loan is six months commencing from December 29, 2011 to June 28, 2012. The loan is secured by a pledge of several bank acceptance notes owned by CER Shanghai in the amount of RMB 7,430,000 (approximately $1,176,433).
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In December 2011, CER Shanghai borrowed $789,639 (RMB 5,000,000 at the then-existing exchange rate) from Shanghai Pudong Zhanjiang Micro-credit Co., Ltd. The loan is collateralized by a building in Shanghai owned by Jiangsu SOPO, and guaranteed by Mr. Qinghuan Wu, the Chairman and Chief Executive Officer 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. The total amount of principal and interest amounting to RMB5,043,333 (approximately $801,038) was repaid on April 16, 2012.
On January 16, 2012, CER Shanghai borrowed RMB1,380,000 (approximately $217,989 at the then-existing exchange rate) from Industrial and Commercial Bank of China Limited, Zhangjiang Branch. The loan carries an annual interest rate of 6.405%. The term of the loan is six months commencing from January 16, 2012 to July 15, 2012. The loan is collateralized by several bank acceptance notes owned by CER Shanghai in the amount of RMB1,530,000 (approximately $242,949).
On March 29, 2012, CER Shanghai repaid RMB100,000 (approximately $15,890) because one bank acceptance note used for collateral in the amount of RMB100,000 expired on that day.
On February 27, 2012, CER Shanghai signed a loan contract to borrow RMB 10 million from Shanghai Pudong Zhanjiang Micro-credit Co., Ltd. On February 29, 2012, CER Shanghai drew down $1,589,345 (RMB 10 million at the exchange rate at that time). The loan is guaranteed by Mr. Qinghuan Wu, the Chairman and Chief Executive Officer of CER and collateralized by the accounts receivable of CER Shanghai. If there is any default in repayment, CER Shanghai agrees to further secure the loan by way of CER’s office building in Zhangjiang, Shanghai. The loan carries an annual interest rate of 12% and the due date of the loan is February 20, 2013.
On March 6, 2012, CER Shanghai entered into a short-term comprehensive loan facility with the Bank of Communication, Shanghai Branch. The facility is RMB 57,000,000 (approximately $9,000,000). 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 a cash deposit of RMB 17,000,000 (approximately $2,700,000) to the bank. On March 20, 2012, CER Shanghai drew down RMB 29 million to replace the existing Shanghai Pudong Development Bank, Shanghai Branch loan. Any amounts due under the loan are repayable no later than January 20, 2013. The loan has been collateralized by CER’s office building in Zhangjiang, Shanghai and guaranteed by Qinghuan Wu, the Company’s Chief Executive Officer.
On March 23, 2012, CER Shanghai entered into a loan contract to borrow RMB5,000,000 (approximately $795,000 at the exchange rate at that time) from Industrial and Commercial Bank of China Limited, Zhangjiang Branch. The loan carries an annual interest rate of 6.1641%. The term of the loan is six months commencing from March 23, 2012. The loan is collateralized by several bank acceptance notes owned by CER Shanghai in the amount of RMB 5,600,000 (approximately $890,000).
Interest expense on short-term loans, except the formerly convertible debt, for the three months ended March 31, 2011 and 2012 was $63,401 and $217,406, respectively.
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Descriptions of letters of credit
CER, through its subsidiary, CER Yangzhou imports goods from CER Hong Kong, which are purchased from overseas suppliers. CER Yangzhou issued a forward letter of credit (“L/C”) to CER Hong Kong for import purchases in September 2011. The L/C is collateralized by the machinery of CER Yangzhou’s plant. On September 30, 2011, CER Hong Kong discounted the L/C from Standard Chartered Bank’s Hong Kong branch in the amount of RMB 21,000,000 ($3,240,000 at the exchange rate at such date). The due date of the L/C is January 6, 2012. The discount rate is 5.02% annually. CER Yangzhou repaid RMB 21,000,000 on January 6, 2012.
On November 29, 2011, CER Shanghai issued a forward letter of credit (“L/C”) to CER Yangzhou for the purchase of goods. The L/C is collateralized by a building in Shanghai, which is owned by Jiangsu SOPO. On December 12, 2011, CER Yangzhou discounted the L/C from Industrial and Commercial Bank of China Limited, Zhangjiang Branch in the amount of RMB 7,980,000 (approximately $1,260,000 at the exchange rate at the time). The due date of the L/C is May 28, 2012. The discount rate is 6.71% annually. The total amount of the letter of credit was repaid on May 15, 2012. On May 18, 2012, CER Shanghai renewed the issuance of a forward letter of credit amounting to RMB 7,900,000 (approximately $1,254,000) to CER Yangzhou for purchase of goods.
Interest expense on letters of credit for the three months ended March 31, 2011 and 2012 was $0 and $26,986, respectively.
Formerly convertible debt (presented as current portion of long term loan)
Borrowing | Borrowing date |
Interest rate |
Maturity date |
Balance at Dec. 31, 2011 |
Balance at Mar. 31, 2012 |
Pledge or guarantee | ||||||
$ 5 million – Hold And Opt Investments Limited |
Dec. 31, 2010 | 15.100% | Sept. 9, 2012 | USD 4,850,945 | USD 4,896,982 | Collateralized by 8,000,006 of Qinghuan Wu's shares in CER. |
On May 21, 2009, the Company entered into a term loan agreement (“Convertible Notes Agreement”) with an investment company (the “Lender”). Pursuant to the Convertible Notes Agreement, the lender provided term loan financing (“Convertible Notes”) to the Company in an amount of up to $5,000,000 within 6 months of the making, which may be drawn from time to time, in whole or in installments, upon notice, but once repaid shall not be subject to reborrowing. The proceeds from this Convertible Note were used for the construction of the Company’s new plant located in Yangzhou, China including, the purchase of land for the plant, buildings, equipment, and for the facilitating of financing loans from one or more in-China banks and other institutional lenders. Any amount borrowed will bear interest at 9.5%, payable every six months, calculated and compounded quarterly. Each draw is due twenty-four (24) months after the draw down date, together with any accrued and unpaid interest. The Company drew down $5,000,000 on September 29, 2009. The Convertible Notes could be converted to 2,777,778 shares of common stock at the conversion price of $1.80. In addition, the Company issued the Lender a five-year common stock purchase warrant (“Warrants”) to purchase up to 1,388,889 shares of the Company’s common stock, which is that number of shares of the Company’s common stock equal to 50% of the principal sum of these Convertible Note divided by the conversion price of $1.80.
The Lender may recall a Convertible Note after the first anniversary of the draw down at a redemption price equal to the outstanding principal plus any accrued and unpaid interest upon the closing by the Company of any debt and/or equity financing (except for debt financings with banks or institutional lenders in China), in an amount up to 50% of the amount financed. Additionally, upon occurrence of certain events, the Lender can demand the entire outstanding principal, together with any accrued and unpaid interest to be immediately repaid in full or in part. The Company can also prepay the Convertible Note at any time it desires with accrued and unpaid interest.
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The embedded conversion feature of the Convertible Notes was accounted for as an embedded derivative in accordance with ASC 815 “Derivatives and Hedging” because the conversion price is denominated in USD, which is a currency other than the Company’s functional currency, RMB. The conversion feature was accounted for as a derivative liability on the balance sheet and classified as a current liability based on the timing of the cash flows derived from the convertible notes. The Convertible Notes were recorded with a discount equal to the fair value of the conversion feature at the transaction date and were accreted to the redemption value of the Convertible Notes from the draw down date to September 30, 2011 (the date of extinguishment of the conversion feature) using the effective interest rate method. The change in fair value of the conversion feature derivative liability of $171,175 was recorded in the consolidated statement of operations and other comprehensive (loss) income for the three months ended March 31, 2011 with no similar amount for the quarter ended March 31, 2012 due to the termination of the derivative. The interest expenses recognized for accretion to the redemption value of the Convertible Notes were $36,542 and $46,037 for the three months ended March 31, 2011 and 2012, respectively.
The value of the Warrants at the grant date on May 21, 2009 was accounted for as a commitment fee for obtaining the Convertible Notes, and therefore the value was recorded as deferred financing cost to be amortized over the period from the grant date to September 30, 2011 (the date of extinguishment of the conversion feature) of the Convertible Notes. For the three months ended March 31, 2011, $74,352 of deferred financing costs were amortized and charged to interest expense, respectively with no amounts recognized in 2012 due to the cessation of recognition of remaining costs in 2011. The Warrants were recorded as derivative liabilities in accordance with ASC 815, Derivatives and Hedging, because the exercise price of the warrants is denominated in USD, which is a currency other than the Company’s functional currency, RMB. Changes in fair value of the warrants (Note 12) for the three months ended March 31, 2011 and 2012 were recorded in the consolidated statement of operations and other comprehensive (loss) income.
On December 31, 2010, the Company entered into a loan agreement with the Lender to replace and continue the prior lending arrangement which was entered into on May 21, 2009, to extend the term until which the principal amount of $5,000,000 is due to September 29, 2012, and to change certain of the terms of the loan. The aggregate principal amount of the loan extension is $5,000,000, and bears interest at the annual rate of 15.1%, calculated on a monthly compounded basis. The principal and accrued interest is due September 29, 2012; hence the modified loan is classified as a current liability as of March 31, 2012. The loan may be prepaid by the Company, without penalty. The loan agreement provides for the typical events of default (which includes default in payment of any part of the principal of or interest, performance or compliance with the collateral agreement, assets attached or seized by any third person and or any part of the loan agreement being declared null and void or its enforceability being challenged), including a cross default clause, and the Company has made various representations and given various covenants to the lender, which includes the audit of the Company’s annual financial statements and review of the interim financial statements as well as the timely filing of such statements. The Lender continues to have a right of first refusal with respect to future debt and equity fundings and a right to consent to certain debt and equity fundings by the Company and its subsidiaries and affiliates. As a guarantor of the payments under the loan extension, Mr. Wu, the Chief Executive Officer of the Company, pledged 8,000,006 of his shares in CER for the repayment of the principal due under the loan agreement.
The conversion feature expired, and there is no conversion term on the modified convertible debt described above, since September 30, 2011.
The Company has accounted for the replacement and extension of the loan agreement as a modification as the changes are not substantial such that there has been no accounting extinguishment in accordance with ASC 470, “Debt – Modifications and Extinguishments.” Accordingly a new effective interest rate was determined based on the carrying amount of the original debt and the revised cash flows of the new debt.
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Since the loan is fixed in United States dollars, the lender will receive compensation when the Renminbi exchange rate increases against the US dollar as compared to the rate fixed at the borrowing date. Accordingly, the Company has accounted for this indexed feature as an embedded derivative and recognized a derivative liability in the amounts of $21,274 and $35,918 as of December 31, 2011 and March 31, 2012, respectively. The change in fair value of the derivative liability of $14,644was recorded in the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2012.
As a result of the Company not filing its quarterly report with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended, on a timely basis for the quarter ended March 31, 2012, the Company was in violation of the loan covenants on this formerly convertible loan, which will mature on September 29, 2012, with such loan having covenants and default terms with respect the Company’s obligation to timely file SEC reports and comply with applicable laws. The violation of the covenant provision regarding timely filings of SEC reports permits the lender to accelerate the repayment of the full amount of the principal and interest due on the loan which is reported under current portion – long term loan in the consolidated balance sheet. On May 10, 2012, the lender provided to the Company with a waiver of the covenant and default terms and also provided sufficient time to make the necessary past due filings, before a covenant violation or default would result again concerning these issues. Also, at March 31, 2012 there were no other instruments of debt or contracts outstanding that had covenants requiring monitoring for compliance.
Note 8 – Notes Payable
Notes payable represents bank acceptance drafts that are non-interest bearing and due within six months. The balance of the bank acceptance drafts is $1,396,648 and $2,826,462 as of December 31, 2011 and March 31, 2012.
On November 24, 2011, the bank acceptance drafts were arranged with Industrial and Commercial Bank of China Limited, Shanghai Zhangjiang Branch by CER to settle its purchases from certain customers. The bank acceptance drafts are collateralized by a building in Shanghai owned by Jiangsu SOPO. As of March, 31, 2012, the bank acceptance draft from Industrial and Commercial Bank of China Limited, Shanghai Zhangjiang Branch was $1,397,352.
On January 9, 2012, Shanghai Engineering entered into a three-year loan facility with the Bank of Ningbo, Shanghai Branch. The facility is RMB 4,500,000 (approximately $713,000 at the exchange rate at that time). The funds have been drawn down in the form of bank acceptance drafts in two installments, with $635,160 (RMB 4,000,000) and $793,950 (RMB 5,000,000) being issued by the Bank of Ningbo on March 6, 2012 and March 21, 2012, respectively, with a cash deposit accounting for 50% of the total amount of bank acceptance. The loan has been guaranteed by Qinghuan Wu and Jialing Zhou and also collateralized by a building located in Hongkou District, Shanghai, which is owned by Mr. Wu and his son.
On March 30, 2012, CER Yangzhou entered into a 2 year comprehensive credit facility with the China CITIC Bank, Yangzhou Branch. The facility is RMB 20,000,000 (approximately $3,175,000). The period of the comprehensive line of credit is from March 30, 2012 to March 30, 2014. This facility is guaranteed by Jiangsu SOPO, and guaranteed by Mr. Qinghuan Wu, the Company’s Chief Executive Officer. No amounts were borrowed under this arrangement until April 24, 2012, when CER Yangzhou drew down bank acceptance notes amounting to RMB 3,100,178 (approximately $492,287) after making a cash deposit of RMB 1,860,107(approximately $294,882) to the bank. On May 23, 2012, CER Yangzhou drew down bank acceptance notes amounting to RMB 4,200,000 (approximately $664,472) after making cash deposit of RMB 2,520,000 (approximately $395,519) to the bank.
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Note 9 – Taxation
USA
The Company is subject to U.S. income tax at a rate of 34% on its assessable profits.
Hong Kong
CER Hong Kong subsidiaries were subject to Hong Kong profit tax at a rate of 16.5% on their assessable profits. No Hong Kong profit tax has been assessed as the Group did not have assessable profit that was earned in or derived within the legal boundaries of Hong Kong during the periods presented.
PRC
The New Enterprise Income Tax ("EIT") law was effective January 1, 2008 and the standard EIT rate is 25%. Pursuant to the PRC tax law, net operating losses can be carried forward 5 years to offset future taxable income.
For the quarter ended March 31, 2012, the Group’s Hong Kong subsidiary, CER HK, had, for the first time, estimated taxable profits earned in the PRC. As such, CER HK is likely to be regarded under the PRC tax laws as having permanent establishment for business activities carried out in the PRC, and would be subject to PRC tax at the standard EIT rate of 25%. For the quarter ended March 31, 2012, given the Group is likely to be regarded as having permanent establishment, CER HK provided taxes, included in the consolidated tax provision, of $249,630. The primary reason for CER HK’s generation of taxable income was the non-deductibility, under PRC tax law, of a $1.5 million accrued expense incurred for a penalty payment to an EPC construction contract related party customer which is further described in Note 16. This tax provision, as well as increases in PRC tax expense for the Group’s profitable subsidiaries, were primarily responsible for the significant increase in the Group’s effective tax rate for the quarter ended March 31, 2012 as compared to the quarter ended March 31, 2011.
Pursuant to the PRC income tax laws, Shanghai Engineering and CER Shanghai are subject to enterprise income tax at a statutory rate of 15%, each for a three year period ending in 2014, as they were recognized as high and new technology entities (“HNTEs”) in April, 2011. CER Yangzhou is subject to enterprise income tax at a statutory rate of 25%.
On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a foreign investment enterprise (“FIE”) prior to January 1, 2008 to foreign investor(s) in 2008 or after will be exempt from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at a rate up to 10% (lower rate is available under the protection of tax treaties). Since the Company intends to indefinitely reinvest its earnings to further expand the businesses in mainland China, the foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. As a result, if any dividends are declared out of the cumulative retained earnings as of December 31, 2007, they should be exempt from WHT. Accumulated profits of non-US subsidiaries as of December 31, 2011 and March 31, 2012 were approximately $1,102,139 (RMB7,687,921), and $1,882,668 (RMB12,611,463), respectively, and they are considered to be indefinitely reinvested. Moreover, the Company’s liquidity position does not require transfers of cash outside of the PRC to the parent jurisdiction (U.S.), as all business activity and debt is carried on in the PRC. The Company has not paid dividends on its common shares and does not have an intention of doing so in the foreseeable future. Accordingly, no provision has been made for deferred taxes. No dividends were declared out of cumulative retained earnings as of December 31, 2011 or March 31, 2012.
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The Company is incorporated in the U.S. and incurred a net operating loss for income tax purposes for the three months ended March 31, 2011 and 2012. The net operating loss carry forwards for the U.S. income tax purposes were approximately $8,355,602 and $8,519,850 at December 31, 2011 and March 31, 2012, respectively, which may be available to reduce future years' taxable income. These carry forwards will expire, if not utilized, in 20 years from origination. Management believes that the realization of the benefits arising from these accumulated net operating losses is uncertain due to the Company's limited operating history, continuing losses for United States income tax purposes, and the fact that substantially all of the Company’s business activity is derived from the PRC. Accordingly, the Company has offset substantially all of the gross deferred tax assets for such net operating losses with additional valuation allowances recorded through income tax expense, which are a significant driver of the Company’s effective tax rate, given the history of loss and the uncertainty regarding the future. Remaining net deferred tax assets consist only of those supported by reversing deferred tax liabilities, as well as any deferred tax assets related to the PRC that management has concluded are more likely than not of being realized.
As of March 31, 2012, the Company did not have any material uncertain tax positions subject to the provisions of ASC 740-10; as such, there are no liabilities for unrecognized tax benefits. As described earlier in this Note, the Group provided for PRC EIT tax on profits earned by the Group’s Hong Kong subsidiary in the PRC.
Note 10 –Earnings / (Loss) per Share
The Company reports earnings per share in accordance with the provisions of ASC 260, “Earnings Per Share”. This standard requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings/(losses) per share excludes dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average common shares outstanding during the period under the two-class method. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. In computing the dilutive effect of convertible securities, the number of shares is adjusted for the additional common stock to be issued as if the convertible securities are converted at the beginning of the period (or at the time of issuance, if later). In computing the dilutive effect of options and warrants, the treasury method is used. Under this method, options and warrants are assumed to be exercised at the beginning of the period and as if funds obtained thereby were used to purchase common stock at the average market price during the period. The following table lists the potentially dilutive securities at March 31, 2012 related to our compensation plans under which shares of our common stock are authorized for issuance.
Potentially Dilutive Securities | Number of Securities to be Issued | Reference Index | ||||||
Dilutive securities from warrants issued as part of financing with Series A preferred stock | 1,852,820 | Note 12 | ||||||
Dilutive securities from warrants issued with convertible notes | 1,388,889 | Note 12 | ||||||
Dilutive securities from options to Ye Tian (director) | 500,000 | Note 13 | ||||||
Dilutive securities from options to Estelle Lau (director) | 60,000 | Note 13 | ||||||
Dilutive securities from options to Sum Kung (director) | 22,500 | Note 13 | ||||||
Dilutive securities from options to Jules Silbert (director) | 22,500 | Note 13 | ||||||
Total potentially dilutive securities | 3,846,709 |
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For the three months ended March 31, 2011, there was no diluted effect to loss per share due to the loss position. Warrants to purchase 3,241,709 shares of the Company’s common stock and options to purchase 560,000 shares of its common stock, as of March 31, 2011, were not included in the calculation of dilutive earnings/(loss) per share because of their anti-dilutive effect.
For the three months ended March 31, 2012, warrants to purchase 3,241,709 shares of the Company’s common stock and options to purchase 605,000 shares were excluded from the diluted earnings per share calculation because of their anti-dilutive effects. The exercise price exceeded the current share price for all stock-based options and warrants.
The following is a reconciliation of the basic and diluted earnings per share computations for the three months ended March 31, 2011 and 2012:
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Numerator: | ||||||||
Net loss for the period | (476,447 | ) | (194,276 | ) | ||||
Net loss available to common stock holders – Basic and diluted | (476,447 | ) | (194,276 | ) | ||||
Denominator: | ||||||||
Denominator for basic earnings per share -weighted average common stocks outstanding | 30,930,949 | 31,033,148 | ||||||
Denominator for diluted earnings per share | 30,930,949 | 31,033,148 | ||||||
Basic (loss)/earnings per share | (0.02 | ) | (0.01 | ) | ||||
Diluted (loss)/earnings per share | (0.02 | ) | (0.01 | ) |
Note 11 – Convertible Preferred Stock
Series A Convertible Preferred Stock
On April 15, 2008 and as a condition to closing of the Share Exchange, CER entered into Securities Purchase Agreements with 25 accredited investors pursuant to which CER issued and sold an aggregate of 7,874,241 units at a unit price of $1.08 (the "Financing"). Each unit consisted of one share of CER's Series A convertible preferred stock, par value of $0.001, and one warrant to purchase one-half of one share of CER's common stock at an exercise price of $1.29 per share. After the 1-for-2 reverse stock split conducted on April 16, 2008, the 7,874,241 shares of the Company’s Series A convertible preferred stock are convertible into 3,937,121 shares of common stock and the warrants are exercisable into 1,968,561 shares of the Company's common stock at an exercise price of $2.58 per share. The issuance costs of $1,859,902, including commissions, legal fees and transaction expenses were taken from the proceeds. The net proceeds were allocated between the Series A convertible preferred stock and warrants based on their relative fair values. As of the closing date, the fair value of Series A convertible preferred stock is estimated at $1.68 where as the fair value of the warrants is estimated at $0.85. As a result, an aggregate amount of $5,307,539 was allocated to Series A convertible preferred stock and $1,336,739 was allocated to the warrants. The fair value of the warrants was initially valued using the binomial model with assumptions such as, stock price, volatility, expected term, dividend, risk-free interest rate, etc.
The rights, preferences and privileges with respect to the Series A convertible preferred stock are as follows:
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Voting
Holders of Series A convertible preferred stock are entitled to the number of votes equal to the number of shares of common stock into which such shares of preferred stock could be converted and to vote as a single class.
Dividends
Holders of Series A convertible preferred stock are entitled to dividends when dividends are declared for common stockholders. There have been no dividends declared to date.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A convertible preferred stock shall be entitled to receive the amount of the original issue price per share (as adjusted for the 1-for-2 reverse stock split) for each share of Series A convertible preferred stock, plus all declared and unpaid dividends.
Conversion
Each share of Series A convertible preferred stock is convertible into common stock on a one-for-one basis, anytime at the option of the holder. The current conversion price is $2.16 after taking into effect the 1-for-2 reverse stock split, and the conversion price is subject to adjustment in accordance with the anti-dilution clause.
Adjustment of Series A Convertible Preferred Stock Conversion Price and Warrant Exercise Price
In accordance to the anti-dilution clause of the afore-mentioned Financing, if the Company shall issue additional shares without consideration or for consideration per share less than the conversion price and/or the warrant exercise price immediately prior to the issuance, such conversion price and exercise price shall be adjusted.
For the year and three months ended December 31, 2011 and March 31, 2012, no shares of Series A convertible preferred stock were converted.
As of December 31, 2011 and March 31, 2012, the Company had 200,000 and 200,000 shares of Series A convertible preferred stock issued and outstanding, respectively.
Note 12 – Warrant and Derivative Liabilities
Under authoritative FASB Accounting Standards Codification guidance pertaining to whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments that do not have fixed settlement provisions are deemed to be derivative instruments. The conversion feature embedded derivative that extinguished in 2011 and the embedded derivative related to exchange rate settlement differentials of the Company’s convertible note (described in Note 7), the related warrants issued with the convertible note, and the warrants issued in connection with Series A convertible preferred stock do not have fixed settlement provisions because their conversion and exercise prices are denominated in USD, which is a currency other than the Company’s functional currency, RMB. Additionally, the Company was required to include the reset provision in order to protect the holders from potential dilution associated with future financings. In accordance with the FASB authoritative guidance, the conversion feature embedded derivative and exchange rate settlement differential embedded derivative of the Convertible Notes were separated from the host contract (i.e. the Convertible Notes) and recognized as derivative liabilities in the balance sheet, and the derivatives associated with warrants issued in connection with the Convertible Notes and Series A preferred stocks have been recorded as warrant liabilities in the balance sheet to be re-measured at the end of every reporting period with changes in fair value reported in the consolidated statements of income and other comprehensive income.
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As of September 30, 2011, the conversion feature expired on the formerly convertible debt and there is no longer any conversion term on the modified loan.
The derivative liabilities were valued using both the Black-Scholes and Binomial valuation techniques with the following assumptions. We calculated the fair value of the derivative liability related to the convertible notes on exchange rate at repayment versus exchange rate at loan origination differential, which relates to the repayment of the notes and is distinct and separate from the embedded derivative liability formerly recorded for the now-expired conversion feature, based on the following key assumptions.
Derivative liability from convertible notes | December 31, 2011 | March 31, 2012 | ||||||
Estimated forward rate | 6.34 | 6.32 | ||||||
Discount rate | 0.64 | % | 0.63 | % | ||||
Discount factor | 0.995 | 0.997 | ||||||
Fair value | $ | 21,274 | $ | 35,918 |
Derivative liability associated with warrants issued in connection with convertible notes:
December 31, 2011 | March 31, 2012 | |||||||
Number of shares exercisable | 1,388,889 | 1,388,889 | ||||||
Stock price | 0.38 | 0.55 | ||||||
Exercise price | 1.8 | 1.8 | ||||||
Expected dividend yield (d) | - | - | ||||||
Expected life (in years) (c) | 2.39 | 2.14 | ||||||
Risk-free interest rate (a) | 0.32 | % | 0.37 | % | ||||
Expected volatility (b) | 61 | % | 58.5 | % | ||||
Fair Value: | ||||||||
Derivative liability - warrants issued in connection with Convertible Notes | 20,920 | 42,674 |
(a) | The risk-free interest rate is based on U.S. Treasury securities with compatible life terms. |
(b) | Due to the short trading history of the Company’s stock, the Company uses the volatility of comparable guideline companies to estimate volatility. |
(c) | The expected life of the conversion feature of the notes was based on the term of the notes and the expected life of the warrants was determined by the expiration date of the warrants. |
(d) | The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future. |
Note 13 - Stock-Based Compensation
Stock Option Plan
In September 2008, the board of directors approved the Company’s Stock Option Plan and granted 335,000 options to acquire the Company’s common stock at $2.90 per share to five non-employee directors and consultants under the 2008 Plan. The option plan was revised and approved at the shareholders’ meeting as of November 20, 2011 (there were no significant changes impacting valuation or accounting for share based compensation). Detailed terms of the plan are described as follows with each grant.
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Stock Options
On June 24, 2009, the Company appointed one independent director and granted him stock options to purchase 500,000 shares of the Company’s common stock. The options will vest and become exercisable in eight equal installments evenly spread out during the three year period beginning from July 1, 2009. On September 7, 2009, the Company appointed another independent director and granted her a stock option to purchase 60,000 shares of the Company’s common stock; these options fully vested by October 2011. Unvested options shall be terminated and forfeited upon the termination of a holder’s director status.
On June 7, 2011, the Board of Directors resolved to modify these option grants and adjusted the exercise price of one incumbent director’s options from $1.22 to $0.73 per share and another director’s options from $1.58 to $0.73 per share. The Board also resolved to accelerate the vesting period of one retired director, such that all the shares underlying the option were deemed vested as of June 7, 2011. The total incremental compensation cost in respect of such acceleration and option modification was $202,106, which was recorded in the second quarter of 2011.
On June 13, 2011, with the resignation of two former directors, the Company appointed another two directors and granted them both stock options to purchase 60,000 shares of the Company’s common stock. The options will vest and become exercisable in eight equal quarterly installments evenly spread out during the two year period beginning from July 1, 2011. Unvested options shall be terminated and forfeited upon the termination of a holder’s director status.
The Company used the Black-Scholes Model to value the options at the time they were granted. The following table summarizes the assumptions used in the Black-Scholes Model when calculating the fair value of the options at the grant dates (for 2011, as there were no grants in 2012).
Fair value per share | $0.39- $ 0.47 | |||
Expected Term(Years) | 4.00-5.56 | |||
Exercise Price | $0.73 | |||
Expected Volatility | 72%-76% | |||
Risk Free Interest Rate | 1.16%-1.82% |
Since the Company does not have sufficient applicable history of employee stock options activity, the Company uses the simplified method to estimate the life of the options by taking the sum of the vesting period and the contractual life and then calculating the midpoint which is the estimated term of the options.
For the three months ended March 31, 2011 and 2012, the Company recognized $35,253 and $7,067 of compensation expense, respectively.
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Following is a summary of the status of options outstanding at March 31, 2012:
Outstanding Options | Exercisable Options | |||||||||||||||||||||
Remaining | Remaining | |||||||||||||||||||||
Exercise | contractual | Exercise | contractual | |||||||||||||||||||
price | Number | term (years) | price | Number | term (years) | |||||||||||||||||
$ | 0.73 | 60,000 | 7.50 | $ | 0.73 | 60,000 | 7.50 | |||||||||||||||
$ | 0.73 | 500,000 | 7.25 | $ | 0.73 | 500,000 | 7.25 | |||||||||||||||
$ | 0.73 | 60,000 | 9.25 | $ | 0.73 | 22,500 | 9.25 | |||||||||||||||
$ | 0.73 | 60,000 | 9.25 | $ | 0.73 | 22,500 | 9.25 | |||||||||||||||
Total | 680,000 | 605,000 |
Following is a summary of the option activity:
Outstanding as of December 31, 2010 | 560,000 | |||
Granted | 120,000 | |||
Forfeited | - | |||
Exercised | - | |||
Outstanding as of December 31, 2011 | 680,000 | |||
Granted | - | |||
Forfeited | - | |||
Exercised | - | |||
Outstanding as of March 31, 2012 | 680,000 | |||
Vested and exercisable as of March 31, 2012 | 605,000 |
Note 14– Interest Expense, Net
For a detailed discussion of borrowings and balances underlying interest expense, see Note 7.
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Interest on current portion of long term loan | $ | 159,018 | $ | 168,200 | ||||
Interest on long-term loans | 128,019 | - | ||||||
Amortization of deferred financing costs | 74,352 | - | ||||||
Accretion to face value on loans | 52,357 | 46,037 | ||||||
Expense of common stock issued in relation to long term loan | 40,308 | - | ||||||
Interest on short-term loans | 63,401 | 217,406 | ||||||
Bank note discount interest | 83,667 | - | ||||||
Warrant cancellation | (15,547 | ) | - | |||||
Interest capitalized | - | (25,040 | ) | |||||
Interest income | (216,050 | ) | (2,800 | ) | ||||
Letter of credit interest | - | 26,986 | ||||||
Total | $ | 369,525 | $ | 430,789 |
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Note 15 – Other Non-operating Expense, Net
Other non-operating expenses consist primarily of foreign exchange losses on purchasing transactions.
For the three months ended March 31, | ||||||||
2011 | 2012 | |||||||
(Note 2(v)) | ||||||||
Foreign exchange losses (gain) | 154,035 | (23,267 | ) | |||||
Other non-operating expenses (income) | 36,582 | (36,790 | ) | |||||
Total other non-operating expenses, net | $ | 190,617 | $ | (60,057 | ) |
The previously reported amount of foreign exchange losses for the quarter ended March 31, 2011 was $33,553 in the Form 10-Q as originally filed. As further described in Note 2(v), foreign exchange losses were adjusted for 2011 quarterly periods, and for the first quarter of 2011 were increased by $120,482 for the reasons more fully described in Note 2(v).
Note 16 – Related Party Transactions
In 2005, Shanghai Engineering entered into agreements with the son of Mr. Qinghuan Wu to lease the office at Quyang Road, Hongkou District, Shanghai for 5 years. For the three months ended March 31, 2011 and 2012, the Company paid $13,203 and $0, respectively, as rental expense to Mr. Qinghuan Wu's son. In May 2011, CER terminated the lease agreement and moved to a new Shanghai office.
On February 1, 2010, Mr. Qinghuan Wu, arranged for a $1,000,000 loan from Haide, a company controlled by Mr. Qinghuan Wu, to the Company. The proceeds of this loan were used by CER Yangzhou for additional paid-in capital which helped fund the Company’s new plant in Yangzhou, China. The loan was an interest only loan, bearing interest at the annual rate of 9.5%, and is unsecured. The Company will pay the sum of $23,750 at the end of every three calendar months. The principal is due in full on January 30, 2012, hence the remaining loan is classified as long-term loan to be repaid within one year. The loan is unsecured and there are no guarantees of the interest or principal. Shanghai Engineering has subordinated its loan to those under the loan agreements. The Company repaid principal of $ 460,000 in December 2010. On October 10, 2011, CER paid the remaining outstanding principal due under the long-term loan. The prepayment sum of $548,550 represented the principal amount and the interest due.
On January 8, 2011, CER signed a contract for the design, manufacture, and installation of a major waste heat recovery system with Zhenjiang Kailin Clean Heat Energy Co., Ltd. (“Zhenjiang Kailin”) of Zhenjiang City. The contract was valued at RMB 300 million (approximately $46 million), including the engineering part of RMB 8 million (approximately $1 million), procurement part of RMB 240 million (approximately $37 million) and construction part of RMB 52 million (approximately $8 million). The system will be part of a new sulfuric acid plant and is capable of producing up to 122 tons of steam-per-hour at 485° C and 5.4 MPa from operations at the plant. 98 percent of the project was completed as of March 31, 2012 and the project has been fully completed by the end of May 2012. Transactions between CER and Zhenjiang Kailin are presented as related party transactions because the Chairman, Chief Executive Officer and majority shareholder of Green Asia Resources, Inc. (“Green Asia”), the parent company of Zhenjiang Kailin, is the owner of a significant creditor, Hold and Opt Investments Limited (as discussed in Note 7, Short-Term Loans) and is a less than 5% shareholder of CER, our executive officers own, as a result of a private placement and prior consulting arrangement, a small number (less than 1%) of shares in Green Asia, and, that at the time the contract was signed, a less than 5% shareholder of both CER and Green Asia was a member of CER’s Board of Directors. Management of each company is different and the directors at Green Asia and Zhenjiang Kailin are independent of CER. For the three months ended March 31, 2012, revenue earned from the contract amounted to $5,830,916.
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On November 25, 2011, CER Yangzhou entered into the first of two guaranty contracts regarding the Zhenjiang Kailin contract with third party CGN Energy Service Co., Ltd. (“CGN Energy”). CER Yangzhou and Zhenjiang Kailin agreed to engage CGN Energy to provide financing for a portion of the Zhenjiang Kailin project contract price. CER sold certain equipment integral to the Zhenjiang Kailin sulfuric acid waste heat recovery project to CGN Energy at a price of RMB24.1 million (approximately $3.82 million). As the financing party, CGN Energy resold the equipment to Zhenjiang Kailin via a structured payment arrangement covering a 24 month period. The substance of this transaction is Zhenjiang Kailin obtaining financing from third party CGN Energy to pay CER. CER Yangzhou entered into a guaranty contract with CGN Energy for the equipment sold, which was installed in the sulfuric acid waste heat recovery project. If there is any default by Zhenjiang Kailin, the first in guarantee order is Zhenjiang Kailin’s pledge for payment of its structured note with CGN Energy. The second in guarantee order is Jiangsu SOPO, a third party customer of CER and related party of Zhenjiang Kailin. Third in guarantee order is CER Yangzhou, which provided CGN Energy with an unconditional and irrevocable guarantee with joint responsibility to ensure that Zhenjiang Kailin will fulfill the duties and responsibilities to pay CGN Energy on time under the waste heat recovery project contract. The amount of the guarantee, RMB 24.1 million, represents 7.8% of the RMB300 million project price.
On March 20, 2012, CER and Zhenjiang Kailin agreed to engage CGN Energy to provide financing for another portion of the Zhenjiang Kailin project contract price (similar to the financing arrangement with CGN Energy in 2011). CER sold certain equipment integral to the Zhenjiang Kailin sulfuric acid waste heat power generation project to CGN Energy at a price of RMB30 million (approximately $4.8 million). As the financing party, CGN Energy resold the equipment to Zhenjiang Kailin via a structured payment arrangement covering a 24 month period. CER Yangzhou also entered into a second guaranty contract with CGN Energy for the equipment sold, which was installed in the sulfuric acid waste heat power generation project. The guarantee contract is of the same character as the first financing arrangement, Zhenjiang Kailin’s pledge for payment of its structured note with CGN Energy is in the first guarantee order, Jiangsu SOPO in second guarantee order and CER Yangzhou in the third guarantee order, which provided CGN Energy with an unconditional and irrevocable guarantee with joint responsibility to ensure that Zhenjiang Kailin will fulfill the duties and responsibilities to pay CGN Energy on time under the waste heat power generation project contract. The amount of the guarantee, RMB 30 million, represents 10% of the RMB 300 million project price. There are no other guarantees for any other elements of the Zhenjiang Kailin project contract price.
There are no other guarantees for any other elements of the project. The Company assessed the arrangement under SAB 104 revenue recognition criteria and concluded the criteria, particularly the criterion regarding collectability being reasonably assured, were met. As a similar guaranty could be obtained from a third party financial institution and performance of the contract is probable, the Company separated the deliverable represented by the guaranty from the rest of the contract price and recognized the initial fair value of the guaranty liability arising from the guaranty contract as deferred revenue. As of March 31, 2012, the deferred revenue was $197,154. This amount will be amortized to revenue according to applicable GAAP accounting requirements as the underlying structured payment obligation is satisfied by Zhenjiang Kailin’s payments to CGN Energy.
Subsequent to the first quarter, on May 8, 2012, CER and Zhenjiang Kailin entered into an agreement whereby CER will pay Zhenjiang Kailin RMB 8.9 million (approximately $1.5 million) as a penalty (“the penalty”) for the economic losses suffered by Zhenjiang Kailin resulting from project delays past the originally expected completion date of December 31, 2011. The original Zhenjiang Kailin contract for the construction of the facility did not contain any provisions for late completion or liquidated damages. As part of this agreement, CER agreed to assume additional costs, estimated at $0.6 million, to bring the capacity of the sulfuric acid waste heat recovery system to original specifications and to install additional electric utilities. The penalty payment is included in the accrued expenses and other liabilities and is expected to be paid in June.
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Also, subsequent to the first quarter, on the same date, the two parties also signed an upgrade contract for the same facility valued at RMB 8 million (approximately $1.26 million). The purpose of the enhancements contemplated in this contract is to raise the capacity of the system from 800k tons to 900k tons of sulfuric acid per year. This enhancement project has been completed by the end of May 2012 and will permit $1.26 million of additional billings.
As further described in Note 3 regarding accounts receivable, subsequent to March 31, 2012 CER and Zhenjiang Kailin agreed to revise the payment schedule of outstanding accounts receivable as below.
Maturity date | Amount due | |||
August 31, 2012 | 4,763,700 | |||
June 30, 2013 | 2,858,220 | |||
September 30, 2013 | 3,175,800 | |||
December 31, 2013 | 3,331,807 | |||
Total | 14,129,527 |
As of March 31, 2012, the accounts receivable (including both current and non-current portions) from Zhenjiang Kailin under the contract was $12,684,386 after the taking into account the discounting impact (discount rate was determined as 10.65% considering the risk free rate and Zhenjiang Kailin’s credit risk) and the discount reflected in revenue in the statement of operations was $1,509,668. $7,920,686 represents the balance due from Zhenjiang Kailin which is to be collected in over one year.
Pursuant to applicable construction contract accounting guidance, the additional $1.26 million of revenue for the system upgrade project, the $1.5 million penalty for economic losses incurred by CER’s customer, and the discount effect arising from the payment term extension were added to (or subtracted from, for the latter two items) the total estimated contract revenue for the Zhenjiang Kailin project while the additional estimated costs for both agreements were added to the budgeted costs of the total Zhenjiang Kailin project to calculate a revised percentage of completion. These adjustments were incorporated into the total estimated revenues of the contract, and total budgeted costs, for the quarter ended March 31, 2012 despite both agreements being signed subsequent to such date, as recognized subsequent events, due to underlying facts and conditions regarding the overall project being present prior to or at the balance sheet date of March 31, 2012. As of March, 31, 2012, 98 percent of the project was completed, and it has been fully completed by the end of May 2012. For the three months ended March 31, 2012, revenue earned from the contract amounted to $5,830,916. The cost of revenues associated with the original contract and the additional agreements entered into was $7,505,301 for the three months ended March 31, 2012. The revenue, less the discount effect reflected in revenue and penalty assumed reflected in revenue, was not fully offset by the additional revenue agreed to; further, additional incurred (and yet to be incurred) costs impacted the percentage completion, reducing the margin on the project to negative 28% for the quarter ended March 31, 2012.
On October 20, 2011, CER (Hong Kong) entered into an advanced payment agreement amounting to $669,800 with Haide, a company controlled by Mr. Qinghuan Wu. The substance of this arrangement was a short term borrowing from a related party. Pursuant to the agreement, Haide paid on behalf of CER (Hong Kong) to certain vendors $450,000 on October 20, 2011 and $219,800 on November 1, 2011, respectively. The terms of the agreement provide for zero interest. CER (Hong Kong) repaid $550,000 to Haide on November 25, 2011. As of March 31, 2012, the remaining balance of $119,800 was recorded in accrued expenses and other liabilities.
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In March 2012, Mrs. Jialing Zhou, a shareholder and wife of Mr. Qinghuan Wu, provided an interest-free loan of RMB 1,350,000 (approximately $214,366) to Shanghai Engineering by two installments. The remaining balance of RMB 1,350,000 (approximately$214,366) is expected to be repaid by the end of June, 2012 and is classified in accrued expenses and other liabilities. Shanghai Engineering repaid the principal of RMB 350,000 (approximately $55,576) on April 16, 2012 and RMB 300,000 (approximately $47,637) on June 6, 2012, respectively.
Note 17 – Retirement Benefits
As stipulated by the relevant laws and regulations applicable to enterprises operating in the PRC, the Company and its PRC subsidiaries and affiliates are required to maintain a defined contribution retirement plan for all of its employees who are residents of the PRC. The Company contributes to a statutory government retirement plan approximately 22% of the base salary of each of its employees and has no further obligations for the actual pension payments or post-retirement benefits beyond the annual contributions. The statutory government retirement plan is responsible for the entire pension obligations payable for all past and present employees.
The Company made contributions of $67,375 and $137,808 for employment benefits, including pension payments for the three months ended March 31, 2011 and 2012, respectively.
Note 18 – Statutory Reserves
As stipulated by the relevant laws and regulations applicable to enterprises operating in the PRC, the Company and its PRC subsidiaries and affiliates are required to make annual appropriations to a statutory surplus reserve fund. Specifically, the Company is required to deposit 10% of its profits after taxes, as determined in accordance with the PRC accounting standards applicable to the Company, to a statutory surplus reserve until such reserve reaches 50% of the registered capital of the Company.
The transfer to these reserves must be made before distribution of any dividends to shareholders. For the years ended December 31, 2011, there were $376,794 of transfers to statutory reserves for these subsidiaries and affiliates of the Company generating profits. Statutory reserves were $509,596 as of December 31, 2011 and March 31, 2012.
The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years' losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 50% of the registered capital. The remaining required contributions to the statutory reserves required were approximately $ 8,015,475 as of March 31, 2012.
Note 19 – Commitments and Contingencies
Subsequent to the first quarter, on May 8, 2012, CER and Zhenjiang Kailin entered into an agreement whereby CER will pay Zhenjiang Kailin RMB 8.9 million (approximately $1.5 million) as a penalty for the economic loss suffered by Zhenjiang Kailin resulting from project delays past the originally expected completion date of December 31, 2011. The penalty is included in accrued expenses and other liabilities and is expected to be paid in June.
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Note 20 – Subsequent events
On March 30, 2012, CER Yangzhou entered into a 2 year comprehensive credit facility with the China CITIC Bank, Yangzhou Branch. The facility is RMB 20,000,000 (approximately $3,175,000). No amounts were borrowed under this arrangement until April 24, 2012, when CER Yangzhou drew down bank acceptance notes amounting to RMB 3,100,178 (approximately $492,287) after making a cash deposit of RMB 1,860,107(approximately $294,882) to the bank. On May 23, 2012, CER Yangzhou drew down bank acceptance notes amounting to RMB 4,200,000 (approximately $664,472) after making cash deposit of RMB 2,520,000 (approximately $395,519) to the bank. On June 6, 2012, CER Yangzhou drew down RMB 10 million (approximately $1,587,900) as a short-term loan. This amount due in one year and carries the annual interest rate of 7.544%.
On April 12, 2012, CER Shanghai drew down RMB 11 million under the short-term comprehensive loan facility with the Bank of Communication, Shanghai Branch described in Note 7. The facility is RMB 57 million, CER Shanghai is entitled to draw down RMB 40 million as a short-term loan or RMB 57 million as bank acceptance notes after making a cash deposit of RMB 17 million to the bank. CER Shanghai drew down RMB 29 million on March 20, 2012.
On April 16, 2012, CER Shanghai repaid a full principal amount of RMB 5 million to Shanghai Pudong Zhanjiang Micro-credit Co., Ltd. The loan was signed in December 2011 and carried an annual interest rate of 12%. 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. The total amount of principal and interest amounting to RMB5,043,333 (approximately $801,038) was repaid on April 16, 2012.
In April, CER Shanghai repaid RMB 4.6 million to the Industrial and Commercial Bank of China Limited, Zhangjiang Branch under the loan of RMB 6.68 million signed in December 2011. The loan is secured by a pledge of several bank acceptance notes owned by CER Shanghai in the amount of RMB 7.43 million, and these reimbursements were due to the matured status of a same amount of bank acceptance notes used for collateral. In May, the remaining total amounts of RMB 2.08 million were repaid under this loan.
RMB387,140 was repaid to the Industrial and Commercial Bank of China Limited, Zhangjiang Branch under a loan of RMB 1.38 million signed in January 2012. The loan is collateralized by several bank acceptance notes owned by CER Shanghai in the amount of RMB1.53 million, and these reimbursements were due to the matured status of a same amount of bank acceptance notes used for collateral. In May, the remaining total amounts of RMB 992,860 were repaid under this loan.
CER Shanghai began to repay RMB 900,000 per month to Shanghai Pudong Zhanjiang Micro-credit Co., Ltd from April 2012 under the loan contract of RMB 10 million. The loan carries an annual interest rate of 12% and the due date of the loan is February 20, 2013. Amounts totaling RMB 1,800,000 had been repaid as of May 21, 2012.
On May 18, 2012, CER Shanghai renewed the issuance of a forward letter of credit (“L/C”) to CER Yangzhou for purchase of goods, after repaying the prior letter of credit amounting to RMB 7,980,000 (approximately $1,266,700) to the Industrial and Commercial Bank of China Limited, Shanghai Zhangjiang Branch on May 15, 2012. The L/C is collateralized by a building in Shanghai, which is owned by Jiangsu SOPO (Group) Company Limited, one of the Company’s customers. On May 21, 2012, CER Yangzhou discounted the L/C from Industrial and Commercial Bank of China Limited, Zhangjiang Branch in the amount of RMB 7,900,000 (approximately $1,254,000 at the exchange rate at the time). The due date of the L/C is September 17, 2012, and bears the discount rate of 6.405% annually.
On May 30, 2012, CER Shanghai renewed the issuance of bank acceptance notes amounting to RMB 8.8 million, with a cash deposit of RMB 0.8 million, from the Industrial and Commercial Bank of China Limited, Shanghai Zhangjiang Branch, after it repaid the same amounts on May 22, 2012. The bank acceptance drafts are collateralized by a building in Shanghai owned by Jiangsu SOPO (Group) Company Limited, one of the Company’s customers.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains disclosures which are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, such as, but not limited to, the discussion of economic conditions in market areas and their effect on revenue growth, the discussion of our growth strategy, the potential for and effect of future governmental regulation, fluctuation in global energy costs, the effectiveness of our management information systems, and the availability of financing and working capital to meet funding requirements, and can generally be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These factors include, but are not limited to: the general economic conditions that may affect our customers desire or ability to invest in energy recovery systems; the cost of raw materials; the availability of environmental credits; the positive and adverse effect of governmental regulation affecting energy recovery systems; our reliance on customers in heavy industry, such as chemicals and steel production, and state owned or controlled enterprises; competition in the industry of heat and energy recovery systems; the availability of and costs associated with potential sources of financing; difficulties associated with managing future growth; our ability to increase manufacturing capacity to meet demand; fluctuations in currency exchange rates; restrictions on foreign investments in China; uncertainties associated with the Chinese legal system; the loss of key personnel; and our ability to attract and retain new qualified personnel.
These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
China Energy Recovery, Inc. (the "Company," "we," "us," or "our") is headquartered in Shanghai, China, and, through its subsidiaries and affiliates, is in the business of designing, fabricating, implementing and servicing industrial energy recovery systems. The Company's energy recovery systems capture industrial waste energy for reuse in industrial processes or to produce electricity and thermal power, thereby allowing industrial manufacturers to reduce their energy costs, shrink their emissions and generate sellable emissions credits. All of the manufacturing takes place at the Company's manufacturing facility in Yangzhou, China. The Company transports the manufactured systems in parts via truck, train or ship to the customers' facilities where the systems are assembled and installed. The Company has primarily sold energy recovery systems to chemical manufacturing plants to reduce their energy costs by increasing the efficiency of their manufacturing equipment. The Company mainly sells its energy recovery systems and services directly to customers.
On January 24, 2008, we entered into a Share Exchange Agreement (the "Share Exchange Agreement") with Poise Profit International, Ltd. ("Poise Profit") and the shareholders of Poise Profit. Pursuant to the Share Exchange Agreement, we acquired 100% of the issued and outstanding shares of Poise Profit's common stock in exchange for the issuance of 41,514,179 (pre reverse split) shares of our common stock to the shareholders of Poise Profit. The share exchange (the "Share Exchange") transaction was consummated on April 15, 2008.
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As a result of the Share Exchange, our business operations consist of those of Poise Profit's Chinese subsidiary, Hi-tech, which were subsequently transferred to CER Hong Kong on December 3, 2008. CER Hong Kong is principally engaged in designing, marketing, licensing, fabricating, implementing and servicing industrial energy recovery systems capable of capturing industrial waste energy for reuse in industrial processes or to produce electricity and thermal power.
CER Hong Kong carries out its operations through its subsidiaries CER Shanghai and CER Yangzhou and an affiliated entity (variable interest entity (“VIE”)) with which CER Hong Kong has a contractual relationship, Shanghai Engineering. Effective as of May 1, 2003, Shanghai Engineering's manufacturing activities were carried out by Vessel Works Division located in Shanghai, China, through a lease agreement with Vessel Works Division's owner, which was terminated April 2011. From May 2011, all of our production is carried out in CER Yangzhou, where we completed the first phase of construction of the plant by January 2011. The term “Company” refers to the group of companies described above.
The energy recovery systems that we produce capture industrial waste energy for reuse in industrial processes or to produce electricity and thermal power, which allow industrial manufacturers to reduce a portion of their energy costs, shrink their emissions and potentially generate saleable emissions credits. We have primarily sold energy recovery systems to chemical manufacturing plants to reduce their energy costs by increasing the efficiency of their manufacturing equipment and help control their pollution output. We have installed more than 140 energy recovery systems throughout China and in a variety of international markets.
In September 2011, the State Council issued the work plan for fulfilling the target of energy savings and emissions reduction during the PRC’s 12th five year plan for national economic development. The work plan addressed the importance of energy savings in industries such as coal, fossil fuels, paper manufacturing, and chemicals. The work plan also specified heat or pressure recovery as one of the projects especially encouraged and supported by the government.
Facing a possible large market opportunity and potential government support, we decided to enlarge our production capacity by setting up a 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, 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. In January 2011, Phase One construction of the plant was completed. The Phase One facility is about 14,000 square meters. Many advanced pieces of advanced equipment have been installed in the new factory. The new facility significantly expands our ability to accept new orders and will speed delivery of large-scale waste heat systems for new and retro-fitted industrial plants located in China and other international markets overseas. Phase Two is under construction.
With phase one of the new facilities completed, 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 skills to our engineering and design team. We are also planning on entering into marketing partnerships and licensing deals that should 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.
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Coming through the world economic crisis, we took more orders than anticipated from existing and new customers during the first three months of 2012. The main reason is that we focused more attention and efforts on EPC contracts, which contributed to higher revenue. On January 8, 2011, CER signed an EPC contract for a major waste heat recovery system with Zhenjiang Kailin, a related party of CER. The contract was valued at RMB 300 million (approximately $46 million). This project was nearly completed by March 31, 2012.
During 2011 and first quarter of 2012, the demand for energy recovery systems significantly recovered in response to a series of factors, including the recovery of the global economy, especially the Chinese economy, government support, the implementation of incentive policies for energy savings industries, and increasing availability of financing. With our new manufacturing facility in operation and our ability to perform more EPC contracts, based on our currently signed contracts, forecasts and production schedule, we anticipate positive results in the next few years.
Critical Accounting Policies and Estimates
While our significant accounting policies are more fully described in Note 2 to our Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q, we believe that the accounting policies described below are the most critical to aid you in fully understanding and evaluating this management discussion and analysis. Management believes that there are certain accounting estimates and management judgments that have greater influence on the financial statements, including the process of determining percentage completion on EPC project contracts, allowances for doubtful accounts, provisioning for inventory, measurement of deferred taxes and related valuation allowances, and various fair value measurements. The most critical policies are discussed further herein and in Note 2 to the financial statements.
Revenue Recognition
The Company derives revenues principally from
(a) | Provision of Engineering, Procurement and Construction ("EPC") services, which are essentially turnkey contracts where the Company provides all services in the whole construction process from design, development, engineering, manufacturing, and procurement to installation; |
(b) | Sales of energy recovery systems; and |
(c) | Provision of design services. |
In accordance with the accounting standard regarding performance of construction-type and certain production-type contracts, and long-term construction-type contracts, the Company adopted the percentage of completion method to recognize revenues and cost of sales for EPC contracts. EPC contracts are long-term, complex contracts involving multiple elements, such as design, manufacturing and installation, which all form one integral EPC project. The energy recovery system involved in an EPC project is highly customized to the specific customer's facilities and essentially not transferable to any other facilities without significant modification and cost. It would be difficult, if not impossible, to beneficially use a single element of a specific EPC project on a standalone basis other than in connection with the facilities for which it was intended. EPC contracts are by nature long-term construction-type contracts, usually lasting more than one accounting period, and the Company is able to reasonably estimate the progress toward completion, including contract revenues and contract costs. EPC contacts specify the customers' rights to the goods, the consideration to be paid and received, and the terms of payment. Specifically, the Company has the right to require a customer to make progress payments upon completion of determined stages of the project which serve as evidence of the customer's approval and acceptance of the work completed to date as complying with the terms of the particular EPC contract.
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Sales of the Company's energy recovery systems and related products are essentially product sales. The products consist mainly of waste heat boilers and other related equipment manufactured according to specific customers' specifications. Once manufactured, the Company ships the products to its customers in their entirety in one batch. The Company’s service arrangement also includes a limited warranty to its customers pursuant to which the customers retain between 5% and 10% of the particular contract price as retainage during the limited warranty period (usually 12-18 months). The Company generally recognizes revenues including retainage from product sales when (i) persuasive evidence of an arrangement exists, which is generally represented by a contract between the Company and the customer; (ii) products are shipped; (iii) title and risks of ownership have passed to the customer, which generally occurs at the time of delivery; (iv) the customer accepts the products upon a quality inspection performed by them; (v) the purchase price is agreed to between the Company and the customer; and (vi) collectability is reasonably assured. Net revenues represent the invoiced value of products, less returns and discounts, and are net of value-added tax.
In providing design services, the Company designs energy recovery systems and other related systems based on a customer's requirements and the deliverable consists of engineering drawings. The customer may elect to engage the Company to manufacture the designed system or choose to present the Company's drawings to other manufacturers for manufacturing and installation. The Company recognizes revenues from design services when the services are provided, the design drawings are delivered, invoices are issued and collectability is reasonably assured. The Company generally delivers the drawings in one batch.
Consolidation of Variable Interest Entities
In accordance with U.S. GAAP, variable interest entities are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. Each variable interest entity with which the Company is affiliated must be evaluated to determine who the primary beneficiary of the risks and rewards of ownership of the variable interest entity. The primary beneficiary is required to consolidate the variable interest entity's financial information for financial reporting purposes.
We have concluded that Shanghai Engineering is a variable interest entity and that CER Hong Kong is the primary beneficiary thereof. Pursuant to the contractual arrangements described elsewhere in this filing on Form 10-Q, the Company recovered (recovers) substantially all of the profits of its VIE through service fees charged (particularly under the consulting and service agreement) and has the unilateral ability to do so through its wholly owned subsidiaries. Accordingly, through such contractual arrangements, the Company (as applicable, through wholly-owned subsidiaries) has the power to direct the activities most significant to the economic performance of the VIE and absorbs all, or substantially all, of the profits or losses; therefore, the Company is the primary beneficiary. Under the requirements of the FASB’s accounting standard regarding VIEs, CER Hong Kong consolidates the financial statements of Shanghai Engineering. As all companies are under common control (see Note 1 to our consolidated financial statements), the consolidated financial statements have been prepared as if the arrangements by which these entities became variable interest entities had occurred retroactively. We have eliminated inter-company items from our consolidated financial statements.
Fair Value Measurements
The accounting standard regarding fair value measurements defines financial instruments and requires fair value disclosures for those financial instruments. The fair value standard also establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measurements. The carrying amounts reported in the accompanying consolidated balance sheets for current assets and current liabilities such as cash, restricted cash, accounts and notes receivable, short term loans, accounts payable, and other payables qualify as financial instruments. Management concluded the carrying values of these financial instruments are reasonable approximations of their respective fair values because of the short period of time between the origination of such instruments and their expected realization and the current market rates of interest. The three levels of the valuation hierarchy are defined as follows:
£ | Level 1 | Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
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£ | Level 2 | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments. At December 31, 2011 and March 31, 2012, the Company did not have any assets or liabilities classified as Level 2. |
£ | Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value. Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). Key provisions of the amendments in ASU 2011-04 include: (1) a prohibition on grouping financial instruments for purposes of determining fair value, except in limited cases; (2) an extension of the prohibition against the use of a blockage factor to all fair value measurements; and (3) a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used, and qualitative details about the sensitivity of the measurements. For items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurements disclosed. This ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance, effective with the quarter ended March 31, 2012, did not have a material impact to CER’s financial statements as management concluded CER’s Level 3 fair value measurements were not material for purposes of additional disclosure.
In June 2011, the FASB issued Accounting Standards Update 2011-05, “Comprehensive Income: Presentation of Comprehensive Income.” The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective retrospectively for interim periods and annual periods beginning after December 15, 2011 and has been adopted by CER. Further, the requirement for presentation of reclassifications from other comprehensive income to net income on a line item basis contained in the new accounting standards update is presently subject to indefinite deferral by the FASB pending further evaluation. The adoption of this guidance has not impacted CER’s financial statements as the company presently prepares, and continues to prepare, a consolidated statement of operations and comprehensive income (loss).
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Results of Operations
Comparison of Three Months Ended March 31, 2011 and March 31, 2012
The following table sets forth the results of our operations for the periods indicated as a percentage of revenues:
Three months ended March 31, | ||||||||||||||||
2011 | % of Revenue | 2012 | % of Revenue | |||||||||||||
REVENUES | ||||||||||||||||
Third parties | ||||||||||||||||
EPC - third parties | 4,441,880 | 60.2 | % | 19,411,694 | 67.3 | % | ||||||||||
EPC - related party | 1,774,657 | 24.0 | % | 5,830,916 | 20.2 | % | ||||||||||
Total EPC revenues | 6,216,537 | 84.2 | % | 25,242,610 | 87.5 | % | ||||||||||
Products - third parties | 1,163,522 | 15.8 | % | 3,597,488 | 12.5 | % | ||||||||||
Total revenue | 7,380,059 | 100.0 | % | 28,840,098 | 100.0 | % | ||||||||||
COST OF REVENUES | ||||||||||||||||
Cost of revenues – EPC | (4,979,718 | ) | (67.5 | )% | (23,458,867 | ) | (81.3 | )% | ||||||||
Cost of revenues - products | (1,161,423 | ) | (15.7 | )% | (2,639,161 | ) | (9.2 | )% | ||||||||
Total cost of revenues | (6,141,141 | ) | (83.2 | )% | (26,098,028 | ) | (90.5 | )% | ||||||||
GROSS PROFIT | 1,238,918 | 16.8 | % | 2,742,070 | 9.5 | % | ||||||||||
Selling, general, and administrative expenses | (1,813,081 | ) | (24.6 | )% | (2,053,335 | ) | (7.1 | )% | ||||||||
LOSS / INCOME FROM OPERATIONS | (574,163 | ) | (7.8 | )% | 688,735 | 2.4 | % | |||||||||
OTHER INCOME / (EXPENSE): | ||||||||||||||||
Change in fair value of derivative liability for warrant | 477,889 | 6.5 | % | (26,751 | ) | (0.1 | )% | |||||||||
Change in fair value of derivative liability for loan | 162,217 | 2.2 | % | (14,644 | ) | (0.1 | )% | |||||||||
Subsidy income | - | 0.0 | % | 90,679 | 0.3 | % | ||||||||||
Other non-operating expenses, net | (190,617 | ) | (2.6 | )% | (30,622 | ) | (0.1 | )% | ||||||||
Interest expense, net | (369,525 | ) | (5.0 | )% | (430,789 | ) | (1.5 | )% | ||||||||
Total other income (expense), net | 79,964 | 1.1 | % | (412,127 | ) | (1.5 | )% | |||||||||
(LOSS) / INCOME BEFORE INCOME TAXES | (494,199 | ) | (6.7 | )% | 276,608 | 0.9 | % | |||||||||
BENEFIT / (PROVISION) FOR INCOME TAXES | 17,752 | 0.2 | % | (470,884 | ) | (1.6 | )% | |||||||||
NET LOSS | (476,447 | ) | (6.5 | )% | (194,276 | ) | (0.7 | )% | ||||||||
OTHER COMPREHENSIVE INCOME: | ||||||||||||||||
Foreign currency translation adjustment | 220,769 | 3.0 | % | 40,027 | 0.1 | % | ||||||||||
COMPREHENSIVE LOSS | (255,678 | ) | (3.5 | )% | (154,249 | ) | (0.6 | )% |
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Revenues. Revenue was $28,840,098 for the three months ended March 31, 2012, as compared to $7,380,059 for the three months ended March 31, 2011, an increase of $21,460,039 or 291%. This increase was mainly due to the increase in the number of EPC contracts and the increase in the average revenue recognized per EPC and per product contract. The average revenue per EPC contract increased by $2,027,667, from $777,067 per contract for the three months ended March 31, 2011 to $2,804,734 per contract for the three months ended March 31, 2012. This was mainly due to one significant EPC contract signed with a related party in the first quarter of 2011, Zhenjiang Kailin, for which the revenue amounted to $5.8 million for the three months ended March 31, 2012, whereas only $1.8 million was recognized in the comparable period of 2011. Further, a new contract with a third party customer, Jiangsu SOPO, commenced in the first quarter of 2012, which led to $5.4 million of revenue in the current period, accounting for 20% of the total EPC revenue for the first quarter of 2012. Also contributing to the increase in total revenues and revenue per EPC contract were two new large contracts with third party customers, for which EPC revenues of $4.1 million and $3.8 million were recognized for the three months ended March 31, 2012, respectively, with no such amounts in the comparable prior period. With Phase I of the CER Yangzhou plant complete since 2011, we achieved more average revenue per product due to the completion of bigger product orders. Although the number of customer orders was lower, the average revenue per product contract increased by $553,281 from $166,217 per product contract for the three months ended March 31, 2011 to $719,498 per product contract for the three months ended March 31, 2012.
An analysis of the revenues is as follows:
Three months ended March 31, | ||||||||||||||||
2011 | 2012 | Change ($) | Change (%) | |||||||||||||
Average Revenue per Contract | ||||||||||||||||
EPC | 777,067 | 2,804,734 | 2,027667 | 261 | % | |||||||||||
Products | $ | 166,217 | $ | 719,498 | 553,281 | 333 | % | |||||||||
Average Revenue per Contract | $ | 943,284 | $ | 3,524,232 | 2,580,948 | 274 | % | |||||||||
Number of Contracts Completed | ||||||||||||||||
EPC | 8 | 9 | 1 | 13 | % | |||||||||||
Products | 7 | 5 | -2 | -29 | % | |||||||||||
Total Number of Contracts Completed | 15 | 14 | -1 | -7 | % |
On January 8, 2011, CER signed a contract for the design, manufacture, and installation of a major waste heat recovery system with Zhenjiang Kailin, a related party of the Company. Zhenjiang Kailin is considered a related party by reason of the fact that the Chairman, Chief Executive Officer and majority shareholder of the ultimate holding company of Zhenjiang Kailin is the owner of a significant lender to the Company and is a less than 5% shareholder of the Company. The contract was valued at RMB 300 million (approximately $46 million), including the engineering part of RMB 8 million (approximately $1 million), procurement part of RMB 240 million (approximately $37 million) and construction part of RMB 52 million (approximately $8 million). The overall project contains engineering, construction, electric, and water supply and drainage engineering components related to the entire HRS system rather than only a certain part of the system as with past contracts. The system will be part of a new sulfuric acid plant and is capable of producing up to 122 tons of steam-per-hour at 485° C and 5.4 MPa from operations at the plant.
Subsequent to the first quarter, on May 8, 2012, CER and Zhenjiang Kailin entered into an agreement whereby CER will pay Zhenjiang Kailin RMB 8.9 million (approximately $1.5 million) as a penalty for the economic loss suffered by Zhenjiang Kailin resulting from project delays past the originally expected completion date of December 31, 2011. The original Zhenjiang Kailin contract for the construction of the facility did not contain any provisions for late completion or liquidated damages. As part of this agreement, CER agreed to assume additional costs, estimated at $0.6 million, to bring the capacity of the sulfuric acid waste heat recovery system to original specifications and to install additional electric utilities.
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Also, subsequent to the first quarter, on the same date, the two parties also signed an upgrade contract for the same facility valued at RMB 8 million (approximately $1.26 million). The purpose of the enhancements contemplated in this contract is to raise the capacity of the system from 800k tons to 900k tons of sulfuric acid per year. This enhancement project has been completed by the end of May 2012 and will permit $1.26 million of additional billings.
Subsequent to the balance sheet date of March 31, 2012, CER and Zhenjiang Kailin agreed to revise the payment schedule of receivables related to a project originally entered into in January 2011, which was near complete at the balance sheet date of March 31, 2012, from all remaining amounts due by August 31, 2012 to 4 installments due by December 31, 2013 with no interest to be earned (Refer to Note 16 to the Company’s Consolidated Financial Statements for more details about the Zhenjiang Kailin receivable collection schedule). As of March 31, 2012, the accounts receivable (including both current and non-current portions) from Zhenjiang Kailin under the contract were $ 12,684,386 after the taking into account the discounting impact (discount rate was determined as 10.65% considering the risk free rate and Zhenjiang Kailin’s credit risk) and the discount reflected as a reduction to revenue in the statement of operations was $1,509,668. Of the total balance of $12,684,386, $7,920,686 represented the non-current balance due from Zhenjiang Kailin which is to be collected over one year; the remaining $ 4,763,700 is included in current receivables due from a related party.
Pursuant to applicable construction contract accounting guidance, the additional $1.26 million of revenue for the system upgrade project, the $1.5 million penalty for economic losses incurred by CER’s customer, and the discount effect on revenue of $1,547,337 were added to (or subtracted from, for the penalty and the discount) the total estimated contract revenue while the additional estimated costs for both agreements were added to the budgeted costs of the total Zhenjiang Kailin project to calculate a revised percentage of completion. These adjustments were incorporated into the total estimated revenues of the contract, and total budgeted costs, for the quarter ended March 31, 2012 despite both agreements being signed subsequent to such date, as recognized subsequent events, due to underlying facts and conditions regarding the overall project being present prior to or at the balance sheet date of March 31, 2012. As of March, 31, 2012, 98 percent of the project was completed, and it has been fully completed by the end of May 2012. For the three months ended March 31, 2012, revenue earned from the contract amounted to $5,830,916. The cost of revenues associated with original contract and the additional agreements entered into was $7,505,301 for the three months ended March 31, 2012. The discount reflected in revenue and penalty assumed charged to revenue were not fully offset by the additional revenue agreed to; further, additional incurred (and yet to be incurred) costs impacted the percentage completion, reducing the margin on the overall project to negative 28% for the quarter ended March 31, 2012. After taking into account all additional agreements, no net loss needed to be recorded as the overall project is profitable.
With the significant increase in revenue, we have a substantial amount of accounts receivable as of March 31, 2012. Accounts receivable (including both the current and non-current portions) increased to $30 million as of March 31, 2012, as compared to $21 million as of December 31, 2011. This was primarily due to the accounts receivable from Zhenjiang Kailin and Jiangsu SOPO, whose payment schedules were delayed over one year.
Long term accounts receivable, net due from third parties of $3,638,024 represents a balance due from Jiangsu SOPO. On October 18, 2011, CER signed a contract for the manufacture, design, and installation of a major dock storage and tube project with Jiangsu SOPO, a third party customer of CER and related party of Zhenjiang Kailin. The contract was valued at RMB 50 million (approximately $7.9 million), including the procurement part of RMB 40 million (approximately $6.3 million) and construction part of RMB 10 million (approximately $1.6 million). On April 15, 2012, CER and Jiangsu SOPO entered into a repayment agreement. Jiangsu SOPO will pay the original project price of RMB 50 million, plus interest over time of RMB 6 million, for a total of RMB 56 million (approximately $8.9 million) in exchange for an extension of the payment terms involving 36 installments due on a monthly basis starting from April, 2012. The discount rate used to discount these receivable cash flows under the applicable accounting guidance for Jiangsu SOPO was 8% (considering its stated-owned background and AA credit rating), which is same as the contractual rate of interest included in the contract. For the three months ended March 31, 2012, $5,355,174 of revenue was recognized in relation to this EPC project and the receivable as of March 31, 2012 was $6,076,529, among which $3,638,024 was classified as long-term accounts receivable.
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Cost of Revenues. Cost of revenues increased to $26,098,028 for the three months ended March 31, 2012, as compared to $6,141,141 for the three months ended March 31, 2011, an increase of $19,956,887, or 325%. The absolute increase is consistent with the increase of revenue. As a percentage of revenues, cost of revenues increased from 83.2% for the three months ended March 31, 2011 to 90.5% for the three months ended March 31, 2012, an increase of 6.8%. As the largest driver of total gross margin, the gross profit margin on EPC contracts decreased from 19.9% for the three months ended March 31, 2011 to 7.0% for the three months ended March 31, 2012, mainly due to the two biggest EPC contracts for customers Zhenjiang Kailin and Jiangsu SOPO, which made up 39% of total EPC revenue. The gross margin for the Zhenjiang Kailin project decreased to a negative 28% for the quarter ended March 31, 2012 (as further discussed in Note 16 to the Company’s Consolidated Financial Statements) while the Jiangsu SOPO contract gross margin was only 10% (such contract is a normal construction contract which is not related to energy saving activities). Offsetting the gross margin impact from EPC contracts, the gross profit margin on product sales increased from 0.2% to 26.7% as we shifted production into our new manufacturing facility and began to incur anticipated lower costs related to our new facility. The main reason for the low product sales gross margin for the first quarter of 2011 was due to the two largest product contracts bearing negative margins due to large fixed costs associated with operations in the Sifang Vessels facility which the Company occupied prior to the launch of the CER Yangzhou manufacturing facility. Owning to a focus on EPC contracts (which comprise almost 90% of revenue) from late 2011, the revenue from EPC contracts accounted for a greater proportion of total revenue; however, such contracts have lower margins than product contracts.
The following table sets forth the analysis of cost of revenues and margin:
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Cost of Revenues: | ||||||||
EPC | 4,979,718 | 23,458,867 | ||||||
Products | 1,161,423 | 2,639,161 | ||||||
Total Cost of Revenues | $ | 6,141,141 | $ | 26,098,028 | ||||
Gross Margin: | ||||||||
EPC | 19.9 | % | 7.0 | % | ||||
Products | 0.2 | % | 26.7 | % | ||||
Gross Profit Margin | 16.8 | % | 9.5 | % |
Gross Profit. Gross profit was $2,742,070 for the three months ended March 31, 2012, as compared to $1,238,918 for the three months ended March 31, 2011, an increase of $1,503,152 or 121%. The gross margins were 16.8% and 9.5%, respectively, for the three months ended March 31, 2011 and 2012. The lower gross profit is mainly due to the lower margins generated from EPC contracts, which accounted for a larger proportion of total revenue.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $2,053,335 for the three months ended March 31, 2012, as compared to $1,813,081 for the three months ended March 31, 2011, an increase of $240,254 or 13%. Selling, general and administrative expenses, as a percentage of revenues, decreased from 24.6% for the three months ended March 31, 2011 to 7.1% for the three months ended March 31, 2012, a decrease of 17.5%. This decreased effect as a percentage of sales resulted from the larger business and sales volume for the three months ended 2012 compared to the same period of 2011 compared to costs which are less variable than sales. The absolute increase is mainly due to the effect of higher salaries as well as increased depreciation and amortization expense, offset by decreases in administration and rental expenses. First, salary expenses increased by $616,585 or 109% for the three months ended March 31, 2012 as compared to the same period in 2011, as a result of additional administration staff needed for the new plant in Yangzhou, the addition of top and middle level management, and gradual increases in personnel salaries. Second, depreciation and amortization expenses increased by $133,995, mainly due to the new office building which was purchased in June 2011 in Shanghai, and the purchase of more office equipment and software. Third, offsetting the above increases is a decrease in administrative expense of $338,124 due to the Company incurring one-time costs in the closing of its former production facility and the opening costs for the Yangzhou plant which amounted to $150,000 in early 2011. Fourth, rental expenses decreased by $86,597 since we purchased our new office building in Zhangjiang, Shanghai and no longer paid rental fees from March 2011 onward.
Income/(Loss) from Operations. As a result of the above, income from operations totaled $688,735 for the three months ended March 31, 2012, as compared to a loss of $574,163 for the same period in 2011, an absolute difference of $1,262,898, or 220%. As a percentage of revenues, income from operations represents 2.4% of total revenue for the three months ended March 31, 2012, while loss from operations represents 7.8% of total revenue for the three months ended March 31, 2011. The change is mainly attributable to the increase in revenue and gross profit.
Other Income / (Expense), net. For the three months ended March 31, 2012, the Company incurred other expense of $412,127 as compared to other income of $79,964 for the three months ended March 31, 2011, an absolute difference of $492,091, as further described in the next three paragraphs.
Change in fair value of derivative liabilities for warrants and loan - This resulted from the valuation of warrants and derivative liabilities. The $640,106 fair value gain recognized in the first quarter of 2011 was due to significant declines in the Company's stock price, whereas small fair value losses amounting to $41,395 recognized in 2012 were due to small increases in the Company's stock price as of the related contracts approached maturity.
Non-operating Income/(expenses), net – During the three months ended March 31, 2012, the Company realized non-operating income of approximately $90,679, which mainly consisted of subsidy income received by CER Yangzhou from the Yizheng industrial park in which the CER Yangzhou facility is located. There was no such income recognized in the comparable period of 2011. Furthermore, during the three months ended March 31, 2011, CER purchased imported equipment via advance payments to suppliers through the holding company CER Hong Kong, which then resold the equipment to mainland PRC inter-company subsidiaries (CER Shanghai and CER Yangzhou). With RMB appreciation against the US dollar from RMB6.62 to $1 to RMB6.56 to $1 over the three months ended March 31, 2011, an exchange loss of $120,482 was realized for the three months ended March 31, 2011 due to the large amount of import transactions related to CER Yangzhou, whereas the appreciation of RMB against USD for the three months ended March 31, 2012 was immaterial.
Interest Expense, net - Interest expense was $430,789 for the three months ended March 31, 2012, as compared to interest expense of $369,525 for the three months ended March 31, 2011, an increase of $61,264. This increase was mainly due to higher average short term loan balances borrowed mostly for trade financing and working capital.
(Loss)/Income From Operations Before Income Taxes. As a result of the foregoing, income before provision for income taxes was $276,608 for the three months ended March 31, 2012, as compared to a loss of $(494,199) for the three months ended March 31, 2011, an absolute increase of $770,807 or 156%.
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Income Tax Benefit/(Expense). The normal applicable income tax rate for the operating entities in China is 25%. Pursuant to the PRC income tax laws, Shanghai Engineering and CER Shanghai are subject to enterprise income tax at a statutory rate of 15% as the high technology entities. For the three months ended March 31, 2012, the Company incurred $470,884 of income tax provision, as compared to an income tax benefit of $17,752 for the three months ended March 31, 2011, an absolute change of $ 488,636.
For the quarter ended March 31, 2012, the Group’s Hong Kong subsidiary, CER HK, had, for the first time, estimated taxable profits earned in the PRC. As such, CER HK is likely to be regarded under the PRC tax laws as having permanent establishment for business activities carried out in the PRC, and would be subject to PRC tax at the standard EIT rate of 25%. For the quarter ended March 31, 2012, given the Group is likely to be regarded as having permanent establishment, CER HK provided taxes, included in the consolidated tax provision, of $249,630. The primary reason for CER HK’s generation of taxable income was the non-deductibility, under PRC tax law, of a $1.5 million accrued expense incurred for a penalty payment to an EPC construction contract related party customer which is further described in Note 16. This tax provision, as well as increases in PRC tax expense for the Group’s profitable subsidiaries, were primarily responsible for the significant increase in the Group’s effective tax rate for the quarter ended March 31, 2012 as compared to the quarter ended March 31, 2011.
Net Loss Net loss was $194,276 for the three months ended March 31, 2012, as compared to a net loss of $476,447 for the three months ended March 31, 2011, a decrease of $282,171, or 59%. The net loss for the three months ended March 31, 2012 is primarily due to $1,866,130 in interest expense and $482,033 in income tax expense, offset by $2,198,403 in income from operations.
Liquidity and Capital Resources
Our principal sources of liquidity have been cash provided by operations and borrowings from banks and other lenders, including related parties. Our principal uses of cash have been to finance working capital, facility expansions, and other capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future. As of March 31, 2012, our working capital deficit was approximately $36 million, which primarily was driven by the amount of customer deposits being larger than our advances to suppliers. Due to our industry practice, we usually receive large customer deposits before starting projects. Based on our cash flow budget, further customer deposits will be received from our backlog projects in 2012, making up a significant portion of our cash inflow from operating activities. Excluding the impact of customer deposits and advances to suppliers, the working capital deficit was approximately $10 million.
The Company expects that, based upon existing backlog on EPC contracts in progress and business booked for the forthcoming year, coupled with the assumptions of management, cash flows from operations may be in the range of $8 million to $10 million for the year, which takes into account expected progress billings, expected margins, cash received in advance from customers, and cash to be expended for supplier advances. With the ongoing Phase Two construction of CER’s Yangzhou facility and other deployment needs, capital expenditures for the coming 12 months are expected to range from $18 million to $20 million, a portion of which has been committed to as further described in the contractual obligations section below. Given expected cash provided by operations and outflows for investing needs, less the amounts on deposit, and also considering scheduled repayments, net cash requirements from financings will be in the range from $11 million to 12 million for the coming 12 months, which management believe can be met through refinancing and collateralization of existing assets, consistent with past practice.
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It is our practice to carefully monitor the state of our business, cash requirements and capital structure. We believe that funds generated from our operations and available from financial institutions via new borrowings or those under our existing credit facilities will be sufficient to fund current business operations over at least the next twelve months. Additionally, based on forecasts of operations and financial condition over the next few years, we anticipate that we will continue to generate positive cash flows from business operations, which will enable us to develop our company in a sustainable manner. With the expansion of energy recycling and environmental protection efforts under the vigorous policy and support from the government, we believe that there will be increasing growth and expansion opportunities in the future, which may lead to an expansion of our manufacturing base, including the ongoing Phase 2 construction of our Yangzhou factory.
To improve our existing cash and liquidity position, we are continuing our efforts 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. Notwithstanding our existing resources for operations on a going forward basis at current operating levels, we will continue to need capital for our expansion plans, including funding for the ongoing expansion of our manufacturing facility in Yangzhou, China. If these organic (inherent to CER only) sources are insufficient to satisfy our cash requirements, we may seek to issue debt securities or additional equity or to obtain additional bank borrowings. The issuance of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict our operations and the placement of liens over some or all of our assets. We cannot assure that financing will be available in amounts or on terms acceptable to us, if at all.
Cash Flows
The following table sets forth a summary of our cash flows for the periods indicated below:
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Net cash provided by operating activities | $ | 2,142,457 | 614,683 | |||||
Net cash used in investing activities | (1,752,250 | ) | (2,533,251 | ) | ||||
Net cash used in financing activities | (718,371 | ) | (742,236 | ) | ||||
Effects of exchange rate change in cash | 11,184 | 406 | ||||||
Decrease in cash | (316,980 | ) | (2,660,398 | ) | ||||
Cash, beginning | 2,996,076 | 3,579,446 | ||||||
Cash, ending | $ | 2,679,096 | 919,048 |
Operating Activities
Net cash used in operating activities was $614,683 for the three months ended March 31, 2012 compared with net cash provided by operating activities of $2,142,457 for the three months ended March 31, 2011. As of March 31, 2012, the cash balance was $919,048. Due to industry practice, the company usually receives large customer deposits before starting projects and then makes payments to suppliers for purchases on a delayed basis, giving rise to a 2-3 month gap in which the Company can leverage the customer deposits interest free. For the three months ended March 31, 2012, in relation to projects for customers Zhenjiang Kailing and Jiangsu SOPO, which accounted for 39% of total EPC revenue, CER paid money for purchases first but extended receivable payment terms, which had a negative effect on CER’s liquidity. Management expects the liquidity position will improve as CER approaches the completion stage of these two projects as CER will return to a position of net cash inflows (only inflows as no outflows will be incurred).
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Investing Activities
Net cash used in investing activities was $2,533,251 for the three months ended March 31, 2012 compared to net cash used in investing activities of $1,752,250 for the three months ended March 31, 2011. The change was mainly due to consistent year-over-year levels of expenditures incurred for the construction of CER’s Yangzhou plant (phase I in the first quarter of 2011, and phase II in the first quarter of 2012).
Financing Activities
Net cash used in financing activities was $742,236 for the three months ended March 31, 2012 compared to net cash used in financing activities of $718,371 for the three months ended March 31, 2011, an increase of $23,865. The Company drew down cash of $7.2 million from short term loans and repaid $7.9 million of short term loans in the first quarter of 2012. In the first quarter of 2011, the Company repaid $0.4 million of long-term loans and $0.3 million of short-term loans according to the loan repayment schedule.
Capital Resources
The Company’s major capital injections have historically been through borrowings from banks or financial institutions. Amounts outstanding as of March 31, 2012 are listed in Note 7 to the Company’s Consolidated Financial Statements. The Company’s borrowings or facilities obtained from banks or financial institutions subsequent to March 31, 2012 are listed as follows.
Nature | Drawdown date | Principal Amount | ||
Short-term loan | 12-April-12 | RMB 11,000,000 (approximately $1,746,250) | ||
Bank acceptance notes | 24-April-12 | RMB 3,100,178 (approximately $492,287) | ||
Letter of Credit | 18-May-12 | RMB 7,900,000 (approximately $1,254,000) | ||
Bank acceptance notes | 23-May-12 | RMB 4,200,000 (approximately $664,472) | ||
Bank acceptance notes | 30-May-12 | RMB 8,800,000 (approximately $1,397,047) | ||
Short-term loan | 6-June-12 | RMB 10,000,000 (approximately $1,587,900) |
On March 30, 2012, CER Yangzhou entered into a 2 year comprehensive credit facility with the China CITIC Bank, Yangzhou Branch. The facility is RMB 20,000,000 (approximately $3,175,000). The period of the comprehensive line of credit is from March 30, 2012 to March 30, 2014. This facility is guaranteed by Jiangsu SOPO, and guaranteed by Mr. Qinghuan Wu, the Company’s Chief Executive Officer. No amounts were drawn under the facility until April 24, 2012, when CER Yangzhou drew down bank acceptance notes amounting to RMB 3,100,178 (approximately $492,287) after making a cash deposit of RMB 1,860,107(approximately $294,882) to the bank. On May 23, 2012, CER Yangzhou drew down bank acceptance notes amounting to RMB 4,200,000 (approximately $664,472) after making cash deposit of RMB 2,520,000 (approximately $395,519) to the bank. On June 6, 2012, CER Yangzhou drew down RMB 10 million (approximately $1,587,900) as a short-term loan. This amount due in one year and carries the annual interest rate of 7.544%.
On April 12, 2012, CER Shanghai drew down RMB 11 million (approximately $1,746,690) under the short-term comprehensive loan facility with the Bank of Communication, Shanghai Branch. The facility is RMB 57 million (approximately $9,051,030), CER Shanghai is entitled to draw down RMB 40 million (approximately $6,351,600) as a short-term loan or RMB 57 million as bank acceptance notes after making a cash deposit of RMB 17 million (approximately $2,699,430) to the bank. CER Shanghai drew down RMB 29 million (approximately $4,604,910) on March 20, 2012.
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On May 18, 2012, CER Shanghai renewed the issuance of a forward letter of credit (“L/C”) to CER Yangzhou for purchase of goods, after repayment of the prior letter of credit in the amount of $7,980,000 to the Industrial and Commercial Bank of China Limited, Shanghai Zhangjiang Branch on May 15, 2012. The L/C is collateralized by a building in Shanghai, which is owned by Jiangsu SOPO. On May 21, 2012, CER Yangzhou discounted the L/C from Industrial and Commercial Bank of China Limited, Zhangjiang Branch in the amount of RMB 7,900,000 (approximately $1,254,000 at the exchange rate at the time). The due date of the L/C is September 17, 2012, and bears the discount rate of 6.405% annually.
On May 30, 2012, CER Shanghai renewed the issuance of bank acceptance notes amounting to RMB 8.8 million (approximately $1,397,352) from the Industrial and Commercial Bank of China Limited, Shanghai Zhangjiang Branch, after repayment of the same amounts on May 22, 2012. The bank acceptance drafts are collateralized by a building in Shanghai owned by Jiangsu SOPO.
The loans and facilities subsequent to March 31, 2012 have provided us with $5.6 million towards financing cash flows for 2012. According to common practice of PRC banks, borrowers presenting proper collateral, especially real estate, with good credit, can usually get financing. Due to such unique practices and risk aversion in the banking industry, it is commonplace for short term financing to be secured by a borrower’s long term assets. The Company does not have any over collateralized assets and anticipates that its asset base, coupled with its credit standing and turnover in existing short term borrowings, will be sufficient to incur new borrowings as needed to meet the range of expected cash flow from financing activities.
As a result of the Company not filing its quarterly report with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended, on a timely basis for the quarter ended March 31, 2012, the Company was in violation of the long-term loan-current portion which matures in September 29, 2012(formerly Convertible debt), covenants and default terms with respect its obligation to file SEC reports and compliance with applicable laws under the terms of the Loan Agreements. The violation of the covenants and default permit the lenders to accelerate the repayment of the full amount of the principal and interest due on the loan. On May 10, 2012, the lenders provided the Company with a waiver of the covenant and default terms and also provided sufficient time to make the necessary past due filings, before a covenant violation or default would result again concerning these issues. Also, at March 31, 2012, there were no other instruments of debt or contracts outstanding that had covenants requiring monitoring for compliance.
Contractual Obligations
Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations as of March 31, 2012:
Payment Due by Period | ||||||||||||
Total | Less than 1 year | 1-3 years | ||||||||||
Short-term loans | 18,543,395 | 18,543,395 | - | |||||||||
Purchasing obligations | 40,543,375 | 35,659,156 | 4,884,219 | |||||||||
Capital investment obligations* | 10,556,110 | 1,217,138 | 9,338,972 | |||||||||
Total | 69,642,880 | 55,419,689 | 14,223,191 |
*With the ongoing Phase Two construction of CER’s Yangzhou facility and other deployment needs, capital expenditures for 2012 are expected to range from $18 million to $20 million. The capital investment contractual obligation which cannot be terminated was about $1.2 million.
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Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The management team evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Considering the material weaknesses previously reported in Item 9A, Controls and Procedures, of the Company’s Annual Report on Form 10-K filed March 30, 2012 for the year ended December 31, 2011, and based on the evaluation of our disclosure controls and procedures as of March 31, 2012, management concluded that, as of such date, our disclosure controls and procedures were not effective.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
We are not a party to and our property is not subject to any material pending legal proceedings nor are we aware of any threatened or contemplated proceeding by any governmental authority against the Company.
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Item 1A Risk Factors
There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 703. Purchases of equity securities by the issuer and affiliated purchasers.
On December 22, 2011, the Company publicly announced a share repurchase program of up to $500,000 authorized by the Company’s board of directors for periodic repurchases of stock from time to time subject to applicable rules and regulations. During the quarter ended March 31, 2012 the Company did not have any activity under the program.
ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
January 1 to January 31, 2012 | - | - | - | $ | 500,000 | |||||||||||
February 1 to February 29, 2012 | - | - | - | $ | 500,000 | |||||||||||
March 1 to March 31, 2012 | - | - | - | $ | 500,000 | |||||||||||
Total | - | - | - | $ | 500,000 |
Subsequent to the quarter ended March 31, 2012, in May, the company purchased a limited number of shares pursuant to the program.
ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
April 1 to April 30, 2012 | - | - | - | $ | 500,000 | |||||||||||
May 1 to May 31, 2012 | 2,389 | $ | 0.4316 | 2,389 | $ | 498,969 |
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Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Mine Safety Disclosures
Not applicable.
Item 5 Other Information
None
Item 6 Exhibits
Exhibits:
10.1 | Maximum amount loan agreement with Bank of Ningbo dated January 9, 2012 | |
10.2 | Loan agreement with Industrial and Commercial Bank of China dated January 11, 2012 | |
10.3 | Comprehensive facility with Bank of communications dated January 30, 2012 | |
10.4 | Loan agreement with Shanghai Pudong Zhanjiang Micro-credit Co., Ltd dated February 27, 2012 | |
10.5 | Bank Acceptance Agreement with Bank of Ningbo dated March 6, 2012 | |
10.6 | Bank Acceptance Agreement with Bank of Ningbo dated March 21, 2012 | |
10.7 | Comprehensive facility with China Citic Bank dated March 30, 2012 |
31.1 | Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 |
31.2 | Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA ENERGY RECOVERY, INC. | ||
June 18, 2012 | By: | /s/ Qinghuan Wu |
Qinghuan Wu | ||
Chief Executive Officer |
June 18, 2012 | By: | /s/ Simon Dong |
Simon Dong | ||
Acting Chief Financial Officer | ||
(Principal Financial Officer) |
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Maximum Amount Loan Agreement
Bank of Ningbo
Maximum Amount Loan Agreement
No. 07001EK 20120018
Lender: Bank of Ningbo, Shanghai Branch
Borrower: Shanghai Hailu Kunlun Hi-tech Engineering Co.,Ltd
Whereas the Lender will enter into loan business with the Borrower during the period which set in term 1.2 of this agreement and in order to ensure the security of Lender’s creditor's rights, definite two parities’ rights and obligations, the Lender and the Borrower enter into this Agreement in relation to the provision of relevant loan by the Lender to the Borrower.
Maximum Amount and Period
1.1 | The max loan amount is decided by the Lender which will be provided to borrower and allow the Borrower to turnover. The max loan amount in this agreement only effective under this agreement. The same borrower can make several <Maximum Amount Loan Agreement> with lender and meanwhile hold the several maximum amounts, each of the maximum amount loan agreement is separate from the other. The same borrower can also enter into the <Maximum Amount Loan Agreement > and other credit business agreement with the lender, each is separate from each other, except the special engagement made by both parities. |
1.2 | The Lender agrees to provide the max amount of RMB 4.5 million loan to the Borrower in the period of from 2012/01/09 to 2015/01/08, and based on the status of applicant’s credit, the cash flow, guarantees, the Lender has the right to provide the loan in once or several times. The drawdown for the loan during the period of above will not need to set another new contract, but the maturity date of these drawdown can not exceed 2015/01/08. Please note that this term have no effect on the Lender’s rights under term 3.3 of this Agreement. |
1.3 | Both parties agree that although the max amount is used to provide loan to the Borrower, with the approval of the Lender, the Borrower can take the max amount to do other credit business, including but not limited to Bank acceptance, Bank Guarantee, L&C and so on. The detail rights and obligation will be clarified in the other business agreement signed by both parties, including but not limited to <Bank acceptance agreement ><Bank guarantee contract><L&C Agreement> <Import Financing contract> and so on. |
1.4 | Both parties agree that the Lender has the rights to adjust the max amount under this loan agreement according to the Borrower’s status of Credit, Cash flow, Guarantees etc. The adjustment will not be approved by the Borrower, and there is no need to provide the explanation to the Borrower. It should have its effect once the decision made by the Lender. |
1.5 | The notice of the adjustment of max amount will delivered to the Borrower by the ways agreed in this agreement by the Lender. Please note that the Lender has no legal obligation for the delivery. If there is any reason that resulted the Borrower has not received the notice on time, or does not receive the notice, then there is no effect on the adjustment of the max amount and the Lender has no any legal responsibility for this. |
1.6 | During the period of the agreement, the detail currency, amount, time, interest rate and method of repayment should base on the related due bills (including the electronic bank, the due bills of electronic bank), the Borrower has no objection. The due bills are the integral components of this agreement. |
1.7 | If the max amount of loan is decreased, which lead to the unliquidated debt is above the max amount, then the Borrower’s debt should as the same as the amount that un-repaid by the Borrower. |
Conditions of Loan
2.1 The period for the Borrower to fulfill obligation should be decided by each specified transaction separately which agreed by two parties.
2.2 The interest should calculate from the date which the money has been transferred into the appointed bank account. Rate per month= rate per year/12, rate per day = rate per year/360.
2.3 During the period of this agreement, the interest rate of each loan should base on the rate the Lender provides. The lender has the rights to adjust the interest rate according to it’s actual business situations and there is no need to notice the borrower in advance.
Before the loan provided, if the adjustment of loan interest rate of The People's Bank of China is apply to the loan under this agreement, then should adjust the same interest rate of this agreement and use the new interest rate; but for the loan which has provided, the interest rate should base on the due bills and should adjust as following:
The time period of loan is less than one year, the loan interest rate should adjust with method (1)
(1) | Go on carrying out the original interest rate of related due bills , no sectional interest accrual |
2.4 The settlement of interests under this agreement should be by quarter, the interest settlement date should be the 20th of last month of each quarter. Payment date shall be the next day to the interest settlement date and all the interest should be paid to the Lender with principal when the term of the loan.
2.5 Drawdown
Except the whole or the part which the Lender gives up, the borrower should meet blow requirements or else the Lender has the rights to reject the drawdown application
2.5.1 The Borrower is legally existing, and takes the promise made in this agreement
2.5.2 Both of the agreement and the guarantee agreement are in effect
2.5.3 The Borrower has fully filled the obligations under this agreement and there is no default event under this agreement
2.5.4 The Borrower has prepared the documents per the Lender’s requirement
2.6 Payment of the loan
The payment of the loan under this agreement is set in two ways : one is the Lender entrusted payment and the other is Borrower payment.
Lender entrusted payment means the Lender according to the Borrower’s drawdown application, provide the money to the transaction party based through the Borrower’s account
Borrower payment means the Borrower receives the loan in it’s bank account and then pay the money to the transaction party
2.6.1 The Borrower agrees that the Lender can decide the loan payment method according to documents provided by the Borrower and related law
2.6.2 The borrower agrees that under the Lender entrusted payment situation, the Lender provides the loan into the borrower’s account and transfers the money to transaction party through the Borrower’s account
When the loan is on the Borrower’s account, the Borrower can not withdraw these payments and during this period, if the payment has the compulsive measures but not limited to freeze, deduct etc, then the borrower should take the responsibility for that and also afford the repayment obligation
2.6.3 Whether the Lender entrusted payment or the Borrower payment , it should be regarded as the successful drawdown once the payment is into the borrower’s named account. After that, the Borrower should take the repayment obligation under this agreement
2.6.4 If use the lender entrusted payment, the borrower should prepare the business contract related to the loan usage per lender’s requirement. The lender checks and agrees to do the money lending obligation. Or else the lender has the rights to refuse. If use the borrower payment, the borrower should report the loan usage after money lending three month and also needs to provide the use record and document. Borrower also needs to prepare the related account information, payment document for lender’s checking or the lender has the rights which defined in the term 3.3 under this agreement
2.6.5 If Borrower payment is applicable, the lender agrees the borrower to go to the lender’s counter or the Web bank, or the other methods which the lender agrees to do the drawdown process. The borrower agrees to draw the loan according to the lender’s requirement.
2.7 Capital collecting account
The borrower should set the special capital collecting account, which number is 70010122001528535 in the lender’s bank and provide the account status to the lender. The lender has the rights to get the loan back in advance per the capital collecting status of the Borrower
2.8 Repayment account
The borrower should set the special repayment account, which number is 70010122001528535 in the lender’s bank and pay enough principal and interest in this account and authorize the lender to deduct in the account; if there is any unpaid principal and interest of borrower, then he should pay into the account on time and authorize the lender can deduct the money at anytime. If the interest rate is adjusted by the people's Bank of China, the borrower should pay the enough money into the account or the Borrower will afford all the consequences, which has no relationship with lender. If the repayment account has the loss report, freezes, settle up or the borrower needs to change the repayment account, the borrower should do the account change procedure. If there is no enough money before the changing account, the borrower should go to the counter. If the borrower can not do the modification of account or pay all the loan off on time, then the borrower should take the responsibility of default.
2.9 Annual fees
2.9.1 The annual fee is collect by year. The first collect date is the effective date of the max amount loan or the adjustment date. The later collect date shall be the match date of the first collect date .Whatever reason, which lead the loan period is less than one year ,the paid annual fee will not return by the Lender.
2.9.2 The borrower authorizes the lender to deduct the annual fee in the opened account of the Borrower.
Rights and obligations of Lender
3.1 the lender has the rights to recovery the loan principal and interest in advance according to this agreement or related due bills
3.2 the lender has the rights to know borrower’s operation status, financial affairs, storage and the usage status of loan ,and also has the rights to check ,print ,record or use these basis information and report through credit investigation system or the other system
3.3 if there is any event as following ,the Lender has the rights to announce all the credit acceleration of maturity ,including but not limited to loan ,cash ,bank acceptance etc. and also has the rights to (1) reduce or cancel the max loan amount in the agreement (2) terminate all the related contract ,agreement including but not limited to this agreement (3) stop providing the new loan and announce to recovery all the loan principal and interest in advance (4) deduct all the loan principal and interest from the borrower’s account(5) need borrower’s supplement for guarantee (6) bring a suit before a people's court.(7) other Asset keeping measures. And meanwhile all the branches of bank of Ningbo also have the rights above.
(1) | There is production halts, production breaking , dissolution, cancellation of registration, declare bankruptcy, business license revoked |
(2) | The borrower hides the important affair or provide the false document ,status or provide the false report forms、warrant to the lender |
(3) | The borrower can not repay the principal and interest on time |
(4) | The borrower use the loan not according to this agreement |
(5) | The borrower does not fulfill obligation which set with lender or the third party |
(6) | The borrower disposal any asset before repay the money to the lender ,which will has the effect on its ability for repayment |
(7) | The credit decreases ,or there is any difficult on the borrower’s operation, cause temporary trouble in financing status |
(8) | The borrower does not repay the loan according to the engaged ways |
(9) | There is any economic dispute, or seizing assets, etc. |
(10) | The borrower is indicted due to break laws and commit crime or the legal person is keep in custody , arrested , indicted or condemn |
(11) | The borrower does not fulfill any one of obligation under this contract or break any promise during the contract |
(12) | guarantee contract lose effectiveness or the guarantee ability decrease |
(13) | The guarantee person breaks the promise |
(14) | Besides above, another issues which has the bad effect to the repayment of the borrower. |
The lender has the rights to determine above situations independently.
3.4 During the process of repay loan, the lender has the rights to do below followings (1) change the Borrower payment into entrusted payment (2) stop to provide the loan and payment (3) discuss the supplemental loan and payment conditions with the borrower
(1) | The credit of borrower has decreased |
(2) | The profit ability of borrower’s business is not strong |
(3) | There is any strange during the borrower’s usage |
3.5 If the borrower can not repay the loan principal and interest, compound interest, default interest and other debt, the lender has the rights to deduct the apply amount from the borrower’s account in the bank of Ningbo. If lender needs to deduct the fixed deposit which doesn’t become due, then lender will take all in advance and calculate per the current interest rate on the taking date. If the lender needs to take part of money, the taken part needs to calculate per the current interest rate on the taking date, and the left part will be calculated per the current interest rate of the opening fixed deposit date. The borrower should afford the interest loss.
3.6 If there is any default of the borrower under this agreement or escape the lender’s inspection or there is any false important undertakings provided by borrower. The lender has the rights to disclose the default information and send the information to the collection Institution or report to the related department. Meanwhile, the lender has the rights to ascertain where the responsibility lies of borrower per the related law and regulations
3.7 The lender has the rights to join the actives of borrower’s, such as financing, assets sales, liquidate and so on
3.8 Borrowers and mortgage person should make the mortgage registration according to the law, property insurance, legal procedures, and the guarantees based on the requirements of lenders, insurance remains in force, the lender has the right to request to become first person requesting insurance, and get a copy of the relevant insurance contracts or insurance document, otherwise the lender has the right to refuse to provide loans under this contract
3.9 The lender has the right to require the borrower loan accounts in a timely manner
3.10 Under the fulfill of the obligation of this agreement and the security contract by the Borrower and Guarantor, the Lender should provide the loan to the Borrower in accordance with this agreement
Borrower commitments
4.1 The Borrower provides the truly, completed, effect material
4.2 Coordinate with the lender for the management of loan repayment and related examination
4.3 The Borrower shall not use the loan in the investment or the other areas that are forbidden by laws and regulation. The Borrower shall not divide the payment into several pieces to avoid the entrusted payment by Lender
4.4 The borrower promises to fulfill the obligation under this agreement
Rights and obligations of borrower
5.1 The borrower has the rights to get and use the loan according to the agreement
5.2 The borrower needs to repay the principal, interest, compound interest, default interest, legal cost, execution fees, lawyer fee, travelling costs and so on, and hereto authorize the Lender has the rights to deduct these expense according to term 3.5 of this agreement, un-revoked
5.3 The borrower should use the loan according to the agreement, no misappropriate and embezzle
5.4 The borrower should provide lender the true and completed financial statement, and the other related information, and the Borrower should cooperate with lender for checking its operation, financial status, storage and the usage of the loan
5.5 if the borrower has the leasing, shareholding reform, joint operation, merge, joint venture, asset transfer, suspend business to bring up to standard, bankrupt which has the effect on the loan relationship of the lender . The borrower should notice the lender in written before these above activity in 30 days advance and practicable its loan obligations. If there is no agreement of lender, the borrower can not take above activity.
5.6 if there is any affair which does have the big effect on the lender’s activity, the borrower should notice the lender in written in 3 days and practicable the repayment
5.7 if there is any guarantee of borrower for the third party, which may has the effect on the repayment ability of borrower ,then borrower should notice the lender in written and get the approval of lender
5.8 The borrower cannot transfer financial resources, Low-cost disposal, Donating assets or share transfer which will evade lender’s debts or weaken its repay ability
5.9 If there is any changing for borrower’s name, legal representative , legal address, operation area, contact address, contact number , then the borrower should give the written notice with other certificate to the lender in 5 days or the borrower should take the responsibility for all the consequence.
5.10 if there is any stop production, ; cancellation of registration, bankrupt and other situation for the guarantor under this contract ,which lead to weaken the part or all the guarantee ability , or there is any reducing for the mortgage , the borrower should provide the other guarantee to the lender in 10 days
5.11 The borrower has the obligation to cooperate the account checking with the lender
5.12 the borrower should afford the related lawyer fee , insurance fee, transport fee , register fee, evaluation fee , guarantee fee and other fee under this contract
5.13 The borrower should sign and return back these Collection letters from lender through post at once or send the receipt to lender in 3 days
Guarantee
The guarantee contract under this agreement is signed by lender and the guarantor, the NO. is 270018920120019 and 070010920120020
Breach of the agreement
7.1 After the agreement takes into effect, both parties should take its Obligations and commitments, if there is any liability for breach of contract by any party, then the party should undertake the corresponding responsibility and make compensation for the other party
7.2 If there is any breach of contract for lender, which leads to the loss of borrower, then the lender should make compensation for the borrower . The compensation area should be direct losses, not include indirect losses and expected loss
7.3 If the loans is due (including the in advance ), the borrower can not repay the principal and interest, then from the overdue date , the lender will charge the borrower the day interest rate and 50% floating up of the day interest rate for the default interest per the actual days
7.4 If the borrower use the loan but not according the description in the agreement, the lender has the rights to charge the borrower the day interest rate and 80% floating up of the day interest rate for the default interest per the actual days
7.5 The lender has the rights to charge the borrower with compound interest if the borrower does not pay the interest on time. In the loan period, the lender will calculate compound interest in appointed interest rate ; if the loan is due or the borrower uses the loan but not according the description in the agreement, then the lender will calculate the compound interest in the default interest rate
7.6 If the loan interest rate needs to adjust, the overdue interest rate and compound interest will adjust itself according to the term 7.3, 7.4 under this agreement.
7.7 If the borrower hides the important fact or provide the false information ,situation on purpose, the lender has the rights to charge the borrower the 10% liquidated damages of the max loan credit
7.8 The borrower should undertake the fee which the lender fulfill its creditor's rights,including but not limited to legal cost , arbitration fees, execution fees ,lawyer fee, travelling cost and other fee
7.9 If the borrower breaches this agreement or the guarantor breach its obligation , the borrower should undertake above obligation. And the lender has the rights to define that all the credit are due in advance and has the rights to do all the measures in the term 3.3
Effective, changing, transfer, terminate and discharge of the contract
8.1 The agreement takes effect from here under signing, and term on the date that all the credit from the lender has been repaid, and the term 1.2 has been met.
8.3 If the borrower break any term of this agreement, the lender has the rights to recovery the principal and interest and get the compensation from the borrower , it also has the rights to terminate this agreement .
8.4 If there is any need for the lender to terminate the agreement, the lender has the rights to terminate the contract from one-sided and no need to get the agreement of borrower. If the decision make then the contract will lose effective
8.5 The lender could notice the decision of release this agreement to the Borrower through any contact way defined in this agreement, but it is not the lender’s obligation. If there is any situation for the notice cannot arrive on time or the notice does not arrive, then it do not affect the terminating this agreement , and the lender does not need to undertake any legal liability
8.6 After the agreement takes effect, any party can not take the liberty to change or terminate the contract except the terms which has been. If there is any need for changing and terminating of the contract, it should come into a written agreement after negotiation. Before the written agreement, the terms of the contract are still effective
8.7 If the agreement is ineffective, terminate, for the loan that happened before, both parties’ should also fulfill the corresponding obligation to each other
8.8 It is no need for the lender to get the agreement of the borrower to transfer the rights of the agreement to the third party. The transfer notice can be in written or in the public notice
8.9 The borrower can not transfer its obligation under this agreement to a third party without the agreement of lender.
Settlement of Disputes
9.1 If there is any disputes of this agreement , both parties can have the negotiation, if failed , then they can bring a suit in a people's court where is the local of contract signing
9.2 During the period of negotiation and sue, these terms which has no disputes should still keep effect and both parties should fulfill obligation. Any party can not take the excuse of there is a dispute and not to fulfill its obligation
Other items
10.1 if there is any invalid or any cancel of the terms under this agreement, which will not have the effect on the other terms, then the other terms still keep effective
10.2 the lender sends the notice to the address as below is deemed as the borrower get the notice in 3 days unless the borrower notice lender the changing of its address
Borrower contact phone : 20281866 fax 20282378
Contact address Building #26, No.1388 Zhangdong Road
10.3 The headline of this contract is only for reference, and not consist the part of this contract. Any terms of this contract can not have its meanings from the headline.
10.4 If any party requires the notarization, then it needs both parties to ask for the notarization together and clear the effect of compulsory execution. Borrower affords the notarial charge. If the borrower does not undertake its obligation of this agreement, the lender has the rights to ask the people’s court to carry out.
10.5 If there is any changing of law ,rules and policy ,which leads the contract can not completely fulfilled , the lender does not need to take the responsibility
10.6 Any unaccomplished matter should do with laws, provision of People's Bank of China, China Banking Regulatory Commission
11 This agreement is in 3 duplicate, each one has the same legal validity
12 This agreement, the supplemental, the application, the certificate and so on consist the completeness of this agreement . Above part which can be the paper, Electronic Methods or the other method which lender approved to set out
13. Statement and notice
The lender has reminded borrowers to pay fully understanding to all the statements , especially the bold letters and also made the necessary explanation to the borrower. Both parties have the fully understanding to the meaning and the legal consequence of the terms in this contract
Meanwhile the borrower claims that he has made the special attention to the disadvantageous terms and accepts that.
Signature page
Lender (seal): Bank of Ningbo ,Shanghai branch
Person-in-charge/authorized representative: Shi Daoming
Borrower (seal):_Shanghai Hailu Kunlun Hi-tech engineering Co.,Ltd
Legal representative/authorized representative: Wu Qinghuan
Date: 2012-1-09
Contract No.:_30121000029_______
Working Capital Loan
Contract
Important Notice: This Contract is entered into by the Parties in accordance with laws based on equality and free will, and the terms and conditions of this Contract fully reflect the genuine intention of the Parties hereto. In order to protect legal rights and interests of the Borrower, the Lender hereby draws the Borrower's special attention to the terms and conditions of this Contract in relation to each Party's rights and obligations, in particular those in bold.
Lender: Industrial and Commercial Bank of China Limited, ____Shanghai Zhangjiang Branch____________
Person in Charge: Jiang Qiqing | Contact Person: Yu Yiren |
Address: No.639 Zhangjiang Road, Shanghai | Post Code: 201210 |
Telephone: 50797515 | Fax: 50797551 | Email: | yuyiren-zj@sh.icbc.com.cn |
Borrower: CER Energy Recovery (Shanghai)., Ltd
Legal Representative: Wu Qinghuan | Contact Person: Simon Dong |
Address:Building#26,No.1388 Zhangdong Road, Shanghai | Post Code: 201210 |
Telephone: | 20281866 | Email: | simondong@cerenergy.com |
Upon equal negotiations and mutual agreement, the Lender and the Borrower enter into this Contract in relation to the provision of relevant loan by the Lender to the Borrower.
Part I Loan Conditions
Article 1 | Purpose of Loan |
The loan hereunder shall be used for the following purposes. Without written consent of the Lender, the Borrower may not use the loan for any purpose other than those listed below. The Lender may supervise the use of the proceeds of the loan.
Purpose: _____ facilities purchase__________________
Article 2 | Amount and Term of Loan |
2.1 | The currency and amount of the loan hereunder shall be ____________RMB__1380000__________________ (one million three hundred eighty thousands_____) (if there is any inconsistency between the amount in figures and the amount in words, the amount in words shall prevail.) |
2.2 | The term of the loan hereunder shall be determined in accordance with Item _(2)__ below: |
(1) | The term of the loan hereunder shall be ______/_______ commencing from the actual drawdown date (or if there are more than one drawdown, the first drawdown date) as stated on the receipt of loan. |
(2) | The term of the loan hereunder shall be _____6 months__________ commencing from ____2012.1.11___________ to ____2012.7.10___________ (the actual drawdown date shall be the corresponding date as stated on the receipt of loan). |
Article 3 | Interest Rate, Interest and Fees |
3.1 | [Determination of Interest Rate for RMB Loans] |
Interest rate for RMB loans shall be determined in accordance with Item _(2)__ below:
(1) | Fixed interest rate at __/__% per annum, which shall remain unchanged within the term of this Contract. |
(2) | Floating interest rate. The loan interest rate shall be the benchmark interest rate plus the floating margin, where the benchmark interest rate shall be the benchmark lending interest rate as published by the People's Bank of China on /_ (drawdown date/effective date of this Contract) corresponding to the term of loan as stated in Article 2.2, and the floating margin shall be floating up _5__% (floating up/floating down/zero). The floating margin shall remain unchanged within the term of this Contract. After the drawdown, the loan interest rate will be adjusted every __6___ (1/3/6/12) month(s) (Interest Period) and the loan interest for each Interest Period shall be calculated according to the loan interest rate as adjusted and applicable to such Interest Period. The loan interest rate applicable to each Interest Period subsequent to the initial period shall be determined on the same numerical date in the month of such adjustment as the drawdown date. If there is no same numerical date in the month of adjustment as the drawdown date, the loan interest rate for such Interest Period shall be determined on the last day of such month of adjustment. If the Borrower makes more than one drawdown, the loan interest rate shall be determined in accordance with Item ___/__ below: |
A. | regardless of the number of drawdown made in an Interest Period, the loan interest rate for each of such drawdown shall be the loan interest rate applicable to such Interest Period as determined on the interest rate determination date of such Interest Period and will be adjusted simultaneously in each of the following Interest Periods; or |
B. | the loan interest rate for each drawdown shall be determined and adjusted separately. |
(3) | Others: _________________/_______________________________. |
3.2 | [Determination of Interest Rate for Foreign Currency Loans] |
Interest rate for foreign currency loans shall be determined in accordance with Item __/__ below:
(1) | Fixed interest rate at __/__% per annum, which shall remain unchanged within the term of this Contract. |
(2) | Floating interest rate. The loan interest rate shall be /____-month ________/______ (LIBOR/HIBOR) (the benchmark interest rate) plus a margin equal to ___/__ base point(s) (a base point is equal to 0.01%). The margin shall remain unchanged within the term of this Contract. If the Borrower makes more than one drawdown, the loan interest rate for each drawdown shall be calculated separately. After the Borrower makes drawdown, the benchmark interest rate will be adjusted in accordance with Item __/__ below, and the loan interest for each interest period shall be calculated according to the loan interest rate as adjusted and applicable to such interest period: |
A. | the benchmark interest rate will be adjusted in each interest period as applicable to such benchmark interest rate. The benchmark interest rate applicable to each interest period subsequent to the initial period shall be determined on the same numerical date in the month of such adjustment as the drawdown date. If there is no same numerical date in the month of adjustment as the drawdown date, the benchmark interest rate for such period shall be determined on the last day of such month of adjustment; or |
B. | the benchmark interest rate for each interest period shall be adjusted on the first day of such interest period. |
(3) | Others: _________________/_______________________________. |
3.3 | The loan interest hereunder shall accrue from the actual drawdown date on a daily basis, and be settled every ______month_________ (month/quarter/half year). Upon maturity of the loan, all outstanding interest shall be paid together with the principal. The daily interest rate shall be applicable annual interest rate/360. |
3.4 | Penalty interest will be imposed in addition to the loan interest rate hereunder at _30__% on any overdue amount (overdue penalty interest rate), or at _50__% on any amount that is used for any purpose other than those set out hereunder (misappropriation penalty interest rate). |
Article 4 | Drawdown |
The Borrower shall make drawdown according to its actual need for fund. The first drawdown shall be made before ___2012.7.10_____________, and the last drawdown shall be made before ___2012.7.10________________. If the Borrower fails to make drawdown as required above, the Lender may cancel all or part of the loan. (This article is not applicable to revolving loan.)
Article 5 | Repayment |
5.1 | The Borrower shall repay the loans hereunder in accordance with Item _(1)__ below: |
(1) | the Borrower shall fully repay the loan in one lump sum upon its maturity. |
(2) | the Borrower shall repay the loan in installments according to the following schedule (if there is not enough space below, please state the repayment schedule on a separate page): |
Time of repayment |
Amount of repayment (in RMB10,000) |
/ | / |
5.2 | If the loan hereunder falls in any of the following events, the Borrower shall immediately repay the loan upon receipt of relevant fund, without any compensation to be paid by the Borrower for prepayment caused thereby: |
____________________________/_____________________
____________________________/_____________________
5.3 | Except for the event under Article 5.2 above, the Borrower shall pay to the Lender a compensation equal to __/__% of prepayment amount if the Borrower prepays any amount of the loan hereunder. |
Article 6 | Special Provisions in Relation to Revolving Loans (optional clause: this article is □applicable/■not applicable) |
6.1 | The loan hereunder is provided on a revolving basis. The amount and the term of the loan as set out in Article 2 above is the limit of the revolving credit line and the term to use such revolving credit line, respectively. The term to use the revolving credit line shall commence on the date when this Contract takes effect. |
6.2 | If an RMB revolving loan adopts a floating interest rate, the benchmark interest rate shall be the benchmark lending interest rate as published by the People's Bank of China corresponding to the term of such loan. |
6.3 | In addition to the loan interest, the Borrower shall also pay to the Lender a commitment fee in accordance with Item __/__ below: |
(1) | the commitment fee shall be equal to _/__% of the limit of revolving credit line and paid to the Lender in one lump sum on the date when this Contract takes effect; or |
(2) | after the effectiveness of this Contract, the commitment fee shall be paid to the Lender in installments on 20th day of each ____/___ (month/quarter/half a year) (Fee Period) until expiry of the term to use the revolving credit line, and the amount of each installment shall be calculated based on the balance of the revolving credit line after deducting the daily average amount of drawdown made by the Borrower within each Fee Period and based on an annual rate of _/_%; or |
(3) | _________________/______________. |
Article 7 | Security |
7.1 | If the loan hereunder is a secured loan, such loan is secured by _________pledge_________. |
7.2 | If the security for the loan hereunder is a security with a maximum secured amount, the relevant security contract (with the maximum secured amount) is as follows: |
Name of the security contract (with the maximum secured amount): _______pledge contract___ (No.:_______/____________)
Security Provider: __CER Energy Recovery (Shanghai) Co., Ltd
Article 8 | Financial Covenants (optional clause: this article is □applicable/■ not applicable) |
Within the term of this Contract, the Borrower shall comply with the following covenants in relation to financial indicators:
________________________/_________________________
_________________________/________________________
Article 9 | Dispute Resolution |
All disputes under this Contract shall be solved in accordance with Item (2) below:
(1) | Such dispute shall be submitted to ______/___________Arbitration Commission for arbitration at _______/_________(place of arbitration) in accordance with the arbitration rules of such commission in force upon submission of arbitration application. The arbitration award shall be final and binding upon both parties; or |
(2) | Such dispute shall be submitted to the jurisdiction of the competent court of place where the Lender is located. |
Article 10 | Miscellaneous |
10.1 | This Contract is made in __two___ copies, with each of the Borrower, the Lender and _______/_____ holding ___one____ copy(ies), each of which shall have equal legal effect. |
10.2 | The following appendices and other appendices as confirmed by both parties shall constitute integral part of this Contract and have equal legal effect as this Contract: |
Appendix 1: Form of Drawdown Notice
Appendix 2: Entrusted Payment Agreement
Appendix 3:
Article 11 | Other Matters Agreed by the Parties |
11.1 | If Party B’s profit level, and assets liabilities rate, and flow ratio, and should received account paragraph turnover, and business activities cash flow, index deterioration, or the equity structure, and production business and external investment occurs major changes, which has the effect on Party A’s loan ,then Party has the right to announce loan ahead of due and refuse new of drawing requirements, and require Party B ahead of part or all loan reimbursement which has issued, or require Party B append a legitimate, and good value, and effective of guarantees recognized by Party A |
11.2 | If Party B violate any loan agreement signed with money corporation ,which lead to effect the creditor's rights of Party A and violate this agreement, then Party A has the rights to announce the mortgage debt has maturity ahead of time |
11.3 | In the similar agreement ,Party B can not have the financial terms with other banks which are better than the credit terms of Party A |
11.4 | Party B promise that the loan lend from Party A will not go into the securities , futures market and share capital Marketable investment ,these areas which are inhibit by national laws |
11.5 | Part II Terms of Working Capital Loan Contract |
Article 1 | Interest Rate and Interest |
1.1 | The LIBOR applicable to a foreign currency loan hereunder shall be the inter-bank offered rate applicable to the currency of such loan as shown on the "LIBO=" page of the Reuters' financial messaging terminal at 11:00 am (London time) on the day that is two bank business days prior to the drawdown date or the benchmark interest rate adjustment date; the HIBOR shall be the inter-bank offered rate applicable to Hong Kong Dollar as shown on the "HIBO=" page of the Reuters' financial messaging terminal at 11:15 am (Hong Kong time) on the day that is two bank business days prior to the drawdown date or the benchmark interest rate adjustment date. |
1.2 | If the loan hereunder adopts a floating interest rate, the interest rate will continue to be adjusted in accordance with the original adjustment rules after such loan is overdue. |
1.3 | If interest is settled on a monthly basis, the settlement date shall be 20th day of each month; if interest is settled on a quarterly basis, the settlement date shall be 20th day of the last month of each quarter; and if interest is settled on a half-year basis, the settlement date shall be June 20 and December 20 of each year. |
1.4 | The first interest period shall commence from the actual drawdown date to the first interest settlement date; the last interest period shall commence from the day immediately following the end of the preceding interest period to the final repayment date; and each of the other interest period shall commence from the day immediately following the end of the preceding interest period to the next interest settlement date. |
1.5 | If the People's Bank of China adjusts the method to determine the loan interest rates, relevant provisions of the People's Bank of China in relation to such adjustment shall apply to this Contract without requiring any further notice from the Lender to the Borrower. |
Article 2 | Advance and Payment of Loan |
2.1 | The Lender has no obligation to advance any loan to the Borrower until all following conditions have been satisfied by the Borrower or waived by the Lender: |
(1) | except for unsecured loans, the Borrower has provided security as required by the Lender and completed relevant formalities for provision of such security; |
(2) | there is no default event occurring under this Contract or any other contract between the Borrower and the Lender; and |
(3) | the purpose of loan as stated in the supporting documents provided by the Borrower is consistent with the purpose as agreed hereunder. |
2.2 | All written documents provided by the Borrower to the Lender for drawdown shall be originals. If no original is available, the Borrower may, upon consent of the Lender, provide photocopies affixed with the Borrower's company seal. |
2.3 | When applying for drawdown, the Borrower shall submit a drawdown notice to the Lender at least 5 bank business days prior to the proposed drawdown date. Once submitted, a drawdown notice will be irrevocable unless otherwise agreed by the Lender in writing. |
2.4 | After all conditions precedent to drawdown have been satisfied by the Borrower or waived by the Lender, the Lender will remit the loan into a designated account of the Borrower. Such remittance shall be deemed as advance of the loan by the Lender to the Borrower in accordance with this Contract. |
2.5 | In accordance with relevant regulatory requirement and management requirement of the Lender, a loan exceeding certain value or meeting certain other conditions shall be subject to the entrusted payment arrangement, where the Lender will, upon and in accordance with drawdown request and payment entrustment issued by the Borrower, pay the proceeds of the loan to relevant payees for the purpose as agreed under this Contract. For this purpose, the Borrower shall enter into an entrusted payment agreement with the Lender, which shall be attached hereto as an appendix, and shall open or designate a dedicated account with the Lender for such entrusted payment. |
Article 3 | Repayment |
3.1 | The Borrower shall repay the principal of and pay the interest on the loan hereunder and other amount payable in accordance with the amount and schedule as required under this Contract. The Borrower shall, on the day that is one bank business day prior to the repayment date and each interest settlement date, deposit into a repayment account opened by the Borrower with the Lender sufficient fund to repay the principal, interest and other amount to be paid on such repayment date or interest settlement date. The Lender may transfer an amount equal to such principal, interest and other amount payable out of such account on such repayment date or interest settlement date without further instruction from the Borrower, or require the Borrower to cooperate in completing relevant formalities for such transfer. If the balance of the repayment account is not sufficient to pay all amount to be paid by the Borrower, the Lender may decide the priority sequence of each item to be settled. |
3.2 | If the Borrower applies for prepayment of all or part of the loan, it shall submit a written application to the Lender for its approval 10 bank business days prior to such prepayment, and pay to the Lender relevant compensation as agreed hereunder. |
3.3 | If the Lender approves any prepayment, the Borrower shall fully pay on the prepayment date all principal, interest and other amounts due and payable as of such prepayment date hereunder. |
3.4 | The Lender may require the Borrower to early repay any loan based on the Borrower's collection of receivables. |
3.5 | The applicable interest rate grade (based on term of loan) will not change if the actual term of loan is shortened due to any prepayment by the Borrower or early repayment as required by the Lender in accordance with this Contract. |
Article 4 | Revolving loan |
4.1 | If the loan hereunder is provided on a revolving basis, the aggregate amount of outstanding loans taken by the Borrower at any time within the term to use the revolving credit line may not exceed the amount of the revolving credit line. The term of each drawdown made by the Borrower shall commence from the actual drawdown date to the agreed repayment date, each as stated on relevant receipt of loan. No drawdown may have a repayment date that is beyond the term to use the revolving credit line. |
4.2 | If the loan hereunder is provided on a revolving basis, and the Borrower fails to make any drawdown within three consecutive months from the date of this Contract, the Lender may cancel the revolving credit line. |
Article 5 | Security |
5.1 | Except for unsecured loans, the Borrower shall provide legal and effective security acceptable to the Lender for the performance of its obligations hereunder. A security contract will be entered into separately. |
5.2 | The Borrower shall promptly notify the Lender of any damage, depreciation, title dispute, seizure or attachment of the collateral hereunder, or unauthorized disposal of the collateral by the mortgagor, or any adverse change to the guarantor's financial condition, or any other adverse change to the claims of the Lender, and provide other security that is acceptable to the Lender. |
5.3 | Where the loan hereunder is secured by a pledge over accounts receivable, the Lender may declare accelerated maturity of the loan and require the Borrower to immediately repay all or part of the principal and pay the interest of the loan, or provide additional legal, effective and sufficient security acceptable to the Lender, if any of the following events occurs within the term of this Contract: |
(1) | the bad debt ratio in relation to accounts receivable by the pledgor from the payer of such accounts receivable increases for two consecutive months; |
(2) | the accounts receivable that are due but not recovered by the pledgor from the payer of such accounts receivable represent at least 5% of the total outstanding accounts receivable to be paid by such payer to the pledgor; or |
(3) | any trade dispute (including without limitation dispute over quality, technology or service) or debt dispute arises between the pledgor of the accounts receivable and relevant payer or other third party, which may prevent the accounts receivable from being settled when they become due. |
Article 6 | Account management |
6.1 | The Borrower shall designate a special collection account with the Lender, which will be used to collect relevant sales revenue or fund to be used to repay the loan. If any sales revenue is settled by non-cash method, the Borrower shall ensure that the proceeds of such revenue will be promptly transferred into the special collection account when it receives the same. |
6.2 | The Lender may supervise on the special collection account, including without limitation monitoring and supervising income and expenditure of such account, and the Borrower shall cooperate with the Lender in such supervision. If requested by the Lender, the Borrower shall enter into an account supervision agreement with the Lender. |
Article 7 | Representations and Warranties |
The Borrower makes the following representations and warranties to the Lender, and these representations and warranties will remain valid and effective within the term of this Contract:
7.1 | It is eligible to act as a borrower hereunder, and has all qualifications and capacity to enter into and perform this Contract. |
7.2 | It has obtained all necessary authorizations or approvals to enter into this Contract. Its execution and performance of this Contract does not violate its articles of association or any applicable laws or regulations, or conflict with any of its obligations under other contracts. |
7.3 | Its other debts have been repaid when they become due and it has not committed any malicious default in repaying any principal or interest of bank loan. |
7.4 | It has a well-established organizational structure and financial management system. It has not committed any material violation of regulations or disciplines during its production and operation in the past one year. Its current senior management has no material negative record. |
7.5 | All documents and information provided by the Borrower to the Lender are true, accurate, complete and effective and do not contain any false record, gross omission or misleading statement. |
7.6 | The financial and accounting reports provided by the Borrower to the Lender are prepared in accordance with the general accepted accounting principle of the PRC and give true, fair and complete presentation of the operation and indebtedness status of the Borrower. The financial condition of the Borrower has no material adverse change since the end date of its latest financial and accounting reports. |
7.7 | It has not concealed from the Lender any litigation, arbitration or claim involving the Borrower. |
Article 8 | Undertakings of the Borrower |
8.1 | The Borrower undertakes to draw down and use the loan in accordance with the schedule and purpose as agreed hereunder. The Borrower shall not use the proceeds of the loan hereunder for investment in fixed assets or equity, or for investment in securities or futures market, or any other purpose prohibited or restricted by applicable laws and regulations. |
8.2 | The Borrower undertakes to settle principal, interest and any other amount payable in relation to the loan hereunder in accordance with this Contract. |
8.3 | The Borrower undertakes to accept and actively cooperate with the Lender's check and supervision on use of the proceeds of the loan (including purpose of the loan) including account analysis, voucher verification and on-site investigation, and to regularly summarize and report information on the use of proceeds of the loan as requested by the Lender. |
8.4 | The Borrower undertakes to accept credit check by the Lender, to provide financial documents including balance sheets and income statements and other documents that reflect the Borrower's ability to repay its debts, as requested by the Lenders, and to actively assist and cooperate with the Lender in investigating, understanding and supervising its production, operation and financial conditions. |
8.5 | The Borrower undertakes not to distribute any dividend or profit in any form before full settlement of principal, interest and other amount payable in relation to the loan hereunder. |
8.6 | The Borrower undertakes to obtain prior written consent of the Lender or make appropriate arrangements in relation to the realization of the Lender's claims to the Lender's satisfaction, before it carries out any merger, division, decrease of capital, equity change, transfer of material assets and creditor's rights, material external investment, material increase of debt financing and other action that may cause an adverse impact on the Lender's rights and interests. |
8.7 | The Borrower undertakes to promptly notify the Lender upon occurrence of any of the following events: |
(1) | any change to its articles of association, business scope, registered capital or legal representative; |
(2) | its winding-up, dissolution, liquidation, suspension of business, revocation or cancellation of its business licence, or application (or be applied for) for bankruptcy; |
(3) | it is or may be involved in any material economic dispute, litigation or arbitration, or its property is subject to seizure, attachment or supervision in accordance with applicable laws; or |
(4) | any of its shareholders, directors or current senior management personnel is suspected of major crime or involved in any material economic dispute. |
8.8 | The Borrower undertakes to disclose its related party relationship and related transaction to the Lender in a prompt, complete and accurate manner. |
8.9 | The Borrower undertakes to promptly confirm receipt of all notices sent by the Lender by post or any other means. |
8.10 | The Borrower undertakes not to dispose of its own assets in a way that will reduce its ability to repay its debts. The Borrower undertakes not to provide security to the benefit of any third party in a way that will harm the Lender's rights and interests. |
8.11 | If the loan hereunder is an unsecured loan, the Borrower undertakes to regularly make complete, true and accurate disclosure to the Lender in relation to all securities provided by the Borrower for others, and enter into an account supervision agreement as requested by the Lender. If any provision of security may affect its ability to perform its obligations hereunder, the Borrower shall obtain written consent of the Lender on such provision of security. |
8.12 | The Borrower undertakes to bear expenses for entering into and performing this Contract, and expenses paid and payable by the Lender for realization of its claim hereunder, including without limitation litigation or arbitration fee, attachment fee, attorney's fee, enforcement fee, appraisal fee, auction fee and announcement fee. |
8.13 | The debt hereunder is senior to the debts owed by the Borrower to its shareholders, and is not subordinated to similar debts owed by the Borrower to other creditors. |
Article 9 | Undertakings of the Lender |
9.1 | The Lender undertakes to advance the loan to the Borrower in accordance with this Contract. |
9.2 | The Lender undertakes to keep non-public materials and information provided by the Borrower confidential, unless otherwise required by applicable laws and regulations or agreed hereunder. |
Article 10 | Default |
10.1 | The Borrower will be in default upon occurrence of any of the following events: |
(1) | The Borrower fails to repay any principal, interest or other amount payable in relation to the loan hereunder in accordance with this Contract, or fails to perform any other obligations hereunder, or breaches any of its representations, warranties or undertakings hereunder; |
(2) | the Borrower fails to provide other security acceptable to the Lender when the security provided hereunder suffers any change that is adverse to the claim of the Lender; |
(3) | the Borrower fails to settle any other debt when it becomes due (including due to accelerated maturity declared by the creditor), or is in default or breach of any of its obligations under other agreements, which has affected or may affect performance of its obligations hereunder; |
(4) | the Borrower's ability to make profit, repay debts or operate its business, or its financial indictors such as cash flow do not comply with agreed standard or suffer deterioration, which has affected or may affect performance of its obligations hereunder; |
(5) | the Borrower's equity structure, production, operation or external investment suffers any material adverse change, which has affected or may affect performance of its obligations hereunder; |
(6) | the Borrower is or may be involved in any material economic dispute, litigation or arbitration, or its property is subject to attachment, seizure or enforcement, or the Borrower is investigated or punished by any competent judicial or administrative authority in accordance with laws, or any media report that the Borrower has violated relevant regulations or policies of the State, which has affected or may affect performance of its obligations hereunder; |
(7) | there is any abnormal change or missing of major individual investor or key management personnel of the Borrower, or any competent judicial authority has launched investigation on or restricted right of freedom of such investor or personnel in accordance with laws, which has affected or may affect performance of the Borrower's obligations hereunder; |
(8) | the Borrower obtains fund or credit facility from the Lender by using false contracts between the Borrower and its related party or transactions that do not actually exist, or intentionally uses related transactions to evade from or invalidate the Lender's claim; |
(9) | the Borrower is or may be under winding-up, dissolution, liquidation, suspension of business, or its business licence has been or may be revoked or cancelled, or it has applied or been applied, or may apply or be applied, for bankruptcy; |
(10) | there is any liability accident caused by the Borrower's violation of applicable laws and regulations, regulatory rules or industry standard in relation to food safety, production safety or environmental protection, which has affected or may affect performance of its obligations hereunder; |
(11) | where the loan hereunder is an unsecured loan, the Borrower's credit rating, profitability, asset liability ratio, net cash flow in operation activities, etc. do not comply with the Lender's requirement on grant of unsecured loans, or the Borrower creates mortgage or pledge over its effective operation assets or provides guarantee to the benefit of others without written consent of the Lender, which has affected or may affect performance of the Borrower's obligations hereunder; or |
(12) | other events that may cause adverse impact on realization of the Lender's claim hereunder. |
10.2 | If the Borrower is in default, the Lender may take any one or more of the following steps: |
(1) | the Lender may require the Borrower to remedy its default within a designated period; |
(2) | the Lender may cease to advance the loans and other amounts to the Borrower under this Contract or any other contract between the Lender and the Borrower, and cancel all or part of the loan or other amount for which the Borrower has not made drawdown; |
(3) | the Lender may declare immediate maturity of all outstanding loans and other amounts under this Contract or any other contract between the Lender and the Borrower, and require immediate repayment of such loans and amounts; |
(4) | the Lender may require the Borrower to compensate the Lender against all losses caused by such default of the Borrower; and |
(5) | other steps that are set out under applicable laws and regulations, agreed under this Contract or deemed necessary by the Lender. |
10.3 | If the Borrower fails to repay any loan when it becomes due (including due to accelerated maturity as declared by the Lender), the Lender may impose penalty interest on the Borrower at the overdue penalty interest rate as agreed hereunder from the day immediately following the due date. Compound interest will accrue at the overdue penalty interest rate on any interest that the Borrower fails to pay when it becomes due. |
10.4 | If the Borrower fails to use the loan for the purpose as agreed hereunder, the Lender may impose penalty interest on the misappropriated part of the loan at the misappropriation penalty interest rate as agreed hereunder from the date of misappropriation. When the loan is being misappropriated, compound interest will accrue at the misappropriation penalty interest rate on any interest that the Borrower fails to pay when it becomes due. |
10.5 | If both of the penalty interest rates under Articles 10.3 and 10.4 are applicable to the Borrower, the higher of the two interest rates will apply. The two types of penalty interest may not be applied at the same time. |
10.6 | The Lender may make a public announcement in media to demand repayment if the Borrower fails to repay any principal, interest (including penalty interest and compound interest) or any other amount payable as scheduled. |
10.7 | If the control relationship between the Borrower and its related party has changed, or any related party of the Borrower is in any event under Articles 10.1 (excluding Articles 10.1(1) and (2)), which has affected or may affect performance of the Borrower's obligations hereunder, the Lender may take all steps as set out under this Contract. |
Article 11 | Deduction and Setoff |
11.1 | If the Borrower fails to repay any debt due hereunder (including due to accelerated maturity declared by the Lender) in accordance with this Contract, the Lender may deduct relevant amount from all RMB and foreign exchange accounts opened by the Borrower with the Lender or any other branch office of Industrial and Commercial Bank of China to set off such debt, until all debts of the Borrower hereunder are fully settled. |
11.2 | If the currency of deducted amount is different from that of the loan hereunder, the amount will be converted in accordance with applicable exchange rate published by the Lender on the date of such deduction. The Borrower shall bear all interest and other expenses incurred between the deduction date and the actual settlement date (i.e. the date when the debts hereunder are actually settled after the Lender converts the deducted amount into the currency of the loan hereunder in accordance with applicable State policies on administration of foreign exchange), as well as the difference caused by fluctuation of exchange rate during such period. |
11.3 | If the amount deducted by the Lender is insufficient to repay all debts owed by the Borrower, the Lender may decide the priority sequence of each item to be settled. |
Article 12 | Transfer of Rights and Obligations |
12.1 | The Lender may transfer all or part of its rights hereunder to a third party, without consent of the Borrower. The Borrower may not transfer any of its rights or obligations hereunder without written consent of the Lender. |
12.2 | The Borrower acknowledges that the Lender or Industrial and Commercial Bank of China Limited (ICBC) may, based on operation and management requirements, authorize or appoint another branch office of ICBC to perform the rights and obligations hereunder, or transfer the loan hereunder to another branch office of ICBC. Such transfer by the Lender does not require further consent of the Borrower. The branch office of ICBC that is the transferee of the rights and obligations of the Lender hereunder may exercise all rights hereunder, and may in its own name initiate litigation or arbitration or apply for enforcement in relation to the dispute hereunder. |
Article 13 | Effectiveness, Amendment and Termination |
13.1 | This Contract shall take effect as of the date hereof, and end upon the date when all of the Borrower's obligations hereunder are fully performed. |
13.2 | Any amendment to this Contract shall be agreed by the Parties and made in writing. Amended clauses or amendment agreement shall constitute an integral part of this Contract and have equal legal effect as this Contract. The rest terms of this Contract which are not amended shall remain effective. The original terms of this Contract which are to be amended shall remain effective until the relevant amendments take effect. |
13.3 | Amendments to or termination of this Contract shall not prejudice each Party's right to claim compensation for loss. The dispute resolution clause hereof shall survive termination of this Contract. |
Article 14 | Governing Law and Dispute Resolution |
The execution, validity, interpretation, performance and dispute resolution of this Contract shall be governed by the PRC law. All disputes and controversies arising from or in connection with this Contract shall be solved by the Parties through consultations, failing which, be solved by the means agreed hereunder.
Article 15 | Entire Agreement |
Part I (Loan Conditions) and Part II (Terms of Working Capital Loan Contract) of this Contract shall constitute a complete loan contract, and the same term shall have the same meaning in both parts. Both parts above are applicable to the loan granted to the Borrower hereunder.
Article 16 | Notices |
16.1 | All notices hereunder shall be sent in writing. Unless otherwise agreed, the address of each Party as stated in this Contract will be its address for communication and contact. If the contact address or other contact information of a Party changes, such Party shall promptly notify the other Party of such change in writing. |
16.2 | If either Party hereto refuses to confirm receipt of a notice or a notice is otherwise unable to be delivered, the Party sending such notice may serve such notice by means of notarization or public announcement. |
Article 17 | Miscellaneous |
17.1 | Failure to exercise, partial exercise or delay in exercise by the Lender of any of its rights hereunder will not constitute waiver of or amendment to such right or any other right, nor will it affect the Lender's further exercise of such right or any other right. |
17.2 | Invalidity or unenforceability of any provision hereof will not affect validity or enforceability of any other provision hereof or validity of the whole Contract. |
17.3 | If so required by applicable laws, regulations, or other financial regulators, the Lender may provide the information related to this Contract and other information related to the Borrower to the credit information database of the People's Bank of China or other credit database created in accordance with laws for duly qualified institutions or individuals to check or use. The Lender may also enquire information related to the Borrower by using the credit information basic database of the People's Bank of China or other credit database created in accordance with laws for purpose of execution and performance of this Contract. |
17.4 | The terms used in this Contract including "related party", "related party relationship", "related transaction", "major individual investor" and "key management personnel" shall have the meaning given to them in the Accounting Standard for Business Enterprises No. 36—Disclosure of Related Parties (Cai Kuai [2006] No. 3) issued by the Ministry of Finance of the People's Republic of China and its amendments. |
17.5 | The documents and vouchers prepared and retained by the Lender in relation to the loan hereunder in accordance with its business practice shall constitute valid proof of debt relationship between the Borrower and the Lender, and shall be binding upon the Borrower. |
17.6 | In this Contract, (1) any reference to this Contract shall include all amendments and supplements to this Contract; (2) the headings are for reference only, and do not constitute any interpretation of this Contract, or restriction on contents or scope of provisions under such headings; and (3) if a drawdown date or repayment date is not a bank business day, it shall be postponed to the immediate following bank business day. |
The Parties hereby confirm by signing or affixing of seal that all terms of this Contract have been fully negotiated by the Borrower and the Lender. The Lender has brought the Borrower's special attention to all terms in relation to the rights and obligations of each Party, asked the Borrower to fully and accurately understand all such terms, and upon the Borrower's request, made explanation on relevant terms. The Borrower has carefully read and fully understands all contractual terms hereof (including Part I (Loan Conditions) and Part II ((Terms of Working Capital Loan Contract)). The understanding of the Borrower and the Lender of this Contract is consistent, and the Parties have no dispute over the terms of this Contact.
Lender (seal):Industrial and Commercial Bank of China Limited, Shanghai Zhangjiang Branch
Person-in-charge/authorized representative: ________Jiang Qiqing__
Borrower (seal):______CER Energy Recovery(Shanghai) Co.,Ltd______________________
Legal representative/authorized representative: Wu Qinghuan
Date: ____2012-1-11_______
No:3102002012C000000000
Comprehensive Facility Contract
Bank of communications
Comprehensive Facility Contract
Applicant: CER Energy Recovery (Shanghai) Co.,Ltd
Legal representative: Wu Qinghuan
Legal Address: Room 101&102, Building#26,No.1388 Zhangdong Road,Zhangjiang Hi-tech Park
Contact Address: Room 101&102, Building#26, No.1388 Zhangdong Road, Zhangjiang Hi-tech Park
Facility giver: Bank of communications, Shanghai Branch
Head: Lv Benxian
Contact Address: No.560 Songtao Road
Whereas the applicant applies the comprehensive facilities from the facility giver, both parties enter into this contract and it is agreed upon through consultation between the parties.
Definition
In this contract, below term has its meaning as following except there is another expressly agreed in the context.
“Comprehensive facility line”, the facility giver gives the facility to the applicant which related to one or above one from following: RMB or foreign currency working capital loan, Export rebate account mortgage loans, Opening of bank acceptance bills, opening import letters of facility, packing facility, import bills, financing of import collection, import payment financing, export, export invoice financing, financing of export collection, opening a letter of guarantee or other facility recognized varieties
“Comprehensive facility”, the facility giver gives the applicant the max facility under this contract.
“Classification of facility”, the facility giver gives the applicant the max facility for one kind of facility
“Facility balances” the amount of debt which has occurred by the applicant and still does not pay off to the facility giver .Among which, in Opening of bank acceptance /letter of facility/guarantees, that means the amount for following two: The effective bank acceptance which opened by the facility giver/letter of facility/ guarantees, the amount which the applicant unpaid and advances by the facility giver according to the bank acceptance /letter of facility/guarantees
“Classification of facility balances”, under this contract, the amount of outstanding debt which occurred by applicant
“Line balance”, comprehensive facility deducted the facility balances
“Classification line balance” Facility Classification deducted classification of facility balances
“Facility period”, the period that facility giver provide to the applicant according to this contract, it specially means the period of occur, and different with the period of execution, the period of execution under this contract shall be specified in the <Apply of facility> agreed by both parties The facility period under this contract shall from January 30, 2012 to January 20, 2013.
“Facility”, means the “Comprehensive facility” or “Classification of facility” in this contract
“Export rebate account mortgage loans”, the facility giver provides the applicant the short term working capital loan by the guarantee of the receivable from the applicant’s export rebate
“Import financing”, the facility giver provides the applicant short term loan based on the written applying from applicant, so that the applicant can payoff all the payable under L/C, the applicant should repay the facility giver principal and interest in time agreed by both parties
“Import collection financing”, under this facility, the facility giver provides the applicant short term loan according to the written applying from applicant, based on that the facility giver is collection bank for applicant, and the applicant should repay the facility giver principal and interest in time agreed by both parties
“Import payment financing”, when all the import goods have been arrived in port, or according to the import contract, the advances are required, or the shipping fee, commission and other affiliated fees should be paid, the applicant authorize the facility giver pay these expenses, and the facility giver according to applicant’s indicators to provide the applicant the loan to pay for the import payment using TT method, and the applicant should repay the facility giver principal and interest in time agreed by both parties
“Exportation documentary bills”, the applicant submitted the facility and full set of documents to the facility giver and apply for the financing ,the facility giver provide the short-term financing after his reviewing, applicants pay the principal and interest at the agreed interest rate and time
“Financing of export collection”, under this business, the facility giver should provide the short-term financing, applicants pay the principal and interest at the agreed interest rate and time
“Export invoice financing”, the applicant uses the TT payment for export trade, the facility giver can provide certain ratio short-term financing according to the applicant’s invoice and applicants pay the principal and interest at the agreed interest rate and time
“Financing” the each money or the total money which the facility giver give to the applicant in the different business
Line of facility
2.1 Comprehensive facility is RMB 57,000,000
2.2 Above money is used on RMB working capital loan and opening bank’s acceptance
Facility amount for each kind
RMB working capital loan | RMB 40million |
Bank acceptance | RMB 57million |
2.3 The facility amount for each kind is the max facility amount for related facility product. Any facility should be limited to the classification facility and comprehensive facility
Precondition of using the facility
3.1 The common precondition of using the facility
(1) The facility amount should not exceed the comprehensive facility amount. The classification facility balance cannot exceed the matched classification facility
(2) The facility amount which plan to use can not exceed the amount balance and classification facility balance
(3) The application should within the facility period
(4) If there is any guarantee contract which has taken effect and lasted effect , the guarantee contract is the mortgage contract, the security interest should has been set and has the lasted effect
(5) The applicant has prepared all the procedures required by the facility giver, such as government permission, ratification, and registration and so on
(6) The request for utilization meets the requirement of facility giver
(7) There is no great unfavorable change for the operation and financial situation of applicant
(8) There is no delinquency for the applicant of the contract
(9) The applicant should meet the requirement of the precondition of matched classification facility
(10) The method of payment for the loan should according to the terms of the contract.
(11) If use the foreign exchange loan, the applicant should open the related account per the requirement of foreign exchange management and has provided the documentary evidence, including but not limited to the effective foreign exchange usage certification or the registration documents
(12) The applicant has pointed below account as the Capital Returning account and signed the account management contract per facility giver’s request
Account name CER Energy Recovery (Shanghai) Co.,Ltd
Account number 310066865018010189665
Bank of deposit: Bank of communication Zhangjiang Branch
3.2 The precondition of working capital loan facility ( RMB and foreign currency)
(1) The loan should use in operation turnover, among which RMB 29 million is used for shifting the loan on bank of communication
(2) The length of maturity can not longer than 12 months and expiration date can not exceed than 2013.07.20
3.3 The precondition of hypothecated loan facility amount for refunding export taxes account
(1) The apply of refunding export taxes has got the approbation of State Administration for Taxation or the foreign trade department
(2) The first apply should provide the tax return text of the local departments of state taxes
(3) The first apply should provide the declaration form and detail list for the export tax return
3.4 The precondition of opening the bank acceptance
(1) The applicant has put guarantee money equal to 30% acceptance amount or provides the same amount bank certificate of deposit for mortgage
(2) The applicant has provided the trueness and legitimate documents per the approbation of facility giver
(3) The applicant has paid the commission charge per the facility giver’s requirement
(4) The time limit of bank acceptance can not longer than 6 months and the expiration date cannot later than 2013.07.20
(5) The risk exposure fee has been paid according to the contract
The application of facility amount
4.1 The facility amount is the max facility amount which facility giver can give to the applicant under this contract. The signing of this contract doesn’t mean the facility giver should give the amount for the facility. If the applicant needs to use the facility amount under this contract, then he should bring the use application according to the form of “facility use application” and can use the facility after the agreement of facility giver
4.2 If the facility giver agrees the application of applicant, then the facility kind, currency, amount, usage, time limit and the rate should according to the record of “facility use application” signed by facility giver
4.3 The use status should according to the documents, warrant and receipts during the fulfilling of this contract for the facility giver
4.4 If the currency set in “facility use application” is not the same as the facility currency under this contract. Then for the purpose of calculating the facility, the will convert with the rate of each day of the bank of communication. If there is no applicable rate, then it will convert with the reasonable rate decided by bank of communication
4.5 If the applicant becomes the shareholder of guarantor or the “actual controller” defined in the “company law”, then before the Resolution Based on Shareholder Committee which shows that they agreed to guarantee for the applicant , the facility giver has the rights to stop or cancel the un-used facility
Payment of loan
5.1 The payment of loan is applicable for this term
5.2 The applicant appoint below account for the loan account
Account name CER Energy Recovery (Shanghai) Co.,Ltd
Account number 310066865018010189665
Bank of deposit: Bank of communication Zhangjiang Branch
5.3 Before each withdraw, the applicant should make the withdraw procedure in at least XX working days and should definite the payment method, and each withdraw should only has one kind of payment method
Statement and guaranty of applicant
6.1 The applicant established a company by operation of law and has the necessary rights and can fulfill its obligation of this contract, and afford the civil liability
6.2 Signing and fulfill this contract is the truly expression of the applicant and it has passed all the necessary agreement, ratified and authorization. There is no blemish of the law.
6.3 The operation of the applicant is legal and compliance. The applicant has the ability to last the operation and has the legal repay source. There is no big and important bad facility record. There is also no bad record for the senior management of applicant
6.4 All the documents, report forms and information which the applicant provided to the facility giver is the true, accuracy, completed and effective. The applicant does not hide any information which may have the effect on the finance status and the repay ability. The finance status of applicant does not have any big or adverse changes from the finance report date
6.5 When signing this contract, the applicant is not the shareholder of guarantor or the actual controller defined in “company law”
Rights and obligations of facility giver
7.1 The facility giver has the rights to recovery the loan principal and interest, and charge for the cost which the applicant should pay for. The facility giver has the rights to decide to recovery the loan in advance based on the repay status of the applicant
7.2During the fulfilling this contract, the facility giver only reviews for the information which the applicant provided. If there is any false, not accuracy or not completed for these information, which lead to the facility giver can not make trustee payment on time or the applicant break the contract ,then the facility giver does not afford any result
7.3 If the money withdrawing account of applicant or the customer’s account freeze or another reasons which lead the unsuccessful to the money lending, then the facility giver does not afford any result
Obligation of applicant
8.1 The applicant should fulfill this contract and all the ratification, report, records or registration requested by “facility use application “
8.2 The applicant should use the facility according to this contract without embezzlement and can not invest the loan into the fixed assets , shareholding or the area , application which the state forbids
8.3 If there is any engagement with the payment method, the applicant should use the loan according to the engaged method and can not break up the whole into parts to avoid the trustee payment of facility giver; if use the independence payment, the payment of loan amount should be up to specification
8.4 The applicant should fulfill its obligation on time and on enough amount per this contract and the “facility use application “
If there is another engagement, then the applicant can not fulfill its debt in advance without the written agreement of facility giver
8.5 The repay account of applicant is used for sales income or the planned repayment. If the sales income is calculated in non-cash, the applicant should insure the money go into the account in time after receiving the income. The applicant should provide the status of cash move in and out per the request of facility giver
8.6 The applicant should afford all the cost under this contract and the “facility use application “, including but not limited to notarial fee, appraisal cost, registered fee and so on.
If the loan cost which the applicant should afford, then the applicant should pay enough amount per the request rate and time of facility giver. When it is the loan payment, the repay account is the another bank of strange land, then the payment should process by the payment system of the People's Bank
8.7 The applicant should follow the business system and operation tradition of the facility giver, including but not limited to cooperate with the facility giver for the management of the loan and the supervision for the applicant’s operation status. The applicant should provide the finance form, loan usage record and information for affiliated party or the affiliated trade per the request of facility giver and also needs to insure all the documents, data, and information should be trueness, completed and accurate.
8.8 If there is any one matter for the applicant , the applicant should notice the facility giver in written in 30 days advance and also should repay all the principal and interest of debt under this contract or provide the repay method agreed by the facility giver and can not take the action before the guarantee
(1) Sale, dotation, rent, transfer, mortgage or the other method to process the whole or the part of assets
(2) If there may be any great change for the management system or property right organization, including but not limited to contract ,rent, joint-operation, corporate system change, the joint stock cooperative system changes, merger, joint venture, schism, stock right transfer, reduction of capital and so on
(3) The investments abroad exceed RMB 2 billion or the debt financing exceed RMB 2 billion
8.9 If there is any one matter for the applicant, the applicant should notice the facility giver in written within 7 days from the date of happening
(1) The applicant or the affiliated party revises bylaws, change the company name, legal representative, address, contract and the operation area, or makes the decision for finance or personnel
(2) The applicant, its affiliated party or the guarantor plans to voluntary bankruptcy or maybe has be bankruptcy
(3) The applicant or its affiliated party get involved in lawsuit, arbitration, administrative measure or the soundness status of main assets/guaranty has or may affection or the value has or may decreased
(4) The applicant or its affiliated provides the guarantee for the third party who led to the great negative influence for the capacity of fulfilling this contract or its finance status
(5) The applicant or its affiliated signed the contract which will has the great negative influence for its operation and finance status
(6) If there is any production halts, close down, dissolution, or business license is revoked of the applicant, its affiliated or the guarantor
(7)If the legal representative, director or the mainly management of the applicant, it’s affiliated or the mainly investor disappear or involved in the illegal trade
(8) If there is any great difficult of operation, financial conditions deteriorate or the other affairs which has the negative effects for the normal operation, finance condition or the repay ability of applicant or its affiliated
(9) If there is any related transaction and the transaction amount arrives or exceeds the 10% of the latest audited net asset
(10) Before repay all the debt under this contract, the applicant becomes or may become the shareholder or the actual controller of the guarantor
(11) If the applicant or its affiliated has the liability accident or is exposure by the media due to it breaks the law, provision, national policy or the industrial standard
(12) If there is any change for control or under control relation of applicant and its affiliated
(13) If there are any other material adverse events which will have effect on the repay ability of the applicant and it’s affiliated
8.10 If there is any disadvantageous changes to the facility giver’s rights for the guarantee, the applicant should provide the another guarantee on time per the request of the facility giver
The “changes” mentioned here including but not limited to : guarantor’s merger, schism, production halts, stoppage, disbandment, revocation, bankruptcy; there is great changes for the operation or the finance condition of the guarantor; the guarantor is involved in lawsuit, arbitration or the mainly assets have the property preservation or the other enforcement measures; the guaranty is not in sound condition; the value of guaranty decrease or may decrease; the guaranty is taken by property preservation or the other enforcement measures; the guarantor or its legal representative or the main management is involved in any illegal activity; If the guarantor is person, the guarantor disappearance, dead; The guarantor breaks the terms under this contract ; the guarantee contract lose its effect or is dissolved; there is some disputes of guarantor and the applicant; the guarantor wants to terminate contract or the other affairs may affect the safety of rights of facility giver
Miscellanea
The applicant undertakes that 1) he will inform the facility giver in time if he got the information of the guaranty will be removed. 2) If it use property swap to compensate the removal of guaranty, then the applicant should repay all the debt ahead of time or reset the mortgage. Before settle all the registration of the new mortgage, the applicant should provide the other guaranty which approved by the facility giver.
The payment under this contract should according to the “facility use application” signed by the facility giver
When the applicant applies for the bank acceptance, it should pay the risk exposure management fee besides the acceptance commission. Among which, if the time of bank acceptance is within 3 months , then the risk exposure management fee is charged of 0.02% of risk exposure amount /month; If the time of bank acceptance is longer than 3 months , then the risk exposure management fee is charged of 0.02% of risk exposure amount /month. The applicant should pay out all management fees at once according to the facility giver’s notification. “risk exposure amount “ means the balance of facility and cash guarantee, the cash guarantee including cash deposit, deposit, national debt, bank acceptance, bank debenture and other amount of guarantee which accepted by Bank of Communications
Acceleration of maturity
10.1 If any one of below issues constitute the “acceleration of maturity” mentioned in this contract
(1) The applicant’s statement and guarantee of this contract or any “facility use application” is false
(2) The applicant breaks this contract or any “facility use application”
(3) If any affairs mentioned in No.8.9 term, the facility giver thinks it will affect the safety of its rights
(4)The facility giver thinks the applicant should repay all the debt in advance based on the capital returning status
(5) The promise which the facility giver provided may get out of line due to the changes of supervision
(6) When the applicant fulfill the contract which signed with facility giver, the applicant has the default or the debt may or has been announced acceleration of maturity
10.2 If any one of”acceleration of maturity issues”, the facility giver has the rights to take one, several or the whole measure
(1) Turn down, stop or cancel the facility under this contract
(2) Announce the part or the whole debts of this contract become due in advance and ask the applicant repay all the principle and interest at once. If it related to bank acceptance, letter of facility, backward letter, the applicant should supplementary the cash deposit till the amount arrive the total amount of all the facilities.
(3)Stop the payment for the loan which the applicant has applied but not use
(4) Ask the applicant to discuss the” give and pay “condition within the limited time
(5) Ask the applicant change the payment method per the request of facility giver
Breach of contract
11.1 If the applicant can not repay the enough principal or interest, for these unpaid, the facility giver will charge for the default interest and compound interest since unfulfilled date to clear off date. If the applicant does not use the loan according to the “facility use application”, then the facility giver can charge for the default interest and compound interest based on the embezzlement amount and the actual days
If the debt currency is RMB, the default interest of overdue and embezzlement should float upward 50% and 100% compared with the record in the “facility use application”
The fulfill expiration date can be any date as following: Payment Date, expiration date, interest payment date
11.2 If the applicant breaks the contract ,it should afford all the cost which the facility giver achieve its facility or rights, such as collection fee, legal fare, Charge for announcement, lawyer fee, travelling coast and other fee
11.3 If there is any behavior, such as escape supervision, default principle and interest and so on, the facility giver has the rights to report to related units concerned and has the public notice
Deduct engagement
12.1 The applicant authorizes the facility giver can deduct the debt principle, interest, default interest, compound interest from the any account opened in bank of communication for repaying
12.2 After deduct, the facility giver should notice the applicant the account ,contract number ,the bank voucher number, deduct amount ,the left debt .
12.3 If the deduct amount can not repay enough debt, then it should cancel out for the overdue cost. If the overdue days of principle and interest is less than 90 days, the balance will be used in due interest, default interest and compound interest and then cancel out for the principle; if overdue for more than 90 days, the balance will be used in due principle and then cancel out for the due interest, default interest and compound interest
If the debt is bank acceptance, letter of facility or backward letter, the deduct amount can not repay all be debt, then should first use for cancel out the unpaid fee. The balance first use for cancel out the overdue principle and then use for the overdue interest
Information disclosure and secure
14.1 The facility giver is responsible for the secure of trade secret and other confidential data of applicant, except following:
(1) Which is applicable for the laws and regulations or listing regulations.
(2) Which is request by the judicial department or the government
(3) Disclose to the professional consultant of facility giver
(4) The applicant agrees or authorizes the facility giver to disclose
14.2 The applicant agrees the bank of communication can use or disclose the information and data of applicant in following condition, including but not limited to the basis information, facility trade information and other related information. And the applicant is willing to undertake all the results
(1) For the following purpose to disclose and use the information to outsourcing institution, the third party supplier, or the other institution or person which the facility giver thinks it is necessary to disclose ,including but not limited to the other branch of bank of communication, or the subsidiary company owned by bank of communication A : related to facility business ,such as popularization the bank facility business, collection the debt of applicant, transfer debt and so on B The facility giver provides or may provide the new product or service to applicant C for the purpose of better maintain and management the customer relationship
(2) Provide the information and data to China facility reference center or the other facility reference institution which is approved by the people's Bank of China
(3) Use for the purpose of business operation, management, statistics, analysis or use on the confidentiality based with the third party
Solution to disputes
This contract is applicable for the law of People's Republic of China. All the disputes raised from this contract should bring a lawsuit against to the local court of facility giver. During the disputes, each party should continue to fulfill its obligation under this contract
Other terms
16.1 The applicant agrees the facility giver inquire and record the facility information of applicant due to the facility application
16.2 The facility giver will not undertake the responsibility but will inform the applicant in time if there is any failed facility due to the force majeure, network fault, and system fault
16.3 The “facility use application” signed by both parties and the other documents confirmed by both parties constitute the complete and indivisibility party of this contract. If the “facility use application” has disagreement with this contract, then should according to the “facility use application”; If there is any un-mention matter , the should according to this contract
16.4 The meaning of affiliated party, affiliated party trading, the mainly investor in this contract is the same as the meaning of “No.36 accounting postulates—disclose of affiliated party” which issued by Ministry of Finance
16.5 This contract will take effect after the signing and sealing of the legal representative of each party
16.6 This contract is in 6 duplicate, each party and the guarantor ( if any) hold one
The applicant has read above terms and the facility giver has made the necessary explanation to the applicant. The applicant has no objection to all the contents
The applicant (Seal):CER Energy Recovery (Shanghai) Co.,Ltd
Legal representative: Wu Qinghuan
Date :2012.1.30
The facility giver(Seal) : Bank of communication , Shanghai Branch
Head: Lv Benxian
Date: 2012.1.30
Contract No.:_ ZJXD-JK20120060____________
Loan Contract
Borrower: CER Energy Recovery (Shanghai) Co., Ltd.
Lender: Shanghai Pudong Zhanjiang Micro-credit Co., Ltd.
Dear client,
Thanks for your supports to Shanghai Pudong Zhanjiang Micro-credit Co., Ltd.(“Our Company”), please take note of the following items:
1. Please pay attention to the due date of principal and interest and ensure timely payment made according to the contract. Should your company / you breach the contract, our Company has the right to claim the loan due immediately. You company has to repay the principal and interest under the contract and assume the liability for breach of contract.
2. Please pay special attention to the clauses marked by “▲▲”. These clauses are the important clauses related to your rights and obligations. Please make sure your company / you carefully read and fully understand all contractual terms and have no objection.
3. If your company/ you breach the contract, your company’s / your default record will be provided to relevant government departments, including the People's Bank of China, association of small loan companies, relevant industry associations, financial institutions. Your company’s / your breach may adversely affect your company’s / your future applications for bank loans and government subsidies and may also adversely affect the personal credit of the related responsible person.
4. Please cooperate with our check after the loan drawdown. The check includes the usage of the fund and your company’s operational condition. Please provide us with the related material truthfully.
5. The reminders that our Company currently makes, such as the repayment reminders, online reminders, are the free value-added services our Company provides to our clients, which do not constitute an obligation to our Company.
We inform you all the above. Thank you for your company’s / your cooperation and support. Wish a pleasant cooperation with your company / you.
Shanghai Pudong Zhanjiang Micro-credit Co., Ltd.
Please read this Contract carefully and pay special attention to the terms marked by “▲▲”. If you have any objection, please ask the Lender to make timely correspondent explaination.
Borrower: CER Energy Recovery (Shanghai) Co., Ltd.
Legal Representative: _Qinhuan Wu________________
Address: Building#26, No. 1388 Zhangdong Road, Zhangjiang Hi-tech Park, Shanghai , China________________
Post Code: 201203_________________________
Business License no.: 310115400249903
Contact Person: ____Simon Dong_____________________
Telephone: 13801969233______________
Lender: Shanghai Pudong Zhanjiang Micro-credit Co., Ltd.______________
Person in Charge: __Xianpei Lin_______________
Address: Building#4, No. 439 Chunxiao Road, Shanghai,China________________
Post Code: ___201203______________________
Telephone: ___021-58959900_________Fax:___021-58959900______________
The Borrower thinks the Lender has the right to engage in lending transaction and apply for a loan to the Lender. Upon equal negotiations and mutual agreement, the Lender and the Borrower enter into this Contract in relation to the provision of relevant loan by the Lender to the Borrower.
Article 1 Major terms and security of Loan
1.1 | The currency and amount of the loan hereunder shall be __RMB 10,000,000_________________________ |
1.2 | The term of the loan hereunder shall be _six months______________ commencing from _Feb 27, 2012______________ to _Feb 20, 2013_____________ (the actual drawdown date shall be the corresponding date as stated on the debt certificate. The debt certificate shall constitute integral part of this Contract and have equal legal effect as this Contract). |
1.3 | The loan hereunder shall be used for the working capital purposes. The Lender may supervise the use of the proceeds of the loan. |
1.4 | Performance bond: None. |
1.5 | The Borrower must secure the performance of this Contract in accordance with the requirements of the Lender. The security of this contract can be one or more among the guarantee, mortgage, pledge or other way of security. |
1.6 | The detailed information about the security is described under the security clauses of this Contract. The agreements includes but not limits to the followings: |
· | If there is any default in repayment, the Borrower agrees to further secure the loan by a mortgage of its new office building in Zhangjiang, Shanghai . Address of the building is Building#26, No. 1388 Zhangdong Road, Zhangjiang Hi-tech Park, Shanghai , China |
· | The guarantor, Mr. Qinghuan Wu, provides the Lender unconditional and irrevocable guarantee letter. The guarantor assumes joint liability under the guarantee letter. |
· | The loan is secured by a pledge of the accounts receivables owned by the Borrower. |
1.7 | The Borrower hereby acknowledges that the Lender has the right to freely choose its way to exercise any or part of the creditor’s rights under this Contract. The borrower agrees to give up defense towards the Lender’s choice. |
Article 2 Interest rate and interest calculation
2.1 | Interest rate under this Contract is RMB Fixed interest rate. |
The rate is at _12___% per annum, which shall remain unchanged within the term of this Contract.
2.2 | The daily interest rate shall be applicable monthly interest rate/30. The monthly interest rate shall be applicable annual interest rate/12. One month shall be 30 days. |
2.3 | Calculation of interest |
2.3.1. | Normal interest=applicable interest rate*drawdown amount*occupation days. Occupation days shall be counted from the actual drawdown date to the due date. |
2.3.2. | Borrower shall pay penalty for the overdue amount. Penalty is calculated by the overdue amount and the overdue period. Should the Borrower fail to repay the principal and interest under the Contract on time, the Lender is entitled to claim penalty interest at a rate that four times the current interest rate. Penalty=(overdue principal or overdue interest)*(4*daily interest)*overdue days. The daily interest is the contractual daily interest agreed in this Contract. |
2.3.3. | The penalty is settled at both principal repayment date and interest settlement date. If the Borrower repays part of the overdue amount, the repayment first goes to the penalty, then the normal overdue principal and interest. The loan with early maturity has priority in settlement. |
2.3.4. | Should the Borrower misappropriate the fund in violation of the purpose of the loan; the Lender is entitled to claim penalty interest at a rate that four times the current interest rate from the misappropriation date. |
2.4 | The loan interest hereunder shall be settled every _____month__________ (month/quarter/half year). If interest is settled on a monthly basis, the settlement date shall be 20th day of each month. |
The first interest period shall commence from the actual drawdown date to the first interest settlement date; the last interest period shall commence from the day immediately following the end of the preceding interest period to the day that is one day before the final repayment date; and each of the other interest period shall commence from the day immediately following the end of the preceding interest period to the next interest settlement date.
Interest payment date is the first bank business day immediately after interest settlement date. In case of legal holidays, the payment date extends to the first bank business day immediately after the legal holidays.
Upon maturity of the loan, all outstanding interest shall be paid together with the principal.
Article 3 Drawdown and repayment
3.1 | The loan hereunder shall be drawdown in lump. |
The Borrower shall make the drawdown within 2 months after the Contract is signed and all the related procedures are completed or within the period that agreed by the Lender, or the Lender has the right to refuse the drawdown.
3.2 | ▲▲The Lender has no obligation to advance any loan to the Borrower until all following conditions have been satisfied. |
3.2.1. | Total drawdown amount does not exceed the amount agreed in Article 1.1. |
3.2.2. | The drawdown application date and actual drawdown date are made by the Borrower within the borrowing term. |
3.2.3. | The Borrower has provided related government approval, registration (if necessary) and any other procedure required by the Lender. All the above have taken effect and are continuously effective. |
3.2.4. | The guaranty contract (if any) under this Contract have taken effect and is continuously effective; If the guaranty contract is a mortgage contract or pledge contract, the correspondent mortgage or pledge has been secured. |
3.2.5. | The Borrower operation and financial condition does not suffer any material adverse change. |
3.2.6. | The Borrower meets the related requirement of the Lender. |
3.2.7. | There is no default event occurring under this Contract. |
3.2.8. | If required, the Borrower shall provide the Lender with a due diligence report issued by a designated lawyer office or accounting firm. |
3.3 | As for the drawdown information, the documents retained, certificates and notes shall prevail. The Lender has the right to ask the Borrower sign a debt certificate. |
3.4 | Repayment is made by installment. The Borrower shall repay RMB 0.9 million every month since April 2012. |
When the loan is repaid by installment, the Borrower shall inform the Lender of the repayment amount and date by written notice. If the Lender is not informed, the Borrower shall bear the interest during the period.
3.5 | ▲▲If the Borrower applies for prepayment of all or part of the loan, it shall submit a written application to the Lender for its approval 3 bank business days prior to such prepayment, and pay to the Lender relevant compensation as agreed hereunder. If the Borrower prepays the Lender within 30 day (including 30 days) from the actual drawdown date, the Borrower shall pay interest of 30 days and the processing fee according to the interest rate agreed in Article 2.1. If the Borrower prepays the Lender after 30 day from the actual drawdown date, the Borrower shall pay interest according to the actual borrowing period. |
3.6 | The Lender will provide the funds to the Borrower through promissory note, credit voucher, online banks or others. If fund is provided in the manner of promissory note, the Lender shall starts accruing interest from the note issuing day and the Borrower shall take the promissory note on the issuing day. If fund is provided in the manner of credit voucher or online banks, the Lender shall start accruing interest from the day that the fund is successfully transferred to the Borrower’s account and stop accruing interest from the day that the principal is fully repaid. If the opening bank of the Lender and Borrower are different, the Borrower may not receive the funds on the day that the Lender transfers it. Hence the Borrower shall try to provide the bank account with the same opening bank as the Lender’s so as to receive the funds as soon as possible. If the Borrower affords the false bank account to the Lender which leads to unsuccessful transfer of funds, the Borrower shall assume the interest loss arousing from its mistake. The interest loss shall be calculated at a rate agreed in this Contract. If the unsuccessful transfer of funds is caused by the Lender, the interest loss shall be assumed by Lender. |
Article 4 ▲▲Representations and warranties
4.1 | The Borrower is an independent legal entity, which has all the necessary rights and can take the responsibility under this Contract and bear civil liability. |
4.2 | It has obtained all necessary authorizations or approvals to enter into this Contract. Its execution and performance of this Contract does not violate any applicable laws or regulations. |
4.3 | All documents and information provided by the Borrower to the Lender are true, accurate, complete and effective and do not contain any false record, gross omission or misleading statement. |
Article 5 Rights and responsibilities of the Lender
5.1 | The Lender has the right to receive the principal and interests (including the overdue and misappropriation penalty interest) and exercise other rights regulated by law or agreed in this Contract. If the Borrower is in default, the Lender has the right to declare accelerated maturity of the loan or withdraw part of the loan, or/and forfeit the performance bond. |
5.2 | The Lender may transfer all or part of its rights hereunder to a third party by notifying the Borrower, without consent of the Borrower. |
Once the Lender sends written notice to the Borrower, the both Parties of this Contract automatically adjust to be the creditor assignee and the Borrower. Both Parties shall continue to implement this Contract. There is no need to renew the Contract unless the Borrower present written objection within three bank business days from the notification is received.
5.3 | The Lender may transfer its right to loan proceeds hereunder to a third party without sending notice to the Borrower. The Borrower shall continue to undertake its obligation under this Contract. |
5.4 | The Lender shall deduct the repayment in a sequence of expense, penalty, interest and principal. |
5.5 | The Lender undertakes to keep non-public materials and information provided by the Borrower confidential, unless otherwise required by applicable laws and regulations or agreed hereunder. |
5.6 | The Borrower agrees that the Lender has the right to engage the details of its implementation of this Contract into the credit system. |
Article 6 Rights and responsibilities of the Borrower
6.1 | The Borrower undertakes to settle principal, interest and any other amount payable in relation to the loan hereunder in accordance with the debt certificate and this Contract. |
6.2 | The Borrower undertakes to draw down and use the loan in accordance with the schedule and purpose as agreed hereunder. The Borrower shall not use the proceeds of the loan hereunder for any other purpose that is not agreed in this Contract. |
6.3 | ▲▲The Borrower undertakes to bear expenses for entering into and performing this Contract, and expenses paid and payable by the Lender for realization of its claim hereunder, including without limitation litigation or arbitration fee, attachment fee, attorney's fee, enforcement fee, appraisal fee, auction fee and announcement fee. |
6.4 | ▲▲The Borrower undertakes to accept and actively cooperate with the Lender's check and supervision on use of the proceeds of the loan (including purpose of the loan) and the Lender’s operation condition. The Borrow shall provide the Lender with the financial documents and other information, and ensure all these materials are true, complete and accurate. |
6.5 | ▲▲The Borrower undertakes to promptly notify the Lender upon occurrence of any of the following events. A written application shall be submitted to the Lender for its notification 30 bank business days prior to such prepayment. The Borrower commits that the following actions shall not be taken without the written approval of Party B. |
6.5.1. | Selling, offering, renting, lending, transferring, mortgaging, pledging or disposing most or all of its significant assets in other ways. |
6.5.2. | Significant change in the operation structure or the form of ownership, including but not limit to contracting, rent, jointly operation, stock restructuring, company selling, merger, division, transfer of stock, , setup of subsidiary, decrease of registered capital and other action that may cause an adverse impact on the Lender's rights and interests. |
6.6 | ▲▲The Borrower undertakes to promptly notify the Lender upon occurrence of any of the following events. A written application shall be submitted to the Lender for its notification7 bank business days prior to such prepayment. |
6.6.1 | Any change to its articles of association, company name, legal representative, address, correspondence, business scope, or other significant decision related to fiancé or personnel; |
6.6.2 | The Borrower or the guarantor has applied or been applied, or may apply or be applied, for bankruptcy. |
6.6.3 | The Borrower is or may be involved in any material economic dispute, litigation or arbitration, or its property is subject to seizure, attachment or supervision in accordance with applicable laws. |
6.6.4 | Provision of guaranty to third party that may cause an adverse impact on Party A’s financial condition or ability to repay debt under the Contract. |
6.6.5 | Signing Contract or agreement that may cause an adverse impact on Party A’s ability to repay debt under the Contract. |
6.6.6 | The Borrower’s winding-up, dissolution, liquidation, suspension of business, revocation or cancellation of its business license. |
6.6.7 | The Borrower, its legal representative or its major management personnel is suspected of major crime or involved in any material dispute. |
6.6.8 | The Borrower’s financial condition suffers deterioration, which has affected or may affect performance of its obligations hereunder; or there occurs the events which put negative effects on the financial condition or ability of repayment of the Borrower. |
6.6.9 | The amount of the related-party transaction exceeds 10% of the net assets (which is currently audited). |
6.6.10 | The Borrower and the guarantor change or add operational address. |
6.7 | ▲▲If there occur the events which will put negative effects on the guaranty under this Contract; the Borrower shall provide the Lender with other guaranty that is acknowledged by the Lender. The events includes but not limits to: |
6.7.1 | The guarantor is under merge, division, winding-up, dissolution, liquidation, suspension of business, or its business license has been or it has applied or been applied, or may apply or be applied, for bankruptcy. |
6.7.2 | There occur the events which put negative effects on the operation and financial condition of the guarantor. |
6.7.3 | The guarantor is or may be involved in any material economic dispute, litigation or arbitration, or its major property is subject to supervision in accordance with applicable laws. |
6.7.4 | The value of the guaranty decreases or may decrease or is subject to seizure, attachment or supervision in accordance with applicable laws. |
6.7.5 | The guarantor, its legal representative or its major management personnel is suspected of major crime or involved in any material dispute. |
6.7.6 | If the guarantor is a natural person, in this circumstance, the guarantor is missing, dead or claimed dead. |
6.7.7 | The guarantor default under this Contract. |
6.7.8 | There arises dispute between the Borrower and the guarantor. |
6.7.9 | The guarantor asks for ending the guaranty agreement. |
6.7.10 | The guaranty agreement does not take effect, is ineffective or canceled |
6.7.11 | The guaranty is not set up or invalidly set up. |
6.7.12 | Other event that will affect the safety of the debt obligation of the Lender. |
Article 7 Special clause
The Borrower agrees to undertake all the default responsibilities, including repaying the principal and interest, forfeiting the performance bond, paying the penalty and any other cost. i.e. the lawyer fee, litigation fee, preservation fee.
Article 8 ▲▲Adjustment of principal amount and claim of the accelerated maturity of the loan
The Lender may reduce, suspend or cancel the credit amount under this Contract, declare accelerated maturity of all or part of the loan, require the Borrower to immediately repay all or part of the principal and pay the interest of the loan and ask for compensation according to the default clauses agreed in this Contract if not repaid on time, if any of the following events occurs within the term of this Contract:
8.1 | The Borrower fails to repay the principal or interests according to this contract or any of the debt certificates. |
8.2 | The representation and guaranty made by the Borrower under Article 4 is not true. |
8.3 | The Borrower or the guarantor collateralizes the guaranty again without the consensus of the Lender. |
8.4 | There occurs one of the events listed in Article 6.6 and 6.7. |
8.5 | The Borrower defaults in other contracts with the Lender and does not correct its behavior after notifying by the Lender. |
8.6 | The borrower breaches other terms of this Contract. |
The accelerated maturity of all or part of the loan takes effect since the Lender makes the declaration. Written notice will be sent to the Borrower after the declaration.
Article 9 ▲▲Default
9.1 | Since this Contract takes effect, the Lender has the right to forfeit all the performance bond, declare accelerated maturity of the loan, require the Borrower to immediately repay all or part of the principal and pay the interest of the loan and ask for compensation according to the default clauses agreed in this Contract if not repaid on time, if the Borrower is in default upon occurrence of any default events motioned in this Contract. |
9.2 | If the Borrower fails to repay any principal, interest or use the funds according to the agreed purpose, the Lender has the right to settle penalty based on the overdue penalty interest or misappropriation penalty interest. |
9.3 | If the Borrower fails to repay any principal and interest, it undertakes to reimburse the Lender such expenses in relation to realize the debt obligation. i.e. Reminder fees, legal fees (or arbitration fees ) , security fees , advertising fees, collateral and disposal fees , transfer fees , execution fees, lawyer fees, travelling fees and other fees. |
9.4 | The Lender may make a public announcement in media to demand repayment if the Borrower deliberately avoids supervision of the Lender, fails to repay any principal, interest. The Lender may report the crime of fraud in loan if the material provided by the Borrower is not true. |
Article 10 ▲▲Deduction
10.1 | The Borrower undertakes to transfer the payable interest, principal and other expenses to the designated account on every repayment date and settlement date. Funds transferring into the bank account of the Lender listed below are deemed to be repayment. |
Account Name: Shanghai Pudong Zhanjiang Micro-credit Co., Ltd.
Opening bank: Shanghai Pudong Development Bank, Zhangjiang Branch
Account No.: 97160158000000409
10.2 | If the amount deducted by the Lender is insufficient to repay all debts owed by the Borrower, the Borrower agrees to deduct in a sequence of expense, penalty, interest and principal. |
Article 11 Covenant
11.1 | When both Parties agree the credit has been granted to the Borrower, the Lender has the right to receive a processing fee of RMB 0.2 million in lump from the Borrower before the first drawdown. |
11.2 | Both Parties agree that the Borrower shall repay the loan of RMB 5 million (Contract No. ZJXD-JK2011300) to the Lender within 3 bank business days after it obtains the loan from the Bank of Communication, or the Lender has the right to declare accelerated maturity of the loan under this Contract. |
The Borrower shall repay the loan to the Lender immediately after it receives the accounts receivable from Zhenjiang Kailin, or the Lender has the right to declare accelerated maturity of the loan under this Contract.
Article 12 Dispute Resolution
Either Party may submit the dispute to a court in the place where the Lender is located to start litigation. During the proceedings, both Parties shall continue to perform their respective duties, responsibilities and obligations hereunder in a faithful, diligent and responsible manner.
Article 13 Miscellaneous
The debt certificate shall constitute integral part of this Contract and have equal legal effect as this Contract
This Contract takes effect after signing by both Parties.
The Contract is made in three duplicates with the equal legal effect.
The Borrower has read the terms above and the Lender has made correspondent explanations as required by the Borrower. The Borrower has no objection over all the terms of this Contract.
Signature Page
Borrower (seal):_
CER Energy Recovery (Shanghai) Co., Ltd.___________________________
Legal representative/authorized representative:
Qinghuan Wu________________________________
Date: _ ____________________
Lender (seal):__
Shanghai Pudong Zhangjiang Micro-credit Co., Ltd._____________________________
Person-in-charge/authorized representative:
Xianpei Lin ________________________________
Bank Acceptance Agreement
No: 701200088
Applicant: Shanghai Hailu Kunlun Hi-tech Engineering Co.,Ltd
Acceptor: Bank of Ningbo, Shanghai Branch
According to the law, legislation and the business institution , Both parties enter into this agreement based on consensus
Accept the bank acceptance
The total bank acceptance which the applicant apply for is 4 pieces, amount total of RMB 4 million.
On the condition of applicant fulfills its obligation under the agreement, the acceptor agree to accept the bank acceptances, detail as following
CER Energy | CER Energy | CER Energy | CER Energy | |||||
Recovery | Recovery | Recovery | Recovery | |||||
(Shanghai) | (Shanghai) | (Shanghai) | (Shanghai) | |||||
Name | Co.,Ltd | Co.,Ltd | Co.,Ltd | Co.,Ltd | ||||
Bank | ICBC Shanghai jidiangang branch | ICBC Shanghai jidiangang branch | ICBC Shanghai jidiangang branch | ICBC Shanghai jidiangang branch | ||||
Account number | 1001145719006914063 | 1001145719006914063 | 1001145719006914063 | 1001145719006914063 | ||||
Acceptance amount | RMB 1 million | RMB 1 million | RMB 1 million | RMB 1 million | ||||
date of draft | 2012.3.6 | 2012.3.6 | 2012.3.6 | 2012.3.6 | ||||
Maturity date | 2012.9.6 | 2012.9.6 | 2012.9.6 | 2012.9.6 |
Delivery and payment of the bank acceptance
Applicant should deposit enough money to Acceptor before the mature date of bank acceptance under this agreement unconditional. From the mature date of bank acceptance, and as the following, the Acceptor has the rights to deduct the payment from the account of applicant directly.
Commission charge
The commission is calculated with the 0.5% of the total amount of bank acceptance, it is RMB 2000 under this agreement. The applicant agrees to pay this commission to the acceptor at once
Security
1 The applicant should deposit RMB 2 million to the account (no: 70010099000062557) which opened in Acceptor or the branch of Acceptor. The deposit cannot be used by Applicant, before the amount of acceptance has been fully repaid. If the applicant can not repay the enough money at the maturity date, the acceptor has the rights to deduct the lack part from the deposit directly.
2. The interest rate of the deposit is calculated with following method:
It should calculate with the rate of 6 months fixed deposit issued by People's Bank of China, if the period of deposit is not lasting for 6 months, the interest rate will calculate in current deposit rate issued by People's Bank of China.
Undertakings of Applicant
1. | The Applicant undertakes the business rules of acceptor and authorize the acceptor to have the right to deduct the deposit ,commission from its account |
2. | The bank acceptance under the contract is based on the true and legal commercial transaction with authenticity and validity |
3. | Dispute raised with acceptance holder can not be the obstruction that makes the refusal to fulfill obligation by Applicant .The dispute will have no effect to the rights and obligation of each party under this agreement. The applicant should repay full money to the acceptor on time based Article 2 of this agreement. |
4. | Applicant undertakes to provide the document and information for operation status ,financial report ,basic contract per the request of acceptor and should be in the responsible of the authenticity and validity |
5. | During the period of this agreement, if there occurs any one situation as following, the Applicant should notice Acceptor in time and provide full deposit for the bank acceptance in advance or new guarantee according to the Acceptor’s requirements. Meanwhile, the Acceptor has the rights to announce the overdue of the credit that the Applicant got from the Acceptor, including but not limited to following: loan, bill discount, bank acceptance, business financing, etc. and the Acceptor has the rights to (1) stop to provide loan (2) recovery principle and interest which has provided (3) bring a lawsuit against (4) apply to seizure of all applicant’s property (5) the other method to keep the assets secure, and the other branch of Bank of Ningbo also has the above rights |
(1) | If there is any great operation decision for the applicant, such as Chinese-foreign joint, merge, disjunction, change the line of production, disbandment or bankrupt, the Applicant should notice the Acceptor in written one month advance. The successor of the Applicant would automatically be the new Applicant after the written approval of the Acceptor under this agreement ,the successor willl keep the same responsibility under this agreement |
(2) | If there is any change for the name, corporate representative, address , registered capital and so on of the Applicant ,then he should notice the Acceptor in 3 days in written |
(3) | Besides above, if there is any other affair which has material effect for the applicant to fulfill its obligation ,including but not limited to stop production, logout, business license revoke, litigious activities, great economic dispute, freezing of property, has trouble in financing status and so on , the Applicant should notice the Acceptor in 3 days in written |
6 All the meanings under this agreement are truthfulness. If the agreement is regarded as invalidity, the Applicant will still fulfill its obligation of this contract and will compensate all the loss of Acceptor.
7 The applicant will undertake other obligation which set by law
Rights and obligations of Acceptor
1. | Except the situations of refusal payment set by law, the Acceptor will fully pay the money to the Acceptance holder without any condition at the maturity date of the bank of acceptance even if the Applicant can not pay the enough money |
2. | If the Applicant can not pay the enough money at the maturity date, the Acceptor has the rights to regard the unpaid money as overdue loan of the Applicant and will calculate the interest and compound interest according to statement 7 in Article 2 of without signing another loan contract with the applicant. And the acceptor has the rights to deduct the principle and interest and other fee from the applicant’s account or has the rights to get the compensation from the applicant’s guaranty |
3. | If there occurs any other material affair not definite in statement 5 of Article 2, which will damage the interest of Acceptor, the Acceptor has the rights to hand over all the acceptance amount in advance or seeking legal security procedures |
4. | If the Applicant break any terms or undertakings , besides to undertake the responsibility of specified in Artical7 of this agreement, the Acceptor has the rights to require the Applicant to provide full security deposit for the bank acceptances and take other legal action to insure the assets |
Responsibility of Breach
1. | Both parties should fulfill the agreement or should afford the responsibility of breach of agreement according to the related laws and regulations |
2. | If the Applicant can not repay the money, the Acceptor has the rights to calculate the interest as 0.5% per day for the part of unpaid money. The interest will be calculated with the interest as 0.5% by compound method |
3. | If the Applicant provides the false document or status on purpose. The Applicant shall pay 10% of the acceptance amount under this agreement as the penal sum to the acceptor |
4. | If there is any need for the Acceptor to achieve its creditor’s rights , the Applicant should afford the legal cost, action cost ,lawyer cost ,travelling cost or the other cost related to achieve the Acceptor’s rights |
Guarantee for creditor's rights
If the applicant does not save or does not save enough cash deposit on the Acceptors, the balance should be guaranteed by the guarantors of Wu Qinghuan and Zhou Jialing. The guarantee contract number is 0700113920120019; 070010920120020
Miscellanea
1. | If there is any dispute raised in the agreement , both parties should resolve by negotiation, if failed , then can bring a lawsuit against in the people's court in the location of the Acceptor |
2. | If any party thinks the agreement should have the justice then it needs both parties to apply for the justice to the justice institution and clear the effective of forcible execution. The justice cost should afforded by the Applicant and the Acceptor has the rights to collect for |
3. | The matters not mentioned should handle by the laws and regulations, the rules of acceptor and regulator |
The contract is in 2 duplicate, each party hold one piece
Declaration and Note
The acceptor has brought the applicant's special attention to all terms in relation to the rights and obligations of each Party, asked the applicant to fully and accurately understand all such terms. The applicant has carefully read and fully understands all contractual terms hereof and has no dispute over the terms of this Contact.
Lender (seal): Bank of Ningbo, Shanghai branch
Person-in-charge/authorized representative: ____Shi Daoming____ __
Borrower (seal):_Shanghai Hailu Kunlun Hi-tech engineering Co.,Ltd
Legal representative/authorized representative: Wu Qinghuan
Date: ____2012-3-6___
Bank Acceptance
No: 7012000112
Applicant: Shanghai Hailu Kunlun Hi-tech Engineering Co.,Ltd
Acceptor: Bank of Ningbo, Shanghai Branch
According to the law , legislation and the business institution , Both parties enter into this contract based on consensus
Accept the bank acceptance
The total bank acceptance which the applicant apply for is 4 pieces , amount is RMB 4 million On the condition of applicant can fully fulfill its obligation, the acceptor agree to accept ,detail as following
CER Energy | CER Energy | CER Energy | CER Energy | |||||
Recovery | Recovery | Recovery | Recovery | |||||
Name | (Shanghai) Co.,Ltd | (Shanghai) Co.,Ltd | (Shanghai) Co.,Ltd | (Shanghai) Co.,Ltd | ||||
Bank | ICBC Shanghai jidiangang branch | ICBC Shanghai jidiangang branch | ICBC Shanghai jidiangang branch | ICBC Shanghai jidiangang branch | ||||
Account number | 1001145719006914063 | 1001145719006914063 | 1001145719006914063 | 1001145719006914063 | ||||
Acceptance amount | RMB 2 million | RMB 1 million | RMB 1 million | RMB 1 million | ||||
date of draft | 2012.3.21 | 2012.3.21 | 2012.3.21 | 2012.3.21 | ||||
Maturity date | 2012.9.21 | 2012.9.21 | 2012.9.21 | 2012.9.21 |
Delivery and payment of the bank acceptance
Applicant should hand over these enough bank acceptance to the acceptor unconditional. From the date as the following, the acceptor has the rights to deduct the payment from the account of applicant
Commission charge
The commission is calculated with the 0.5% of the amount of this bank acceptance, and then it should be RMB 2500. The applicant agrees to pay this commission to the acceptor at once
Cash deposit
1 The applicant should transfer RMB 2.5 million to the account (no: 70010099000062557) as the cash deposit. Before repay the amount of acceptance, the applicant can not use it. If the applicant can not repay the enough money at the maturity date, then the acceptor has the rights to deduct the lack part from the cash deposit
2. The interest rate for the cash deposit is calculated with following method
It should calculate with the rate of 6 months fixed deposit of people's Bank of China, if the cash deposit is not enough, then the interest rate will calculate in current deposit rate of people's Bank of China
Undertakings of applicant
1. | The applicant undertakes the business rules of acceptor and authorize the acceptor deduct the cash deposit ,commission from its account |
2. | The bank acceptance under the contract is based on the true and legal commodity transaction and should afford the responsibility for the authenticity and validity |
3. | These dispute raised with ticket holder can not be the reason that refuse to fulfill it’s obligation .And it will have no effect to the rights and obligation of each party. The applicant should repay the acceptance to the acceptor on time |
4. | Applicant undertakes to provide the document and information for operation status ,financial report ,basic contract per the request of acceptor and should in the responsibility for the authenticity and validity |
5. | During the period of this contract, if there occur any one situation as following , the applicant should notice acceptor in time and should pay the cash deposit in advance . And meanwhile the acceptor has the rights to say all the credit of the applicant will overdue in advance and also has the rights to (1) stop to provide loan (2) recovery these principle and interest which has provided (3) bring a lawsuit against (4) apply to seizure of all applicant’s property (5) the other method to keep the assets and the other branch of bank of Ningbo also has the above rights |
(1) | If there is any great operation decision for the applicant, such as Chinese-foreign joint, merge, disjunction, change the line of production, disbandment or bankrupt, applicant should notice the acceptor in one month advance. The beneficiary of the applicant should be the new applicant ,which still keep the same responsibility |
(2) | If there is any change for the name, corporate representative, address , registered capital and so on of applicant ,then he should notice the acceptor in 3 days in written |
(3) | Besides above, if there is ant other affair which have the big effect for the applicant to fulfill its obligation ,including but not limited to stop production, logout, business license revoke, litigious activities, great economic dispute, freezing of property, has trouble in financing status and so on , the applicant should inform the acceptor in 3 days in written |
6 | All the meaning under this contract are truthfulness. If the contract is regarded as invalidity, the applicant will still fulfill its obligation of this contract and will compensate all the loss of acceptor. |
7 | The applicant will undertakes the other obligation which set by law |
Rights | and obligations of acceptor |
1. | If it is the maturity date of the bank of acceptance and the applicant can not pay the enough money, the acceptor still need to pay the money to the ticket holder without any condition |
2. | If the applicant can not pay the enough money at the maturity date, the acceptor has the rights to regard the unpaid money as the overdue loan for the applicant and will calculate the interest and compound interest according to the term 2 of statement 7 without signing another loan contract with the applicant. And the acceptor has the rights to deduct the principle and interest and other fee from the applicant’s account or has the rights to get the compensation from the applicant’s guaranty |
3. | If there is another great affairs which will damage the interest of acceptor beside the description in the term 5 of statement 5, the acceptor has the rights to hand over all the acceptance amount in advance or take the legal action |
4. | If the applicant break any terms or undertakings , besides to undertake the responsibility of term 7 ,and also the acceptor has the rights to ask the applicant to hand over all the cash deposit and can take the other legal action to insure the assets |
Responsibility of breach of contract
1. | Both parties should fulfill the contract or should afford the responsibility of breach of contract according to the related laws and regulations |
2. | If the applicant can not repay the money, the acceptor has the rights to calculate the interest as 0.5% per day for this unpaid money. For these unpaid interest ,then calculate with the interest as 0.5% for the compound interest |
3. | If the applicant provide the false document or status on purpose. Then it should pay the 10% of the acceptance amount as the penal sum to the acceptor |
4. | If there is any need for the acceptor to achieve its creditor’s rights , then the applicant should afford the legal cost, action cost ,lawyer cost ,travelling cost or the other cost related to achieve the creditor’s rights |
Guarantee for creditor's rights
If the applicant does not save or does not save enough cash deposit on the acceptor’s, the balance should be guaranteed by the #1-3 underground garage No.269 Quyang Road of Wu Qinghuan and Zhou Jialing . The guarantee contract number is 0700113920120019; 070010920120020
Miscellanea
1. | If there is any dispute in the contract , both parties should resolve by consultation, if failed , then can bring a lawsuit against in the people's court in the local of acceptor |
2. | If any party thinks the contract should have the justice then it needs both parties to apply for the justice to the justice institution and clear the effective of forcible execution. The justice cost should afforded by the applicant and the acceptor has the rights to collect for |
3. | The matters not mentioned should handle by the laws and regulations, the rules of acceptor and regulator |
The contract is in 2 duplicate, each party hold one piece
Declaration and Note
The acceptor has brought the applicant's special attention to all terms in relation to the rights and obligations of each Party, asked the applicant to fully and accurately understand all such terms.
The applicant has carefully read and fully understands all contractual terms hereof and has no dispute over the terms of this Contact.
Lender (seal): Bank of Ningbo ,Shanghai branch
Person-in-charge/authorized representative: ____Shi Daoming____ __
Borrower (seal):_Shanghai Hailu Kunlun Hi-tech engineering Co.,Ltd
Legal representative/authorized representative: Wu Qinghuan
Date: ____2012-3-21______
Contract No 2012-00132 |
Integration Credit agreement
China Citic Bank
Integration Credit agreement
Borrower: CER Energy Recovery (Yangzhou) Co.,Ltd (hereafter refer to Party A)
Address: No.100 Zhongjiang Road, Yizheng Automobile Industry Park, Yangzhou
Zip: 211400
Tel: 85716661
Legal representative: Wu Qinghuan
Lender: China Citic Bank, Yangzhou Branch
Address no.171, weiyang road, Yangzhou
Zip: 225009
Tel : 87890559
Legal representative: Xu Yong
Signing address: Yangzhou
Date: 3/30/2012
Party A and Party B enter into this contract based on the honesty and credibility, with the principles of equality, voluntariness according to “The Law of Commercial Banks of the People's Republic of China" and “Contract Law of the People's Republic of China”
Definition
In this contract, below terminology has following meanings except the meanings are expressly agreed in the context.
“Integration credit “ The credits which Party B provides Party A as following : RMB or foreign currency working capital loan , Bank acceptance, note discount, letter of credit, backward letter , documentary bills or the other business which Party B agrees “Integration Credit amount” the max credit which Party B can provide Party A “Credit balance” the amount of credit and debt. Among which, in the bank acceptance, that means the amount of opened acceptance and un-paid acceptance. In the letter of credit, that means the amount of opened credit letter and un-paid credit letter; in the backward letter, that means the amount of opened backward letter and un-paid backward letter.
Species and credit amount
2.1 The amount that Party A can apply for the credit during the period of contract from Party B is RMB 20,000,000.00
2.2 The credit amount under this contract can be used in following: loan, bank acceptance, note discount, letter of credit, backward letter, documentary bills or the other business which Party B agrees
2.3 The kinds, credit amount, deadline, usage which Party A applies for should according to the contract. Party B only has the responsibility for giving credit under the fixed terms of the contract
Use of the credit amount
3.1 The use period of credit amount under this contract is 2 years. Form 2012-03-30 to 2014-03-30
3.2 During the period in this contract, Party A can apply for the credit once or several times in written.
When party A applies for the credit, Party A should write the kinds, deadline, amount and so on clearly. Party B will enter into the specified business contract or other legal documents with Party A when Party B thinks the requirements of this contract are met.
3.3 Whenever Party A uses the credit, it should not exceed the credit amount. During the period of credit, for the repaid credit of Party A, Party B agrees to do with the credit amount as following
The repaid credit can be used in circle .That means under the term 2 of the contract, the debt which Party A has repaid Party B during the period of contract , for the repaid part , Party B should restore Party A’s credit amount and Party A can re-use the credit.
3.4 The service fee charged by Party B in bank acceptance, note discount, letter of credit, backward letter, should be engaged in each specified business contract
3.5 If there is any different between the detail business contract and this contract, then should according to the detail business contract
3.6 When Party A applies for the credit, Party B should enter into the detail business contract with Party A if Party A meets the requirement of credit.
Party A’s representations and warranties
4.1 Party A is a company which complies with the laws and regulations of the People's Republic of China and has the civil rights and capacity for action. And Party A has got all the necessary ratification and authorization under this contract
4.2 Party A guarantees that Party A will use the credit according to the law and the terms of this contract
4.3 Party A guarantees that the financial statement and other information which required by Party B will send to Party B on time, and these documents, information should be true, accuracy, complete, legal and effective
Party A’s rights and obligations
5.1 During the effect period of credit, if there is any material change of Party A’s operation, including but not limited to transfer shares, merger, division, joint venture, cooperation, joint-operation etc. which may cause an adverse impact on Party B's rights and interests, Party A should notice Party B in 30 days advance and fulfill the repay and provide the guarantee which agreed by Party B
5.2 If the transfer or the rent part is the most assets of Party A’s , then Party A should notice Party B in written in 30 days advance and should get the written approval of Party B
5.3 If any affairs occur which will cause adverse effect on fulfill of this contract, including but not limited to lawsuit, arbitration, penalty, shutout, bankrupt, financial circs become worse etc. Party A should notice Party B from that day in 3 days
5.4 If there is any lawsuit, arbitration, penalty, shutout, bankrupt, financial circs become worse etc. for the guarantor, then Party A should provide the new guarantee to Party B
5.5 Without the written approval of Party B, Party A can not transfer part or whole debt to the third party that under this contract
5.6 Party A promises to repay the principal and interest on time and the related payable due under this contract. If the payment is default by Party A, including but not limited to the loan principal, interest, default interest, Party B has the rights to deduct these fee from the Party B’s account without Party B’s permission. If the currency of the account is different from the currency of business, then will calculate per the Conversion rate that Pary B announces on that day
5.7 During the effect period , if there is any change of legal representative, project Manager, address, phone, fax and so on of Party A, Party A should inform Party B in 7 days in written from that day
Party B’s rights and obligations
6.1 Party B has the rights to decide whether Party B will enter into detail business contract with Party A according to Party B’s internal administrative provisions and also Party B has the rights to examine and check the fulfill status of each detail business at any time
6.2 When Party A applies for the credit, Party B should agree to enter into the detail agreement with Party A if Party A meets the requirement of Party B’s bank
6.3 If Party B does not exercise or delay exercise the rights under this contract that does not mean Party B gives up its right and it should not become the hindrance when Party B wants to exercise it
6.4 Party B should keep secret with the documents, information of Party A, except these required to be disclosed by law
Guarantee
7.1 In order to ensure the debt can be repaid, the guarantee method is as following
The guarantor Jiangsu SOPO Co.,Ltd entered into the Max Amount Guarantee Contract with Party B ,which number is 2012-00054; the Guarantor Wuqinghuan entered into the Max Amount Guarantee Contract with Party B ,which number is 2012-00053
7.2 When Party A engaged with Party B for the detail business, Party B has the rights to require the more guarantee except the guarantee in this term
Default and Treatment
8.1 Both parties should obey the terms of this contract. Any party does not fulfill its responsibility should afford the responsibility of breach of contract and afford the loss.
8.2 During the contract, Party A will be deemed as default if there is any event as following
8.2.1 During the period of this contract, Party A makes clearly or its behavior show that Party A cannot fulfill its obligation under this contract
8.2.2 Party A does not fulfill any one of obligation under this contract
8.2.3 Each of the documents or the guarantee which Party A provided is not true, accurate, completed or misunderstanding
8.2.4 Party A stops repaying or cannot repay the debt
8.2.5 These affairs which Party B thinks it may or has damaged Party B’s interest, such as stop operation, bankrupt, lawsuit, administrative penalty and so on
8.2.6 If there is any material changes of Party A’s address, operation area, legal representative or great investment, which has the bad effect on the Party B’s creditor rights
8.2.7 If there is a great financial loss or the other financial crisis which Party B thinks it may or has damaged the Party B’s interest
8.2.8 Party A change the use of the credit
8.2.9 If there is any material crisis for Party A‘s majority stockholder or related company or there is a related party transaction, which has effect on the normal operation of Party A
8.2.10 If there is any bad change of the industry of Party A, which has the adverse effect on Party B’s creditor rights
8.2.11 if there is corruption, accept bribes or the other illegal affairs happen in the high management of Party A, which Party B thinks it may or has damaged the Party B’s interest
8.2.12 If there is any default to other creditor of Party A, which will has the adverse effect on Party B’s creditor rights
8.2.13 If there is any default of the guarantor of Party A, and Party A can not provide any new guarantee to Party B
8.2.15 If there is any affairs that may damage the interest of Party B
8.3 If there occurs any one of above, then Party B has the rights to do one or several pieces of following, and Party A has no comments
8.3.1 Adjust, cancel or stop the credit under this contract or adjust the deadline of the credit
8.3.2 Stop to give credit to Party A and announce that all or part of credit under this contract is overdue and require Party A to repay all the debt at once
8.3.3 Require Party A to provide supplementary guarantee or do the other method to ensure Party B’s interest
8.3.4 Party B has the rights to exercise the guarantee rights
8.3.5 Party B can deduct from the account of Party A to repay the debt of Party A without Party A’s permission
8.4 Party A should afford all the cost that occurred in the process of Party B to achieve creditor's rights of Party B
Take effect, change and terminate of the contract
9.1 The contract will take effect after singing of both Parties and stamped
9.2 After the contract take effect, any party can not change or terminate the contract, if there is any needs, the change or termination should through the discussion by both parties and conclude an agreement
Dispute
10.1 If there is any dispute raise from this contract, both parties should resolve by negotiation. If failed, both parties should resolve by lodge a complaint to the people's court where Party B located
Other
11.1 The notice documents will be regarded as arrived once send if it through telegram and fax. If use post, then will regarded as arrived in 3 days since the day sent
11.3 The other matters not mentioned, can be the attachment of both parties. Any attachment, changed or supplement will consist the indivisibility part of the whole contract
11.4 This contract will be in 3 duplicate, both parties hold one
11.5 The Party B has brought the Party A's special attention to all terms in relation to the rights and obligations of each Party, asked the Party A to fully and accurately understand all such terms, and upon the Party A ‘S request, made explanation on relevant terms. The Party A has carefully read and fully understands all contractual terms hereof and has no dispute over the terms of this Contact.
Party A CER Energy Recovery (Yangzhou) Co.,ltd
Legal representative Wu Qinghuan
Party B China Citic Bank Yangzhou branch
Legal representative Xu yong
Exhibit 31.1
CERTIFICATION
PURSUANT TO RULES 13A-14 AND 15D-14
OF THE SECURITIES ACT OF 1934
I, Qinghuan Wu, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of China Energy Recovery, Inc.; |
2. | Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; |
3. | Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and |
d) | Disclosed in the report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: June 18, 2012 | /s/ Qinghuan Wu | |
Qinghuan Wu, | ||
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
PURSUANT TO RULES 13A-14 AND 15D-14
OF THE SECURITIES ACT OF 1934
I, Simon Dong, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of China Energy Recovery, Inc.; |
2. | Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; |
3. | Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and |
d) | Disclosed in the report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: June 18, 2012 | /s/ Simon Dong | |
Simon Dong, | ||
Acting Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of China Energy Recovery, Inc. (the "Company") for the quarterly period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, Qinghuan Wu, Chief Executive Officer of the Company, and Simon Dong, Acting Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
By: | /s/ Qinghuan Wu | ||
Qinghuan Wu, | |||
Chief Executive Officer | |||
June 18, 2012 | |||
By: | /s/ Simon Dong | ||
Simon Dong, | |||
Acting Chief Financial Officer | |||
June 18, 2012 |
Commitments and Contingencies
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3 Months Ended |
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Mar. 31, 2012
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Commitments and Contingencies | Note 19 – Commitments and Contingencies
Subsequent to the first quarter, on May 8, 2012, CER and Zhenjiang Kailin entered into an agreement whereby CER will pay Zhenjiang Kailin RMB 8.9 million (approximately $1.5 million) as a penalty for the economic loss suffered by Zhenjiang Kailin resulting from project delays past the originally expected completion date of December 31, 2011. The penalty is included in accrued expenses and other liabilities and is expected to be paid in June. |
Accounts Receivable, Net
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Mar. 31, 2012
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Accounts Receivable, Net | Note 3 – Accounts Receivable, Net
Current receivables also include revenue recognized in excess of amounts billed for EPC contracts. As of December 31, 2011 and March 31, 2012, revenue recognized in excess of amounts billed amounted to approximately $18,085,048 and $15,100,978, respectively.
The Company classifies accounts receivable and revenue recognized in excess of amounts billed which are to be collected after one year as long-term accounts receivable.
Long-term accounts receivable, net, which are presented in the below table net of the discounting effect for interest (see Note 16 for further description), included revenue recognized in excess of amounts billed of approximately $0 and $11,558,710 as of December 31, 2011 and March 31, 2012, respectively. As of March 31, 2012, an amount of $173,632 was re-classified to current receivables due to a change in contractual term.
Long-term accounts receivables consisted of two customers, Zhenjiang Kailin and Jiangsu SOPO, for both periods presented.
Subsequent to the balance sheet date of March 31, 2012, CER and Zhenjiang Kailin, related party, agreed to revise the payment schedule of receivables related to a project originally entered into in January 2011, which was near completion at the balance sheet date of March 31, 2012, from all remaining amounts due by August 31, 2012 to 4 installments due by December 31, 2013 with no interest to be earned (refer to note 16 for more details about the Zhenjiang Kailin receivable collection schedule). As of March 31, 2012, the accounts receivable (including both current and non-current portions) from Zhenjiang Kailin under the contract was $12,684,386 after discounting for the time value of money pursuant to applicable accounting guidance (the discount rate was determined as 10.65% considering the risk free rate and Zhenjiang Kailin’s credit risk). The discount reflected as a reduction to revenue in the statement of operations arising from this extension of payment terms was $1,509,668. Of the total balance of $12,684,386, $7,920,686 represented the non-current balance due from Zhenjiang Kailin which is to be collected over one year; the remaining $4,763,700 is included in current receivables due from a related party.
Long term accounts receivable, net due from third parties of $3,638,024 represents a balance due from Jiangsu SOPO. On October 18, 2011, CER signed a contract for the manufacture, design, and installation of a major dock storage and tube project with Jiangsu SOPO, a third party customer of CER and related party of Zhenjiang Kailin. The contract was valued at RMB 50 million (approximately $7.9 million), including the procurement part of RMB 40 million (approximately $6.3 million) and construction part of RMB 10 million (approximately $1.6 million). On April 15, 2012, CER and Jiangsu SOPO entered into a repayment agreement. Pursuant to the agreement, the total contract price depends on final settlement, and the current best assessment of this amount is RMB 50 million. Jiangsu SOPO will pay the original project price of RMB 50 million, plus interest over time of RMB 6 million, for a total of RMB 56 million (approximately $8.9 million) in exchange for an extension of the payment terms involving 36 installments due on a monthly basis starting from April, 2012. The discount rate used to discount these receivable cash flows under the applicable accounting guidance for Jiangsu SOPO was 8% (considering its stated-owned background and AA credit rating), which is same as the contractual rate of interest included in the contract. For the three months ended March 31, 2012, $5,355,174 in revenue was recognized in relation to this EPC project and the receivable as of March 31, 2012 was $6,076,529, among which $3,638,024 was classified as long-term accounts receivable.
Both of the arrangements described above regarding extensions of payment terms for these two particular customers were recognized in the March 31, 2012 balances and revenue for the quarter then ended as the underlying facts and circumstances leading to the arrangements existed, or were in the early stages of negotiation, at that time. |