CORRESP 1 filename1.htm Unassociated Document
 
 
 
 
Albany
 
Atlanta
 
Brussels
 
Denver
 
Los Angeles
 
 
THOMAS WARDELL
(404) 527-4990
www.mckennalong.com
 
 
 
New York
 
Philadelphia
 
San Diego
 
San Francisco
 
Washington, DC
 
 
EMAIL ADDRESS
twardell@mckennalong.com
 
 
February 24, 2011
 
Via EDGAR
 
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C.  20549-0405
Attn: 
William H. Thompson, Accounting Branch Chief

 
Re:
China Recycling Energy Corporation
 
Form 10-K for the Fiscal Year Ended December 31, 2009
 
Filed March 16, 2010
 
File No. 1-34625
 
Dear Mr. Thompson:
 
This firm is counsel to the above-referenced company, China Recycling Energy Corporation (“CREG” or the “Company” and sometimes referred to as “we” or “our”) and is filing this response to your comment letter, dated February 9, 2011, with respect to the above-referenced filings on CREG’s behalf.  For convenience of reference, we have included, in this response letter, the same caption and paragraph number, as well as the text of the comment, set forth in your comment letter followed by our response.

Form 10-K for Fiscal Year Ended December 31, 2009
 
Item 8.  Financial Statements and Supplementary Data, page 26
 
Consolidated Statements of Cash Flows, page 30
 
1.
We reviewed your response to comment one in our letter, dated January 4, 2011, which indicates that revised consolidated statements of cash flows are attached to the response. However, we are unable to locate the revised statements in submitted correspondence files. Please submit the revised statements as correspondence so that we are able to review your proposed revisions. In addition, please tell us whether you plan to restate your statements of cash flows presented in the filing and in subsequently filed quarterly reports on Form 10-Q. If so, tell how you intend to disclose the restatements. If not, please explain the quantitative and qualitative reasons why a restatement is not necessary. Refer to SAB Topics 1:M and 1:N.
 
 
 
 
 
United States Securities and Exchange Commission
February 24, 2011
Page 2
 
Response:
 
The revised Consolidated Statements of Cash Flows are submitted with this response in accordance with your comment letter, dated of February 9, 2011.  The Company does not plan to restate its statements of cash flows presented in its Form 10-K for the fiscal year ended December 31, 2009, or its quarterly reports on Form 10-Q for fiscal year 2010.  The Company does intend to disclose the reclassification of cash flows for fiscal year ended December 31, 2009, for certain line items, from investing to operating activities, and implement such reclassification prospectively, including in our Form 10-K for the fiscal year ended December 31, 2010, in a footnote to the 2010 financial statements included in its Form 10-K, and will present its Cash Flow statements consistent with its presentation on the attached statement in all reports thereafter.
 
Qualitatively, the reclassification of cash flows is undertaken in order to provide consistency in presentation.  The Company believes that the decision as to classification of cash flows with respect to the construction of its projects and payments received under sales-type leases of these projects as either operating or investing inflow or outflow is subject to interpretation and is not clearly directed by GAAP.  In connection with its conversations with the Staff, the Company understands and agrees with the position that consistency in treatment of both cash inflow and outflow provides disclosure that is more easily understood.  However, the change to treating both outflows and inflows as operating items has no overall effect either on the net cash flow itself or on the other financial statements of the Company, and as such the Company does not believe that the reclassification rises to the level of requiring retrospective restatements of the cash flows in its prior filings.
 
In addition, qualitatively, the Company does not believe there is any need to retroactively restate the cash flows because:

·  
There is no change in net income or earnings per share
·  
There is no change in the net cash flows for any period
·  
There is no change in any balance sheet or income statement line items
·  
There is no cumulative effect of the change on retained earnings or any other component of equity or net assets.
 
 
Should you have further comments or require further information, or if any questions should arise in connection with this submission, please call me at (404) 527-4990 or Mr. James Thornton at (404) 527-8118.
 

 
 
  Very truly yours,  
     
  /s/ Thomas Wardell   
  Thomas Wardell   
 

cc: 
David Chong, CFO, China Recycling Energy Corp.
Jeffrey Li, Esq.
James L. Thornton, Esq.

 
 
 
 
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
    
September 30, 2010 (Unaudited)
    
December 31, 2009
  
             
ASSETS
            
             
CURRENT ASSETS
            
     Cash & cash equivalents
   $ 6,488,518     $ 1,111,943  
     Restricted cash
     2,253,361       1,461,659  
     Investment in sales type leases, net
     6,635,231       4,396,395  
     Interest receivable on sales type leases
     766,580       437,626  
     Prepaid expenses
     154,798       445,458  
     Other receivables
     414,248       184,355  
     Subscription receivable
     430,500       -  
     VAT receivables - current
     1,268,448       383,027  
                 
        Total current assets
     18,411,684       8,420,463  
                 
NON-CURRENT ASSETS
                
     VAT receivables - noncurrent
     1,053,437       957,567  
     Investment in sales type leases, net
     86,733,485       48,147,738  
     Property and equipment, net
     172,524       97,311  
     Construction in progress
     45,907,791       34,858,845  
                 
        Total non-current assets
     133,867,237       84,061,461  
                 
TOTAL ASSETS
   $ 152,278,921     $ 92,481,924  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
                 
CURRENT LIABILITIES
                
     Accounts payable
   $ 6,208,498     $ 3,583,219  
     Notes payable - bank acceptances
     2,999,508       1,461,659  
     Interest payable
     2,509,889       -  
     Taxes payable
     1,707,112       681,707  
     Accrued liabilities and other payables
     2,945,354       2,785,796  
     Advance from related parties, net
     4,036,492       468,475  
     Convertible note, net of discount due to beneficial conversion feature
     3,980,937       -  
     Accrued interest on short term convertible note
     127,939       -  
     Deferred tax liability-current
     54,466       148,193  
     Loans payable - current
     1,343,063       -  
                 
         Total current liabilities
     25,913,258       9,129,049  
                 
NONCURRENT LIABILITIES
                
      Shares to be issued
     12,812,971       -  
      Deferred tax liability, net
     5,446,238       2,762,115  
      Convertible notes
     3,000,000       8,000,000  
      Accrued interest on long term convertible notes
     346,668       353,024  
      Loans payable
     40,761,965       25,570,429  
                 
         Total noncurrent liabilities
     62,367,842       36,685,568  
                 
         Total liabilities
     88,281,100       45,814,617  
                 
CONTINGENCIES AND COMMITMENTS
                
                 
STOCKHOLDERS' EQUITY
                
     Common stock, $0.001 par value; 100,000,000 shares
                
           authorized, 38,778,035 shares issued and outstanding
                
           as of September 30, 2010 and December 31, 2009, respectively
     38,779       38,779  
     Additional paid in capital
     42,583,642       38,319,163  
     Statutory reserve
     4,288,441       2,497,724  
     Accumulated other comprehensive income
     4,929,794       3,709,490  
     Retained earnings
     9,922,599       1,485,914  
                 
         Total Company stockholders' equity
     61,763,255       46,051,070  
                 
         Noncontrolling interest
     2,234,566       616,237  
                 
         Total equity
     63,997,821       46,667,307  
                 
TOTAL LIABILITIES AND EQUITY
   $ 152,278,921     $ 92,481,924  
 
 
 
 
 
Updated
 
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
NINE MONTHS ENDED SEPTEMBER 30,
  
   
2010
    
2009
  
             
CASH FLOWS FROM OPERATING ACTIVITIES:
            
            Income including noncontrolling interest
   $ 10,817,221     $ 8,097,090  
            Adjustments to reconcile income including noncontrolling
                
            interest to net cash provided by operating activities:
                
            Changes in gross sales type leases receivables
     (30,724,470 )     (11,032,444 )
            Depreciation and amortization
     9,298       23,155  
            Amortization of discount related to conversion feature of convertible note
     1,326,274       -  
            Stock options and warrants
     1,919,102       1,129,328  
            Stock compensation expense
     602,000       -  
            Accrued interest on convertible notes
     121,583       60,182  
            Changes in deferred tax
     2,495,828       1,731,344  
                         (Increase) decrease in current assets:
                
                                   Interest receivable on sales type leases
     (315,675 )     (379,331 )
                                   Collection of principal on sales type leases
     3,267,917       1,547,527  
                                   Prepaid expenses
     294,464       3,828,438  
                                   VAT receivable and other receivables
     (1,163,901 )     (113,744 )
                         Increase (decrease) in current liabilities:
                
                                   Accounts payable
     4,004,280       847,314  
                                   Taxes payable
     996,753       (1,917,728 )
                                   Unearned revenue
     -       (658,655 )
                                   Interest payable
     2,470,914       -  
                                   Accrued liabilities and other payables
     112,574       (260,167 )
                                   Construction in progress
     (10,226,469 )     (8,255,441 )
                 
            Net cash used in operating activities
     (13,992,307 )     (5,353,132 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
            Increase investment in subsidiary
     -       (16,100 )
            Restricted cash
     (752,116 )     (4,393,159 )
            Acquisition of property & equipment
     (81,526 )     (15,096 )
                 
            Net cash used in investing activities
     (833,642 )     (4,424,355 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
            Insurance of common stock
     -       2,000,000  
            Insurance of convertible notes
     -       3,000,000  
            Cash contribution from noncontrolling interest
     908,279       263,439  
            Proceeds from loans
     15,800,376       2,927,358  
            Advance from related parties
     3,504,613       -  
                 
            Net cash provided by financing activities
     20,213,268       8,190,797  
                 
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
     (10,744 )     2,646  
                 
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
     5,376,575       (1,584,044 )
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD
     1,111,943       7,267,344  
                 
CASH & CASH EQUIVALENTS, END OF PERIOD
   $ 6,488,518     $ 5,683,300  
                 
Supplemental Cash flow data:
                
   Income tax paid
   $ 1,307,901     $ 1,307,406  
   Interest paid
   $ 269,083     $ 319,086  
 
 
 
 
 
Original
 
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
NINE MONTHS ENDED SEPTEMBER 30,
  
   
2010
    
2009
  
             
CASH FLOWS FROM OPERATING ACTIVITIES:
            
            Income including noncontrolling interest
   $ 10,817,221     $ 8,097,090  
            Adjustments to reconcile income including noncontrolling
                
            interest to net cash provided by operating activities:
                
            Depreciation and amortization
     9,298       23,155  
            Amortization of discount related to conversion feature of convertible note
     1,326,274       -  
            Stock options and warrants
     1,919,102       1,129,328  
            Stock compensation expense
     602,000       -  
            Accrued interest on convertible notes
     121,583       60,182  
            Changes in deferred tax
     2,495,828       1,731,344  
                         (Increase) decrease in current assets:
                
                                   Interest receivable on sales type leases
     (315,675 )     (379,331 )
                                   Prepaid expenses
     294,464       3,828,438  
                                   VAT receivable and other receivables
     (1,163,901 )     (113,744 )
                         Increase (decrease) in current liabilities:
                
                                   Accounts payable
     4,004,280       847,314  
                                   Taxes payable
     996,753       (1,917,728 )
                                   Unearned revenue
     -       (658,655 )
                                   Interest payable
     2,470,914       -  
                                   Accrued liabilities and other payables
     112,574       (260,167 )
                                   Construction in progress
     (10,226,469 )     (8,255,441 )
                 
            Net cash provided by operating activities
     13,464,246       4,131,785  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
            Initial investment in sales type leases
     (30,724,470 )     (11,032,444 )
            Collection of principal on sales type leases
     3,267,917       1,547,527  
            Increase investment in subsidiary
     -       (16,100 )
            Restricted cash
     (752,116 )     (4,393,159 )
            Acquisition of property & equipment
     (81,526 )     (15,096 )
                 
            Net cash used in investing activities
     (28,290,195 )     (13,909,272 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
            Insurance of common stock
     -       2,000,000  
            Insurance of convertible notes
     -       3,000,000  
            Cash contribution from noncontrolling interest
     908,279       263,439  
            Proceeds from loans
     15,800,376       2,927,358  
            Advance from related parties
     3,504,613       -  
                 
            Net cash provided by financing activities
     20,213,268       8,190,797  
                 
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
     (10,744 )     2,646  
                 
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
     5,376,575       (1,584,044 )
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD
     1,111,943       7,267,344  
                 
CASH & CASH EQUIVALENTS, END OF PERIOD
   $ 6,488,518     $ 5,683,300  
                 
Supplemental Cash flow data:
                
   Income tax paid
   $ 1,307,901     $ 1,307,406  
   Interest paid
   $ 269,083     $ 319,086