China Recycling Energy Corporation Reports 2012 Third Quarter Financial Results

XI'AN, China, November 15, 2012 /PRNewswire-FirstCall/ -- China Recycling Energy Corp. (NASDAQ: CREG; "CREG" or "the Company"), a leading industrial waste-to-energy solution provider in China, today announced its financial results for the 2012 third quarter ended September 30, 2012.

Summary of Financial Results:

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

(2) Non-GAAP diluted weighted average shares outstanding were calculated based on outstanding shares, issued options, and estimated shares under the assumption that they would be converted from our convertible debentures.

Mr. Guohua Ku, Chairman and Chief Executive Officer of China Recycling Energy, discussed quarterly financial results, current projects and the company's growth potential, "As expected, we do not have project completion during the third quarter, hence we do not realize system sales for this quarter. Interest income from our sales-type lease is our other major revenue. During this quarter, we generate stable income and cash flow from our 11 systems. As most of our projects are recognized as sales-type lease, we experience non-linear revenue flows in our financial statement due to the special revenue recognition method for sales-type lease. We need to indicate that this quarterly result does not represent the long-term growth potential of the Company. Currently, we have a large-scale ongoing project and a series of projects with great potentials. We will expand our recycling energy market in 2013 and payback our shareholders with consistent and growing profits."

Mr. Ku continued to comment: "For ongoing projects, construction of Shanxi Datong Project goes on well. It is estimated that one of the power stations will be completed by the end of 2012. As of September 30, we successfully won two significant government awards; one is Xi'an City High Tech Development Special Financial Reward; the other one is Shaanxi Province Technology Innovation Award and provincial government grant. These awards not only demonstrate the company's leading comprehensive competence in energy recycling high-tech research and development, but also show the government support to energy recycling industry. While developing new projects, we also focus on the development and improvement of recycling energy technology, apply new technology to our existing projects and develop more projects, which in turn becomes a beneficial cycle for us and our customers. We intend to lead the development of recycling energy technology, bring more social and economic benefits to our customers, provide better results to our investors, and make greater contributions to the environmental protection of the country."

Financial Results for Three Months Ended September 30, 2012

Total sales, including system sales and contingent rental income, for the three months ended September 30, 2012 was $0.48 million while total sales for the comparable period of 2011 was $18.84 million, a decrease of $18.37 million as a result of decrease in sales of systems. Of the total sales, sales of systems for the three months ended September 30, 2012 was $0, as compared to $18.58 million for the comparable period of 2011, a decrease of $18.58 million. For the three months ended September 30, 2012, none of the Company's power stations has been completed and sold, while in the same period of 2011, we completed and sold Shenqiu biomass power generation system. For the three months ended September 30, 2012, the Company received contingent rental income of $0.48 million from usage of electricity in addition to the minimum lease payments, compared to $0.26 million for the comparable period in 2011. For the sales-type lease, sales and cost of sales ("COS") are recorded at the time of leases; interest income from the sales-type leases is our other major revenue source in addition to sales revenue.

COS for the three months ended September 30, 2012 was $0.03 million while our COS for the comparable period of 2011 was $14.33 million, a decrease of $14.29 million. This decrease was mainly due to the fact that, unlike during the fiscal quarter ended September 30, 2011, the Company did not complete and sell a power generation system during the fiscal quarter ended September 30, 2012.

Gross profit was $0.44 million for the three months ended September 30, 2012 compared to $4.52 million for the comparable period of 2011. This decrease was mainly due to a combined gross margin for sales of systems and rental income of 93% and 24% for the comparable period of 2012 and 2011, respectively.

Interest income on sales-type leases for the three months ended September 30, 2012 was $4.59 million, a $0.88 million decrease from $5.47 million for the comparable period of 2011. During the third quarter of 2012, interest income was derived from 11 systems: one TRT system (the other system completed the lease term), two CHPG systems, two systems with Erdos Phase I project and three systems of Erdos Phase II project, the Pucheng biomass power generation system, Shenqiu biomass power generation system and Zhongbao WHPG system. During the third quarter of 2011, the interest income was derived from 12 systems: two TRT systems, two CHPG systems, one WGPG system, two waste heat power generating systems associated with our Erdos Phase I project and three systems of Erdos Phase II project, the Pucheng biomass power generation system and Zhongbao WHPG system.

Operating expenses consisted of selling, general and administrative expenses totaling $3.59 million for the three months ended September 30, 2012 compared to $0.39 million for the comparable period of 2011, an increase of $3.20 million or 820%. The increase was mainly due to the loss resulting from termination of Erdos TCH Phase III power generation projects of $2.97 million.

Our net income (loss) for the three months ended September 30, 2012 was a net loss of $1.41 million compared to net income of $8.66 million for the comparable period of 2011, a decrease of $10.06 million. This decrease in net income was mainly due to decreased total sales, increased operating expenses and increased non-operating expenses as explained above.

For the three months ended September 30, 2012, GAAP diluted EPS was minus $0.03 with approximately 50.83 million shares of common stock outstanding, as compared with $0.16 in the same period of 2011 when the Company had 54.95 million shares of common stock outstanding.

As of September 30, 2012, the Company had cash and cash equivalents of $56.16 million, other current assets were $13.16 million and current liabilities were $33.14 million. Working capital was $36.18 million. The debt-to-equity ratio was 0.68:1 as of September 30, 2012.

Financial Results for Nine Months Ended September 30, 2012

Net sales of systems for the nine months ended September 30, 2012 were $1.03 million while our net sales for the comparable period of 2011 were $30.77 million, a decrease of $29.75 million. The decrease was primarily due to no power stations being completed and only $1.03 million from contingent rental income during the nine months ended September 30, 2012. During the comparable period of 2011, we completed and sold $29.93 million of the 3rd 9MW capacity power station of Erdos Phase II project and 12MW Shenqiu biomass power generation system, and received $0.85 million from contingent rental income. Sales-type lease, sales and COS are recorded at the time of leases; the interest income from the sales-type leases is our other major revenue source in addition to sales revenue.

COS for the nine months ended September 30, 2012 was $0.07 million while our COS for the comparable period of 2011 was $22.85 million, a decrease of $22.78 million. No projects were completed and sold, unlike during the comparable period of 2011, when the 3rd 9MW capacity power station of Erdos Phase II project and the 12MW Shenqiu biomass power generation system were completed and sold.

Gross profit was $0.95 million for the nine months ended September 30, 2012 compared to $7.92 million for the comparable period of 2011. This decrease was mainly due to a blended gross margin for sales of systems and rental income of 93% and 26% for the comparable period of 2012 and 2011, respectively.

Interest income on sales-type leases for the nine months ended September 30, 2012 was $14.11 million, a $1.98 million decrease from $16.09 million for the comparable period of 2011. During the nine months ended September 30, 2012, interest income was derived from 11 systems: one TRT system (the other system completed its leasing term), two CHPG systems, two systems with Erdos Phase I project and three systems of Erdos Phase II project, the Pucheng biomass power generation system, Shenqiu biomass power generation system and Zhongbao WHPG system. In comparison, during the nine months ended September 30, 2011, interest income was derived from 12 systems: two TRT systems, two CHPG systems, one WGPG system, two waste heat power generating systems associated with our Erdos Phase I project and two systems of Erdos Phase II project, the Pucheng biomass power generation system and Zhongbao WHPG system, and the 3rd 9MW waste heat power generating system of Erdos Phase II project.

Operating expenses consisted of selling, general and administrative expenses totaling $5.18 million for the nine months ended September 30, 2012 as compared to $3.83 million for the comparable period of 2011, an increase of $1.35 million or 35%. The increase was mainly due to $2.97 million loss resulting from the termination of the Erdos TCH Phase III power generation projects.

Our net income for the nine months ended September 30, 2012 was $1.84 million compared to $16.91 million for the comparable period of 2011, a decrease of $15.07 million. This decrease in net income was mainly due to decreased total sales, increased operating expenses and increased non-operating expenses as explained above.

For the nine months ended September 30, 2012, GAAP diluted EPS was $0.04 with approximately 51.11 million shares of common stock outstanding, as compared with $0.33 in the same period of 2011 when the Company had 55.08 million shares of common stock outstanding.

Net Investment in Sales-Type Leases as of September 30, 2012

The Company, through its subsidiary, Xi'an TCH leased TRT systems to Zhangzhi with terms of 5 and 13 years, respectively; and leased CHPG systems to Tong Chuan, Shengwei, and Jing Yang Shengwei respectively for 5 years, BMPG systems to Pucheng for 15 years, BMPG systems to Shenqiu for 11 years, and a power and steam generating system from waste heat from metal refining to Erdos (five projects) for 20 years.

The components of the net investment in sales-type leases as of September 30, 2012 and December 31, 2011 are as follows:

As of September 30, 2012, the future minimum rentals to be received on non-cancelable sales-type leases by years are as follows:

Non-GAAP Financial Measures

For the 2012 third quarter, Non-GAAP net income was $0.27 million, as compared with $2.23 million in the 2012 second quarter and $7.46 million in the 2011 third quarter.

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

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

10Q Filing
For more information regarding China Recycling Energy Corp.'s financial performance during the quarter ended September 30, 2012, please refer to the Quarterly Report on Form 10-Q, which was filed with the Securities and Exchange Commission on Nov 14, 2012.

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

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

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