China Energy Recovery, Inc. - FORM 10-K

Attached files

file	filename
EX-32.1 - China Energy Recovery, Inc.	v218935_ex32-1.htm
EX-21.1 - China Energy Recovery, Inc.	v218935_ex21-1.htm
EX-31.2 - China Energy Recovery, Inc.	v218935_ex31-2.htm
EX-31.1 - China Energy Recovery, Inc.	v218935_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

¨	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 Incorporation or Organization)		(I.R.S. Employer Identification No.)

7F, No. 267 Qu Yang Road Hongkou District, Shanghai China		200081
(Address of Principal Executive Offices)		(Zip Code)

Registrant's telephone number, including area code +86 (0)21 5556-0020

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered

NONE

Securities registered pursuant to Section 12(g) of the Act:

Common stock, par value $0.001

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

NOTE – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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 o

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 ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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	x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates is $11,983,530 [as computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed first fiscal quarter.]

Number of shares outstanding of the registrant's common stock as of March 31, 2011:

30,956,651 shares of Common Stock, $0.001 par value per share

DOCUMENTS INCORPORATED BY REFERENCE

None

Table of Content

PART I		3

Item 1	Business	3

Item 1A	Risk Factors	18

Item 1B	Unresolved Staff Comments	29

Item 2	Properties	30

Item 3	Legal Proceedings	30

Item 4	[Reserved]	30

PART II		31

Item 5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31

Item 6	Selected Financial Data	32

Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	33

Item 7A	Quantitative and Quantitative Disclosures about Market Risk	49

Item 8	Financial Statements and Supplementary Data	50

Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	84

Item 9A	Controls and Procedures	84

Item 9B	Other Information	86

PART III		87

Item 10	Directors, Executive Officers and Corporate Governance	87

Item 11	Executive Compensation	89

Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	91

Item 13	Certain Relationships and Related Transactions, and Director Independence	92

Item 14	Principal Accountant Fees and Services	92

PART IV		93

Item 15	Exhibits and Financial Statement Schedules	93

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K and other materials we will file with the U.S. Securities and Exchange Commission (the "SEC") contain, or will contain, 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, fluctuations 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 our management's current plans and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These risks and uncertainties include, but are not limited to: our limited operating history; our ability to effectively market our products and services; the loss of key personnel; our inability to attract and retain new qualified personnel; our capital needs and the availability of and costs associated with potential sources of financing; adverse effects of the current turmoil in the credit markets; adverse effects of the current depressed global economic conditions; our inability to increase manufacturing capacity to meet demand; economic conditions affecting manufacturers of energy recovery systems and the industry segments they serve; our dependence on certain customer segments; difficulties associated with managing future growth; our failure to protect our intellectual property rights; allegations of claims of infringements of intellectual property rights brought against us; the loss of our ability to sell and install energy recovery systems made by third parties or such systems manufactured by us under licenses from third parties; fluctuations in currency exchange rates; our failure to comply with applicable environmental regulations; increased competition in our industry; our exposure to litigation from performing work on our customers' properties; an increase in warranty claims; our liability for injuries caused by our products; our inability to cover damages owed by insurance; fluctuations in energy prices resulting in fluctuating demand for our products and services; risks related to our corporate structure, such as our inability to control our affiliated entities and conflicts of interest between our Chief Executive Officer’s duties to us and to our affiliated entities; the uncertainties associated with the environmental, economic, political and legal conditions in China and changes thereof; the adverse effect of governmental regulation and other matters affecting energy recovery system manufacturers; Chinese restrictions on foreign currency exchange transactions; restrictions on foreign investments in China; ineligibility for and expiration of current Chinese governmental incentives; natural disasters and health related concerns; the development of an active trading market for our common stock; the loss of coverage of our common stock by securities analysts; the failure of our complying with securities laws in private placements; our common stock being a penny stock; a sudden increase in the number of shares of our common stock in the market as a result of Rule 144 sales or conversion or exercise of derivative securities, and our failure to maintain adequate internal controls over financial reporting.

These forward-looking statements speak only as of the date of this Annual Report on Form 10-K. 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. You should also read, among other things, the risks and uncertainties described in the section of this Annual Report on Form 10-K entitled "Risk Factors."

PART I

Item 1 Business

Overview of Our Business

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. A majority of the manufacturing takes place at the Company's leased manufacturing facilities in Shanghai, China. The Company transports the manufactured systems in parts via truck, train or ship to the customers' facilities where the system is 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. Since inception, the Company has installed over 122 energy recovery systems both in China and internationally. The Company mainly sells its energy recovery systems and services directly to customers.

Our History

Unless otherwise noted, the disclosures about our history reflect the Company's capital structure as of the time of the occurrences described and do not take into account subsequent stock splits or other adjustments to the Company's capital structure.

We incorporated in the State of Maryland in May 1998 under the name Majestic Financial, Ltd. We changed our name to Commerce Development Corporation, Ltd. in April 2002. Effective June 5, 2007, we changed our name to MMA Media Inc.

On January 24, 2008, we entered into a Share Exchange Agreement (the "Share Exchange Agreement") with Poise Profit International, Ltd., a private British Virgin Islands corporation ("Poise Profit"), and Poise Profit's shareholders pursuant to which we agreed to acquire all of the issued and outstanding shares of Poise Profit's common stock in exchange for the issuance of 41,514,179 shares of our common stock (on a post-1-for-9 stock split basis approved by our board of directors in connection with entering into the Share Exchange Agreement) to Poise Profit's shareholders (the "Share Exchange").

On January 25, 2008, we entered into and closed an Asset Purchase Agreement with MMA Acquisition Company, a Delaware corporation, pursuant to which we sold substantially all of our assets to MMA Acquisition Company in exchange for MMA Acquisition Company's assuming a substantial majority of our outstanding liabilities. The transferred assets consisted of letters of intent for the proposed acquisitions of MMAWeekly.com, dated June 9, 2007, and Blackbelt TV, Inc., dated July 16, 2007, and all shares of common stock in Blackbelt TV, Inc. we owned, among other things. The total book value of the assets acquired was approximately $317,000. The assumed liabilities consist of accounts payable, convertible debt, accrued expenses and shareholder advances of approximately $360,000.

Effective February 5, 2008, we changed our name to China Energy Recovery, Inc. and conducted a 1-for-9 reverse stock split of our issued and outstanding capital stock pursuant to which each nine shares of our common stock issued and outstanding on the record date of February 4, 2008 were converted into one share of our common stock. We had 84,922,000 shares of common stock issued and outstanding immediately prior to the reverse stock split and 9,435,780 shares thereafter.

On April 15, 2008, we closed the Share Exchange pursuant to which we acquired all of the issued and outstanding shares of Poise Profit's common stock in exchange for the issuance of 41,514,179 shares of our common stock to Poise Profit's stockholders. Upon the closing of the Share Exchange, Poise Profit became our wholly-owned subsidiary and our business operations consisted of those of Poise Profit's wholly-owned subsidiary, HAIE Hi-tech Engineering (Hong Kong) Company, Limited ("Hi-tech"), incorporated in the Hong Kong Special Administration Region, China.

Also on April 15, 2008 and as a condition to closing of the Share Exchange, we entered into Securities Purchase Agreements (the "Securities Purchase Agreement") with 25 accredited investors pursuant to which we issued and sold an aggregate of 7,874,241 units at a price per unit of $1.08 with each unit consisting of one share of our Series A Convertible Preferred Stock, par value $0.001 per share, and one warrant to purchase one-half of one share of our common stock at an exercise price of $1.29 per share (the "Financing"). Thus, at the closing of the Financing, we issued 7,874,241 shares of our Series A Convertible Preferred Stock to the investors and we also issued warrants to the investors for the purchase of an aggregate of 3,937,121 shares of our common stock for an aggregate purchase price of $8,504,181. After the April 16, 2008 1-for-2 reverse stock split described below, the warrants are exercisable into 1,968,561 shares of common stock at an exercise price of $2.58.

As a result of the closing of the Share Exchange on April 15, 2008, our new business operations consist of those of Poise Profit's Chinese subsidiary, Hi-tech, which were subsequently transferred to CER (Hong Kong) Holdings Limited (“CER Hong Kong”) as described in Item 1 Business - Organizational Structure and Subsidiaries. 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.

On April 16, 2008, we conducted a 1-for-2 reverse stock split of our issued and outstanding capital stock pursuant to which each two shares of our common stock issued and outstanding on the record date of April 15, 2008 were converted into one share of our common stock. We had 50,949,959 shares of common stock issued and outstanding immediately prior to the reverse stock split and 25,474,980 shares thereafter.

Starting in the summer of 2008, we began a reorganization of our corporate structure as further described under the caption "Organizational Structure and Subsidiaries" below.

Organizational Structure and Subsidiaries

After closing of the Share Exchange, our organizational structure reflected Chinese limitations on foreign investments and ownership in Chinese businesses. Generally, these limitations prevent a U.S. corporation from owning directly certain types of Chinese businesses. Instead, a U.S. corporation can obtain the benefits and risk of equity ownership of a Chinese business either by being a part-owner of a Chinese joint venture or by entering into fairly extensive and complicated contractual relationships with Chinese companies wholly-owned by Chinese owners. At that time, and still to a significant extent, our business relied on contractual relationships. However, we began a corporate reorganization process in the summer of 2008 to gradually move our assets and operations from affiliated entities with which we have only contractual relationships into wholly-owned subsidiaries. Until our reorganization is complete, our corporate structure will reflect a combination of control via direct ownership and contractual arrangements.

Poise Profit, a wholly-owned subsidiary of the Company, was incorporated on November 23, 2007 under the laws of the British Virgin Islands. Poise Profit, in turn, owns 100% of the issued and outstanding equity interests in Hi-tech and CER (Hong Kong) Holdings Limited ("CER Hong Kong"). Historically, all of our operations were conducted through Hi-tech via contractual arrangements with affiliated Chinese entities, but we are in the process of transferring our assets and operations from Hi-tech to CER Hong Kong and its wholly-owned subsidiary CER Energy Recovery (Shanghai) Co., Ltd. ("CER Shanghai"). As part of our reorganization, CER Hong Kong was incorporated on August 13, 2008 under the laws of the Hong Kong Special Administrative Region, China and was originally jointly owned by Mr. Qinghuan Wu, one of our directors and our Chairman of the Board and Chief Executive Officer, and his spouse, Mrs. Jialing Zhou, who is one of our directors. On December 3, 2008, Mr. Qinghuan Wu and Mrs. Zhou transferred ownership of CER Hong Kong to Poise Profit. CER Shanghai was incorporated on November 11, 2008 as a wholly foreign-owned enterprise in Shanghai, China. After our reorganization is complete, CER Shanghai will be our primary operating entity in China and CER Hong Kong will be our primary holding entity holding all equity interests in our Chinese subsidiaries, including CER Shanghai. While we are gradually transferring our current assets and operations to CER Shanghai, we plan that CER Shanghai will enter into the majority of all new business contracts.

At the time of the closing of the Share Exchange, Hi-tech owned 90% of a joint venture called Shanghai Haie Investment Consultation Co., Ltd. ("JV Entity"), a company organized in Shanghai, China, providing investment consultancy services, enterprise management consultancy services and marketing policy planning services to third-party customers as well as affiliates. The remaining 10% was owned by Shanghai Engineering. In compliance with the new Chinese regulation effective January 2008, on June 16, 2008, JV Entity's board of directors approved a plan to dissolve JV Entity. The application for dissolution was approved by the Chinese governmental authority in July 2008. We dissolved JV Entity on September 1, 2008 and its assets, in the form of an initial capital contribution from Hi-tech, were returned to Hi-tech on September 18, 2008.

Before December 3, 2008, all of our operations were conducted through Hi-tech and its affiliated companies. Hi-Tech was engaged in the marketing and sale of energy recovery systems which were designed, manufactured and installed by affiliated companies. Hi-tech had entered into contractual relationships with two entities incorporated in Shanghai, China: Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. ("Shanghai Engineering") and Shanghai Xin Ye Environmental Protection Engineering Technology Co., Ltd. ("Shanghai Environmental"). Each of Shanghai Engineering and Shanghai Environmental was considered a "variable interest entity" and their respective financial information was consolidated with Hi-tech's pursuant to the Accounting Standard Codification (“ASC”) 810-10. Hi-tech entered into contractual relationships with Shanghai Engineering and Shanghai Environmental to comply with Chinese laws regulating foreign-ownership of Chinese companies. Shanghai Engineering is engaged in the business of designing, manufacturing and installing energy recovery systems. All manufacturing is done by Vessel Works Division pursuant to a cooperative manufacturing agreement between Shanghai Engineering and Vessel Works Division's parent, Shanghai Si Fang Boiler Factory ("Shanghai Si Fang"), as further described below. Vessel Works Division holds important permits for the manufacturing and installation of boilers used in our energy recovery systems. Shanghai Environmental is not an operating company but it served in the past as a vehicle for arranging sales and maximizing tax benefits. We did not use Shanghai Environmental for these purposes during our 2010 fiscal year and do not intend to do so in the future, hence we dissolved Shanghai Environmental in 2010. Shanghai Engineering is owned jointly by Mr. Qinghuan Wu, our Chairman of the Board and Chief Executive Officer, and his spouse, Mrs. Jialing Zhou, who is one of our directors.

On December 3, 2008, as a part of our reorganization, all of the material contracts between Hi-tech and Shanghai Engineering and between Hi-tech and Shanghai Environmental were transferred to CER Hong Kong. Since that date, CER Hong Kong has been engaged in the marketing and sale of energy recovery systems which are designed, manufactured and installed by its subsidiaries and affiliated companies. These material contractual relationships consist of:

Consulting Services Agreements - These agreements allow CER Hong Kong to manage and operate Shanghai Engineering and Shanghai Environmental, and collect the respective net profits of each company. Under the terms of the agreements, CER Hong Kong is the exclusive provider of advice and consultancy services to Shanghai Engineering and Shanghai Environmental, respectively, related to the companies' general business operations, human resources needs and research and development, among other things. In exchange for such services, each of Shanghai Engineering and Shanghai Environmental must pay to CER Hong Kong such company's respective net profits. CER Hong Kong will own all intellectual property rights developed or discovered through research and development in the course of providing services under the agreements but will grant a license to use such intellectual property back to the respective company if necessary to conduct the business. Each of Shanghai Engineering and Shanghai Environmental are required to cause their respective shareholders to pledge such shareholders' equity interests in the respective companies to secure the fee payable by Shanghai Engineering and Shanghai Environmental, respectively, under the agreements. The agreements contain affirmative covenants requiring each of Shanghai Engineering and Shanghai Environmental to take certain actions, such as (but not limited to) delivering periodic financial reports to CER Hong Kong. The agreements also contain negative covenants preventing each of Shanghai Engineering and Shanghai Environmental from taking certain actions such as (but not limited to) issuing equity, incurring indebtedness and changing its business. The agreements are effective until terminated and they may be terminated by CER Hong Kong for any or no reason and by either party for reasons explicitly set forth in the agreements, including (but not limited to) a breach by the other party or the other party's becoming bankrupt or insolvent. The parties may not assign or transfer their rights or obligations under the respective agreements without the prior written consent of the other party, except that CER Hong Kong may assign its rights or obligations under the agreements to an affiliate.

Operating Agreements - The parties to each of these agreements are CER Hong Kong, Shanghai Engineering, Shanghai Environmental, respectively, and all of the shareholders of each of Shanghai Engineering and Shanghai Environmental, respectively. Under the agreements, CER Hong Kong guarantees the contractual performance by each company under any agreements with third parties, in exchange for a pledge by each of Shanghai Engineering and Shanghai Environmental of all of its respective assets, including accounts receivable. CER Hong Kong has the right to approve any transactions that may materially affect the assets, liabilities, rights or operations of each company and provide, binding advice regarding each company's daily operations, financial management and employment matters, including the dismissal of employees. In addition, CER Hong Kong has the right to recommend director candidates and appoint the senior executives of each company. The agreements expire 10 years from execution unless renewed. CER Hong Kong has the right to terminate each of the agreements upon 30 days' written notice but Shanghai Engineering and Shanghai Environmental do not have the right to terminate their respective agreement during its term. CER Hong Kong may freely assign its rights and obligations under the agreements upon written notice to Shanghai Engineering and Shanghai Environmental, respectively. Shanghai Engineering and Shanghai Environmental may not assign their rights or obligations under the respective agreements without the prior written consent of CER Hong Kong.

Proxy Agreements - CER Hong Kong has entered into proxy agreements with all of the shareholders of each of Shanghai Engineering and Shanghai Environmental under which the shareholders have vested their voting power of the companies in CER Hong Kong and agreed to not transfer the shareholders' respective equity interests in the two companies to anyone but CER Hong Kong or its designee(s). The agreements do not have an expiration date. CER Hong Kong has the right to terminate each of the agreements upon 30 days' written notice but the shareholders may not terminate the agreements without CER Hong Kong's consent.

Option Agreements - The parties to each of these agreements are CER Hong Kong, Shanghai Engineering, Shanghai Environmental, respectively, and all of the shareholders of each of Shanghai Engineering and Shanghai Environmental, respectively. The shareholders of each of Shanghai Engineering and Shanghai Environmental have granted CER Hong Kong or its designee(s) the irrevocable right and option to acquire all or a portion of such shareholders' equity interests in the two companies. The shareholders have also agreed not to grant such an option to anyone else. The purchase price for a shareholder's equity interests will be equal to such shareholder's original paid-in price for such equity interest. Pursuant to the terms of the agreements, the shareholders and each of Shanghai Engineering and Shanghai Environmental have agreed to certain restrictive covenants to safeguard CER Hong Kong's rights under the respective agreement. The agreements expire 10 years from execution unless renewed. CER Hong Kong may freely assign its rights and obligations under the agreements upon written notice to Shanghai Engineering, Shanghai Environmental and the shareholders, respectively. Shanghai Engineering, Shanghai Environmental and the shareholders, respectively, may not assign their rights or obligations under the respective agreements without the prior written consent of CER Hong Kong.

Equity Pledge Agreements - The parties to each of these agreements are CER Hong Kong, Shanghai Engineering, Shanghai Environmental, respectively, and all of the shareholders of each of Shanghai Engineering and Shanghai Environmental, respectively. The shareholders of each of Shanghai Engineering and Shanghai Environmental have pledged all of their respective equity interests in the two companies to CER Hong Kong to guarantee each of Shanghai Engineering and Shanghai Environmental performance of these companies' respective obligations under the Consulting Services Agreements. The pledge expires two years after the obligations under the Consulting Services Agreements described above are fulfilled. CER Hong Kong has the right to collect any and all dividends paid on the pledged equity interests. Pursuant to the terms of the agreements, the shareholders and each of Shanghai Engineering and Shanghai Environmental have agreed to certain restrictive covenants to safeguard CER Hong Kong's rights under the respective agreement. Upon an event of default under the agreements, CER Hong Kong may vote, control, sell or dispose of the pledged equity interests and may require the shareholders to pay all outstanding and unpaid amounts due under the Consulting Services Agreement. Pursuant to the terms of the agreements, the shareholders have agreed to certain restrictive covenants to safeguard CER Hong Kong's rights under the respective agreement. CER Hong Kong may freely assign its rights and obligations under the agreements upon written notice to the shareholders. The shareholders may not assign their rights or obligations under the respective agreements without the prior written consent of CER Hong Kong.

All of Shanghai Engineering’s manufacturing activities are conducted through a Leasing and Operation Agreement, a form of cooperative manufacturing agreement, originally effective as of May 1, 2003 and subsequently renewed and amended with a state-owned enterprise, Shanghai Si Fang. Pursuant to the agreement, Shanghai Si Fang leases certain land use rights, buildings and fixed assets (lease elements) in one of its subsidiaries, Vessel Works Division, and provides management services and licenses the “Si Fang” brand and manufacturing license (non-lease elements) of Vessel Works Division to Shanghai Engineering. Because the arrangement contains both the lease and non-lease elements, the quarterly payment is allocated between the lease and non-lease deliverables. The lease elements are classified and accounted for as operating leases and the lease expense is recorded on a straight-line basis. The non-lease elements are accounted for as prepayment for management and licensing fees and the payment is amortized on a straight-line basis over each contractual period.

Shanghai Engineering does not have a variable interest in Vessel Works Division through this agreement as the arrangement is established between Shanghai Engineering and Shanghai Si Fang. Shanghai Engineering does not have any contractual or ownership interest in Vessel Works Division, and therefore, Shanghai Engineering does not have variable interests in Vessel Works Division.

The arrangement, however, may result in Shanghai Engineering having a variable interest in Shanghai Si Fang, but as Shanghai Si Fang is a state-owned enterprise that has substantive operations other than this lease and operation arrangement, Shanghai Engineering is not the primary beneficiary of Shanghai Si Fang.

In August 2009, CER Hong Kong entered into a series of contracts with Yangzhou (Yizheng) Automobile Industrial Park Administration Committee, a government entity of the City of Yangzhou, Jiangsu Province, China, to acquire a tract of land on which CER Hong Kong plans to build a new manufacturing facility. Phase one construction of the plant was completed and began operating in January 2011. Phase two is under construction and anticipated to be completed in 2012. As a result, the company’s production function is now split between Vessel Works Division and CER Yangzhou. We are in the process of transferring the production function from Vessel Works Division to CER Yangzhou and expect to be finished by end of April 2011.

The following is an organizational chart setting forth the current status of the Company's subsidiaries and affiliated companies as of December 31, 2010:

Industry Overview

Global demand is increasing for innovative environmental protection and renewable energy solutions for sustainable economic growth. Modern industrial nations and emerging markets today are faced with the growing challenge of reducing and controlling air pollution emissions that present serious health risks to national populations, cross international borders, and damage the environment. Increased energy consumption has forced governments and industries to invest in improving energy efficiency and alternative forms of power generation and conservation. As the global power generation industry and manufacturing industries increase their focus on improving efficiency and mitigating the environmental impact of their processes, we believe that energy recovery systems will play a major role in improving the output that can be obtained from current supplies.

Energy recovery systems can salvage the majority of the wasted energy from excess heat that industrial manufacturing facilities and power plants release into the atmosphere in the form of hot exhaust gases or high pressure steam by converting the heat into electricity (often through steam driven generator turbines) which can be used in industrial processes, thereby lowering energy costs. In addition, energy recovery systems can also capture harmful pollutants that would otherwise be released into the environment from certain industrial processes. These reduced emissions can also help companies meet environmental regulations. Energy recovery systems may also be used in heat recovery applications whereby excess heat may be used to heat buildings and water. Examples of end-users of this type of energy recovery system include hospitals and schools that may heat their buildings and water with excess heat generated by their own large electrical equipment. This type of energy recovery system is less complicated and requires significantly less technical qualifications to build than the industrial energy recovery systems described above as it is essentially redirecting the heat generated by one system into other on-site systems. As a result, this type of energy recovery system is cheaper to build and the barriers to entry into this market are lower than in the market for industrial energy recovery systems. Our business focuses on energy recovery systems for industrial applications.

We believe that energy recovery systems represent a large-scale, environmentally friendly and economically feasible form of power generation and tool for improving energy efficiency. Compared with other alternative forms of power, such as solar, wind or biomass, we believe that energy recovery systems are dramatically more affordable for technology capable of delivering power on the scale necessary for industrial clients. In our opinion, energy recovery systems are cost competitive even with large-scale, traditional power sources such as coal, fossil fuels and nuclear power, but have the added benefit of reducing pollution and greenhouse gas emissions.

According to recent studies from the U.S. Department of Energy and the U.S. Environmental Protection Agency, energy recovery systems could generate nearly 200 gigawatt ("GW") new power, equivalent to approximately 20% of current U.S. power generation capacity. The European Union is a significant user of energy recovery systems, with 104 GW installed power generating capacity. Germany and Italy have the most installed capacity at 16 GW and 13 GW, respectively.

We have developed and commercialized our proprietary customized energy recovery technologies and solutions to cost-effectively reduce pollution and capture the waste heat released by our customer's industrial processes. Our energy recovery systems can help our customers improve their energy use efficiency. For example, our energy recovery systems applied in sulfuric acid manufacturing processes can produce as much as three times the usable energy from the same fuel by recovering otherwise lost energy and reusing it in the manufacturing processes directly or to further generate electrical power, which may allow customers to slash energy expenditures by up to two-thirds. Additionally, these systems can reduce harmful emissions resulting from certain types of sulfuric acid manufacturing processes that otherwise would have been released into the atmosphere. Other benefits include our customers' ability to sell carbon credits, reduction of flue gas and equipment sizes of all flue gas handling equipment such as fans, stacks, ducts, and burners, and a reduction in auxiliary energy consumption.

The most notable target customers for our energy recovery systems are major types of industrial manufacturing facilities, such as chemical plants, petrochemical plants, paper manufacturing plants, oil refineries, etc. These types of customers generally operate manufacturing equipment that release waste heat into which our energy recovery systems can be implemented and integrated to capture such waste heat for direct reuse or, if connected with steam-driven turbines, to produce electricity.

In March 2010, the Chinese People's Political Consultative Conference (“CPPCC”) and National People's Congress (“NPC”) convened, during which the number one proposal on low carbon: Suggestion On Promotion of Low Carbon Life and Improve Social Sustainable Development, proposed by Jiu San Society, was highly received by the NPC and CPPCC; over 10% proposals of CPPCC and NPC were related to low carbon issues. The Government Work Report of 2009, issued by Premier Wen Jiabao, addressed that Energy Saving and Environmental Protection is one of the nine principal focuses of the government in 2010, which means low carbon will be a State Strategy in the near future. The issues mentioned above implied that the energy saving industry should experience significant growth over the next few years. Furthermore, at the Copenhagen Climate Conference, Premier Wen Jiabao announced that China would decrease carbon emission by 40%-45% in 2020, as compared with 2005, which is further evidence that the energy saving industry should experience significant growth in the near future in China, which should benefit CER to in growing its business in the domestic Chinese market.

Global Market Overview

The world currently faces fundamental problems with its energy supply, which are due primarily to the reliance on fossil fuels. The economic prosperity of the wealthiest nations in the twentieth century was built on a ready supply of inexpensive fossil fuel and developing nations have continued in the twenty-first century to consume fossil fuel reserves at an ever increasing rate. This has led to worldwide reserve depletions, indicating that both oil and gas are likely to be effectively exhausted before the end of this century. Only coal reserves are expected to last into the next century. Yet even if fossil fuel supplies were unconstrained, their continued use poses its own problems. All fossil fuel combustion produces carbon dioxide, which appears to result in the warming of the earth's atmosphere with profound environmental implications across the globe.

These problems have resulted in the realization that the world must both increase the efficiency of its utilization of fossil fuels and decrease its reliance upon them. Environmental issues related to fossil fuel combustion arose first during the 1980s with the advent of acid rain, a product of the sulfur and nitrogen emissions from fossil fuel combustion. Power plants were forced by legislation and economic measures to control these emissions. However it is the recognition of global warming that presents the most serious challenge because carbon dioxide exists at much higher levels in the fuel gases of power plants and major types of industrial manufacturing facilities than sulfur dioxide and nitrogen oxides.

Although renewable energy capacity offers a hedge against major price rises because most renewable technologies exploit a source of energy that is freely available, many renewable technologies today still rely on government subsidies to make them competitive. Governments may also impose penalties upon companies, such as carbon trading schemes, which discourage the use of fossil fuels or increase its costs by imposing stringent emissions limits.

Given the international concerns regarding global warming and pollution and the need to more efficiently utilize fossil fuels, we believe that there exists substantial worldwide demand and a growing market for technologies that can enable companies to generate greater amounts of energy from the same supply of fossil fuels and that also reduce the amount of harmful emissions that would otherwise be released from the combustion of those fossil fuels. These technologies, including energy recovery systems, could benefit companies by both reducing energy costs and mitigating possible emissions penalties.

China Market Overview

Booming economic growth and rapid industrialization has spurred demand for electric power in China over the previous few years. For example, by the end of 2010, China's total installed generating capacity reached 960GW, an increase of more than 10% over the capacity at the end of 2009. Due to the expansion of energy intensive industrial sectors such as steel, cement, coal, petrol and chemicals, China's energy consumption has been growing faster than the country's gross domestic product ("GDP") and thus causing a shortage of electricity and coal and blackouts in over 20 of the country's 32 provinces, autonomous regions and municipalities. With the rapid modernization and industrialization of the country's economy, according to the International Energy Agency, China needs to add 1,300 GW to its electricity-generating capacity, more than the total installed capacity currently in the United States, to meet its demands over the next several years. We predict that the result of this massive increase in electric generation capacity will be a rapid rise in harmful emissions. China has already surpassed the United States to become the world's largest emitter of greenhouse gases, and the country faces enormous challenges from the pollution brought about by its energy needs.

In 2010, China's primary energy consumption was 3.25 billion tons of standard coal, an increase of 6% compared to that of 2009. China has become one of the world's major energy consumers. However, China has tried to reduce energy intensity to some extent. The energy consumption per GDP fell 4%. It is predicted that China will reach total electricity consumption of 4.6 trillion kwh, an increase of 9.5%; coal consumption of over 3.5 billion tons; crude oil consumption of 0.46 billion tons; natural gas consumption will maintain rapid growth and the total consumption is expected to reach 120-130 billion cubic meters.

The Chinese government principally encourages the setup of large-scale companies in energy intensive industries such as chemicals, petrol and coal. Therefore we would expect a general decrease in the number of smaller-scale companies in this related industry. We intend to develop the market opportunities to cooperate with these large companies for our future development.

In November 2010, the State Council approved development plans for energy-saving and environmental protection industries. The government addressed the support of development of high-efficiency energy-saving techniques and equipment, including our waste-heat energy recovery systems. We predicted that China will launch a series of technological and fiscal support policies to further promote the healthy growth of such industries.

In December 2010, a Chinese senior government official reiterated at the Cancun Conference that China intends to fulfill the goal of reducing the intensity of carbon dioxide emissions per unit of GDP in 2020 by 40 to 45 percent compared with 2005 levels, in order to address global climate change. From 2001 to 2005, the 10th five year plan, China realized an annual increase of GDP by 9.8% with increase of energy by10.4%. From2006 to 2010, the 11th five years, China realized an annual increase of GDP by 10.2% with increase of energy by 6.8%, which represented China’s rapid growth in investment of new energy and great improvement in energy utilization efficiency.

China would include the low-carbon targets in the 12th five-year plan for national economic development (2011-2015) to build an energy-saving, ecologically friendly society, the commission said.

In February 2011, Ministry of Industry and Information Technology announced that China will continue to encourage the energy-saving industries, to accelerate the development of recycling economics, recovery industries and energy-saving equipments. The supporting measures will be launched in order to reduce energy utilization and mitigate the release of harmful emissions.

Competitive Markets and Competition

Competition in the energy recovery system industry generally is divided by segment following the differentiation between low-grade energy recovery systems used for heat recovery applications (lower power extraction/generation capacity) and high-grade energy recovery systems used in industrial applications (higher power extraction/generation capacity).

Most of the players in the market are engineering firms that produce low-grade energy recovery systems for heat recovery applications mainly used by schools, hospitals and similar facilities. These products are generally undifferentiated and require lower levels of capital to develop. This type of energy recovery system is less complicated and requires significantly less technical qualifications to build than high-grade industrial energy recovery systems. As a result, this type of energy recovery system is cheaper to build and the barriers to entry into this market are lower than in the market for industrial energy recovery systems.

High-grade energy recovery systems for industrial applications, like ours, require large amounts of capital investment and high levels of expertise resulting in barriers to entry to most prospective market entrants. Because energy recovery systems of this type are highly customized based on the particular customer's need, manufacturers mainly compete based on their respective engineering capabilities. The manufacturers of industrial energy recovery systems generally fall into one of the following classifications:

Companies that specialize exclusively in energy recovery systems and account for the majority of the larger and more advanced production of energy recovery systems; and

Major equipment manufacturers for which energy recovery systems are not a key focus but which have the necessary resources to build effective systems.

Barriers to entry for the production of high grade energy recovery systems have resulted in a majority of the global sales for energy recovery systems being generated by a few large players. These industry participants focus on large scale projects leaving many intermediate opportunities for companies such as ours. The largest of these global players include Babcock-Hitachi (Japan), Foster Wheeler (USA), and Mitsubishi Heavy Industries (Japan). The major players in China include Dong Fang Boiler Group, Wuhan Boiler, Hangzhou Boiler Group, and Anshan Boiler.

We are principally engaged in designing, manufacturing, installing and servicing fully-customized energy recovery systems. While most of our competitors only offer one or two off-the-rack models, we develop products across varying specifications to best suit each customer's needs and objectives. Our products can recycle as much as 70% of the energy that would otherwise have been lost.

We believe that our products enable our customers to achieve substantial gains in energy efficiency and we continue to carry out research and development activities along with the design and engineering activities for customers’ projects to enhance efficiencies and decrease environmental impact. We employ approximately 100 highly trained engineers in our engineering team and are planning to hire more.

We have targeted our products at industrial sectors with significant amounts of waste heat. These sectors include:

Chemical and Petrochemical Industries;

Paper Manufacturing;

Refining Industry; and

Coking Industry.

We differentiate ourselves from our competitors by specializing in energy recovery systems and being one of the few players in the market capable of providing engineering, procurement and construction ("EPC") services for waste heat recovery (as further described below under the caption "Products and Technology"). Although we have the capacity and ability to provide EPC services, it was relatively rare that a customer requested such services. For example, we entered into three EPC contracts in 2007 and 2008. The number of EPC contracts increased to four and eight in 2009 and 2010, respectively. The revenue generated from EPC contracts increased from 43.6% to 56.2% of the total revenue in year 2010. We believe that we are currently a dominant player in energy recovery systems to sulfuric acid manufacturers in China. We believe that energy recovery systems for sulfuric manufacturing are the most difficult to design and engineer due to the strong corrosive character of the sulfuric acid.

By the end of 2010, phase one of our newly built first class manufacturing facility in Yangzhou, China was completed. Starting from 2011, our new facility will significantly boost our production capability, lower the production costs and provide us the opportunity to expand our participation as a supplier of high-performance energy recovery systems to industry located in China and around the world.

Design and Engineering

Our primary design and engineering facility is located in Shanghai, China. The facility employs approximately 100 engineers. Approximately 70 of the engineers engage in project design, customizing the energy recovery systems to meet the individual needs of various industries. The others manage our production processes at the facility. We believe that our engineering team is highly experienced and accomplished in its field.

Manufacturing

We operated a manufacturing facility, owned by Shanghai Si Fang through Shanghai Engineering in Shanghai, China. The facility occupies approximately 10 acres (4 hectares) of land with approximately 9,000 square meters of manufacturing space and storage. We employed a team of 230 skilled workers, technicians and quality assurance personnel at the manufacturing facility. Our employees utilize a vast array of equipment including lathes, drills, metal cutting machines, forging equipment, handling equipment (cranes), welding machines, and testing equipment. A majority of the equipment is leased from Shanghai Si Fang pursuant to the cooperative manufacturing agreement described above. This equipment will remain the property of Shanghai Si Fang when the agreement expires. Shanghai engineering does not own the facility but leases it from Shanghai Si Fang.

In August 2009, we started to build our new manufacturing base in Yangzhou Auto Industry Park, Jiangsu Province. The new factory will occupy approximately 37.5 acres (15 hectares) of land with approximately 90,000 square meters of manufacturing space and storage., with a total investment is about $60 million. Total registered capital of the Yangzhou Company is $20 million. One special railway is planned from Yizheng railway station leading directly to the plant. Meanwhile, there are three ports adjoining the Park: Yangzhou Port, Yizheng Liquid Dock of Nanjing Port Inc. and Yihua Port. Our objective is to construct a facility for the manufacturing of energy-saving and highly effective waste heat boilers, and also for the manufacturing of pressure vessels and other equipment, forming the capability of manufacturing Level-A boilers and Class I, II and III pressure vessels. 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 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 overseas.

As a result, our production facilities are currently contained in both Vessel Works Division and CER Yangzhou. We will complete the transfer of the production function from Vessel Works Division to CER Yangzhou at the end of April 2011. Phase two is under construction and anticipated to be complete in 2012.

Marketing and Sales

We market and sell our products worldwide through our direct sales force, which is based in Shanghai, China. Our marketing programs include industrial conferences, trade fairs, sales training, and trade publication advertising. Our sales and marketing groups work closely with our design and engineering, and manufacturing groups to coordinate our product development activities, product launches and ongoing demand and supply planning. Primarily we sell our products directly to the end users of our energy recovery systems, but we also sell energy recovery systems to leading engineering firms who in turn sell them to their end users.

We plan on entering into marketing partnerships and licensing deals that will enable us to reach a boarder segment of the market. We believe that there is significant opportunity in international markets such as the Middle East, the United States, Europe and Latin America, and we intend to enter these markets through partnerships. Additionally, we will look to expand into new industrial sectors through partnerships with leading engineering firms that specialize in specific industry groups.

Products and Technology

We have four main service offerings available to our customers, of which the first three generate the majority of our revenue stream:

Fabrication. We have highly-trained manufacturing teams capable of building high quality energy recovery systems in a timely fashion. All of our energy recovery systems are of modular design with a high degree of factory assembly. With modular construction, site welds on heat exchanger pressure parts are kept to a minimum. We design all energy recovery systems we manufacture to protect our brand. We collect a one-time fee for the fabrication of each of our units. Of the approximately 110 unique customers who have purchased energy recovery systems from us, more than 25% of them have also purchased some of the other three major services that we offer which are auxiliary to our fabrication services, or have returned to us for new projects.

Design. Our primary product line of energy recovery systems can be designed to meet the specific needs of our customers. We typically focus on heavy industrial applications. In addition to the designing of energy recovery systems for our own customers, we occasionally are approached by and contract with third party manufacturers or engineering firms to design systems for their customers. This offers a peripheral revenue stream to supplement our core operations. We employ a flexible pricing scheme when designing for third parties that depends upon the size, application and deadline of the proposed energy recovery system.

Implementation and EPC Projects. Similar to the revenue model employed for our design services, we either package the implementation (installation) of our energy recovery system with the design and fabrication of our units, or outsource this function to third party manufacturers for a service charge; this allows smaller third party manufacturers to convert fixed costs to variable costs, while offering us an ancillary revenue stream. We do not perform implementation services on a stand-alone basis. We also possess the resources, expertise and capabilities to act as the lead engineering procurement and construction contractor, overseeing the implementation of energy recovery systems for our customers. EPC services involve the whole process of the construction of projects from design, development, engineering, manufacturing up to installation.

Maintenance. Our team is responsible for the overall maintenance of the energy recovery systems we install. In the event that major repairs are needed, the maintenance team is capable of rebuilding the equipment in order to repair or replace any necessary components. The maintenance team is contracted to service our own as well as other manufacturers' energy recovery systems. Our maintenance team charges an hourly fee for its services.

Our energy recovery systems represent a fully-customizable technology capable of meeting the varying needs of a diversified customer base. The systems are capable of recycling up to 70% of the energy that would otherwise be lost in customers' industrial processes, in many cases allowing our customers to recover their costs of the energy recovery system in energy savings within one to three years. The energy recovery systems can also capture and eliminate harmful particles, carbon dioxide, sulfur dioxide and other pollutants where the main industrial facilities release such harmful emissions.

Our energy recovery systems are suitable for use in a wide range of industries, including chemical processing, papermaking, and oil and ethanol refining. The core technology is easily adaptable to meet a variety of different size facilities and types of plant design. Below is an illustration of our technology as it is implemented in the sulfuric acid production industry.

Traditional Sulfuric Acid Production Process. The production of sulfuric acid involves highly exothermic chemical reactions. Most of the heat is released into the atmosphere through cooling towers without capturing any of the energy contained therein. Some of the heat from the production process is captured as steam, which the manufacturer can use to, for example, generate electricity. Without the use of an energy recovery system, the production of one ton of sulfuric acid will produce approximately one ton of steam.

Sulfuric Acid Production Process with Energy Recovery System. The incorporation of an energy recovery system increases the manufacturer's ability to extract energy from the production process such that the production of one ton of sulfuric acid can produce between 1.3 and 1.65 tons of steam. In so doing, 94% of the heat that would have otherwise been released to the atmosphere is utilized to provide a larger quantity of steam that can be used in industrial applications. The harnessed steam can be used for various applications, most commonly to drive generator turbines to produce electricity. Doing so decreases the manufacturer's demand for externally produced energy as the manufacturer instead can use internally produced energy resulting from the energy recovery system's increased production and utilization of steam.

Customers

We have provided approximately 110 unique customers with energy recovery systems, and more than 25% of these customers have purchased multiple other products and services from us such as design and implementation services. Our customers are mainly industrial manufacturers, such as chemical plants, paper manufacturers and industrial engineering firms. Our energy recovery systems are currently deployed and being deployed in a variety of international markets, including Saudi Arabia, Egypt, Pakistan, Korea, Vietnam and Malaysia, as well as in 20 of China's 32 provinces, including Yunnan, Jiangsu, Shandong, Sichuan, Hunan and Hubei.

Because of the nature and long life of our energy recovery systems, a majority of our sales are from new customers when comparing our customer base from year to year. However, we do receive repeat business from previous customers, especially those in China, when they are expanding their capacities or building new plants. For the years ended December 31, 2009 and 2010, our five largest customers accounted for 69% and 60% of our sales, respectively. Receivables from these five customers were 66% and 5% of total accounts receivable at December 31, 2009 and 2010, respectively. Our large customers may not be the same from year to year. It represents the revenue recognized in excess of the amount billed based on the percentage of completion method. Therefore, we do not believe that we are dependent upon any specific major customer to continue our current level of sales.

Intellectual Property and Other Proprietary Rights

The Chinese State IPR Office has authorized and granted the following patents to Shanghai Engineering and CER Shanghai on various components of our energy recovery systems:

Patent Type	Patent Name	Expiration Date
Utility model	Drum-type sectional ache fire tube boiler made by sulphur	5/6/2013
Utility model	Double drum-type fire tube exhaust-heat boiler which shares one steam dome	11/6/2013
Utility model	Improvement of tube compensator breed which makes ache fume	11/6/2013
Utility model	Improvement of protective casing tube	11/6/2013
Utility model	Triple drum-type fire tube exhaust-heat boiler which shares one steam dome	1/30/2015
Utility model	Spray pump synthesizing tower	8/30/2017
Invention	Chlorosulfonic acid preparation new craftwork and equipment	8/30/2017
Utility model	Cement kiln forced-circulated waste heat recovery boiler	4/2/2019
Utility model	The center pipe smoke double disc regulator	4/16/2019
Utility model	Steam air reactor	3/28/2020

CER Shanghai has submitted the following patent applications to the Chinese State IPR Office, which are currently pending authorization:

Patent Type	Patent Name	Application Date
Utility model	Feed water type diluter	6/2/2010
Utility model	Inspection device for leaking	6/2/2010
Utility model	Steam drainage device	6/2/2010

Research and Development

We are focused on a strategy of utilizing our research and development capabilities to continuously improve the waste heat and emissions capture technology of our energy recovery systems. Our research and development efforts focus specifically on maximizing efficiency and reliability while minimizing the cost to customers. We have currently been focusing our efforts on new products with immediate demand in the markets such as capturing and reducing emissions released in various industrial processes, such as sulfur dioxide (a byproduct in sulfuric acid processes) and alkali (a byproduct in paper-making processes). We maintain strong relationships with many professional engineering firms in China that can provide technical support in the development process.

We employ approximately 100 highly trained engineers at our Shanghai, China facilities who are engaged in refining the core technology for our energy recovery systems, developing our intellectual property rights, enhancing energy efficiencies and decreasing environmental impact for our customers. Our engineers carry out development activities alongside with the design work for our customers’ projects and the expenses associated with our research and development activities are passed along to our customers as part of the price paid for our products and services. However, since expenses incurred in research and development are immaterial, we do not record research and development expenses as a separate line item in our financial statements. Shanghai Engineering has a portfolio of core Chinese patents on various components of our energy recovery systems as described above.

Our Business Strategy

We have established a three-phase growth strategy:

Phase One. During the first phase of our growth strategy, we will continue to fulfill our current orders while growing our domestic Chinese business. During this time, we intend to establish long-term strategic purchasing agreements with suppliers that provide key raw materials.

Phase Two. The second phase of our growth strategy involves increased expenditures that will support our growth. We have completed the first phase of the construction of our first owned manufacturing facility, which we believe will increase our profit margins and efficiency. We also intend to invest in specialized equipment to further increase the efficiency of our manufacturing process. While these capital expenditures are underway, we expect to incur separate (unrelated to any particular customer project) research and development expenditures to support an expansion into new sectors, such as coke refining and cement, including adding more specialized talents to our engineering and design team. We also anticipate recruiting an international sales and marketing team to assist in international market expansion.

Phase Three. In the third phase of our growth strategy, we plan to complete the second phase of the construction of our first owned manufacturing facility to meet future demand. We also anticipate expanding our EPC business by continuing to increase the size of our engineering and design team. Finally, we intend to increase our international marketing efforts in the Middle East, Europe and the United States during this phase.

Raw Materials and Principal Suppliers

We do not currently have any long-term supply agreements. We do not believe that we are reliant on our current suppliers. We believe that we could substitute other suppliers if needed. Our five largest suppliers (by value) supplied approximately 29% of our raw materials in 2010.

Employees

As of December 31, 2010, we had approximately 470 employees, all of who are full time employees. Of these, approximately 100 are engineering and technical personnel. We expect to continue to add additional personnel, especially engineers, in 2011 and beyond to support our anticipated growth.

None of our employees is covered by a collective bargaining agreement. Each of our managerial, sales and administrative employees has entered into a standard form of employment agreement. All of our personnel who have access to our confidential information and technical know-how have entered into a separate agreement that contains covenants not to compete for 24 months following termination of employment and to maintain the confidentiality of certain proprietary information. We believe that our employee relations are good.

Governmental Regulation

The manufacture of boilers and pressure vessels used in our energy recovery systems is subject to licensing requirements imposed by the Chinese national government, as well as regional and local governments, depending on the type of license needed. Shanghai Si Fang conducted all our manufacturing operations before 2011 and obtained all required licenses. In January 2011, CER Yangzhou also obtained all required licenses and will take over all our manufacturing function starting approximately in May 2011. Boilers and pressure vessels manufactured without such licenses are not allowed to be sold in China. To qualify for a license, a manufacturer must (a) be a legal entity registered with the local government; (b) have a production facility, equipment, technical expertise, and inspection and testing capabilities suitable for producing boilers and pressure vessels; (c) establish and maintain an effective quality assurance system; and (d) manufacture the boilers and pressure vessels in accordance with the requirements of the applicable safety and technical standards.

Our operations are also subject to governmental regulations applicable to any business such as general permitting, licensing and registration. For example, the installation of energy recovery systems at our clients' locations requires a construction project building permit from the applicable regional government.

Compliance with Environmental Laws

We belong to what is known as the "machinery manufacturing industry" in China which industry is considered not to generate exhaust gas, waste liquor or waste residue during manufacturing. Therefore, generally, our manufacturing operations are not subject to any material environmental regulations.

The installation and construction of our energy recovery systems at our clients' locations are subject to environmental laws applicable to construction projects generally. As part of the procedure for obtaining a construction project building permit, we must submit an environmental impact statement for each construction project which assesses the pollution the projects is likely to produce, its impact on the environment, and which stipulates preventive and curative measures. The issuance of a building permit is conditioned on the approval of the environmental impact statement.

Item 1A Risk Factors

There are numerous and varied risks that may prevent us from achieving our goals, including those described below. You should carefully consider the risks described below and the other information included in this Annual Report on Form 10-K, including our financial statements and related notes. Our business, financial condition and results of operations could be harmed by any of the following risks. If any of the events or circumstances described below were to occur, our business, financial condition and results of operations could be materially adversely affected. As a result, the trading price of our common stock could decline, and investors could lose part or all of their investment.

Risks Related to Our Business

Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

Our limited operating history and the unpredictability of our industry make it difficult for investors to evaluate our business and future operating results. An investor in our securities must consider the risks, uncertainties and difficulties frequently encountered by companies in new and rapidly evolving markets. The risks and difficulties we face include challenges in accurate financial planning as a result of limited historical data and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to companies with longer operating histories.

Our dependence on a limited number of customer segments may cause significant fluctuations or declines in our revenues.

We currently sell a substantial portion of our energy recovery systems to companies in either the chemical or paper manufacturing sectors. Consequently, any one of the following events may cause material fluctuations or declines in our revenues and have a material adverse effect on our results of operations:

Decreased demand for the products of these manufacturing sectors;

Advances in the manufacturing processes of these sectors that could eliminate the economic feasibility of our technology; and

Failure to successfully implement our systems for one or more customers within a particular sector could adversely affect the reputation of our products and services have as a viable option for other companies within that sector.

We face risks associated with the marketing, distribution and sale of our energy recovery systems, and if we are unable to effectively manage these risks, they could impair our ability to expand our business.

The marketing, distribution and sale of our products expose us to a number of risks, including, but not limited to:

Increased costs associated with maintaining marketing efforts in various parts of China and various countries;

Marketing campaigns that are either ineffective or negatively perceived in one or more countries and/or across one or more industry sectors;

Difficulty and cost relating to compliance with the different commercial and legal requirements of the overseas markets in which we offer our products;

Inability to obtain, maintain or enforce intellectual property rights; and

Trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries.

If we are unable to manage these risks, we may be unable to expand our business into new countries or industries, or expansion may become costlier than expected.

The success of our business depends on our ability to attract highly qualified personnel without whom we would be unable to maintain the quality of our services, and our ability to retain them, including senior management and other key personnel who may terminate their employment with us at any time causing us to lose experienced personnel and to expend resources in securing qualified replacements.

We depend substantially on the current and continued services and performance of our senior management and other key personnel. Loss of the services of any of such individuals would adversely impact our operations. In addition, we believe that our technical personnel represent a significant asset and provide us with a competitive advantage over many of our competitors and that our future success will depend upon our ability to hire and retain these key employees and our ability to attract and retain other skilled financial, engineering, technical and managerial personnel. As our industry continues to grow, we expect increased competition for qualified personnel. In the event that we are unable to retain or attract the same level of qualified personnel as in the past on the current terms of employment, we may face higher labor costs or lower productivity. If our productivity or the quality of the services we provide decrease, our business may suffer negative consequences such as a reduction in our rate of securing and completing customer engagements. Increased costs of labor and reduced throughput would negatively affect our profitability.

We do not have currently any employment agreements with our key personnel, including our chief Executive Officer; therefore such key personnel may voluntarily terminate their employment at any time. There is no guarantee that we will be able to retain the services of these, or other, individuals on reasonable terms or at all. We do not currently maintain any "key man" life insurance with respect to any of such individuals.

Our inability to obtain capital, use internally generated cash, or use shares of our capital stock or debt to finance future expansion efforts could impair the growth and expansion of our business.

Reliance on internally generated cash or debt to finance our operations or complete business expansion efforts could substantially limit our operational and financial flexibility. The extent to which we will be able or willing to use shares of capital stock to consummate expansions will depend on the market value of our capital stock from time to time and the willingness of potential investors, sellers or business partners to accept it as full or partial payment. Using shares of capital stock for this purpose also may result in significant dilution to our then existing stockholders. To the extent that we are unable to use capital stock to make future expansions, our ability to grow through expansions may be limited by the extent to which we are able to raise capital for this purpose through debt or equity financings. The higher gearing ratio may make us more difficult to perform debt finance in the future. Raising external capital in the form of debt could also require periodic interest payments that could hinder our financial flexibility in the future. No assurance can be given that we will be able to obtain the necessary capital to finance a successful expansion program or our other cash needs. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of any expansion. In addition to requiring funding for expansions, we may need additional funds to implement our internal growth and operating strategies or to finance other aspects of our operations. Our failure to (a) obtain additional capital on acceptable terms, (b) use internally generated cash, or (c) use shares of capital stock to make future expansions may hinder our ability to actively pursue any expansion program we may decide to implement. 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 interests are due September 29, 2012.

Our future success substantially depends on our ability to significantly increase our manufacturing capacity. Our ability to achieve our capacity expansion goals is subject to a number of risks and uncertainties.

Our future success depends on our ability to significantly increase our manufacturing capacity. If we are unable to do so, we may be unable to expand our business, decrease our average cost per watt, maintain our competitive position and improve our profitability. Our ability to establish additional manufacturing capacity for future expansion is subject to significant risks and uncertainties on funding. We may be unable to raise the necessary capital to complete the remaining phase of construction of our manufacturing base in Yangzhou or further initiate a new manufacturing facility. We may be unable to acquire the appropriate permits to allow construction of a new manufacturing facility, or engage a company qualified to construct our manufacturing facility at a reasonable price, or at all.

We may not be able to manage our expansion of operations effectively and if we are unable to do so, our profits may decrease.

The trend towards mitigating the effect of global warming and the enactment of new environmental protection policy greatly increased the demand for our products and services. As we continue to grow, we must continue to improve our operational and financial systems, procedures and controls, increase our manufacturing capacity and output, and expand, train and manage our growing employee base. In order to fund our on-going operations and our future growth, we need to have sufficient internal sources of liquidity or access to additional financing from external sources. Furthermore, our management will be required to maintain and strengthen our relationships with our customers, suppliers and other third parties. As a result, our continued expansion has placed, and will continue to place, significant strains on our management personnel, systems and resources. We will also need to further strengthen our internal control and compliance functions to ensure that we will be able to comply with our legal and contractual obligations and minimize our operational and compliance risks. Our current and planned operations, personnel, systems, internal procedures and controls may not be adequate to support our future growth. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures. As a result, our results from operations may decline.

Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.

We rely primarily on patent, trademark, trade secret, copyright law and other contractual restrictions to protect our intellectual property. For example, Shanghai Engineering holds six patents in China. Nevertheless, these afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. In addition, implementation of China's intellectual property-related laws has historically been lacking, primarily because of ambiguities in China's laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. As a result, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. We cannot assure you that the outcome of such potential litigation will be in our favor. Such litigation may be costly and may divert management attention as well as expend our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause us to pay significant damage awards.

Our success also depends largely on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. The validity and scope of claims relating to our technology patents involve complex scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our products or subject us to injunctions prohibiting the manufacture and sale of our products or the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation.

Although we sell a substantial portion of our products outside of China through the local contractors, the patents protecting parts of our energy recovery systems are issued in China. Our business, results of operations and financial condition could be materially and adversely affected if our sales outside China were to be restricted by intellectual property claims by third parties.

As of today, we held a total of ten issued patents in China. We do not have, and have not applied for, any patent for our proprietary technologies outside of China although we have sold, and expect to continue to sell, a substantial portion of our products outside of China through the local contractors. Because the protection afforded by our patents is effective only in China, others may independently develop substantially equivalent technologies, or otherwise gain access to our proprietary technologies, and obtain patents for such intellectual properties in other jurisdictions, including the countries to which we sell our products. If any third parties are successful in obtaining patents for technologies that are substantially equivalent or the same as the technologies we use in our products in any of our markets before we do and enforce their intellectual property rights against us, our ability to sell products containing the allegedly infringing intellectual property in those markets will be materially and adversely affected. If we are required to stop selling such allegedly infringing products, obtain a license and pay royalties for the relevant intellectual properties, or redesign such products with non-infringing technologies, our business, results of operations and financial condition may be materially and adversely affected.

We also sell or install other types of energy recovery systems manufactured by a third party and our inability to continue to do so may make us less competitive in the market and decrease our revenues.

We do not manufacture all types of the energy recovery systems that we sell or install. In the sulfuric acid industry, our proprietary energy recovery systems are used for high and middle temperature applications. We also sell or install low temperature energy recovery systems manufactured by a third party specifically for sulfuric acid manufacturing facilities. Also, in the future, we may sell or install energy recovery systems that we manufacture under licenses from third parties owning the proprietary rights to such energy recovery systems. These energy recovery systems allow us to serve the low temperature market segment in the sulfuric acid manufacturing sector that we are unable to serve with our own proprietary energy recovery systems. Our current arrangement with this third party is on a project-by-project basis. If we are unable to continue offering these energy recovery systems to our customers, we may be unable to serve the low temperature market segment in the sulfuric acid manufacturing sector, thereby harming our competitive position and likely decreasing our revenues.

Fluctuations in exchange rates could adversely affect our business and your investment.

A portion of our sales is currently denominated in U.S. dollars, with the remainder in Renminbi, while our costs and expenses are denominated in U.S. dollars and Renminbi. Therefore, fluctuations in currency exchange rates could have a material adverse effect on our financial condition and results of operations. Fluctuations in exchange rates, particularly among the U.S. dollar and Renminbi, affect our gross and net profit margins and could result in foreign exchange and operating losses.

Our financial statements are expressed in U.S. dollars but our functional currency is Renminbi. The value of your investment in our stock will be affected by the foreign exchange rate between U.S. dollars and Renminbi. To the extent we hold assets denominated in U.S. dollars, any appreciation of the Renminbi against the U.S. dollar could result in a charge to our income statement. On the other hand, a decline in the value of Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of our stock.

The change in value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China's political and economic conditions. On July 21, 2005, the Chinese government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in approximately 25% appreciation of the Renminbi against the U.S. dollar as of December 31, 2010 since the change in policy. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the Chinese government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. For example, to the extent that we need to convert U.S. dollars we received in a financing into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

Fluctuation in steel price may continue to increase the level of our earnings volatility and reduce our profitability.

Steel is a major raw material of our products. Fluctuation in the price of steel may greatly affect the cost of goods sold. If we are unable to increase our selling price, to the same extent as the price of steel increases, the level of our earnings volatility would increase and our profitability would decline, which would materially and adversely affect our business, financial condition and results of operations.

We do not believe that our energy recovery systems are subject to emission standards applicable to fuel-burning boilers but if they were to be subject to such emission standards, we may incur additional costs in complying with them which may negatively impact our profitability.

There are emissions standards applicable to the operation of coal-burning, oil-burning or gas-fired boilers (China National General Standard GWPB 3-1999). We do not believe that these emission standards are applicable to the boilers included within our energy recovery systems because our boilers are not independently emitting any emissions as they are being heated by industrial processes as opposed to by coal, oil or gas. If our energy recover systems were to become subject to these emission standards, we may need to change the design of our energy recovery systems to bring them into compliance with the emission standards which may increase our costs and negatively impact our profitability.

We operate in a competitive industry with several established and more horizontally integrated companies. It may be difficult to sustain our market share in the event of a decline in market conditions.

Our industry is competitive and rapidly changing. Future competitors may include international engineering companies and large domestic engineering companies. These competitors may have a material advantage in their financial, technical and marketing resources. Competition in the energy recovery industry may increase in the future, which could result in reduced pricing power and declining margins. We may be unable to successfully compete against future competitors, which would adversely affect our business and operations.

In our course of business, we expose ourselves to possible litigation associated with performing services on our customers' properties.

We perform installation services on our customers' properties and doing so can result in claims of property damage, breach of contract, harassment, theft, and other such claims. These claims may become time consuming and expensive, which would adversely affect our financial condition and the reputation of our business.

We are subject to risks related to warranty claims whereby we may not be able to collect the full purchase price of sold products or which are greater than anticipated due to the unenforceability of liability limitations.

We warrant the majority of our products for periods of one or two years. Defects may not become apparent until after the products have been sold and installed. As a normal practice in the industry, we allow our customers to retain 5% to 10% of the contract prices as retainage during the warranty period for any future warranty claims. When a warranty claim occurs and we determine that the product in question is defective, we repair the product at our expenses, which could increase our costs and adversely affect our business. Also, if we are unable to repair the product to the customer's satisfaction or for other reasons, we may not have the right or be able to collect the whole or part of the retainage at the end of the warranty period. Further, our standard warranties contain limits on damages and exclusions of liability for consequential damages and for misuse, alteration, accident or mishandling after the sale and installation. If these limitations are ineffective or found to be unenforceable, we may be subject to greater than anticipated warranty claims.

We have limited insurance coverage and may incur losses resulting from product liability claims or business interruptions.

While we historically have not been subject to any product liability claims, we are exposed to risks associated with such claims in the event that the use of the products we sell results in injury. We do not have any product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against us. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. In addition, because the insurance industry in China is still in its early stages of development, business interruption insurance available in China offers limited coverage compared to that offered in many other countries. We do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

A drop in the price of conventional energy sources may decrease the demand for our energy recovery systems and may negatively impact our sales and profitability.

Our energy recovery systems capture industrial waste energy which then can be reused in industrial processes or used to produce electricity and thermal power. An energy recovery system is expensive to purchase and install. We believe that our customers make purchasing decisions based on the economic feasibility of installing one of our energy recovery systems relative to using conventional energy and other alternative energy sources. Decreases in the prices of oil and other fossil fuels, utility electric rates, and other alternative energy sources could cause the demand for energy recovery systems to substantially decline, which would negatively impact our profitability. A significant decrease in energy prices globally could cause a slowdown in our order volume and delays in acceptance of international orders.

If we do not generate the anticipated demand for our energy recovery systems, we may not continue to realize the necessary sales levels needed to reach or maintain profitability.

The market for energy recovery systems is relatively new and still evolving. The success of our products and services will depend on the cost effectiveness and the relative performance of our systems relative to conventional and other alternative energy technologies. If our products and services do not capture the necessary industry market share, we may not be able to generate sufficient revenue or sustain profitability.

Risks Related to Our Corporate Structure

In order to comply with Chinese laws limiting foreign ownership of Chinese companies, we currently conduct our business by means of contractual arrangements with Chinese companies that we do not own. If the Chinese government determines that these contractual arrangements do not comply with applicable regulations, our business could be adversely affected.

The Chinese government restricts foreign investment in the manufacturing business in China. Accordingly, we operate our business in China through our indirect wholly-owned Chinese subsidiary, CER Hong Kong, which in turn has entered into contractual arrangements with Shanghai Engineering and Shanghai Environmental for the design, manufacturing and installation of energy recovery systems. Since Shanghai Environmental was dissolved in year 2010 and we will transfer our production function to CER Yangzhou from Vessel Works Division, which was controlled by Shanghai Engineering, we no longer need to enforce, retain or renew these contracts with Shanghai Environmental and Shanghai Engineering. The risk of conducting business by means of contractual agreements will be remote from year 2011.

Our contractual arrangements with Shanghai Engineering and their respective shareholders may not be as effective in providing control over these entities as direct ownership.

Because Chinese law limits foreign equity ownership in companies in China, we operate our business through affiliated Chinese company, Shanghai Engineering. We have no equity ownership interest in Shanghai Engineering and rely on contractual arrangements to control and operate such entity and its business. This contractual arrangement may not be as effective in providing control as direct ownership. For example, Shanghai Engineering could fail to take actions required for our business despite their contractual obligation to do so. If Shanghai Engineering fails to perform under its agreement with us, we may have to rely on legal remedies under Chinese law to enforce it, which may not be effective. In addition, we cannot assure you that Shanghai Engineering's respective shareholders would always act in our best interests.

Risks Related to Doing Business in China

Our business is exposed to risks associated with the economic, environmental and political conditions in China because the substantial majority of our assets are located in China and the majority of our revenues are derived from our operations in China.

Because our headquarters and manufacturing facilities are located in China, our business is disproportionately exposed to the economic, environmental and political conditions of the region. The country's political and economic systems are very different from more developed countries and uncertainties may arise with changing of governmental policies and measures. China also faces many social, economic and political challenges that may produce instabilities in both its domestic arena and in its relationship with other countries. These instabilities may significantly and adversely affect our performance. In addition, as the Chinese legal system develops, they can be no assurance that changes in laws and regulations and their interpretation or their enforcement will not have a material adverse effect on our business operations. As a large portion of our target customers are also located in China and are subject to the aforementioned risks, our business may also be adversely affected by the effects of the conditions within the region upon them.

Adverse changes in political and economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.

A majority of our business operations and sales are conducted and made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

the amount of government involvement;

the level of development;

the growth rate;

the control of foreign exchange; and

the allocation of resources.

While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result in decreased capital expenditure by companies in our target markets for energy recovery systems, which in turn could reduce demand for our products.

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses.

Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.

We conduct substantially all of our business through subsidiaries and affiliated entities in China. These entities are generally subject to laws and regulations applicable to foreign investment in China. China's legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, Chinese legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and China's legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

The majority of our revenues and expenses are denominated in Renminbi. If our revenues denominated in Renminbi increase or expenses denominated in Renminbi decrease in the future, we may need to convert a portion of our revenues into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our common stock.

Due to the global financial crisis, the Chinese government has strengthened measures to control exchange of Renminbi into foreign currencies and outbound payments by, among other things, requiring prior approval from the Chinese State Administration of Foreign Exchange ("SAFE") before taking such actions in some cases. As a result, it has become more difficult for us to exchange Renminbi into foreign currencies and to make payments to entities and individuals outside of China. In some cases we need SAFE's prior approval to do so. If these measures are not loosened in the near future, our ability to pay dividends in foreign currencies is restricted and if we are unable to obtain SAFE's prior approval when needed, we will not be able to pay dividends in foreign currencies at all. We cannot assure you that that the Chinese government will not further restrict access to foreign currencies for current account transactions in the future.

Foreign exchange transactions by our subsidiaries and affiliated entities or under the capital account continue to be subject to significant foreign exchange controls and require the approval of China's governmental authorities, including the SAFE. In particular, if our subsidiaries and affiliated entities borrow foreign currency loans from us or other foreign lenders, these loans must be registered with the SAFE, and if we finance our subsidiaries and affiliated entities by means of additional capital contributions, these capital contributions must be approved by certain government authorities including the Chinese Ministry of Commerce or its local counterparts. These limitations could affect the ability of our subsidiaries and affiliated entities to obtain foreign exchange through debt or equity financing.

Our business benefits from certain Chinese government incentives. Expiration of, or changes to, these incentives could have a material adverse effect on our operating results.

The Chinese government has provided various incentives to high technology companies, including our affiliate Shanghai Engineering, in order to encourage development of the high technology industry. Such incentives include reduced tax rates and other measures. For example, Shanghai Engineering has been qualified as a "high or new technology enterprise." As a result, we are entitled to a preferential enterprise income tax rate of 15% so long as Shanghai Engineering continues to maintain its "high or new technology enterprise" status. A new Enterprise Income Tax ("EIT") law replaced the old laws for Domestic Enterprises ("DEs") and Foreign Invested Enterprises ("FIEs") in 2008. The key changes are: (a) the new standard EIT rate of 25% replaces the 33% rate originally applicable to both DEs and FIEs, except for companies with high or new technology enterprise status, which will pay a reduced rate of 15%, and (b) companies established before March 16, 2007 will continue to enjoy tax holiday treatment approved by local government for a grace period of the next five years or until the tax holiday term is completed, whichever is sooner. These companies will pay the standard tax rate as defined in point (a) above during the grace period. Because Shanghai Engineering was established before March 16, 2007, it is qualified to continue enjoying the reduced tax rate as described above. Any increase in our enterprise income tax rate in the future could have a material adverse effect on our financial condition and results of operations.

Risks Related to our Common Stock

There is not an active trading market for our common stock, and if a market for our common stock does not develop, our investors may be unable to sell their shares.

Our common stock is currently quoted on the Pink Sheets trading system. The Pink Sheets is not a listing service or exchange, but is instead a dealer quotation service for subscribing members. The Pink Sheets tend to be highly illiquid, in part because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of market volatility for securities that trade on the Pink Sheets as opposed to a national exchange or quotation system. This volatility may be caused by a variety of factors including:

The lack of readily available price quotations;

The absence of consistent administrative supervision of "bid" and "ask" quotations;

Lower trading volume;

Market conditions;

Technological innovations or new products and services by us or our competitors;

Regulatory, legislative or other developments affecting us or our industry generally;

Limited availability of freely-tradable "unrestricted" shares of our common stock to satisfy purchase orders and demand;

Our ability to execute our business plan;

Operating results that fall below expectations;

Industry developments;

Economic and other external factors; and

Period-to-period fluctuations in our financial results.

In addition, the value of our common stock could be affected by:

Actual or anticipated variations in our operating results;

Changes in the market valuations of other companies operating in our industry;

Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

Adoption of new accounting standards affecting our industry;

Additions or departures of key personnel;

Introduction of new services or technology by our competitors or us;

Sales of our common stock or other securities in the open market;

Changes in financial estimates by securities analysts;

Conditions or trends in the market in which we operate;

Changes in earnings estimates and recommendations by financial analysts;

Our failure to meet financial analysts' performance expectations; and

Other events or factors, many of which are beyond our control.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also significantly affect the market price of our common stock.

In a volatile market, you may experience wide fluctuations in the market price of our securities. These fluctuations may have an extremely negative effect on the market price of our securities and may prevent you from obtaining a market price equal to your purchase price when you attempt to sell our securities in the open market. In these situations, you may be required either to sell our securities at a market price which is lower than your purchase price, or to hold our securities for a longer period of time than you planned. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using common stock as consideration.

Because we do not intend to pay any dividends on our common stock, purchases of our common stock may not be suited for investors seeking dividend income.

We do not currently anticipate declaring and paying dividends to our stockholders in the near future. It is our current intention to apply any net earnings in the foreseeable future to the internal needs of our business. Prospective investors seeking or needing dividend income or liquidity from our common stock should, therefore, not purchase our common stock. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our shares, and in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors, who currently do not intend to pay any dividends on our common shares for the foreseeable future.

We cannot assure you that we will list our common stock on NASDAQ or any other national securities system or exchange.

Although we intend to apply to list our common stock on NASDAQ or the American Stock Exchange in the future, we do not currently meet the initial listing standards of either of those markets and we cannot assure you that we will be able to qualify for and maintain a listing of our common stock on either of those markets or any other stock system or exchange in the future. Furthermore, in the case that our application is approved, there can be no assurance that trading of our common stock on such market will reach or maintain desired liquidity. If we are unable to list our common stock on NASDAQ, the American Stock Exchange or another national securities system or exchange, or to maintain the listing, we expect that our common stock will be eligible to trade on the Pink Sheets, maintained by NASDAQ, another over-the-counter quotation system, or on the "pink sheets," where an investor may find it more difficult, or impossible, to dispose of shares or obtain accurate quotations as to the market value of our common stock. Under such circumstances, the probability of reduced liquidity would hinder investors' ability to obtain accurate quotations for our common stock, and our common stock could become substantially less attractive to investors.

Securities analysts may not continue to cover our common stock, and this may have a negative impact on our common stock's market price.

The trading market for our common stock will depend, in part, on the research and reports that securities analysts publish about us and our business. We do not have any control over these analysts. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our stock is downgraded, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

We have raised substantial amounts of capital in private placements, and if we fail to comply with the applicable securities laws, ensuing rescission rights or lawsuits would severely damage our financial position.

Our private placements consist of securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state "blue sky" law as a result of exemptions from such registration requirements. Such exemptions are highly technical in nature and if we inadvertently failed to comply with any of such exemptive provisions, investors could have the right to rescind their purchase of our securities and also sue for damages. If any investors were to successfully seek such rescission or prevail in any such suit, we could face severe financial demands that could have significant, adverse affects on our financial position. Future financings may involve sales of our common stock at prices below prevailing market prices on the exchange on which our common stock is quoted or listed at that time, as well as the issuance of warrants or convertible securities at a discount to market price.

The application of the "penny stock" rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.

The SEC has adopted regulations which generally define a "penny stock" to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The last reported trade of our common stock on the Pink Sheets was at a price below $5.00 per share, and, accordingly, our common stock is currently considered a penny stock. The SEC's penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that before a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's agreement to the transaction. If applicable in the future, these rules may restrict the ability of brokers-dealers to sell our common stock and may affect the ability of investors to sell their shares, until our common stock no longer is considered a penny stock.

Sales of a significant number of shares of common stock in the public market could lower the market price of our common stock.

A significant amount of common stock is subject to issuance upon the conversion of our Series A Convertible Preferred Stock and upon exercise of warrants to purchase common stock. The conversion, exercise and sale of these financial instruments could depress the market price of our common stock.

As of December 31, 2010, we had 200,000 shares of our Series A Convertible Preferred Stock currently exercisable into 105,882 shares of common stock outstanding. Also, all of the warrants issued in the Financing, currently exercisable into 3,357,450 shares of common stock, remain outstanding.

Sales of a significant number of shares of our common stock in the public market after the conversion or exercise of these securities could lower the market price of our common stock.

Risks Related to Our Company

Mr. Qinghuan Wu, one of our directors and our Chairman of the Board and Chief Executive Officer, may have potential conflicts of interest with us, which may adversely affect our business, and beneficially owns a significant number of shares of our common stock, which will have an impact on all major decisions on which our stockholders may vote and which may discourage an acquisition of our Company.

Mr. Qinghuan Wu, who is our Chairman of the Board and Chief Executive Officer, is also an Executive Director of each of Shanghai Engineering and Shanghai Environmental. Shanghai Engineering is owned jointly by Mr. Qinghuan Wu and his spouse, Mrs. Jialing Zhou, who is one of our directors. Conflicts of interest may arise between his duties to our company and his duties to Shanghai Engineering, or his interest as an owner of Shanghai Engineering. As Mr. Qinghuan Wu is a director and executive officer of our company, he has a duty of loyalty and care to us under Delaware law when there are any potential conflicts of interest between our company and Shanghai Engineering and Shanghai Environmental. We cannot assure you that when conflicts of interest arise, Mr. Qinghuan Wu will act completely in our interests or that conflicts of interest will be resolved in our favor. In addition, Mr. Qinghuan Wu could violate his legal duties by diverting business opportunities from us to others. If we cannot resolve any conflicts of interest between us and Mr. Qinghuan Wu, we would have to rely on legal proceedings, which could disrupt our business.

Further, the design, manufacturing and installation of energy recovery systems are conducted by Shanghai Engineering. We do not own Shanghai Engineering but instead rely on contractual arrangements between our wholly-owned subsidiary CER Hong Kong and it to control the company and to participate in its profitability. Shanghai Engineering, in turn, has entered into contractual agreements with Shanghai Si Fang for the manufacture of our energy recovery systems. The agreements constituting these contractual arrangements provide that CER Hong Kong may assign them to other parties, in some cases freely, and that Shanghai Engineering may assign them to other parties with CER Hong Kong's consent. Mr. Qinghuan Wu, as an owner and member of management of Shanghai Engineering, and as our Chairman of the Board and Chief Executive Officer, has the power to direct the operations of Shanghai Engineering and CER Hong Kong and to cause them to terminate, fail to renew, assign or consent to the assignment of the agreements constituting these contractual arrangements, even if contrary to Mr. Qinghuan Wu's duties to us. If these agreements were terminated, not renewed or assigned to a party unaffiliated with us, and we were unable to enter into satisfactory substitute agreements with other design firms, manufacturers, installers and sales firms, we would likely be unable to continue to design, manufacture, install and sell energy recovery systems and our stockholders would hold stock in a company without meaningful business operations.

Currently, Mr. Qinghuan Wu directly owns approximately 37% of our currently outstanding common stock (including the shares escrowed in the Share Exchange; and beneficially together with his spouse approximately 64%). In addition, he is also our Chairman of the Board, Chief Executive Officer and Acting Chief Financial officer. The interests of Mr. Qinghuan Wu may differ from the interests of other stockholders. As a result, Mr. Qinghuan Wu has the ability to significantly impact all corporate actions requiring stockholder approval, including the following actions:

Election of our directors;

The amendment of our organizational documents; and

The merger of our company or the sale of our assets or other corporate transaction; and

Mr. Qinghuan Wu's beneficial stock ownership may discourage potential investors from investing in shares of our common stock due to the lack of influence they could have on our business decisions, which in turn could reduce our stock price.

If we fail to implement effective internal controls required by the Sarbanes-Oxley Act of 2002, to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.

Section 404 of the Sarbanes-Oxley Act of 2002 requires management of public companies to develop and implement internal controls over financial reporting and evaluate the effectiveness thereof,.

In 2010, we strengthened our internal control and reviewed corporation governance and financial related issues and have improved the financial reporting systems as we have previously restate the financials for fiscal 2008 and 2009. During our assessment of the effectiveness of our disclosure controls and procedures and internal controls over financial reporting as of December 31, 2009, we found that some of our accounting staff lacked sufficient accounting skills and experience necessary to fulfill our public reporting obligations according to accounting principles generally accepted in the United States and the SEC's rules and regulations. We also lack qualified resources to perform our internal audit functions properly. However, we did take some actions to remediate these weaknesses in 2010.

Any failure to complete our assessment of our internal controls over financial reporting, to remediate any material weaknesses that we may identify, including those identified above, or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Inadequate disclosure controls and procedures and internal controls over financial reporting could also cause investors to lose confidence in our public disclosures and reported financial information, which could have a negative effect on the trading price of our common stock.

Further, because some members of the management team have limited or no experience operating a publicly-traded company, we are continuously keeping recruit, hire, train and retain additional financial reporting, internal controls and other personnel to develop and implement appropriate internal controls and reporting procedures. This may be time consuming, difficult and costly for us.

Our Amended and Restated Certificate of Incorporation authorizes our board of directors to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock or delay or prevent a change in control.

Our board of directors has the authority to fix and determine the relative rights and preferences of our preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. In addition, our issuing preferred stock could have the effect of delaying or preventing a change in control.

Item 1B Unresolved Staff Comments

Not applicable.

Item 2 Properties

Our corporate headquarters are currently located at 7F, No. 267 Qu Yang Road, Hongkou District, Shanghai 200081, China. The telephone number of our corporate headquarters is +86 (0)21 5556-0020.

On March 19, 2009, CER Shanghai entered into an office lease agreement with Shanghai Zhangjiang Integrated Circuit Industrial Zone Development Co., Ltd. to lease space to serve as our new main office and design and engineering center in China. The lease term began on March 1, 2009 and ended on February 28, 2011. The Company is also required to make a security deposit of approximately $292,613 in addition to the annual lease payments. The rental expense is recorded on a straight-line basis.CER Shanghai also has an option to purchase the office space. If CER Shanghai exercises the purchase option, all the lease payments and the deposit payment made can be credited against the purchase price and counted as a partial purchase payment. The Company has paid the first year’s rental fee in the amount of $146,304 and the security deposit of $292,613 in April 2009, and has also paid the second year’s rental fee in the amount of $851,525 in February 2010.The Company has amortized the total rental fee using straight-line method over the 2-year lease period.

On March 30, 2011, CER Shanghai exercised the purchase option with Shanghai Zhangjiang Integrated Circuit Industrial Zone Development Co., Ltd. The total purchase price of the building is $7,392,770 (RMB 48,486,224), which represents the price of the building and related land use right. CER Shanghai paid cash of $1,174,226 (RMB 7,698,697) and bank acceptance of $747,361 (RMB 4,900,000) on March 31, 2011. The maturity date of the bank acceptance shall be no later than October 10, 2011. The remaining payment will be made after March 30, 2011, by means of cash or bank acceptance according to the contract.

Through a contractual arrangement with Shanghai Engineering, our subsidiary Shanghai Engineering currently operates a manufacturing facility in Shanghai, China. The facility occupies approximately 10 acres (4 hectares) of land with 191,300 square feet of manufacturing space and storage. The manufacturing equipment includes cranes, press bending machines, cutting machines, welding machines, lathes, air compressors and other equipment. Shanghai Engineering does not own the manufacturing facility but operates it pursuant to the terms of a cooperative manufacturing agreement with Shanghai Si Fang. Pursuant to the agreement, Shanghai Si Fang leases its subsidiary Vessel Works Division to Shanghai Engineering.

On August 18, 2009, CER Hong Kong entered into a series of contracts with Yangzhou (Yizheng) Automobile Industrial Park Administration Committee, a government entity of the City of Yangzhou, Jiangsu Province, China, to acquire a tract of land on which CER Hong Kong plans to build a new manufacturing facility. The planned facility is part of the Company’s business plan for expanding its production capacity and to develop additional demand for its products within China and from overseas. Phase one construction of the plant was completed in January 2011. Phase two is under construction and anticipated to be complete in 2012.

Our production facilities are currently held in both Vessel Works Division and CER Yangzhou. We will complete the transfer of the production function from Vessel Works Division to CER Yangzhou by end of April 2011.

Item 3 Legal Proceedings

We are not a party to any pending material legal proceedings and are not aware of any threatened or contemplated proceeding by any governmental authority against us.

Item 4 [Reserved]

PART II

Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock has been quoted since May 20, 2010 under the symbol "CGYV.PK" on the Pink Sheets. Prior to May 20, 2010, the common stock was quoted on the OTC:BB under symbol “CGYV.OB”, until trading was terminated because of the delinquency in the Company’s SEC reporting obligations. The following table sets forth, for the periods indicated the high and low bid prices of our common stock as reported on the OTC:BB and Pink Sheets and adjusted for stock splits.

Period	High		Low
2011
First Quarter	$	1.25	$	0.80
2010
Fourth Quarter	$	1.40	$	0.32
Third Quarter	$	0.55	$	0.21
Second Quarter	$	0.8	$	0.15
First Quarter	$	1.05	$	0.59
2009
Fourth Quarter	$	1.25	$	0.85
Third Quarter	$	1.72	$	0.85
Second Quarter	$	2.03	$	1.46
First Quarter	$	2.20	$	1.15

As of March 31, 2011, the last reported sales price on the Pink Sheets for our common stock was $1.07 per share. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Stockholders

As of March 31, 2011, we had approximately 91 shareholders of record of our common stock. However, we currently believe that there are approximately an additional 200 shareholders who beneficially hold their shares through street name.

Dividends

We have not declared any dividends on our common stock since our inception and do not anticipate paying such dividends in the foreseeable future. We plan to retain any future earnings for use in our business. Any decisions as to future payments of dividends will depend on our earnings and financial position and such other facts as the board of directors deems relevant.

Recent Sales of Unregistered Securities

None

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth, as of December 31, 2010, certain information related to our compensation plans under which shares of our common stock are authorized for issuance.

Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options Warrants and Rights (a)		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		—		—		—

Equity compensation plans not approved by security holders		6,422,728	$	2.03		272,500
Total		6,422,728	$	2.03		272,500

Item 6 Selected Financial Data

Not applicable.

Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the results of operations and financial condition for the fiscal years ended December 31, 2009 and 2010 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Statement Regarding Forward-Looking Information, and Business sections in this report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.

Overview

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.

As a result of the Share Exchange, our business operations consist of those of Poise Profit's Chinese subsidiary, Hi-tech, which was 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 subsidiary CER Shanghai, CER Yangzhou and an affiliated entity with which CER Hong Kong has a contractual relationship, Shanghai Engineering. Shanghai Engineering's manufacturing activities are carried out by Vessel Works Division located in Shanghai, China, through a lease agreement with Vessel Works Division's owner. 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 122 energy recovery systems throughout China and in a variety of international markets.

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

Facing a possible large market opportunity and potential government supports, we decided to enlarge our production capacity by setting up new production base. Our plan is to establish CER Yangzhou as a world-class international manufacturing facility of waste heat equipment, in both products and technology. We plan to make highly efficient energy-saving products, make using advanced manufacturing processes and equipment. We intend, for this manufacturing facility to embody a completely new look of a modern factory, thus making the Company more competitive; while promoting the development of the local economy and further exploiting the manufacturing advantages in renewable energy equipment and waste heat recovery core equipment. During the last years, production constraints limited our growth and affected our financial profitability. Thus in 2010, we focused much of our energies on the construction of our new manufacturing facility in, Yangzhou, China, and completed the first phase of construction of the plant by January 2011. As a result, our production facilities are currently held in both Vessel Works Division and CER Yangzhou. We will complete the transfer of the remaining production function from Vessel Works Division to CER Yangzhou by end of April 2011. Phase two of the facility is still under construction and is anticipated to be complete in 2012.

In order to close down our existing manufacturing facility at Vessel Works Division in Shanghai, we deliberately accepted fewer product orders beginning in June 2010. However, with the factors mentioned above and the world economy beginning to recover, we took more orders than anticipated from existing and new customers. In year 2010, the Company doubled the amount of sales contracts to $65 million. The main reason is that we focused more attention and efforts on EPC contracts, which consolidated our leadership position in these sectors and contributed to higher revenue. All the EPC contracts are signed for projects with HRS techniques, which have been developed into the mature period in China. These techniques have been fully accepted by most of our customers. With the upward trend in energy price, we expect HRS techniques will have a bright future in the next five to ten years. Besides, with our widely recognized brand name and reputation for quality goods in the sulfuric acid industry, we believe we will benefit from this advantage and will have more opportunities in the future to put our expertise to good use.

With phase one of the new facility complete, we are prepared to expand our customer base and enter into more sectors. We expect to incur separate (unrelated to any particular customer project) research and development expenditures to support an expansion into new sectors, such as coke refining and cement, including adding more specialized talents to our engineering and design team. We are also planning on entering into marketing partnerships and licensing deals that will enable us to reach a boarder segment of the market. We believe that there is significant opportunity in international markets and we intend to enter these markets through partnerships.

Critical Accounting Policies and Estimates

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements in this Annual Report on Form 10-K, 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.

Fair Value Measurements

The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires fair value disclosures of those financial instruments. On January 1, 2008, the Company adopted accounting standard regarding fair value measurements, which defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the accompanying consolidated balance sheets for current assets and current liabilities qualify as financial instruments. Management concluded the carrying values of these financial instruments are a reasonable estimate of fair value 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 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. Fair valued assets and liabilities that are generally included in this category are assets comprised of cash, accounts and notes receivable, and liabilities comprised of bank loans, accounts payable, accrued liabilities and other payables. As of December 31, 2009 and December 31, 2010, the carrying values of these assets and liabilities approximated their fair values.

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, 2009 and December 31, 2010, 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.

The following table presents information about the company’s financial liabilities classified as Level 3 as of December 31, 2010.

			Balance as of December 31, 2010
	Carrying		Fair Value Measurements
	Value		Using Fair Value Hierarchy
			Level 1		Level 2		Level 3
Derivative liability, current (Note 13)	$	374,846		-		-	$	374,846
Derivative liability (Note 13)	$	48,461		-		-	$	48,461
Warrant liability (Note 13)	$	1,332,760		-		-	$	1,332,760

A summary of changes in Level 3 derivative and warrant liabilities for the years ended December 31, 2009 and 2010 were as follows:

Balance at January 1, 2009	$	1,524,268
Warrants issued at issuance of convertible notes (Note 13)		1,387,912
Derivative liability at issuance of convertible notes (Note 13)		1,270,500
Change in fair value of warrant liability recognized in earnings		(1,539,233	)
Change in fair value of derivative liability recognized in earnings		(399,500	)
Balance at December 31, 2009	$	2,243,947
Derivative liability of long term loan, current (Note 8)		132,470
Derivative liability of convertible notes (Note 9)		48,461
Change in fair value of warrant liability recognized in earnings		(40,187	)
Change in fair value of derivative liability recognized in earnings		(628,624	)
Balance at December 31, 2010	$	1,756,067

The following presents the carry value and the estimated value of the Company’s convertible note at December 31, 2010:

	Carry Value		Fair Value

Convertible note	$	4,691,582	$	4,580,314

The fair value of the convertible note is based on the market interest rate for debt with similar terms and maturity.

The long term account receivable is recorded at cost, which is discounted from the contractual balance. The carrying value of the long term account receivable, which is estimated based upon future cash flows, approximates fair value at December 31, 2010 and 2009.

In July 2010, the FASB issued an accounting standard update to provide guidance to enhance disclosure related to the credit quality of a company’s financing receivables portfolio and the associated allowance for credit loss. Pursuant to this accounting update, a company is required to provide a greater level of disaggregated information about its financing receivables portfolio and its allowance for credit loss with the objective of facilitating users’ evaluation of the nature of credit risk inherent in the company’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit loss, and the changes and reasons for those changes in the allowance for credit loss. The Company has included in Note 3 the expanded disclosure related to both the year end balances and activities during the reporting period.

Liability for Warrants

Effective January 1, 2009, the Company adopted the provisions of an accounting standard regarding instruments that are indexed to an entity’s own stock. This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. It provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception within the standards.

Consolidation of Variable Interest Entities

In accordance with the FASB’s Interpretation regarding the consolidation of variable interest entities, 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 and Shanghai Environmental are variable interest entities and that Poise Profit and CER Hong Kong are the primary beneficiaries. Under the requirements of FASB’s accounting standard, Poise Profit and CER Hong Kong consolidated the financial statements of Shanghai Engineering and Shanghai Environmental. 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.

All of Shanghai Engineering’s manufacturing activities are conducted through a Leasing and Operation Agreement, a form of cooperative manufacturing agreement, originally effective as of May 1, 2003 and subsequently renewed and amended with a state-owned enterprise, Shanghai Si Fang. Pursuant to the agreement, Shanghai Si Fang leases certain land use right, buildings and fixed assets (lease elements) in one of its subsidiaries, Vessel Works Division, and provides management services and licenses the “Si Fang” brand and manufacturing license (non-lease elements) of Vessel Works Division to Shanghai Engineering. Because the arrangement contains both the lease and non-lease elements, the amount of quarterly payments is allocated between the lease and non-lease deliverables. The lease elements are classified and accounted for as operating leases and the lease expense is recorded on a straight-line basis. The non-lease elements are accounted for as prepayment for management and licensing fees and the payment is amortized on a straight-line basis over each contractual period.

The arrangement, however, may result in Shanghai Engineering having variable interests in Shanghai Si Fang, but as Shanghai Si Fang is a state-owned enterprise that has substantive operations other than this lease and operation arrangement, Shanghai Engineering is not the primary beneficiary of Shanghai Si Fang.

Revenue Recognition

The Company derives revenues principally from

(a)

Sales of energy recovery systems;

(b)

Provision of design services;

(c)

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, procurement to installation.

Revenue by the above categories for years ended December 31, 2009 and 2010 are summarized as follows:

	Year ended December 31,
	2009		2010
Revenue:
Product	$	12,413,075		8,555,323
Service		260,815		-
EPC contracts		9,520,553		12,527,330
Totals	$	22,194,443		21,082,653

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. In contrast, when providing EPC services, the customer is purchasing a turnkey energy recovery system and the Company is involved throughout the entire process from design to installation.

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 risk of ownership have passed to the customer, which generally occurs at the time of delivery; (iv) the customer accepts the products upon 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 net of value-added tax.

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.

In accordance with the accounting standards 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 contracts revenues and contracts 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 and upon which the Company recognizes the revenue.

Classification of Current/Non-Current Receivables

We have reviewed our receivable balances and reassessed each balance and its collectability during the forthcoming 12 months. Upon assessment, we have reclassified certain of these outstanding balances to non-current assets where we have arrangements with the customers to bill and collect a portion of the receivable after 12 months. We intend to closely monitor our receivables and focus on increasing collections over the next quarter.

Recent Accounting Pronouncements

In January 2010, the FASB issued new accounting guidance related to the disclosure requirements for fair value measurements and provided clarification for existing disclosures requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and require disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosure are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements for related to the purchases, sales, issuances and settlements in the roll forward activity of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. The adoption of the updated guidance does not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

In February 2010, the FASB issued an accounting standards update which amends the accounting standard on subsequent events. The accounting update provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. The accounting standard distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. As a result of the accounting update, SEC registrants will not disclose the date through which management evaluated subsequent events in the financial statements, either in originally issued financial statements or reissued financial statements. The accounting standard was effective for interim and annual periods ending after June 15, 2009, and the accounting update is effective immediately. We have evaluated subsequent events in accordance with the accounting update.

In April 2010, the FASB issued an authoritative pronouncement on the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity’s functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. The adoption of this pronouncement does not have a significant impact on its consolidated financial position or results of operations.

In July 2010, the FASB issued new disclosure guidance related to the credit quality of financing receivables and the allowance for credit losses. The guidance will require companies to provide more information about the credit quality of their financing receivables in the disclosures to financial statements including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators. We will adopt this accounting standard upon its effective date for periods ending on or after December 15, 2010. The Company has evaluated the new disclosure requirement in accordance with the accounting guidance

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance on “revenue recognition for arrangements with multiple deliverables and certain revenue arrangements that include software elements.” By providing another alternative for determining the selling price of deliverables, the guidance for arrangements with multiple deliverables will allow companies to allocate consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics and will often result in earlier revenue recognition. The new guidance modifies the fair value requirements of previous guidance by allowing “best estimate of selling price” in addition to vendor-specific objective evidence (“VSOE”) and other vendor objective evidence (“VOE,” now referred to as “TPE,” standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted under the new guidance. The new guidance for certain revenue arrangements that include software elements removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance, resulting in the recognition of revenue similar to that for other tangible products. The new guidance is effective for fiscal years beginning on or after June 15, 2010. However, companies may adopt the guidance as early as interim periods ended September 30, 2009. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company has not early adopted the new guidance and the adoption of the new guidance does not have a significant impact on our financial position or results of operations.

In December 2010, FASB issued revised guidance on “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The revised guidance specifies that an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the revised guidance should be included in earnings as required by Section 350-20-35. The revised guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption does not have a significant impact on our financial position or results of operations.

In December 2010, FASB issued revised guidance on the “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The revised guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The revised guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The revised guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company has not early adopted the new guidance and the adoption does not have a significant impact on our financial position or results of operations.

Results of Operations

Comparison of the Fiscal Years Ended December 31, 2009 and December 31, 2010

The following table sets forth the results of our operations for the years indicated as a percentage of revenues:

	Fiscal Year ended December 31,
	2009					2010

REVENUES	$	22,194,443		100.0	%	$	21,082,653		100.0	%

COST OF REVENUES		(18,842,557	)	(84.9	)%		(17,898,955	)	(84.9	)%

GROSS PROFIT		3,351,886		15.1	%		3,183,698		15.1	%

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		(5,746,743	)	(25.9	)%		(6,440,852	)	(30.6	)%

LOSS FROM OPERATIONS		(2,394,857	)	(10.8	)%		(3,257,154	)	(15.5	)%

OTHER INCOME(LOSS), NET:
Change in fair value of warrant liability		1,539,233		6.9	%		40,187		0.2	%
Change in fair value of derivative liability		399,500		1.8	%		628,624		3.0	%
Non-operating income, net		80,692		0.4	%		1,186,603		5.6	%
Interest expenses		(868,388	)	(3.9	)%		(1,928,955	)	(9.1	)%
Total other income(loss) , net		1,151,037		5.2	%		(73,541	)	(0.3	)%

LOSS FROM OPERATIONS BEFORE INCOME TAXES		(1,243,820	)	(5.6	)%		(3,330,695	)	(15.8	)%

INCOME TAXES BENEFITS/(EXPENSES)		357,340		1.6	%		(188,688	)	(0.9	)%

NET LOSS		(886,480	)	(4.0	)%		(3,519,383	)	(16.7	)%

OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment		29,152		0.1	%		488,131		2.3	%

COMPREHENSIVE LOSS	$	(857,328	)	(3.9	)%	$	(3,031,252	)	(14.4	)%

Revenues. Our revenues include revenues from sales of energy recovery systems, provision of design services and EPC contracts. Revenues decreased to $21,082,653 for the year ended December 31, 2010 as compared to $22,194,443 for the year ended December 31, 2009, a decrease of $1,111,790 or 5.0%. The decrease is mainly attributable to the decrease in number of product contracts. Although the average sales revenue recognized per product contract increased by $15,553 from $326,660 for the year ended December 31, 2009 to $342,213 for the year ended December 31, 2010, the number of completed product contracts decreased from 38 to 25 due to following 2 reasons: (a) Our strategic decision to focus our business more on EPC contracts and less on single product contracts; and (b) the fact we purposely accepted less product contracts during 2010 due to a temporary decrease in our production capacity as a result of moving resources from our Vessel Woks Division, which we plan to close, to plant in Yangzhou, China.

Since we began to focus more on EPC contracts, we have completed 8 EPC contracts in 2010 while the amount completed was only 4 in 2009. However, due to many new orders are signed in late 2010, the revenue on these EPC contracts recognized on percentage-of-completion basis was rather small. Accordingly, the average revenue recognized from each EPC contract decreased by $814,222 in fiscal 2010 as compared to 2009.

Furthermore, we completed two design service contracts during 2009, while no such design service contracts were completed in 2010. The detailed changes are as follows:

	2009		2010		Change ($)			%
Average Revenue per Contract
Products	$	326,660	$	342,213	$	15,553			5	%
Design Services	$	130,408	$	-	$	(130,408	)		(100	)%
EPC	$	2,380,138	$	1,565,916	$	(814,222	)		(34	)%
Average Revenue per Contract	$	504,419	$	638,868	$	134,449			27	%
Number of Contracts Completed
Products		38		25		(13	)		(34	)%
Design Services		2		-		(2	)		(100	)%
EPC		4		8		4			100	%
Total Number of Contracts Completed		44		33		(11	)		(25	)%

Cost of Revenues. Cost of revenues decreased to $17,898,955 for the year ended December 31, 2010, as compared to $18,842,557 for the year ended December 31, 2009, a decrease of $943,602, or 5.0%. As a percentage of revenues, cost of revenues remained 84.9% for the year ended December 31, 2010 compared to that of 2009. The absolute decrease is consistent with the decrease of revenue.

Gross Profit. Gross profit was $3,183,698 for the year ended December 31, 2010 as compared to $3,351,886 for the year ended December 31, 2009, a decrease of $168,188 or 5.0%. The gross margins are 15.1% for both the years ended December 31, 2010 and 2009. The lower gross profit is mainly due to the decrease in number of our products delivered in 2010. The gross profit margin remained the same for year 2009 and 2010, mainly due to the lower profit margin from EPC contracts and higher profit margin from product contracts of 2010 compared to that of 2009. Firstly, we realized a profit margin of 17.9% from EPC contracts in 2009, while we only realized a profit margin of 13.9% in 2010, a decrease of 4%. In 2009, our EPC profit is derived mainly from the Sopo project, which contributed a higher margin based on its completion percentage, with a profit margin of 16%. In 2010, since many new orders are signed in late 2010, the revenue for these EPC contracts recognized on percentage-of-completion basis was rather small with lower profit margin of approximately 10%. Secondly, the profit margin of product increased by 3.8% from 13.0% in 2009 to 16.8% in 2010. In order to focus our attention on construction of Yangzhou factory and EPC projects, we accepted fewer product orders in 2010 but with higher margin. In summary, the increase in the margin in the product sales is offset by the decrease in the margin for EPC contracts, which resulted in a constant gross profit margin for fiscal 2009 and 2010.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $6,440,852 for the year ended December 31, 2010, as compared to $5,746,743 for the year ended December 31, 2009, an increase of $694,109 or 12.1%. Selling, general and administrative expenses, as a percentage of revenue, increased from 25.9% for the year ended December 31, 2009 to 30.6% for the year ended December 31, 2010, an increase of 4.7%. The increase is the net result of increase of salaries, depreciation and amortization costs, and audit fees, offset by a decrease in consulting fees. Firstly, salary expenses increased by $1,179,778 or 79.6% for the year ended December 31, 2010 as compared to the year ended December 31, 2009, as a result of additional of staff (staff increased by 100 headcounts to substantialize the Yangzhou team in 2010 as compared to 2009) to cater for the needs of new plant in Yangzhou, the addition of top and middle level management, and the gradual increase in personnel salary. Secondly, the depreciation and amortization expenses increased by $107,319 to $206,487 for the year ended December 31, 2010 due to the setup and the amortized land use right of CER Yangzhou. Thirdly, we changed our auditor at the end of year 2009 and incurred expenses for the reaudit of the financial statements for fiscal 2008, resulting in an increase in professional and related fees by $211,714. Fourthly, other administration expenses such as conference fees, entertainment fees and traveling fees also increased due to more business negotiations with EPC customers and more exhibitions around the world. The increase in SG&A expenses was offset by a decrease in consulting service fees of $923,955 for the year ended December 31, 2010 as compared to the year ended December 31, 2009, which occurred because the Company signed an agreement with a consulting company which provided financing and marketing advisory service for the Company’s international development in the last half of 2009. There is no such arrangement in fiscal year 2010.

Loss from Operations. As a result of the above, loss from operations totaled $3,257,154 for the year ended December 31, 2010 as compared to $2,394,857 for the year ended December 31, 2009, an increase of $862,297 or 36.0%. As a percentage of revenues, loss from operations increased from 10.8% for the year ended December 31, 2009 to 15.5% for the year ended December 31, 2010, an increase of 4.7%. The increase is mainly attributable to increase in operating expenses and decrease in operation profit.

Other Income(loss), net. Other expense was $73,541 for the year ended December 31, 2010, as compared to income of $1,151,037 for the year ended December 31, 2009, an absolute difference of $1,224,578. The difference consisted primary of $1,269,922 of change in fair value of warrants and derivative liabilities, and $1,060,567 of interest expenses, offset by $1,105,911 of non-operating income, all as further described below.

Change in fair value of warrants and derivative liabilities. This resulted from the valuation of warrants and derivative liabilities. The $668,811 absolute gain of year 2010 is mainly due to the higher risk-free rate and lower expected volatility as a result of reduced holding period of the conversion feature as compared to 2009.

Non-operating Income, net. Non-operating income increased to $1,186,603 for the year ended December 31, 2010, as compared to $80,692 for the year ended December 31, 2009, an increase of $1,105,911, mainly resulted from subsidy income received for Shanghai Engineering on technology support fund from Shanghai Yangpu Science and Technology Commission and the subsidy income for CER Yangzhou on research and development fund from Yizheng Industrial Park in 2010. There was no such subsidy income in 2009.

Interest Expense. Interest expense increased to $1,928,955 for the year ended December 31, 2010, as compared to $868,388 for the year ended December 31, 2009, an increase of $1,060,567 or 122.1%. Although we capitalized interest of $253,825 for the construction of the Yangzhou plant and recognized interest income from the long term receivable from the Sopo project of $407,287, according to the collection schedule starting from June 2010, interest expense increased significantly as the net result of increases of loan interest, deferred financing costs and a decrease of accretion of convertible notes. Firstly, due to the longer borrowing period of the convertible note and newly-borrowed long-term loans, interest expense increased dramatically by $951,586 to $1,070,336 for the year ended December 31, 2010. Secondly, the amortization of deferred financing costs increased by $177,207 due to a full year of amortization in fiscal 2010 as compared to 2009. Lastly, the accretion interest of convertible notes increased by $545,287 to$777, 915 for the year ended December 31, 2010.

Loss before Provision for Income Taxes. As a result of the foregoing, loss before provision for income taxes was $3,330,695 for the year ended December 31, 2010, as compared to $1,243,820 for the year ended December, 2009, an increase of $2,086,875 or 167.8%.

Income Taxes Benefits/(Expenses). The normal applicable income tax rate for the operating entities in China is 25%. Pursuant to the PRC income tax laws, Shanghai Engineering is subject to enterprise income tax at a statutory rate of 15% as a high technology entity. For the year ended December 31, 2010, the Company incurred $188,688 of income tax provision, as compared to benefit of $357,340 for the year ended December 31, 2009, an absolute change of $546,028. The change is mainly because we have provided a 100% valuation allowance for deferred tax asset of Shanghai Engineering for the year ended December 31, 2010 as we do not expect Shanghai Engineering will generate sufficient profit to realize the deferred tax asset in the future.

Net Loss. As a result of the foregoing, we incurred a net loss of $3, 519,383, for the year ended December 31, 2010 as compared to a net loss of $886,480 for the year ended December 31, 2009, an increase of $2,632,903 or 297.0%. The increase in net loss is mainly due to the increase in operating expenses, interest expense, provision for income tax and change in fair value of the warrants and derivative liability, offset by the non-operating income. The production constraints limited our growth and the condition persisted through fiscal 2010 while our new manufacturing facility was under construction. With the opening of our new facility in the fourth quarter of 2010 and the world economy recovering, we are able to take on new contracts at an increased rate and management anticipates better operating results in 2011.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations, the proceeds from the sale of equity to investors and borrowings from banks and other lenders. Our principal uses of cash have been to finance working capital, facility expansion and other capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future. Worldwide economic conditions seemed to be better but may be further deteriorating in the future. This instability could affect the prices at which we will be able to sell our products and services, which likely would also adversely affect our earnings and financial condition. These conditions could also negatively affect our ability to secure funds or raise capital at a reasonable cost, as needed.

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 our credit facilities will be sufficient to fund current business operations over at least the next twelve months. Additionally, based on the forecast of the operation and the finance condition over the next few years, we anticipate that we will continue to generate positive cash flows from the business operations, which will enable us to develop our company in a sustainable manner. However, with the expansion of energy recycle and environment protection under the vigorous policy and support from the government, we believe that there will be an increasing growth and expansion opportunities in the future, which may in turn require an expansion of our manufacturing base, including Phase 2 construction of our Yangzhou factory.

To improve our existing cash and cash requirement 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 building and the expansion of the existing factory which we may pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to issue debt securities or additional equity or to obtain 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:

	Year ended December, 31
	2009			2010

Net cash provided by (used in) operating activities	$	(5,799,655	) (1)	$	3,863,563
Net cash used in investing activities		(3,478,370	) (1)		(10,559,841	)
Net cash provided by financing activities		5,498,780			7,257,121
Effect of exchange rate changes on cash and cash equivalents		29,415			48,660
Net increase/(decrease) in cash and cash equivalents		(3,749,830	)		609,503
Cash and cash equivalents at the beginning of period		6,136,403			2,386,573
Cash and cash equivalents at the end of period	$	2,386,573		$	2,996,076

(1) Revision to Consolidated Statements of Cash Flows for the year ended December 31, 2009: The Company revised the net change in restricted cash during 2009 from operating activities to investing activities because of a contractual requirement to maintain a certain amount of cash on deposit with a bank to support the completion of projects. Since the restricted cash is deposited in a bank account for specific purposes, such activity is deemed to be an investing activity and as a result, net cash used in operating activities has been increased by $597,949 and net cash used in investing activities has decreased accordingly. The revision had no effect on previously reported results of operations or accumulated deficit.

Operating Activities

Net cash provided by operating activities was $3,863,563 for the year ended December 31, 2010 compared with net cash used in operating activities of $5,799,655 for the year ended December 31, 2009. The change of cash flow in operating activities was due to the net impact of cash inflow from customer payment and deposit, offset by cash outflow for advances made out for purchases.

Firstly, the Company took some new EPC orders in late 2010 and received more advance deposits from its customers in 2010 than that received in 2009.

Secondly, the Company did a build and transfer project for one customer, which we paid most of the cost during the production while we received money only when the project was finished in May 2010.

To procure the materials for orders to be completed in 2011, we also made cash advance payment to our suppliers. However, the cash outflow required was lower than the cash inflow, leading to the net cash provided by operating activities.

Investing Activities

Net cash used in investing activities was $10,559,841 for the year ended December 31, 2010 compared to net cash used in investing activities of $3,478,370 for the year ended December 31, 2009. The change was mainly due to the expenditure incurred for the construction of CER Yangzhou. As of December 31, 2009 and 2010, we have invested $0 and $ 10,107,858 on construction, $2,439,071 and $0 on land purchase, $1,637,248 and $192,795 on property, plant and equipment purchases, respectively, leading to the increase of cash expenditure of $ 7,081,471.

Financing Activities

Net cash provided by financing activities was $7,257,121 for the year ended December 31, 2010 compared to net cash provided by financing activities of $5,498,780 for the year ended December 31, 2009, an increase of $1,758,341. The increase is due to the Company still needing capital other than operation cash flows for the construction of the Yangzhou facility. In 2010, the Company borrowed approximately $4.4 million in a short-term bank loan and drew down long-term loans of $5 million from individual lenders. The Company also repaid 2.2 million loans in principal according to the loan repayment schedule.

Capital Resources

We obtained the following loans during the years ended December 31, 2009 and 2010, respectively:

On May 21, 2009, the Company entered into a series of agreements for an unsecured term loan arrangement (“Convertible Note Agreement”) with a private investor (CB holder). In connection with this financing, we agreed to issue a two-year 9.5% Unsecured Convertible Promissory Note in the principal amount of $5 million, which may be converted into common stock at a conversion price of $1.80 per share. The Convertible Note Agreement permitted the Company to draw down up to $5,000,000 in principal amount, within six months. Any amount borrowed bears interest at 9.5%, payable every six months, calculated and compounded quarterly. Each down is due twenty-four months after the draw down date, together with any accrued and unpaid interest. The Company may pre-pay the note at any time, at its option. On September 28, 2009, the Company drew down $5,000,000, the full amount available. The proceeds of this loan are restricted to only the expenses related to the acquisition and construction of the company's new in Yangzhou, China in order to expand our production capacity. On December 31, 2010, the Company entered into a loan agreement with the CB holder to modify 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 interests are due September 29, 2012. The loan may be prepaid by the Company, without penalty. As a guarantee of the payments under the loan extension, Mr. Wu, the Chief Executive Officer of the Company, pledged 8,000,006 shares for the repayment of the principal due under the loan agreement. The pledge will only take effect when the shares are released from the current pledge under another loan entered into by the Company. Additionally, since the loan is fixed in United States dollars, the lender will receive compensation for the value of the difference in the Renmenbi/US Dollar exchange rate between September 29, 2011, and the payment date, provided the Renminbi exchange rate increases against the US dollar, times the amount of being paid.

On September 1, 2009, we borrowed a short-term loan of RMB 6,000,000 (approximately $879, 660) for working capital purpose from Shanghai Pudong Development Bank, Luwan Branch. The term of the loan is one year. The loan agreement provides for monthly interest payments at an annual interest rate of 5.841%, maturing on August 31, 2010. The loan was repaid on January 5, 2010.

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

Contemporaneously with the funding of the Loan Agreements, on February 1, 2010, Mr. Qinghuan Wu, arranged for Haide Engineering (Hong Kong) Limited (“Haide”), a company that Mr. Qinghuan Wu controls, to lend to CER Hong Kong the sum of $1,000,000. The loan bears interest at the annual rate of 9.5%, interest payable quarterly. The principal is due in full on January 30, 2012. The loan is unsecured and there are no guarantees of the interest or principal. CER Hong Kong has subordinated its loan to those under the Loan Agreements.

On November 18, 2010, CER Shanghai borrowed a short-term bank loan of RMB 8,400,000 (approximately $1,260,000) for working capital purpose from Shanghai Pudong Development Bank, Shanghai Branch. The term of the loan is one year. The loan agreement permitted the Company to draw down up to RMB 8,400,000 in principal amount, before the end of 2010. The loan agreement provides for quarterly interest payments at an annual interest rate of 6.116%. As of December 31, 2010, the Company drew down RMB 8,400,000, the full amount and paid back RMB 700,000 as planned, leaving the short-term loan balance of RMB 7,700,000.

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). The funds may be used either as a short term loan or for trade financing or other purposes. Any amounts due under the loan are repayable on November 24, 2013. The loan has been guaranteed by each of Mr Wu, the Company’s Chief Executive Officer and a director, two of the Group’s companies, CER Shanghai, and Shanghai Engineering and Yizheng Auto Industrial Park Investment and Development Co., Ltd. The Company has also pledged the land use right in Yizheng. The Company has drawn RMB 21,000,000 (approximately $3,171,000) under the facility as a short-term loan, due in one year, which amount carries an annual interest rate of 5.838%. These funds will be used for working capital.

Table Disclosure of Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2010:

	Payment Due by Period
	Total		Less than 1 year		1-3 years

Investment capital commitments	$	9,500,000	$	9,500,000	$	-
Short-term loans		4,333,700		4,333,700		-
Long-term loans		3,721,751		3,177,973		543,778
Convertible notes		4,691,582		-		4,691,582
Purchasing obligations		5,672,101		5,099,557		572,544
Total	$	27,919,134	$	22,111,230	$	5,807,904

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 stockholder's 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 7A Quantitative and Quantitative Disclosures about Market Risk

Not applicable.

Item 8 Financial Statements and Supplementary Data

CHINA ENERGY RECOVERY, INC.

Index to Consolidated Financial Statements

	Page No.
Report of Independent Registered Public Accounting Firm	51

Consolidated Balance Sheets as of December 31, 2009 and 2010	52

Consolidated Statements of Income and Other Comprehensive Income for the Years Ended December 31, 2009 and 2010	53

Consolidated Statements of Shareholders' Equity for the Years ended December 31,2009 and 2010	54

Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2010	55

Notes to the Consolidated Financial Statements	56


	普华永道中天会计师事务所有限公司
	11th Floor
	PricewaterhouseCoopers Center
	2 Corporate Avenue
	202 Hu Bin Road, Luwan District
	Shanghai 200021, PRC
	Telephone +86 (21) 2323 8888
	Facsimile +86 (21) 2323 8800 www.pwccn.com

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

China Energy Recovery, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and other comprehensive loss, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of China Energy Recovery, Inc. and its subsidiaries (collectively, the “Company”) at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company

April 18, 2011

CHINA ENERGY RECOVERY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2009 AND 2010

	December 31 2009			December 31 2010
ASSETS

CURRENT ASSETS:
Cash	$	2,386,573		$	2,996,076
Restricted cash		-			218,346
Notes receivable		411,049			1,341,359
Accounts receivable, net of allowance for doubtful accounts		6,601,921			7,059,935
Inventories		8,574,775			8,661,800
Other current assets and receivables		892,657			1,185,032
Deferred financial cost - current		674,748			215,623
Deferred tax assets - current		67,276			-
Advances on purchases		4,271,054			15,200,669
Total current assets		23,880,053			36,878,840

PROPERTY, PLANT AND EQUIPMENT, net		758,888			10,101,755

OTHER ASSETS:
Deferred tax assets		133,758			171,776
Intangible assets		2,439,022			2,477,959
Deferred financial cost		215,623			-
Long-term accounts receivable		6,830,615			4,679,121
Total other assets		9,619,018			7,328,856

Total assets	$	34,257,959		$	54,309,451

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	4,188,205		$	4,557,848
Accrued expenses and other liabilities		1,745,082			1,912,544
Advances from customers		11,226,273			27,530,065
Taxes payable		2,956,476			1,631,507
Long-term loans, current		-			3,177,973
Short-term bank loans		880,200			4,333,700
Derivative liability, current		435,500			374,846
Convertible note, current		2,023,720			-
Total current liabilities		23,455,456			43,518,483

NON-CURRENT LIABILITIES:
Warrant liability		1,372,947			1,332,760
Derivative liability		435,500			48,461
Convertible note		1,938,408			4,691,582
Long-term loan from related party		-			543,778
Total non-current liabilities		3,746,855			6,616,581
Total Liabilities		27,202,311			50,135,064

Commitment and contingency		-			-

SHAREHOLDERS' EQUITY:
Preferred stock(US$0.001 par value; 50,000,000 shares authorized, 662,963 and 200,000 shares issued and outstanding as of December 31, 2009 and 2010, respectively)		626			189
Common stock(US$0.001 par value; 100,000,000 shares authorized, 30,638,720 and 30,906,266 shares issued and outstanding as of December 31, 2009 and 2010, respectively)		30,639			30,906
Additional paid-in-capital		8,163,224			8,313,385
Accumulated deficits		(1,194,158	)		(4,713,541	)
Statutory reserves		132,802			132,802
Accumulated other comprehensive loss/(gain)		(77,485	)		410,646
Total shareholders' equity		7,055,648			4,174,387

Total liabilities and shareholders' equity	$	34,257,959		$	54,309,451

The accompanying notes are an integral part of these consolidated financial statements.

CHINA ENERGY RECOVERY, INC.

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE LOSS

FOR YEARS ENDED DECEMBER 31, 2009 AND 2010

	Year ended December 31,
	2009			2010

REVENUES	$	22,194,443		$	21,082,653

COST OF REVENUES		(18,842,557	)		(17,898,955	)

GROSS PROFIT		3,351,886			3,183,698

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		(5,746,743	)		(6,440,852	)

LOSS FROM OPERATIONS		(2,394,857	)		(3,257,154	)

OTHER INCOME/(EXPENSE), NET:
Change in fair value of warrant liability		1,539,233			40,187
Change in fair value of derivative liability		399,500			628,624
Non-operating income, net		80,692			1,186,603
Interest expenses		(868,388	)		(1,928,955	)
Total other income/(expense), net		1,151,037			(73,541	)

LOSS FROM OPERATIONS BEFORE INCOME TAXES		(1,243,820	)		(3,330,695	)

INCOME TAXES (EXPENSES)/BENEFITS		357,340			(188,688	)

NET LOSS		(886,480	)		(3,519,383	)

OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment		29,152			488,131

COMPREHENSIVE LOSS	$	(857,328	)	$	(3,031,252	)

Loss per share
Basic	$	(0.03	)	$	(0.11	)
Diluted	$	(0.03	)	$	(0.11	)
Weighted average ordinary shares outstanding
Basic		29,952,798			30,850,058
Diluted		29,952,798			30,850,058

The accompanying notes are an integral part of these consolidated financial statements.

CHINA ENERGY RECOVERY, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

	Preferred Stock						Common stock				Additional paid-in			Statutory		Accumulated			Accumulated other comprehensive
	Shares			Amount			Shares		Amount		capital			reserves		deficits			income/(loss)			Total

BALANCE, at January 1, 2009		714,963		$	715			29,912,573	$	29,913		7,534,015			132,802		(307,678	)		(106,637	)		7,283,130

Common stock for consulting services		-			-			700,000		700		839,300			-		-			-			840,000
Change of convertible rate		-			(37	)		-		-		37			-		-			-			-
Stock based compensation		-			-			-		-		221,816			-		-			-			221,816
Conversion of preferred stock		(52,000	)		(52	)		26,147		26		26			-		-			-			-
Deferred tax liability due to discount unconvertible notes		-			-			-		-		(431,970	)		-		-			-			(431,970	)
Net loss		-			-			-		-		-			-		(886,480	)		-			(886,480	)
Foreign currency translation gain		-			-			-		-		-			-		-			29,152			29,152

BALANCE, at December 31, 2009		662,963			626			30,638,720		30,639		8,163,224			132,802		(1,194,158	)		(77,485	)		7,055,648

Conversion of preferred stock		(462,963	)		(437	)		245,098		245		192			-		-			-			-
Stock based compensation		-			-			-		-		141,012			-		-			-			141,012
Common stock issued related to long-term loan		-			-			22,448		22		8,957			-		-			-			8,979
Net loss		-			-			-		-		-			-		(3,519,383	)		-			(3,519,383	)
Foreign currency translation gain		-			-			-		-		-			-		-			488,131			488,131

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

The accompanying notes are an integral part of these consolidated financial statements.

CHINA ENERGY RECOVERY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR YEARS ENDED DECEMBER 31, 2009 AND 2010

	Year Ended December 31,
	2009			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(886,480	)	$	(3,519,383	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization		178,446			273,215
Change in allowance for doubtful accounts		337,383			152,960
Change in provision for inventory		40,248			47,281
Common stock issued for services		840,000			-
Common stock issued for long-term loan		-			8,979
Stock based compensation		221,816			141,012
Change in fair value of warrant and derivative liabilities		(1,938,733	)		(668,811	)
Accretion of interest on convertible note and long term loan		232,628			828,515
Amortization of deferred financing cost		497,541			674,748
Deferred income taxes		(569,763	)		29,258
Capitalized interest		-			(253,825	)
Notes receivable		(290,300	)		(930,310	)
Accounts receivable		(1,830,055	)		(458,014	)
Accounts receivable - related party		1,006,060			-
Inventories		(840,248	)		(134,306	)
Other current assets and receivables		(794,386	)		(292,375	)
Advances on inventory purchases		(1,675,452	)		(9,822,856	)
Long-term accounts receivable		(6,727,925	)		1,980,890
Accounts payable		761,279			296,102
Accrued expenses and other liabilities		1,257,462			167,462
Other payables - related party		(65,078	)		-
Advances from customers		4,182,039			16,303,792
Taxes payable		263,863			(1,324,969	)
Effects of exchange rate change in operating activities		-			364,198
Net cash (used in)/provided by operating activities		(5,799,655	)		3,863,563

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(1,637,248	)		(10,300,653	)
Restricted cash		597,949			(218,346	)
Purchase of intangible assets		(2,439,071	)		(40,842	)
Net cash used in investing activities		(3,478,370	)		(10,559,841	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term bank loans		880,200			4,431,000
Proceeds from convertible note		5,000,000			-
Proceeds from long-term loans		-			5,003,778
Repayment of long-term loans		-			(1,200,157	)
Repayment of short-term bank loans		(381,420	)		(977,500	)
Net cash provided by financing activities		5,498,780			7,257,121

EFFECTS OF EXCHANGE RATE CHANGE IN CASH		29,415			48,660

(DECREASE)/INCREASE IN CASH		(3,749,830	)		609,503

CASH, beginning		6,136,403			2,386,573

CASH, ending	$	2,386,573		$	2,996,076

Supplemental disclosure of cash flow information
Cash paid during the year for income taxes		55,703			53,777
Cash paid during the year for interest		19,469			882,870
Supplemental schedule of non-cash investing and financing activities:
Warrants issued for convertible note		1,387,912			-
Accounts payable relating to purchase of property, plant and equipment		86,507			73,541
Conversion of preferred stock		52			437

The accompanying notes are an integral part of these consolidated financial statements.

Note 1 – Organization

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. 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. 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.

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.

Effective on January 1, 2006, Hi-tech executed a series of contractual arrangements with Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd ("Shanghai Engineering"), established in Shanghai in July 1999, and its shareholders, including a Consulting Services Agreement and an Operating Agreement, through which Hi-tech has the right to advise, consult, manage and operate Shanghai Engineering, and collect and own all of its net profits. Additionally, Shanghai Engineering's shareholders have assigned their voting rights over Shanghai Engineering to Hi-tech. In order to further reinforce Hi-tech's rights to control and operate Shanghai Engineering, Shanghai Engineering and its shareholders have granted Hi-tech the exclusive right and option to acquire all of their equity interests in Shanghai Engineering. Further, Shanghai Engineering shareholders have pledged all of their rights, titles and interests in Shanghai Engineering to Hi-tech.

Effective on May 23, 2007, Hi-tech executed a series of contractual arrangements with Shanghai Xin Ye Environmental Protection Engineering Technology Co., Ltd ("Shanghai Environmental"), incorporated in Shanghai in May, 2007 and Mr. Qinghuan Wu, the Company’s Chief Executive Officer, Shanghai Environmental’s sole shareholder, including a Consulting Services Agreement and an Operating Agreement, through which Hi-tech has the right to advise, consult, manage and operate Shanghai Environmental, and collect and own all of its net profits. Additionally, Mr Wu, assigned his voting rights over Shanghai Environmental to Hi-tech. In order to further reinforce Hi-tech's rights to control and operate Shanghai Environmental, Shanghai Environmental and Mr Wu have granted Hi-tech the exclusive right and option to acquire all Mr Wu’s equity interests in Shanghai Environmental. Further, Mr Wu has pledged all of his rights, titles and interests in Shanghai Environmental. Shanghai Environmental was dissolved in June, 2010 and the registered capital had been transferred to Shanghai Engineering accordingly.

All of Shanghai Engineering’s manufacturing activities are conducted through a Leasing and Operation Agreement, a form of cooperative manufacturing agreement, originally effective as of May 1, 2003 and subsequently renewed and amended with a state-owned enterprise, Shanghai Si Fang. Pursuant to the agreement, Shanghai Si Fang leases certain land use right, buildings and fixed assets (lease elements) in one of its subsidiaries, Vessel Works Division, and provides management services and licenses the “Si Fang” brand and manufacturing license (non-lease elements) of Vessel Works Division to Shanghai Engineering. Because the arrangement contains both the lease and non-lease elements, the quarterly payment is allocated between the lease and non-lease deliverables based on their respective fair values. The lease elements are classified and accounted for as operating leases and the lease expense is recorded on a straight-line basis. The non-lease elements are accounted for as prepayment for management and licensing fees and the payment is amortized on a straight-line basis over each contractual period.

The arrangement, however, may result in Shanghai Engineering having a variable interest in Shanghai Si Fang, but as Shanghai Si Fang is a state-owned enterprise that has substantive operations other than the Lease and Operation arrangement, Shanghai Engineering is not the primary beneficiary of Shanghai Si Fang.

In order to restructure the holding structure of the Company (the “Restructuring”), on December 2, 2008, 100% of the shares of CER Hong Kong were transferred to Poise Profit from Mr. Qinghuan Wu and his wife, Mrs. Zhou, and all the contracts between Hi-tech and Shanghai Engineering, and between Hi-tech and Shanghai Environmental were transferred to CER Hong Kong. Thereafter, CER Hong Kong, through its variable interest entities 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 refinery, fine chemicals, water and power conservancy, metallurgical, 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 has 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 and the contributed capital was approximately $10,500,000 as of December 31, 2010. CER Yangzhou is mainly engaged in the development and manufacturing of waste heat recovery systems and other related energy efficiency equipment.

As all the above entities are under common control, the arrangements described above have been accounted for as a reorganization of entities and the financial statements have been prepared as if the reorganization had occurred retroactively. CER, Poise Profit, CER Hong Kong, Hi-tech, Shanghai Engineering, CER Shanghai, CER Yangzhou, and Shanghai Environmental, are collectively hereinafter referred to as the “Group”.

Note 2 – Summary of Significant Accounting Policies

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below:

(a)	Principal 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, CER Yangzhou, and its variable interest entities (“VIEs”) Shanghai Engineering and Shanghai Environmental. All significant inter-company transactions and balances among the Company, its subsidiaries and VIEs are eliminated upon consolidation.

In accordance with the Accounting Standard Codification (“ASC”) 810-10, variable interest entities (VIEs) 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. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company has concluded that Shanghai Engineering, and Shanghai Environmental are VIEs and that the Company is the primary beneficiary. Under the requirements of US GAAP, the Company consolidated the financial statements of Shanghai Engineering and Shanghai Environmental.

Under the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs, and can have assets transferred freely out of the VIEs 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 VIEs amounting to a total of $1.38 million as of December 31, 2010. As all the consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the consolidated VIEs, which consisted of receipts in advance of $9.3 million, accrued liabilities to suppliers and agents of $1.2 million, tax payable of $1.4 million, and other accrued liabilities of $67,000, totaled $12.0 million. Currently there is no contractual arrangement that could require the Company to provide additional financial support to the consolidated VIEs. As the Company is conducting certain business in the PRC mainly through the VIEs, 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, allowance for doubtful accounts, deferred tax assets and the completion percentage of the construction contracts. Actual results could differ from those estimates.

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 were fully covered by the government provided insurance until the end of 2010. 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 years ended December 31, 2009 and 2010, the Company’s five top customers accounted for 69% and 60% of the Company's sales, respectively. Receivables from the five top customers were 66% and 5% of total accounts receivable at December 31, 2009 and 2010 respectively.

For the years ended December 31, 2010, five top suppliers provided approximately 29% of the Company's purchases of raw materials. Payables to these five suppliers were 11% of accounts payable at December 31, 2010. Five suppliers provided approximately 62% of the Company's purchases of raw materials for the years ended December 31, 2009. There were no payables due to these five suppliers at December 31, 2009 as advance payments were made to them previously.

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.

(d) Foreign currency translations

The reporting currency of the Company is the U.S. dollar. Shanghai Engineering, CER Shanghai, CER Yangzhou, Hi-tech and CER Hong Kong use the 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. Translation adjustments resulting from this process are included in accumulated other comprehensive income (loss) in stockholders' equity. 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 results of operations as incurred. For the year ended December 31, 2009 and 2010, foreign currency translation income amounted to $29,152 and $488,131, respectively.

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 loss amounted to $77,485 and gain amounted to $410,646 as of December 31, 2009 and December 31, 2010, respectively. The balance sheet accounts with the exception of equity at December 31, 2009 and December 31, 2010 were translated at RMB6.82 to $1.00, and were translated at RMB6.62 to $1.00 respectively.

The average translation rates applied to income and cash flow statement amounts for the years ended December 31, 2009 and 2010 were RMB6.82 to $1.00 and RMB6.76 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 use in its operations.

(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 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 allowance for doubtful accounts

Receivables include trade accounts due from the customers, and other receivables from cash advances to employees, related parties or third parties. Management regularly reviews aging of receivables and changes in payment trends by its customers, and records a reserve when they believe collection of amounts due are at risk.

Allowance for doubtful account, December 31, 2008	$	251,458
Addition		337,383
Translation adjustment		207
Allowance for doubtful account, December 31, 2009	$	589,048
Addition		260,487
Write off		(134,639	)
Recovery		(107,527	)
Translation adjustment		17,645
Allowance for doubtful account, December 31, 2010	$	625,014

Accounts receivables which are expected to be collected after one year are reclassified as long-term accounts receivables. The Company reserved a provision for account receivable balances based on the nature of the business and collection history (further discussed 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 additional cost of revenues.

Provision for inventory, December 31, 2008	$	98,251
Addition		40,248
Realized		(21,384	)
Translation adjustment		11
Provision for inventory, December 31, 2009	$	117,126
Addition		47,281
Realized		(74,090	)
Translation adjustment		2,878
Provision for inventory, December 31, 2010	$	93,195

(i) Advances on purchase

Advances on purchases are monies 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:

Plant		20 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 statements of income and other comprehensive income. There was no disposal of assets for the years ended December 31, 2009 and 2010.

(k) Impairment of assets

The Company assesses the carrying value of long-lived assets at 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 impairment of long lived assets recognized for the years ended December 31, 2009 and 2010.

(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.

(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 included in the cost of producing its finished product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables.

(o) Operation leases

Leases where substantial 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 operation 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 value of the award.

The Group recognizes the 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.

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 $497,089 and $422,720 for the year ended December 31, 2009 and 2010, respectively.

(r) Revenue recognition

The Company derives revenues principally from

(a)

Sales of energy recovery systems;

(b)

Provision of design services;

(c)

Revenue by the above categories for the years ended December 31, 2009 and 2010 are summarized as follows:

	2009		2010
Revenue:
Product	$	12,413,075		8,555,323
Services		260,815		-
EPC contracts		9,520,553		12,527,330
Totals	$	22,194,443		21,082,653

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 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 risk of ownership have passed to the customer, which generally occurs at the time of delivery; (iv) the customer accepts the products upon 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 net of value-added tax.

The Company recognizes revenues including retainage from design services when the services are provided, the design drawings are delivered and collectability is reasonably assured. The Company generally delivers the drawings in one batch.

In accordance with the accounting standard regarding long-term construction-type contracts, the Company adopted the percentage of completion method to recognize revenues including retainage 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 contracts revenues and contracts 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 and upon which the Company recognizes revenue.

(s) Fair value of financial instruments

 Level 1

Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Fair valued assets and liabilities that are generally included in this category are assets comprised of cash, restricted cash, accounts and notes receivable, and liabilities comprised of bank loans, accounts payable, accrued liabilities and other payables. As of December 31, 2009 and 2010, the carrying values of these assets and liabilities approximated their fair values.

 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, 2009 and 2010, the Company did not have any fair value assets or liabilities classified as Level 2.

 Level 3

The following table presents information about the company’s financial liabilities classified as Level 3 as of December 31, 2010 and 2009.

			Balance as of December 31, 2010
	Carrying		Fair Value Measurements
	Value		Using Fair Value Hierarchy
			Level 1		Level 2		Level 3
Derivative liability, current (Note 13)	$	374,846		-		-	$	374,846
Derivative liability (Note 13)	$	48,461		-		-	$	48,461
Warrant liability (Note 13)	$	1,332,760		-		-	$	1,332,760

			Balance as of December 31, 2009
	Carrying		Fair Value Measurements
	Value		Using Fair Value Hierarchy
			Level 1		Level 2		Level 3
Derivative liability, current (Note 13)	$	435,500					$	435,500
Derivative liability (Note 13)	$	435,500		-		-	$	435,500
Warrant liability (Note 13)	$	1,372,947		-		-	$	1,372,947

A summary of changes in Level 3 derivative and warrant liabilities for the years ended December 31, 2009 and 2010 were as follows:

Balance at January 1, 2009	$	1,524,268
Warrants issued at issuance of convertible notes (Note 13)		1,387,912
Derivative liability at issuance of convertible notes (Note 13)		1,270,500
Change in fair value of warrant liability recognized in earnings		(1,539,233	)
Change in fair value of derivative liability recognized in earnings		(399,500	)
Balance at December 31, 2009	$	2,243,947
Derivative liability of long term loan, current (Note 8)		132,470
Derivative liability of convertible notes (Note 9)		48,461
Change in fair value of warrant liability recognized in earnings		(40,187	)
Change in fair value of derivative liability recognized in earnings		(628,624	)
Balance at December 31, 2010	$	1,756,067

The following presents the carry value and the estimated value of the Company’s convertible note at December 31, 2010:

	Carry Value		Fair Value

Convertible note	$	4,691,582	$	4,580,314

The fair value of the convertible note is based on the market interest rate for debt with similar terms and maturity.

(t) Segment reporting

The group has adopted ASC 280, Segment Reporting, for its segment reporting. The group mainly operates in china and measures its business as a single segment.

(u) Recent accounting pronouncements

In February 2010, the FASB issued accounting standards update which amends the accounting standard on subsequent event. The accounting update provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. The accounting standard distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. As a result of the accounting update, SEC registrants will not disclose the date through which management evaluated subsequent events in the financial statements, either in originally issued financial statements or reissued financial statements. The accounting standard was effective for interim and annual periods ending after June 15, 2009, and the accounting update is effective immediately. We have evaluated subsequent events in accordance with the accounting update.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance on “revenue recognition for arrangements with multiple deliverables and certain revenue arrangements that include software elements.” By providing another alternative for determining the selling price of deliverables, the guidance for arrangements with multiple deliverables will allow companies to allocate consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics and will often result in earlier revenue recognition. The new guidance modifies the fair value requirements of previous guidance by allowing “best estimate of selling price” in addition to vendor-specific objective evidence (“VSOE”) and other vendor objective evidence (“VOE,” now referred to as “TPE,” standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted under the new guidance. The new guidance for certain revenue arrangements that include software elements removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance, resulting in the recognition of revenue similar to that for other tangible products. The new guidance is effective for fiscal years beginning on or after June 15, 2010. However, companies may adopt the guidance as early as interim periods ended September 30, 2009. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company has not early adopted the new guidance and the adoption does not have a significant impact on our financial position or results of operations.

Note 3 – Accounts Receivable

(a)	Account Receivable

	December 31,		December 31,
	2009		2010

Current accounts receivable	$	6,601,921	$	7,059,935

Subtract: Allowance for doubtful accounts		-		-
Current account receivable, net		6,601,921		7,059,935

Current receivables also consisted of revenue recognized in excess of amounts billed for the EPC contracts recognized using the percentage of completion method. As of December 31, 2009 and 2010, the receivables related to revenue recognized in excess of amounts billed amounted to approximately $2,382,315 and $ 2,328,420, respectively.

(b)	Long-term Account Receivable

The Company reclassified accounts receivable which are expected to be collected after one year as long-term accounts receivable.

	December 31,			December 31,
	2009			2010
Long-term accounts receivable	$	7,419,663		$	5,304,135
Subtract: Allowance for doubtful accounts		(589,048	)		(625,014	)
Long-term accounts receivable, net	$	6,830,615		$	4,679,121

Long-term accounts receivable consisted receivables related to revenue recognized in excess of amounts billed of approximately $6,220,710 and $4,679,121 as of December 31, 2009 and 2010, respectively.

	December 31,			December 31,
	2009			2010
Gross	$	9,145,328		$	6,242,969
Unearned Income		(1,725,665	)		(938,834	)
Allowance for doubtful accounts		(589,048	)		(625,014	)
Total, net	$	6,830,615		$	4,679,121

Contractual maturities of the Long-term accounts receivables at December 31, 2010 are summarized as follows:

Fiscal Year	Amount

2012		2,953,434
2013		2,328,420
2014		961,115
Total		6,242,969

Actual cash collections may differ from the contractual maturities due to early payments or default. Please refer to subsequent event Note 20.

Note 4– Inventories

As of December 31, 2009 and 2010, inventories consist of the following:

	December 31,		December 31,
	2009		2010
Raw materials	$	1,539,322	$	1,589,194
Work in progress		6,988,199		6,837,139
Finished goods		47,254		235,467
Total inventories	$	8,574,775	$	8,661,800

As of December 31, 2009 and December 31, 2010, inventory provision amounted to $117,126 and $93,195 respectively. The amount has been included in cost of revenues for the years ended December 31, 2009 and 2010.

Note 5 – Property, plant and equipment, Net

As of December 31, 2009 and 2010, property, plant and equipment consist of the following:

	2009			2010
Machinery equipment	$	626,485		$	666,335
Transportation equipment		270,419			395,582
Office equipment		431,905			502,625
Accumulated depreciation		(569,921	)		(791,252	)
Subtotal		758,888			773,290
Construction in progress		-			9,328,465
Property, plant and equipment, net	$	758,888		$	10,101,755

Depreciation expense for the years ended December 31, 2009 and 2010 was $178,397 and $200,478, respectively.

Note 6 – Intangible Assets

Intangible assets mainly represent purchase for usage of a parcel of land in Yangzhou where the manufacturing plant is located and software. The land use right is recorded at cost of $2,438,632 and is amortized over the lease term of 50 years starting from November 2009 when it was acquired. The amortization expense for land use of rights and software recorded for the year ended December 31, 2010 amounted to $64,282 and $8,455 respectively (2009: software $49).

The expected amortization expense of intangible assets for the next five years is as follows:

	Amortization expenses
2011		63,546
2012		63,546
2013		54,867
2014		50,202
2015		50,202
And thereafter		2,195,596
		2,477,959

Note 7 – Short-term Bank Loans

On September 1, 2009, the Company borrowed $880,200 in a short-term loan from one bank in China which matures on August 31, 2010 with a 5.841% annual interest rate. The bank loan was collateralized by Shanghai Engineering’s leased office space, which is owned jointly by Mr. Qinghuan Wu and his son. This loan was repaid on January 5, 2010.

On November 18, 2010, CER Shanghai borrowed a short-term loan of RMB 8,400,000 (approximately $1,260,000) for working capital purpose from Shanghai Pudong Development Bank, Shanghai Branch. The term of the loan is one year. The loan agreement permitted the Company to draw down up to RMB 8,400,000 in principal amount before the end of 2010. The loan agreement provides for quarterly interest payments at an annual interest rate of 6.116%. As of December 31, 2010, the Company drew down RMB 8,400,000, the full amount and paid back RMB 700,000 as planned, leaving the short-term loan balance of RMB 7,700,000(approximately $1,162,700).

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). The funds may be drawn down as a short term loan used for trade financing or similar purposes. Any amounts due under the loan are repayable on November 24, 2013. The loan has been guaranteed by each of the Company’s Chief Executive Officer and a director, two of the Group’s subsidiaries, CER Shanghai, and Shanghai Engineering and Yizheng Auto Industrial Park Investment and Development Co., Ltd. The Company has also pledged the land use right in Yizheng. The Company has drawn down RMB 21,000,000 (approximately $3,171,000) under the facility as a short-term loan, due in one year, which amount carries an annual interest rate of 5.838%. These funds will be used for working capital.

Interest expenses of short-term bank loans for the years ended December 31, 2009 and 2010 were $19,469 and $9,686, respectively.

Note 8 – Long Term Loans

On February 1, 2010, the Company, through its subsidiaries, CER Shanghai (“Borrower”) and CER Hong Kong (“Paying Agent”) entered into a series of agreements for a loan arrangement with two lenders (the “Loan Agreements”). The proceeds of this loan are for construction of the new plant in China for the production of the Company’s products.

The aggregate principal amount of the loan under the two Loan Agreements is $4,000,000. The principal is due January 15, 2013, and bears interest at the annual rate of 15.1%. The loan repayments are to be made three times a year starting May 15, 2010, and are fully amortizing, such that the principal and interest will be fully repaid at maturity. The Company will pay the sum of US$566,023 at the end of every four calendar months, commencing May 15, 2010. For the year ended December 31, 2010, the Company has paid $740,156 of the principal. The Borrower has entered into other agreements to provide that moneys due from a certain sale and service contract and related guarantee will be directed to pay the amounts due under the Loan Agreements, with the balance paid to the Borrower or its affiliates. The loan agreement between the Paying Agent and Borrower and related agreements have been registered with State Administration of Foreign Exchange (SAFE) for the inflow of funds and the repayment of the loan obligations. The loans may be prepaid at any time with a premium of 1.25% of the principal amount being paid. The Loan Agreements provide for the typical events of default, and the Company has made various representations and given various covenants to the lenders as are typical of such arrangements.

As a guarantee of the payments under the Loan Agreements, Mr. Qinghuan Wu, the Chief Executive Officer of the Company and the principal officer of the Borrower, Paying Agent and other affiliates, has pledged 8,000,006 shares for the repayment of the obligations under the Loan Agreements.

According to the loan agreement provisions, as an additional inducement to the Lender to make the Loan, which payment will not be considered interest hereunder, CER will issue to the Lender or its designee, on each date that an amount of principal of the Loan is paid, shares of common stock of CER, on a restricted basis, without registration rights, as follows: If the RMB exchange rate between the RMB and United States Dollar (“USD”) is less than RMB 6.8271(the agreed upon exchange rate on the date of the Loan), such that the value of the RMB is greater than the USD, then the difference in the principal installment calculated at the rate of RMB and calculated at the rate of RMB to USD on such repayment date will be converted into a US dollar amount and divided by the closing price of one share of common stock of CER on the OTC or stock exchange, the result of which will represent that number of shares to be issued to the Lender as of such date, in restricted stock. We issued an aggregate of 22,448 shares of common stock on November 12, 2010 based on the RMB appreciation. The derivative liability was originally recognized with amount of $ 132,470. For the year ended December 31, 2010, the derivative liabilities amounted to $170,930.The change in fair value of the derivative liability income amounted to $38,460 was recorded in the consolidated statements of operations for the year ended December 31, 2010. The interest expenses recognized for accretion to the redemption value of the long term loan was $50,600 for the year ended December 31, 2010.

Contemporaneously with the funding of the Loan Agreements, on February 1, 2010, Mr. Qinghuan Wu, arranged for a loan from Haide Engineering (Hong Kong) Limited (“Haide”),a company controlled by Mr. Qinghuan Wu, to lend to the Company the sum of $1,000,000. The proceeds of this loan will be forwarded to CER Yangzhou in the form of investment which will help fund the Company’s new plant being built in Yangzhou, China. The loan is 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. The loan is unsecured and there are no guarantees of the interest or principal. CER Hong Kong has subordinated its loan to those under the Loan Agreements. The Company repaid principal of $460,000 in December 2010 and the balance as of December 31, 2010 was $543,778.

Note 9 – Convertible Notes

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 provides term loan financing (“Convertible Notes”) to the Company in an amount of up to $5,000,000 within 6 months, 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 are for the construction of the Company’s new plant located in Yangzhou, China for, including, but not limited to, 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. For the year ended December 31, 2009 and December 31, 2010, interest expenses of $118,750 and $ 478,037 was incurred, respectively. 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 has 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. In connection with this Convertible Notes, the Company issued to the Lender one hundred shares of Series B preferred stock, that provide for voting rights and directorships in the event of defaults equal to or exceeding $1,000,000 in the aggregate amount.

The Lender may recall the Convertible Note after the 1st anniversary of the draw down at a redemption price equal to the outstanding principal plus any accrued and unpaid interest. The amount that may be requested to be prepaid by the Lender may be no more than 50% of the amount drew down by the Company. 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 interest and unpaid interest. As of December 31, 2010, the entire principal on the Convertible Notes is classified as a current liability. On September 13, 2010, the Lender agreed not to exercise its right to request an early repayment prior to September 29, 2011.

The embedded conversion feature of the Convertible Notes is 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 is accounted as a derivative liability on the balance sheet is 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 the earliest redemption date using effective interest rate method. The change in fair value of the derivative liability of $667,084 was recorded in the consolidated statements of operations for the year ended December 31, 2010. The interest expenses recognized for accretion to the redemption value of the Convertible Notes were $232,628 and $777,915 for the year ended December 31, 2009 and 2010.

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 grant date to the earliest redemption date of the Convertible Notes. For the year ended December 31, 2009 and December 31, 2010, $497,541 and $674,748 of deferred financing cost was amortized and charged to interest expenses, respectively. The Warrants were recorded as derivative liabilities in accordance with ASC 815, Derivatives and Hedging, because the exercise price of the Warrant is denominated in USD, which is a currency other than the Company’s functional currency, RMB. Changes in fair value of the Warrants (Note 13) for the year ended December 31, 2009 and 2010was recorded in the consolidated statements of operations.

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 interests are due September 29, 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. In the event of a default, the lender would have the right to exercise the rights under the Class B Preferred Stock that was issued in connection with the issuance of Convertible Notes, which will continue with respect to the new loan. 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 guarantee of the payments under the loan extension, Mr. Wu, the Chief Executive Officer of the Company pledged 8,000,006 shares for the repayment of the principal due under the loan agreement. The pledge will only take effect when the shares are released from its current pledge under the Long Term loan entered into by the Company on February 1, 2010.

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 is determined based on the carrying amount of the original debt and the revised cash flow of the new loan.

Since the loan is fixed in United States dollars, the lender will receive compensation when the Renminbi exchange rate increase against the US dollar as compared to the rate fixed at the borrowing date. Accordingly, the Company has accounted for the feature as an embedded derivative and recognized derivative liability at issuance in the amount of $ 48,461.

Note 10 – Taxation

USA

The company is subject to U.S. Delaware income tax at a rate of 34% on its assessable profits. No such profit tax has been incurred as the Group did not have any assessable income earned in or derived from the U.S. during the years presented.

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 provided as the Group did not have assessable profit that was earned in or derived from Hong Kong subsidiaries during the years 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 loss can be carried forward 5 years to offset future taxable income.

Pursuant to the PRC income tax laws, Shanghai Engineering is subject to enterprise income tax at a statutory rate of 15% as a high technology entity. CER Shanghai, CER Yangzhou and Shanghai Environmental are subject to enterprise income tax at a statutory rate of 25%.

	2009			2010
Statutory CIT rate		34.00	%		34.00	%
Tax differential from statutory rate applicable to entities in the PRC		(5.42	)%		(7.05	)%
Permanent difference		45.98	%		6.23	%
Utilization of deferred income tax liability		6.36	%		-
Allowance for deferred income tax assets		(52.19	)%		(38.85	)%
Effective CIT rate		28.73	%		(5.67	)%

Deferred tax assets and liabilities without taking into consideration the offsetting of balances are as follows:

	December 31,			December 31,
	2009			2010
Deferred tax assets, current
Rental expenses		67,276			-

Deferred tax assets, non-current:
Tax loss carry forwards		2,178,667			3,299,721
-Allowance for doubtful accounts and provision for inventory		130,192			120,839
Valuation allowance		(1,822,225	)		(3,116,086	)
		486,634			304,474
Total deferred tax assets		553,910			304,474

Deferred tax liabilities:
Taxable temporary difference related to derivative liabilities		(352,876	)		(132,698	)
Total deferred tax liabilities		(352,876	)		(132,698	)

The net balances of deferred tax assets and liabilities after offsetting are as follows:

	December 31,		December 31,
	2009		2010
Deferred tax assets, current, net		67,276		-
Deferred tax assets, non-current net		133,758		171,776

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 Invested Enterprises–(“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 a 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 profit(loss) of foreign subsidiaries as of December 31, 2009 and 2010 were approximately $1,059,500 (RMB 7,844,000) and ($498,756) (RMB 2,643,099), respectively, and they are considered to be indefinitely reinvested. Accordingly, no provision has been made. No dividend was declared out of the cumulative retained earnings as of December 31, 2009 and 2010.

No provision for taxation has been made for Hi-tech, CER Hong Kong, and CER Yangzhou for the years ended December 31, 2009 and 2010, as those subsidiaries did not generate any taxable profits during the periods.

	2009			2010
US income tax benefit	$	(431,970	)	$	-
HK income tax expense		-			-
PRC income tax expense		74,630			188,688
Total provision for income taxes expense /(benefit)	$	(357,340	)	$	188,688

The Company is incorporated in the U.S. and incurred a net operating loss for income tax purposes for the year ended December 31, 2009 and 2010. The net operating loss carry forwards for the U.S. income tax purposes is approximately $5,388,299 and $6,841,578 for year ended December 31, 2009 and 2010, respectively, which may be available to reduce future years' taxable income. These carry forwards will expire, if not utilized, in 20 years. Management believes that the realization of the benefits arising from this loss are uncertain due to Company's limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has recorded $2,178,667 and $3,299,721 of deferred tax assets as of December 31, 2009 and 2010 for these losses carryforwards.

In fiscal 2009 and 2010, the Company has accrued deferred tax liability associated with the convertible note and embedded derivative liabilities in the amount $352,876 and $132,698, respectively. As these fall within the same tax jurisdiction, the Company was able to offset the equivalent deferred tax asset against the deferred tax liability.

As management believes that the realization of the net deferred tax assets arising from these losses are uncertain due to Company's limited operating history and continuing losses, the Company has provided a 100% valuation allowance for the net deferred tax asset recognized at December 31, 2009 and 2010. Management reviews this valuation allowance periodically and makes adjustments as warranted.

The valuation allowances as of December 31, 2009 and December 31, 2010 were as follow:

	Amount
Balance of January 1, 2009	$	1,173,146
Additions		649,079
Balance of December 31, 2009		1,822,225
Additions		1,293,861
Balance of December 31, 2010	$	3,116,086

Note 11– 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(losses) 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 is a reconciliation of the basic and diluted earnings per share computations for the years ended December 31, 2009 and 2010

	2009			2010
Numerator:
Net loss for the year		(886,480	)		(3,519,383	)
Amount allocated to preferred stockholders		-			-
Net loss available to common stock holders – Basic and diluted		(886,480	)		(3,519,383	)
Denominator:
Denominator for basic earnings per share—weighted average common stocks outstanding		29,952,798			30,850,058
Dilutive effect of warrants and options		-			-
Denominator for diluted earnings per share		29,952,798			30,850,058
Basic earnings/(loss) per share		(0.03	)		(0.11	)
Diluted earnings/(loss) per share		(0.03	)		(0.11	)

For the year ended December 31, 2009 and 2010, there was no diluted effect due to the net loss incurred. The potentially dilutive effect of the Company’s convertible notes convertible into 2,777,778 shares of common stocks as of December 31, 2010, warrants to purchase 3,357,450 shares of common stocks as of December 31, 2009 and 2010, and options to purchase 560,000 shares of common stocks as of December 31, 2009 and 2010, were not included in the calculation of dilutive earnings/(loss) per share because of their anti-dilutive effect.

Note 12 – Convertible Preferred Stocks

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 gross proceeds. The net proceeds were allocated between the Series A convertible preferred stocks and warrants based on their relative fair values. As of the closing date, the fair value of Series A convertible preferred stock was estimated at $1.68 where as the fair value of the warrants was estimated at $0.85. As a result, an aggregate amount of $5,307,539 was allocated to Series A convertible preferred stocks 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:

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 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.

There was no beneficial conversion feature charge recognized for the issuance of Series A convertible preferred stock on the issuance date as the estimated fair value of the common stock is less than the conversion price on the date of issuance. At the time, the Company’s common stock was quoted on the OTCBB and had been publicly traded. However, with the high volatility and extremely low volume traded during the time when the Company entered into this financing transaction, the Company's determination of the fair value of the Company’s common stock as of April 15, 2008 was based in part on a valuation report prepared by an independent appraiser. The estimated fair value of the common stock was determined to be $1.55 per share.

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 years ended 2009 and 2010, 52,000 and 462,963 shares of Series A convertible preferred stock were converted to 26,147 and 245,098 shares of common stock respectively.

As of December 31, 2009 and 2010, the Company had 662,963 and 200,000 shares of Series A convertible preferred stock issued and outstanding, respectively.

Series B Convertible Preferred Stock

In connection with the Convertible Notes Agreement discussed in Note 9, the Company was required to issue the Lender one hundred shares of Series B Preferred Stock, par value at $0.001. The Series B preferred stock provides voting rights and the right to appoint directors only in the event of defaults which equal or exceed $1,000,000 in the aggregate. The Series B preferred stock is senior to all other capital stock of the Company. The holder of the Series B preferred stock will not be entitled to any dividends, any liquidation preference of any kind, or any conversion right to convert the Series B preferred stock into the Company’s common stock.

Note 13 – Warrant and Derivative Liabilities

In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments, which do not have fixed settlement provisions, are deemed to be derivative instruments. The conversion feature of the Company’s convertible note (described in Note 9), the related warrants 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 of the Convertible Notes was separated from the host contract (i.e. the Convertible Notes) and recognized as a derivative liability in the balance sheet, and the warrants issued in connection with the Convertible Notes and Series A preferred stocks have been recorded as warranty liabilities in the balance sheet to be re-measured at the end of every reporting period with changes in fair values reported in the consolidated statements of income and other comprehensive income.

The derivative liabilities were valued using both the Black-Scholes and Binomial valuation techniques with the following assumptions:

	September29,			December 31,			December 31,
	2009			2009			2010
	(Issuance date)
Conversion feature of Convertible Note:
Risk-free interest rate		0.95	%		1.14	%		1.15	%
Expected volatility		79.86	%		83.32	%		51.0	%
Expected life (in years)	2.00 years			1.75years			0.75year
Expected dividend yield		-			-			-

Fair Value:
Conversion feature	$	1,270,500			871,000			203,916

We calculated the derivative liability on exchange rate based on the following key assumptions:

Derivative liability from $5 million convertible notes	December 31, 2010

Estimated forward rate		6.49
Discount rate		0.68	%
Discount factor		0.988

Fair value	$	48,461

Derivative liability from $4 million loan	December 31, 2010

Estimated forward rate		6.60-6.50
Discount rate		0.26%-0.80	%
Discount factor		1-0.98

Fair value	$	170,930

Warrants issued in connection with convertible notes:

	May 21, 2009 (Issuance date)			December 31, 2009			December 31, 2010
Number of shares exercisable		1,388,889			1,388,889			1,388,889
Stock price	$	1.73			1.05			1.15
Exercise price	$	1.8			1.8			1.8
Expected dividend yield		-			-			-
Expected life (in years)		5.00			4.39			3.39
Risk-free interest rate		2.15	%		2.38	%		1.22	%
Expected volatility		70	%		73	%		78	%
Fair Value:
Warrants issued in connection with Convertible Note	$	1,387,912			666,793			687,182

Warrants issued in connection with Series A convertible preferred stocks:

	December 31, 2009			December 31, 2010
Number of shares exercisable		1,968,561			1,968,561
Risk-free interest rate		1.81	%		0.72	%
Expected volatility		79	%		83	%
Expected life (in years)	3.29 years			2.29 years
Expected dividend yield		-			-
Fair Value:
Warrants issued in connection with Series A convertible preferred stock	$	703,850		$	645,578

(a)

The risk-free interest rate is based on the 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 14 - Stock-Based Compensation

Common Stock

On December 7, 2009, the Board approved the issuance of 700,000 shares of the Company common stock to a consulting company in exchange for consulting services received for the period of July 1, 2009 through December 31, 2009. The value of those shares issued is $840,000, which was measured based on the fair value of the Company’s common stock at December 7, 2009.

Stock Options

On September 18, 2008, the Company appointed three independent directors and granted them stock options to purchase an aggregate of 260,000 shares of the Company’s common stock. The options will vest and become exercisable in eight equal installments evenly spread out during the two year period beginning from October 1, 2008. On June 24, 2009, the Company appointed another 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. The options will vest and become exercisable in eight equal installments evenly spread out during the two year period beginning from October 1, 2009. 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:

Grant date Fair value per share		$ 0.58- $ 1.20
Expected Term(Years)		1.81
Exercise Price		$1.22-$2.90
Expected Volatility		79%-94%
Risk Free Interest Rate		0.84%-1.45%

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 year ended December 31, 2009 and 2010, the Company recognized $221,816 and $141,012 of compensation expense, respectively,

Following is a summary of the status of options outstanding at December 31, 2010:

Outstanding Options								Exercisable Options
Exercise		Number		Average		Average		Number		Average
price				remaining		exercise				remaining
				contractual		Price				contractual
				Term						term
$	1.22		60,000		2.00	$	1.22		37,500		2.00
$	1.58		500,000		1.75	$	1.58		250,000		1.75
Total			560,000						287,500

Following is a summary of the option activity:

Outstanding as of January 1, 2009	335,000
Granted	560,000
Forfeited	(335,000	)
Exercised	-
Outstanding as of December 31, 2009	560,000
Granted	-
Forfeited	-
Exercised	-
Outstanding as of December 31, 2010	560,000

Vested and exercisable as of December 31, 2010	287,500

On July 20, 2009, the Company terminated the service contract with a consultant. As a result, the options granted to him on September 18, 2008 to purchase 25,000 shares of the Company’s common stock expired on October 21, 2009.

In September 2009, another consultant gave up the options to purchase 50,000 shares of the Company’s common stock.

On September 7, 2009, one of the Company’s independent directors resigned from the Company’s Board of Directors, effective October 1, 2009. The options granted to her on September 18, 2008 to purchase 50,000 shares of the Company’s common stock expired on December 31, 2009.

On December 31, 2009, two of the Company’s independent directors resigned from the Company’s Board of Directors, effective January 1, 2010. The options granted to them on September 18, 2008 to purchase 210,000 shares of the Company’s common stock were forfeited.

Note 15 – Interest Expenses

	For the year ended December 31,
	2009		2010
Interest of $5,000,000 convertible notes		118,750		478,037
Interest of $4,000,000 long-term loan		-		517,312
Interest of $1,000,000 long-term loan		-		74,987
Amortization of deferred financing cost		497,541		674,748
Accretion of convertible notes		232,628		777,915
Accretion of long term loan				50,600
Interest of short-term bank loans		19,469		9,686
Expense of common stock issued		-		8,979
Discount interest				2,642
Interest capitalized				(253,825	)
Interest income from long term accounts receivable.				(407,287	)
Interest income				(4,839	)
Total	$	868,388		1,928,955

Note 16 – Related Party Transactions

In 2005, Shanghai Engineering entered into an agreement with the son of Mr. Qinghuan Wu to lease the office at Quyang Road, Hongkou District, Shanghai for 5 years. For the years ended December 31, 2009 and 2010, the Company paid $52,776 and $53,258, respectively, as rental expense to Mr. Qinghuan Wu's son.

On February 1, 2010, Mr. Qinghuan Wu, arranged for a loan from Haide Engineering (Hong Kong) Limited (“Haide”), a company controlled by Mr. Qinghuan Wu, to lend to the Company the sum of $1,000,000. The proceeds of this loan will be forwarded to CER Yangzhou for additional paid-in capital which will help fund the Company’s new plant being built in Yangzhou, China. The loan is 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. The loan is unsecured and there are no guarantees of the interest or principal. CER Hong Kong has subordinated its loan to those under the loan agreements. The Company repaid principal of $ 460,000 in December 2010 and the balance as of 2010 year end was $543,778, after taking the exchange rate into account.

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 $90,674 and $292,578 for employment benefits, including pension payments for the year ended December 31, 2009 and 2010, respectively.

Note 18 – Statutory Reserve

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 this reserve must be made before distribution of any dividend to shareholders. For the years ended December 31, 2009 and 2010, there were no transfer to the statutory reserve because the China subsidiaries were making losses in both fiscal 2009 and 2010. Statutory reserve amounted to $132,802 as of December 31, 2009 and December 31, 2010.

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 December 31, 2010.

Note 19 – Commitments and Contingencies

Capital contribution to CER Yangzhou

As described in Note 1, CER Yangzhou has registered capital of $20,000,000 of which $10,500,000 has been invested as of December 31, 2010; the remaining capital is scheduled to be injected before August 28, 2011.

Lease and Operation Commitments

According to the renewed and amended Lease and Operation Agreement (Note 1) entered by Shanghai Engineering and Shanghai Si Fang, for the year ended December 31, 2009 and 2010, Shanghai Engineering recorded lease and integrated management fees in the total amounted of $861,909 and $499,956 under cost of revenue and general administrative expenses, respectively.

The Company has paid all the lease payments under this lease, therefore there is no future lease payment under this lease as of December 31 2010 as these will be paid on a month to month basis.

Rental commitments

On January 1, 2009, Shanghai Engineering renewed the lease agreement with the son of Mr. Qinghuan Wu to continue the lease of the current office space (approximately 375 square meters) for one year until December 31, 2010 and the monthly rental was $4,398, which is approximately the market price in Shanghai. After moving into the new office space in Shanghai Zhangjiang Hi-tech Park (“Zhangjiang”), the lease agreement terminates as of March 31 2011. For the year ended December 31, 2009 and 2010, the Company incurred lease payments of $52,776 and $53,258, respectively.

On March 19, 2009, CER Shanghai entered into an office lease agreement with Shanghai Zhangjiang Integrated Circuit Industrial Zone Development Co., Ltd., to lease an office space (approximately 2,664 square meters) in the Zhangjiang, which is to be the new office space and the design and engineering center of the Company in China. The lease is for two years from March 1, 2009 through February 28, 2011. The Company is also required to make a security deposit of approximately $292,613 in addition to the annual lease payments. Then rental expenses have been recognized on a straight-line basis. CER Shanghai also has an option to purchase the office space. If CER Shanghai exercises the purchase option, all the lease payments and the deposit payment made can be credited against the purchase price and counted as a partial purchase payment. The Company has paid the first year’s rental fee in the amount of $146,304 and the security deposit of $292,613 in April 2009, and has also paid the second year’s rental fee in the amount of $851,525 in February 2010. The Company has amortized the total rental fee using straight-line method over the 2-year lease period. For the year ended December 31, 2009 and 2010, the rental expense was $415,109 and $503,439, respectively.

The Company has paid all the lease payments under this lease, therefore there is no future lease payment due under this lease as of December 31 2010.

Note 20 – Subsequent events

In conjunction with the preparation of these financial statements, an evaluation of subsequent events was performed through April 18, 2011, which is the date of the financial statements were issued.

On April 8, 2011, CER Shanghai entered into an early repayment agreement with Zhenjiang Sopo Chemical New Development Co., Ltd. (“Sopo”). According to the agreement, Sopo will make a lump sum payment in the amount of $4.6 million (RMB30 million) and the remaining amount of $1.9 million (RMB12 million) will be paid in an interest-free manner from April 2011 to March 2012.

On April 15, 2011, CER prepaid the remaining principal due under the $4 million long-term loan (note 8). The prepayment sum is $2,981,244, representing the principle amount due, the prepayment premium and the net interest due. Additionally, CER will issue 117,230 shares to the lenders based on the principal amount due under the terms of the Exchange Rate Differential Payment provisions of the Loan Agreement.

Note 21 – Restricted Net Assets

Relevant PRC laws and regulations permit PRC companies to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, the Company’s VIE subsidiaries can only distribute dividends upon approval of the shareholders after they have met the PRC requirements for appropriation to statutory reserve. The statutory general reserve fund requires annual appropriations of 10% of net after-tax income should be set aside prior to payment of any dividends. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries and affiliates are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances, which restricted portion amounted to approximately $16,429,356, or 398.9% of the Company’s total consolidated net assets as of December 31, 2010. Even though the Company currently does not require any such dividends, loans or advances from the PRC subsidiaries and affiliates for working capital and other funding purposes, the Company may in the future require additional cash resources from our PRC subsidiaries and affiliates due to changes in business conditions, to fund future acquisitions and developments, or merely declare and pay dividends to or distributions to the Company’s shareholders.

Additional Information — Condensed Financial Statements of the Company

The Company is required to include the condensed financial statements of the Company in accordance with Regulation S-X promulgated by the United States Securities and Exchange Commission. The separate condensed financial statements of the Company as presented below have been prepared in accordance Securities and Exchange Commission Regulation S-X Rule 5-04 and Rule 12-04 and present the Company’s investments in its subsidiaries under the equity method of accounting. Such investment is presented on the separate condensed balance sheets of the Company as ‘Investments in subsidiaries.” Subsidiaries income or loss is included as the Company’s “Share of income from subsidiaries” on the statement of operations.

As of December 31, 2009 and 2010, there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except for those which have been separately disclosed in the Consolidated Financial Statements, if any.

FINANCIAL INFORMATION OF CHINA ENERGY RECOVERY, INC.

Condensed Statements of Operations:

	For the years ended December 31,
	2009			2010
REVENUES	$	-		$	-

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		(1,134,290	)		(188,696	)

LOSS FROM OPERATIONS		(1,134,290	)		(188,696	)

OTHER INCOME (EXPENSE), NET:
Change in fair value of warrants liabilities		1,539,233			40,187
Change in fair value of derivative liabilities		399,500			667,084
Non-operating expenses, net		(2,731	)		(10,479	)
Interest expenses		(848,919	)		(1,940,146	)
Total other income/(expense), net		1,087,083			(1,243,354	)

LOSS FROM OPERATIONS BEFORE INCOME TAXES		(47,207	)		(1,432,050	)

INCOME TAXES BENEFITS		431,970			-

Share of loss from subsidiaries and VIEs		(1,271,244	)		(2,087,333	)

NET LOSS		(886,481	)		(3,519,383	)

COMPREHENSIVE LOSS	$	(886,481	)	$	(3,519,383	)

Condensed Balance Sheet

	December 31, 2009		December 31, 2010

ASSETS

CURRENT ASSETS:
Cash	$	4,492	$	23,223
Other current assets and receivables		4,900		4,500
Other receivables - inter companies		5,115,560		3,895,580
Deferred financial cost, current		674,748		215,623
Advances on purchases		229		229
Total current assets		5,799,929		4,139,155

OTHER ASSETS:
Deferred financial cost		215,623		-
Long term investment		8,804,774		6,717,441
Total other assets		9,020,397		6,717,441

Total assets	$	14,820,326	$	10,856,596

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	4,109	$	1,255
Other payables - inter companies		659,529		-
Accrued liabilities		121,353		118,750
Derivative liability, current		435,500		203,916
Convertible note, current		2,023,720		-
Total current liabilities		3,244,211		323,921

NON-CURRENT LIABILITIES:
Warrant liabilities		1,372,947		1,332,760
Derivative liability		435,500		48,461
Convertible note		1,938,408		4,691,582
Total non-current liabilities		3,746,855		6,072,803

SHAREHOLDERS' EQUITY:

Preferred stock(US$0.001 par value; 50,000,000 shares authorized, 714,963 and 662,963 shares issued and outstanding as of December 31, 2008 and 2009, respectively)		626		189
Common stock(US$0.001 par value; 100,000,000 shares authorized, 29,912,573 and 30,638,720 shares issued and outstanding as of December 31, 2008 and 2009, respectively)		30,639		30,906
Additional paid-in-capital		7,309,574		7,459,739
Retained earnings (accumulated deficits)		488,421		(3,030,962	)
Total shareholders' equity		7,829,260		4,459,872

Total liabilities and shareholders' equity	$	14,820,326	$	10,856,596

Condensed Cash flow:

	For the year ended December 31,
	2009			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(886,481	)	$	(3,519,383	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Common stock issued for services		840,000			-
Stock based compensation		221,816			141,012
Common stock issued for long-term loan		-			8,979
Change in fair value of warrants		(1,539,233	)		(40,187	)
Change in Value of derivative liabilities		(399,500	)		(667,084	)
Deferred finance cost	-			674,748
Interest expenses of convertible note		730,169			777,915
Deferred income tax		(431,970	)		-
Investment loss		1,271,244			2,087,333
Change in operating assets and liabilities
Other current assets and receivables		(5,095,460	)		1,220,380
Advances on inventory purchases		29,427			-
Accounts payable		(63,319	)		(2,854	)
Accrued expenses and other liabilities		309,441			(662,128	)
Net cash provided by (used in) operating activities		(5,013,866	)		18,731

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible note		5,000,000			-
Net cash provided by financing activities		5,000,000			-

EFFECTS OF EXCHANGE RATE CHANGE IN CASH		-			-

(DECREASE)/INCREASE IN CASH		(13,866	)		18,731

CASH, beginning		18,358			4,492

CASH, ending	$	4,492		$	23,223

Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

The management team evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2010. 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. Notwithstanding improvement made by the management in respect of its disclosure controls and procedures during the fiscal year, based on the evaluation of our disclosure controls and procedures as of December 31, 2010, management concluded that, as of such date, our disclosure controls and procedures were not effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the Company’s Board of Directors, Audit Committee of the Board of Directors, management and other personnel, 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 and includes those policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with management authorization; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010, using the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The COSO framework summarizes each of the components of a company's internal control system, including (a) the control environment, (b) risk assessment, (c) control activities, (d) information and communication, and (e) monitoring. In the course of the controls evaluation, management reviewed any errors or control problems identified and sought to confirm that appropriate corrective actions, including process improvements, were being undertaken. Based on this assessment, our management concluded that, as of December 31, 2010, our internal control over financial reporting was not effective due to the material weakness identified, which is as follow:

1) CER continued to lack some policies/documentation for the specific implementation in the area of sales, purchase and other business processes, resulting in some important control activities moving to next step without required prior approval.

2) Management discovered that the accounting staff continues to lack sufficient accounting skills and experience necessary to fulfill our public reporting obligations according to accounting principles generally accepted in the United States and the SEC's rules and regulations.

3) There continued to be insufficient controls for company information technology, especially in the area of enterprise resource planning (“ERP”). The Company does not have policies to govern IT and the accounts in ERP, particularly in the access right for each account, the access password and segregation of duties in the accounting system.

4) The Company continued to have insufficient qualified resources (employees and work framework) to perform its internal audit functions properly.

5) CER has not completed development of its policies for performance appraisal, and also has no written documentation. Management has no data to analyze the condition of human resources and to assess the related risks.

6) Some controls tested as deficiencies during 2009 and 2010 still remained un-remediated as of the year ended 2010, because most departments were short of resources, especially due to the lack of human resources.

Remediation Activities by Management

Our management is in the process of implementing remediation procedures. Management is seeking to develop the overall scope and effectiveness of our internal audit capabilities. To that end, management has taken the following actions to improve internal controls over financial reporting:

1)	Management has engaged a global business consulting firm continued to assist management in strengthening our internal control of financial reporting. As of the year end of 2010, management has outlined and assessed all the major processes and all the key controls of the Company.

Management continues to establish, together with the consulting firm, more detailed policies and procedures for the preparation of consolidated financial statements, and has improved our formal contract review process to establish and document revenue recognition events and methodologies at the inception of revenue generating contracts.

In addition, management has developed policies and procedures to ensure that the preparation of quarterly and annual financial statements, note disclosures, and related information are in compliance with accounting standards and guidance, and we have developed policies and procedures to review and document the resolution to any abnormal balances and account relationship discrepancies on a monthly basis. Specifically, management has established a policy that it should (a) analyze the abnormal balances and account relationship discrepancies, (b) document the review and resolution for any abnormal balances and account relationship discrepancies that exist, and (c) report significant abnormal balances and account relationship discrepancies on a monthly basis including a status of researching and resolving the balances and be required to report significant abnormal balances and account relationship discrepancies on a monthly basis including a status of researching and resolving the balances. In respect of the above processes, management will maintain adequate documentation.

Furthermore, management is also continuing to develop policies and procedures to determine if any journal entries processed in the current fiscal year have a prior period impact.

During fiscal year 2010, the Company continued to hire several qualified staff with experience in financial reporting, this has provided improved and better compilation of the necessary information and interpretation for the proper presentation of the financial statements, however, management understands that there must be continued improvement in this area.

Management has recruited more qualified employees for the key positions which relate to financial reporting. The Company also recruited some management personnel of both top and middle levels, who are equipped with the appropriate knowledge and experience on internal control. The Company has also provided more training courses for the staff of the financial and internal control departments.

3)	Management is developing an ERP system to eliminate manual processes in the area of supply chain, manufacturing, sales and financial processes to avoid kinds of mistakes that may result from manual entry.

Management has established some and still establishing high level and detailed control policies for all business departments, and management will continue to monitor the implementation of these policies. These policies include, but are not limited to, CER Examine and Approve Matrix, Guidance for Physical Count and Variance Adjustment, IT Security Policy.

Management implemented more comprehensive documentation control policies and procedures to allow it to evaluate whether our controls in this respect are effective and implemented a more comprehensive information technology (including ERP) policies and procedures.

For IT security, management has developed formats to control the accounts and access right to the data if there is any change. Management also periodically inspects the physical room of the computer servers and the virtual system to check whether there is any unusual phenomenon that may cause risks and keep written documentation to support this activity.

Management has established an internal control department consisting of experienced staffs. The team is focused on design of the control points of different operation cycles, as well as inspection of the implementation of the control process. Management planed to recruit more experienced staff in the future to focus on internal controls. Training relating to internal control will also be launched in the near future to increase the effectiveness and efficiency of our control implementation. Management also has established some relevant policies and procedures to strengthen the fraud risk assessment and anti-fraud system, while it is preparing detailed instructions and guidance.

Management has taken steps to remediate many deficiencies, there continued to be deficiencies in the areas of purchasing, inventory control, general ledger and controls surrounding human resources function, which management is continuing on-going assessment, testing of the processes and controls and improving such controls.

While we have begun to take the actions described above to address the material weakness identified, the process of designing and implementing an effective financial reporting system represents a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. As such, the measures we expect to take to improve our internal control over financial reporting may not be sufficient to address the material weakness identified to provide reasonable assurance that out internal control over financial reporting is effective. As we prepare for compliance with Section 404 of the Sarbanes-Oxley Act, we may identify additional deficiencies in our system of internal control over financial reporting and, if so, will take correcting actions accordingly.

Changes in Internal Controls

Other than the above-mentioned “Remediation Initiative by Management”, the Company has made no change in its internal control over financial reporting that has materially affected, or is reasonably likely to materiality affect, the Company’s internal control over financial reporting during the three months ended December 31, 2010.

Item 9B Other Information

None

PART III

Item 10 Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

The following table sets forth certain information concerning the directors and executive officers of our Company as of March 31, 2011:

Name	Age	Position with the Company
Qinghuan Wu	64	Chairman of the Board, Chief Executive Officer and Acting Chief Financial Officer
Qi Chen	40	Chief Operations Officer and Director
Jialing Zhou	55	Director
Ye Tian	31	Director
Estelle Lau	44	Director

Qinghuan Wu has been a director, the Chairman of our Board and our Chief Executive Officer since April 2008 and our acting Chief Financial Officer since November 2009. Mr. Qinghuan Wu has devoted his 40-year career to the design and production of waste heat boilers and energy recovery systems, and related technological development. Mr. Qinghuan Wu has been the Executive Director of our subsidiary Haie Hi-tech Engineering (Hong Kong) Company Limited (which we refer to as Hi-tech), which was founded in January 2002, Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. (which we refer to as Shanghai Engineering and which has entered into a contractual relationship with Hi-tech and subsequently with CER (Hong Kong) Holdings Limited (which we refer to as CER Hong Kong), a wholly-owned subsidiary of the Company founded in August 2008), which was founded in July 1999, and Shanghai Environmental (which was dissolved in June 2010) between 1992 and 2004, Mr. Qinghuan Wu founded or held positions with numerous companies and research institutes whereby he developed significant expertise related to the energy recovery business. Mr. Qinghuan Wu was the founder and President of Zhangjiagang Hai Lu Waste Heat Boiler Research Institute between 1992 and 1998, the Executive Director of Kunshan Kun Lun Hi-technology Engineering Co., Ltd. between 1996 and 2004 and the founder and Executive Director of Zhangjiagang Hai Lu Kun Lun Hi-Technology Engineering Co., Ltd. between 1997 and 2001. Before that, Mr. Qinghuan Wu worked for 23 years (from 1969 until 1992) as a research engineer at the Nanjing Chemical Industry Research Institute, the largest research institute under the Chinese Ministry of Chemical Industry. Mr. Qinghuan Wu has served as the executive member of the Chinese Sulfur Industry Association since 1999 and been responsible for waste heat recovery technology development for the industry. Mr. Qinghuan Wu was granted the China National Science and Technology Advancement Award and Technology Award of the Chinese Ministry of Chemical Industry for his technological innovation in the waste heat recovery field. Mr. Qinghuan Wu holds a bachelor degree in Process Equipment and Control Engineering from Beijing University of Chemical Technology, Beijing, China. We believe Mr. Qinghuan Wu’s qualifications to serve on our Board of Directors include his intimate knowledge of our operations as a result of his day to day leadership as our Chief Executive Officer.

Qi Chen has been a director and our Chief Operations Officer since April 2008. He is also the General Manager of our affiliated company Shanghai Engineering, a position he has held since May 2007, and the General Manager of our wholly-owned subsidiary, CER Energy Recovery (Shanghai) Co., Ltd. (which we refer to as CER Shanghai), a position he has held since February 2009. Mr. Chen joined Shanghai Engineering in 1997 as a member of its design, engineering, and sales departments. Before joining Shanghai Engineering, he served as a trader for the Xiamen Trading and Development Co. for six years. Mr. Chen holds a bachelor degree in engineering from Xiamen University, Xiamen, China. We believe Mr. Chen’s qualifications to serve on our Board of Directors include his knowledge of the industry in which we operate.

Jialing Zhou has been a director since April 2008. She is also a director of Hi-tech and has served in such position since Hi-tech’s inception in January 2002. Mrs. Zhou also serves as the controller of Shanghai Engineering, a position she has held since Shanghai Engineering’s inception in July 1999. She served as the controller for Zhangjiagang Hai Lu Waste Heat Boiler Research Institute between 1992 and 1998 and for Zhangjiagang Hai Lu Kun Lun Hi-Technology Engineering Co., Ltd. between 1997 and 2001. Between 1972 and 1992, she was a computer system analyst at the Nanjing Chemical Industry Research Institute, the largest research institute under the Chinese Ministry of Chemical Industry. We believe Ms. Zhou’s qualifications to serve on our Board of Directors include her knowledge and experience in financial and accounting matters.

Ye Tian has been a director since June 2009. Mr. Tian is currently the CEO of Back In Time Ltd. and its wholly-owned subsidiary JOVI, a retail chain and lifestyle brand in China, and a General Partner of Media Plus, an investment company located in Beijing and focusing on Asia. Prior to his current work, from 2006 to 2007, Mr. Tian was a Director at Loeb Enterprises, an incubation company in New York, and from 2003 to 2005, he was an Analyst at Appian Corporation, a software company in Virginia. Mr. Tian holds a Bachelor of Arts degree in Applied Mathematics from Harvard University. We believe Mr. Tian’s qualifications to serve on the Board of Directors include his business experience as a chief executive officer.

Estelle Lau has been a director since October 2009. Ms. Lau has been a consultant for the past 10 years in the venture capital community focusing on cross-border investments in Asia, mainly in Chinese-speaking countries. Ms. Lau has served as General Counsel to pan-Asian venture funds, including CVM Capital and Crimson Capital. Ms. Lau has held the position of Vice President at 51Job (NASDQ:JOBS), the leading provider of HR services in China, serving as internal counsel and managing investor relations in the U.S. Ms. Lau also worked as an independent consultant at Kmart Corporation as Acting VP of Global Sourcing and Compliance and served as General Counsel and managed investor relations for Shine Media Acquisition Corporation. Currently she heads Development and Communications for CASBS at Stanford University, an independent center focused on the social and behavioral sciences. Ms. Lau was an Associate Professor of Law at SUNY Buffalo School of Law and has a B.A. in Sociology and Philosophy from Wellesley College, an M.A. and Ph.D. in Sociology from the University of Chicago and a J.D. from Harvard Law School. We believe Ms. Lau’s qualifications to serve on the Board of Directors include her financial and legal experience.

Family Relationships

Mr. Qinghuan Wu, our Chairman of the Board, Chief Executive Officer and Acting Chief Financial Officer, and, Mrs. Jialing Zhou, one of our directors, are husband and wife.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who beneficially own more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission (SEC). Officers, directors and ten percent shareholders are charged by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon our review of the copies of such forms received by us, or written representations from certain reporting persons that no Forms 5 were required for those persons, we believe that, during the fiscal year ended December 31, 2010, all filing requirements applicable to our executive officers, directors and ten percent shareholders were fulfilled.

Code of Ethics

We do not currently have a Code of Ethics in place for the Company. Our business operations are not complex and we have a very limited shareholder base. The Company seeks advice and counsel from outside experts such as our lawyers on matters relating to corporate governance.

Audit Committee

The functions of the Audit Committee include oversight of the integrity of our financial statements, compliance with legal and regulatory requirements, and the performance, qualifications and independence of our independent auditors. Estelle Lau (Chairman) and Ye Tian are the current members of our Audit Committee.

The Board of Directors, after making a qualitative assessment of each member of the Audit Committee, has determined that both Estelle Lau and Ye Tian are financial experts within the meaning of all applicable rules. In making this determination, the Board of Directors considered their ability to understand generally accepted accounting principles and financial statements, their ability to assess the general application of generally accepted accounting principles in connection with our financial statements, including estimates, accruals and reserves, their experience in analyzing or evaluating financial statements of similar breadth and complexity as our financial statements, their understanding of internal controls and procedures for financial reporting, and their understanding of the audit committee functions.

Item 11 Executive Compensation

Summary Compensation Table

The following table sets forth information regarding compensation with respect to our fiscal years ended December 31, 2010 and December 31, 2009, paid or accrued by us to or on behalf of those persons who were our principal executive officer, who we refer to as our “named executive officers.” There were no other executive officers whose compensation exceeding $100,000 during those two fiscal years.

Name and principal position	Year	Salary ($)		All Other Compensation(1) ($)		Total ($)
Qinghuan Wu, Chief	2010		72,508		5,000		76,508
Executive Officer and	2009		70,373		4,000		74,373
acting Chief Financial
Officer

Richard Liu(2), Chief Financial Officer	2009		145,033				145,033

(1) Represents cost for automobile benefit.

(2) Richard Liu resigned in November 2009

Base Salary

Our executive officers receive base salaries that are determined based on their responsibilities, skills and experience related to their respective positions within the context of the Chinese market. The amount and timing of an increase in base compensation depends upon, among other things, the individual’s performance, and the time interval and any added responsibilities since his or her last salary increase.

Outstanding Equity Awards at Fiscal Year-End

There is no equity award outstanding at December 31, 2010 for each of the named executive officers:

Option Exercises

None of our named executive officers exercised any options during the year ended December 31, 2010.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

We currently do not have any employment contracts or termination of employment and change-in-control arrangements with our named executive officers.

Retirement Plans and Employee Benefits

Our Chinese subsidiaries and our affiliated companies are required to provide certain employee benefits to their respective employees under Chinese law as described below.



Employees from outside of Shanghai, China. For employees who are not the residents of Shanghai, as stipulated by the relevant laws and regulations for companies operating in the Shanghai, the employer company is required to contribute to a city-sponsored comprehensive insurance plan in an amount equal to 12.5% of a benchmark number consisting of 60% of the last year monthly average salary of the entire workforce in Shanghai (including the employer’s employees).



Outsourced employees. We have entered into an agreement with a human resource service company to outsource the employees for manufacturing. The human resource service company will be responsible for the comprehensive insurance for these employees.



Senior management. Our Chinese subsidiaries and our affiliated companies pay the premiums for accident insurance for a few members of their respective senior management.

Director Compensation

Members of our Board of Directors who are also executive officers do not receive equity or cash compensation for their services as directors. Our policy is to reimburse our non-executive directors for reasonable expenses incurred in attending board of director or committee meetings or in connection with their services as members of the Board.

We entered into substantially similar Board of Directors - Retainer Agreements with each of our independent directors, Estelle Lau and Ye Tian. Pursuant to the terms of the Retainer Agreements, each director has agreed to serve as a director until the earlier of the termination of the Retainer Agreement or the two year anniversary of the effective date thereof. Each director will receive compensation for service on the Company's Board of Directors in the form of options to purchase the Company's common stock and, in some cases, cash retainer payments. The term of the options is ten years and the options vest in eight equal installments on each October 1, January 1, April 1 and July 1 during the term. The retainers are paid on a quarterly basis during the term of the Retainer Agreement. The Retainer Agreements automatically renew for successive terms upon the director's re-election to the Board of Directors for the period of such term, unless the Board of Directors determines not to renew a Retainer Agreement in its sole discretion.

Each Retainer Agreement automatically terminates upon the earlier to occur of (a) the death of the director, (b) the director's resignation or removal from, or failure to win election or re-election to, the Company's Board of Directors, or (c) upon the approval of the Company's Board of Directors, in its sole discretion. In the event of termination, the director is entitled to receive (i) payment of the portion of the retainer for service on the Company's Board of Directors which has accrued to such director through the date of termination, and (ii) the number of options that are vested as of the date of termination. The unaccrued portion of the retainer and any unvested options as of the date of termination will be forfeited by the director upon termination of the Retainer Agreement. Finally, each director has agreed not to compete with the Company during the term of the Retainer Agreement and for a period of six months thereafter.

The following table sets forth compensation information for the Company’s directors who are not named executive officers for the year ended December 31, 2010:

Name	Fees Earned or Paid in cash		Option Awards(1)		All Other Compensation	Total
	($)		($)		($)	($)

Ye Tian				123,550			123,550
Estelle Lau		30,000		17,463			47,463

(1) Option award amounts reflect compensation cost for our directors for the year ended December 31, 2010, calculated in accordance with FASB ASC Topic 718 and using a Black-Scholes valuation model.

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Our common stock and Series A Convertible Preferred Stock constitute our only voting securities. Holders of our common stock and Series A Convertible Preferred Stock vote together as a single class. As of March 31, 2011, we had 30,956,651 shares of common stock and 200,000 shares of Series A Convertible Preferred Stock issued and outstanding. Each holder of Series A Convertible Preferred Stock is entitled to that number of votes equal to the number of shares of common stock into which such holder’s aggregate number of shares of Series A Convertible Preferred Stock is convertible immediately after the close of business on the applicable record date. Currently, the Series A Convertible Preferred Stock is convertible into an aggregate of 105,882 shares.

The following table sets forth, as of March 31, 2011, the beneficial ownership of our common stock by (a) each person or group of persons known to us to beneficially own more than 5% of our outstanding shares of common stock, (b) each of our directors and named executive officers and (c) all of our directors and executive officers as a group. None of the foregoing persons hold any shares of our Series A Convertible Preferred Stock. Except as indicated in the footnotes to the table below, each stockholder named in the table has sole voting and investment power with respect to the shares shown as beneficially owned by such stockholder.

Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act. In computing the number of shares beneficially owned by a person or a group and the percentage ownership of that person or group, shares of our common stock subject to options or warrants currently exercisable or exercisable within 60 days after March 31, 2011 are deemed outstanding, but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the table below, the address of each individual named below is 7F, No. 267 Qu Yang Road, Hongkou District, Shanghai, China 200081.

Name of Beneficial Owner	Number of Shares of Common Stock Beneficially Owned			Percentage of Class(1)
Qinghuan Wu		11,454,254			37.00	%
Qi Chen		-			-
Jialing Zhou		8,302,836			26.82	%
Ye Tian		312,500	(2)		*1.01	%
Estelle Lau		45,000	(3)		*
All directors and officers as a group (5 persons)		20,114,590			64.98	%

(1)	Based upon 30,956,651 shares of common stock issued and outstanding as of December 31, 2010. Does not include 200,000 shares of Series A Convertible Preferred Stock currently exercisable into 105,882 shares of common stock.

(2)	Includes 312,500 shares of common stock issuable upon exercise of outstanding options.

(3)	Includes 45,000 shares of common stock issuable upon exercise of outstanding options.

*	Less than 1%

Item 13 Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Persons

In 2005, Shanghai Engineering entered into agreements with the son of Mr. Qinghuan Wu, our Chairman and Chief Executive Officer, to lease office space. For the years ended December 31, 2009 and 2010, the Company paid $52,776 and $53,258, respectively, in rent to Mr. Qinghuan Wu's son.

On February 1, 2010, Mr. Qinghuan Wu, arranged for a loan from Haide, a company controlled by Mr. Qinghuan Wu, to lend to the Company the sum of $1,000,000. The proceeds of this loan will be forwarded to CER Yangzhou for additional paid-in capital which will help fund the new manufacturing plant being built in Yangzhou, China. The loan bears interest at the annual rate of 9.5%, and is unsecured, The Company will pay interest of $23,750 at the end of every three calendar months. The principal is due in full on January 30, 2012. The loan is unsecured and there are no guarantees of the interest or principal. The Company paid a total of $95,000 of interest on this loan during 2010. As of December 31, 2010, the total principal amount outstanding was $1,000,000.

Director Independence

We undertook a review of the independence of our directors and, using the definitions and independence standards for directors provided in the rules of The Nasdaq Stock Market, considered whether any director has a material relationship with us that could interfere with their ability to exercise independent judgment in carrying out their responsibilities. As a result of this review, we determined that Estelle Lau and Ye Tian are “independent directors” as defined under the rules of The Nasdaq Stock Market.

Item 14 Principal Accountant Fees and Services

Principal Accountant Fees and Services

PricewaterhouseCoopers (“PwC”), our current auditor, performed the audit of our annual consolidated financial statements for the year ended December 31, 2010 and 2009. PwC also performed the review of our quarterly financial statements for the first, second and third quarters ended March 31, 2010, June 30, 2010 and September 30, 2010, respectively.

The following is a summary of fees billed by the principal accountant for services rendered during each of the years ended December 31, 2009 and 2010.

Audit Fees. For the years ended December 31, 2009 and December 31, 2010, the aggregate fees billed for professional services rendered for the audit of our annual financial statements, the review of our financial statements included in our quarterly reports, and services provided in connection with regulatory filings were approximately $242,388,and $402,397, respectively.

Audit Related Fees. For the years ended December 31, 2009 and December 31, 2010, there were no fees billed for professional services by our independent auditors for assurance and related services.

Tax Fees. For the years ended December 31, 2009 and December 31, 2010, there were no fees billed for professional services rendered by our independent auditors for tax compliance, tax advice or tax planning.

All Other Fees. For the years ended December 31, 2009 and December 31, 2010, there were no other fees billed for other professional services by our independent auditors.

Pre-Approval Policy

The Audit Committee pre-approves the services to be provided by its independent auditors. During the year ended December 31, 2010, the Audit Committee reviewed in advance the scope of the annual audit to be performed by the independent auditors and the independent auditors’ audit fees and approved them.

PART IV

Item 15 Exhibits and Financial Statement Schedules

(a) We have filed the following documents as part of this Annual Report on Form 10-K:

1. Financial Statements

		Page No.
China Energy Recovery, Inc. and Subsidiaries Report of Independent Registered Public Accounting Firm		51

China Energy Recovery, Inc. and Subsidiaries Consolidated Balance Sheets as of December 31, 2009 and 2010		52

China Energy Recovery, Inc. and Subsidiaries Consolidated Statements of Income and Other Comprehensive Loss for Years Ended December 31, 2009 and 2010		53

China Energy Recovery, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity for Years Ended December 31, 2009 and 2010		54

China Energy Recovery, Inc. and Subsidiaries Consolidated Statements of Cash Flows for Years Ended December 31, 2009 and 2010		55

China Energy Recovery, Inc. and Subsidiaries Notes to the Consolidated Financial Statements		56

2. Financial Statement Schedules

All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or the notes thereto.

3. Exhibits

Exhibit #		Description
2.1		Agreement and Plan of Merger dated as of April 7, 2006 by and between the Registrant and its wholly-owned subsidiary Commerce Development Corporation, Ltd. (1)
2.2		Share Exchange Agreement made effective as of January 24, 2008 by and among the Registrant, Poise Profit International, Ltd. and the selling stockholders of Poise Profit International, Ltd. as set out in the Share Exchange Agreement (2)
2.3		Asset Purchase Agreement dated as of January 25, 2008 between the Registrant and MMA Acquisition Company (2)
2.4		First Amendment to Share Exchange Agreement, dated as of April 15, 2008, by and among the Registrant, Poise Profit International, Ltd. and the undersigned shareholders of Poise Profit International, Ltd. (3)
3.1		Amended and Restated Certificate of Incorporation (13)
3.2		Corrected Certificate of Designation of the Preferences, Rights, Limitations, Qualifications and Restrictions of the Series A Convertible Preferred Stock of China Energy Recovery, Inc. (14)

3.3		Bylaws (15)
3.4		First Amendment to the Bylaws (16)
3.5		Certificate of Designation, Preferences and Rights of Series B Preferred Stock of China Energy Recovery, Inc. (17)
4.1		Form of Warrant issued under the Consulting Agreement (2)
4.2		Form of Warrant issued in the Financing (3)
4.3		Registration Rights Agreement dated as of January 18, 2008 by and among the Registrant and certain stockholders signatory thereto (3)
4.4		Form of Registration Rights Agreement dated as of April 15, 2008 by and among the Registrant and the investors in the Financing (3)
4.5		Warrant issued under the Consulting Agreement between China Energy Recovery, Inc. and ARC China, Inc. (6)
10.1		Securities Purchase Agreement dated as of January 9, 2006 by and among the Registrant and the purchasers signatory thereto (7)
10.2		Securities Purchase Agreement dated as of April 13, 2006 by and among the Registrant and the purchasers signatory thereto (8)
10.3		Stock Purchase Agreement dated as of April 18, 2006 by and among the selling stockholders and purchasers signatory thereto (8)
10.4		Form of Securities Purchase Agreement dated as of April 15, 2008 by and among the Registrant and the purchasers signatory thereto (3)
10.5		Amended and Restated Senior Secured Promissory Note dated as of January 9, 2008 (9)
10.6		Escrow Agreement dated as of April 15, 2008 by and among the Registrant, Poise Profit International, Ltd., Qinghuan Wu and Jialing Zhou (3)
10.7		Loan and Transaction Expenses Agreement dated as of December 18, 2007 between Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. and RMK Emerging Markets, LLC (3)
10.8		Loan Conversion Agreement dated as of April 15, 2008 between RMK Emerging Markets, LLC, Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. and China Energy Recovery, Inc. (3)
10.9		Leasing and Operating Agreement dated as of April 22, 2004 between Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. and Shanghai Si Fang Boiler Factory, together with Amendment dated as of November 21, 2005, Amendment dated as of December 28, 2006 and Amendment dates as of June 25, 2007 (3)
10.10		Consulting Services Agreement dated as of December 28, 2005 between Haie Hi-tech Engineering (Hong Kong) Company Limited and Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. (3)
10.11		Operating Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering (Hong Kong) Company Limited, Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. and the shareholders of Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. (3)
10.12		Proxy Agreement dated as of December 28, 2005 between Haie Hi-tech Engineering (Hong Kong) Company Limited and the shareholders of Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. (3)
10.13		Option Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering (Hong Kong) Company Limited, Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. and the shareholders of Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. (3)
10.14		Equity Pledge Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering (Hong Kong) Company Limited, Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. and the shareholders of Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. (3)
10.15		Consulting Services Agreement dated as of December 28, 2005 between Haie Hi-tech Engineering (Hong Kong) Company Limited and Shanghai Xin Ye Environmental Protection Engineering Co., Ltd. (3)
10.16		Operating Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering (Hong Kong) Company Limited, Shanghai Xin Ye Environmental Protection Engineering Co., Ltd. and the sole shareholder of Shanghai Xin Ye Environmental Protection Engineering Co., Ltd. (3)
10.17		Proxy Agreement dated as of December 28, 2005 between Haie Hi-tech Engineering (Hong Kong) Company Limited and the sole shareholder of Shanghai Xin Ye Environmental Protection Engineering Co., Ltd. (3)

10.18		Option Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering (Hong Kong) Company Limited, Shanghai Xin Ye Environmental Protection Engineering Co., Ltd. and the sole shareholder of Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. (3)
10.19		Equity Pledge Agreement dated as of December 28, 2005 among Haie Hi-tech Engineering (Hong Kong) Company Limited, Shanghai Xin Ye Environmental Protection Engineering Co., Ltd. and the sole shareholder of Shanghai Xin Ye Environmental Protection Engineering Co., Ltd. (3)
10.20*		Employment Contract dated as of January 1, 2006 between Shanghai Hai Lu Kun Lun, Hi-Tech Engineering Co., Ltd. and Qinghuan Wu (3)
10.21		Consulting Agreement dated as of June 20, 2008 between China Energy Recovery, Inc. and ARC China, Inc.(6)
10.22		Amendment dated as of August 20, 2008 to Leasing and Operating Agreement dated as of April 22, 2004 between Shanghai Hai Lu Kun Lun Hi-tech Engineering Co., Ltd. and Shanghai Si Fang Boiler Factory, as amended (10)
10.23		First Amendment to Consulting Agreement dated as of August 11, 2008 between China Energy Recovery, Inc. and ARC China, Inc. (10)
10.24*		Stock Option Plan (12)
10.25		Loan Agreement dated as of May 21, 2009 between Registrant and Hold And Opt Investments Limited (18)
10.26		Registration Rights Agreement dated as of May 21, 2009 between Registrant and Hold And Opt Investments Limited (18)
10.27		Form of Loan Agreement dated February 1, 2010, between investors and CER Holdings (Hong Kong) Limited (19)
10.28		Loan Agreement between Haide Engineering (Hong Kong) Limited and CER (Hong Kong) Holdings Limited dated February 1, 2010 (19)
10.29		Form of Loan Agreement dated as of December 31, 2010 between registrant and Hold and Opt Investments Limited (20)
10.30		Form of Collateral Agreement, related to the Loan Agreement dated as of December 31, 2011 (20)
10.31		Form of Contract for Commercial Building, dated as of March 30, 2011 between Registrant and Shanghai Zhangjiang Integrated Circuit Industrial Zone Development Co., Ltd. (21)
21.1		List of Subsidiaries (+)
31.1		Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002 (+)
31.2		Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002 (+)
32.1		Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 (+)

*	Indicates management contract, compensatory plan or arrangement.

1.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 13, 2006.

2.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 30, 2008.

3.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 21, 2008.

4.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 7, 2008.

5.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 9, 2008.

6.	Incorporated by reference to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 filed on July 31, 2008.

7.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 13, 2006.

8.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 18, 2006.

9.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 15, 2008.

10.	Incorporated by reference to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 filed on August 25, 2008.

11.	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on September 24, 2008.

12.	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on November 4, 2008.

13.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 7, 2008.

14.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 9, 2008.

15.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 13, 2006.

16.	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on September 24, 2008

17.	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 5, 2009.

18.	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on May 26, 2009.

19.	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on February 4, 2010.

20.	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on January 10, 2011.

21.	Incorporated by reference to the Registrant's Current Report on Form 8-K filed on April 7, 2011.

+	Filed herewith.

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.

April 18, 2011	By:	/s/ Qinghuan Wu
		Qinghuan Wu
		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Principal Executive Officer and Director:

/s/ Qinghuan Wu		Chief Executive Officer and Director
Qinghuan Wu		18-April-2011

Principal Financial and Accounting Officer

/s/ Qinghuan Wu		Acting Chief Financial Officer
Qinghuan Wu		18-April-2011

Directors:

/s/ Qi Chen		Chief Operation Officer and Director
Qi Chen		18-April-2011

/s/ Jialing Zhou		Director
Jialing Zhou		18-April-2011

/s/ Ye Tian		Director
Ye Tian		18-April-2011

/s/ Estelle Lau		Director
Estelle Lau		18-April-2011

China Energy Recovery, Inc. - FORM 10-K - April 18, 2011

Attached files

China Energy Recovery, Inc. Reports