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CORRESP
1
filename1.htm

    Unassociated Document

    January
__, 2011

    Via
EDGAR

    United
States Securities and Exchange Commission

    Division
of Corporation Finance

    100 F
Street, NE

    Washington,
D.C.  20549-0405

    Attn:           William
H. Thompson, Accounting Branch Chief

              Re:

              China
      Recycling Energy Corporation

                Form
      10-K for the Fiscal Year Ended December 31, 2009

                Filed
      March 16, 2010

                  Form
      10-Q for the Quarterly Periods Ended June 30, 2010 and September 30,
      2010

                Filed
      August 16, 2010 and November 15, 2010

                  File
      No. 1-34625

    Dear Mr.
Thompson:

    This firm
is counsel to the above-referenced company, China Recycling Energy Corporation
(“CREG” or the “Company” and sometimes referred to as “we” or “our”) and is
filing this response to your comment letter, dated January 4, 2011, with respect
to the above-referenced filings on CREG’s behalf.  For convenience of
reference, we have included, in this response letter, the same captions and
paragraph numbers, as well as the text of the comment, set forth in your comment
letter followed by our response.

    Form 10-K for Fiscal Year
Ended December 31, 2009

    Item 8.  Financial
Statements and Supplementary Data, page 26

    Consolidated Statements of
Cash Flows, page 30

              1.

              We
      reviewed your response to comment two in our letter dated November 5,
      2010.  We understand you have now concluded that cash
      expenditures for construction of power generating stations sold pursuant
      to sales-type leases should be classified as operating cash outflows since
      such expenditures are like the production of inventory in a manufacturing
      environment.  We also understand that cash inflows related to
      your investment in sales-type leases consist of principal and interest and
      that you believe that principal collections should be classified as
      investing cash inflows.  In addition, we understand that sales
      of systems results in an increase in the investment in sales-type leases,
      and that you believe that the increase should be presented as an investing
      cash outflow.  However, it seems as though your investment in
      sales-type leases is like accounts and/or short- and long-term notes
      receivable from customers arising from sales and that the change in the
      investment should be classified as an adjustment to reconcile net income
      to net cash provided by or used for operating activities, which would be
      consistent with your classification of cash outflows related to
      construction of the power generating systems.  As such, please
      tell us the following:

    United
States Securities and Exchange Commission

      January
31, 2011

      Page
2

              ·

              the
      basis in GAAP, citing specific ASC paragraphs, for classifying the
      increase in the investment in sales-type leases as investing cash outflows
      when the investment (both short- and long-term) arises from sales of power
      generating systems, which are classified as operating cash inflows;
      and

              ·

              why
      you believe it is appropriate to classify principal collections as
      investing cash inflows when collections represent a reduction in the
      investment recognized upon the sale of power generating systems and the
      basis in GAAP for your classification, citing specific ASC
      paragraphs.

    Response:

    We have reclassified increase in the
gross investment in sales type leases, and principal collection on sales type
leases, from investing activities to operating activities in the attached
consolidated cash flow statements.

    Notes to Consolidated
Financial Statements, page 31

    Note
19.  Stock-Based Compensation, page 47

              2.

              We
      reviewed your response to comment three in our letter dated November 5,
      2010, which is the same response you submitted to comment six in our
      letter dated September 22, 2010.  Please tell us why you believe
      the issuance of warrants to non-employees in exchange for services is not
      within the scope of ASC 505-50 and that the guidance in ASC 450-20-25
      should be applied.  In that regard, please note that ASC 505-50
      specifically addresses the date an issuer shall use to measure the fair
      value of equity instruments issued to non-employees, the periods and
      manner an issuer shall use to recognize the fair value of the equity
      instruments and how the equity instruments shall be accounted for before
      the measurement date for purposes of recognizing the cost of the
      transaction.  Please also note that we acknowledge a liability
      should be recognized on the grant date and that the cost should be
      recognized as the services are performed.  Notwithstanding, we
      believe that the fair value of the warrants should be measured based on
      the guidance in ASC 505-50 as of the date at which a commitment for
      performance by the counterparty to earn the equity instrument is reached
      or the date at which the counterparty’s performance is complete, whichever
      is earlier.  As such, as previously requested, please tell us
      the basis for your determination that the measurement date for the
      warrants was the grant date in light of the guidance in ASC 505-50-30-11
      through ASC 505-50-30-17.  Specifically discuss why you believe:
      (i) performance was complete on the grant date or (ii) a performance
      commitment to earn the equity instruments was probable on the grant date
      because of sufficiently large disincentives for
      nonperformance.  If you concluded the warrants were fully vested
      and nonforfeitable on the grant date despite their vesting terms because
      their issuance was irrevocable and you agreed to take no action to cause
      the warrants to become void or revoked or their issuance to be otherwise
      terminated, please confirm that fact and tell us the facts and
      circumstances supporting that conclusion.  Otherwise, please
      explain in detail the sufficiently large disincentives for
      nonperformance.

    United
States Securities and Exchange Commission

      January
31, 2011

      Page
3

              Response:

              We
      have re-measured the fair value of warrants to the IR firm based on ASC
      505-50 at each balance sheet and expense recorded based on the period
      elapsed at each  balance sheet date, which is the date at which
      the counterparty’s performance is deemed to be completed for the period.
      As illustrated in the table below, the difference in expense under ASC
      505-50 and ASC 450-20-25 is not material; the Company will comply with ASC
      505-50 to account for the warrants before the measurement date, for
      purposes of recognizing the cost of the transaction with a cumulative
      adjustment in the 4th
      quarter of fiscal year 2010, and will record the additional expenses under
      ASC 505-50 in the income statement for the year ended December 31, 2010.
      The Company believes expensing the cost over the service term of the
      investor relations agreement is a better matching of cost with services
      received rather than expensing over the warrant’s vesting
      period.

              Amortize
      over the service period of 12
months

              IR
      expense - warrants issued

              2009
      Q4

              2010
      Q1

              2010
      Q2

              2010
      Q3

              2010
      accumulated

              expense
      originally recorded

              90,749

              90,749

              90,749

              -

              272,247

              expense
      under ASC 505 - 50

              176,884

              257,698

              34,830

              34,662

              504,074

              Difference

              86,135

              166,949

              (55,919)

              34,662

              231,827

              Difference
      as % of quarterly net income

              5%

              6%

              1%

              1%

              -

              Difference
      as % of YTD net income

              1%

              -

              1%

              0.3%

              -

              Difference
      as % of total assets

              0.09%

              0.17%

              -0.04%

              0.02%

              -

              Difference
      as % of total equity

              0.18%

              0.32%

              -0.09%

              0.05%

              -

              Impact
      to basic EPS - current quarter

              $0.002

              $0.004

              $(0.001)

              $0.001

              -

              Impact
      to basic EPS - YTD

              $0.002

              -

              $(0.001)

              $0.001

              -

    Item 9A.  Controls
and Procedures, page 51

    Internal Controls over
Financial Reporting, page 51

              3.

              We
      reviewed your response to comment five in our letter dated November 5,
      2010.  We understand that your CFO is responsible for reviewing
      the financial reports under U.S. GAAP and ensures the financial statements
      and other financial information fairly presents the financial condition,
      results of operations and cash flows in accordance in US
      GAAP.  We also understand that your CFO has a U.S. MBA education
      and many years of experience in banking, investment, financing and
      accounting areas in China and the U.S.  Please tell us about the
      CFO’s education, knowledge, experience and on-going training in US GAAP
      and SEC Rules and Regulations.  In addition, please tell about
      the education, knowledge, experience and on-going training in US GAAP and
      SEC Rules and Regulations of your Vice President of Accounting and other
      personnel identified in your
response.

      United
States Securities and Exchange Commission

        January
31, 2011

        Page
4

    Response:

    First, as disclosed in a Form 8-K,
filed January 6, 2011, our Board of Directors appointed David Chong to the
office of CFO of the Company, effective December 30, 2010; therefore, Mr. Xinyu
Peng is no longer the Company’s CFO.

    Our Vice President of Accounting, Mr.
Xiaogang Zhu, is responsible for overseeing and designating the review of our
financial reports under Chinese GAAP. Mr. Zhu is a Chinese Senior Accountant and
an expert in financial reporting.  Mr. Zhu has 30 years of experience
in financial reporting. Mr. Zhu has been the CFO and vice president of
accounting for two NASDAQ listed companies in the past five years. Mr. Zhu is an
expert in Chinese GAAP and is knowledgeable in U.S. GAAP. Mr. Zhu has had prior
training in U.S. GAAP and SEC Rules and Regulations. Mr. Zhu received his
bachelor degree in Accounting from Shaanxi Finance and Accounting Institute (now
Xian Jiaotong University Management School). Mr. Zhu has not completed any
formal on-going training in U.S. GAAP and SEC Rules and Regulations. That said,
Mr. Zhu has remained knowledgeable and current with respect to U.S. GAAP and SEC
Rules and Regulations, since he has held the office of vice president of
accounting for two NASDAQ listed companies within the past five years. In
addition, the Company is in the process of finalizing an on-going training
course for Mr. Zhu and other executive officers of the Company, in U.S. GAAP and
SEC Rules and Regulations.

    Our CFO
is responsible for overseeing and designating the review of our financial
reports under U.S. GAAP. The CFO, for the period covered by this Comment Letter,
Mr. Peng, is a seasoned expert in financial reporting with a unique blend of
banking and private and public company experience. Mr. Peng has significant
experience and knowledge with respect to U.S. GAAP and SEC Rules and
Regulations.  Prior to joining the Company, Mr. Peng served as: (i)
Vice President of Tavistock Group Asia, (ii) Chief Financial Officer and
Director of MOD3 Cabinets & Home LLC, (iii) Chief Financial Officer of
Creative Hospitality Concepts LLC; and (iv) a management level officer of the
Bank of China. Mr. Peng has maintained his knowledge of accounting standards by
completing on-going training in U.S. GAAP and other SEC Rules and Regulations.
Mr. Peng holds a MBA degree from University of Miami and Bachelor degree in Arts
from Shanghai Fudan University major in International Finance. For fiscal
year-ended December 31, 2009, the Company engaged a U.S. CPA, Ms. Yvonne Zhang,
to ensure that the Company’s financial statements fairly present the financial
condition, results of operations and cash flows of the Company in accordance in
U.S. GAAP. Ms. Zhang is licensed in the State of California. As disclosed in our
previous Response Letter, dated November 15, 2010, Ms. Zhang has 10 years of
experience working in various U.S. accounting firms supervising, planning and
performing financial statement audits and reviews (for both SEC reporting and
private companies), preparing financial statement compilations and related
footnote disclosures and special reports, and preparing corporate, partnership
and personal income tax returns. Further, to ensure that: (i) the Company’s
financial statements continue to be presented in accordance with U.S. GAAP and
SEC Rules and Regulations; and (ii) the Company stays fully informed,
knowledgeable and current as to all applicable accounting standards and
principles, the Company has continued its engagement of Ms. Zhang.

              4.

              We
      reviewed your response to comment six in our letter dated November 5,
      2010.  We note that you engaged Deloitte to provide consulting
      services and provide assistance in conducting your evaluation and
      assessment of internal control over financial reporting for fiscal
      2010.  Please tell us how and why Deloitte is qualified to
      evaluate your internal control over financial reporting.  In
      addition, please tell us whether you engaged an accounting firm or other
      similar organization to provide assistance in conducting your evaluation
      and assessment of internal control over financial reporting for fiscal
      2009.  If so, please provide the information requested in our
      previous comment.  Otherwise, please tell us the role each of
      the persons identified in your response to comment five in our letter
      dated November 5, 2010 had in conducting the evaluation and assessment of
      your internal control over financial reporting in fiscal
    2009.

      United
States Securities and Exchange Commission

        January
31, 2011

        Page
5

    Response:

    In the Company’s previous Response
Letter, dated December 8, 2010, we stated that, on June 2, 2010, Xi’an TCH
engaged Deloitte to provide consultancy services for the Group’s SOX 404 and
related internal control compliance. It was not an engagement to provide
consulting services nor an engagement to provide assistance in conducting our
evaluation and assessment of internal control over financial reporting for
fiscal year 2010. On June 23, 2009, the Company engaged Deloitte Touche Tohmatsu
CPA LTD for the specific purpose of providing support services and technical
support to the Company in connection with SOX 404 and related internal control
compliance; the engagement commenced in June 2009 and ended in February 2010.
This was not an engagement to provide assistance in conducting our evaluation
and assessment of internal control over financial reporting for fiscal year
2009. Our evaluation a