Document:

Exhibit
10.1

    

    Lender
name: Hold and Opt Limited

    

    Loan
principal amount: USD 5,000,000

    

    Loan
maturity date: September 28, 2012

    

    

    

    CHINA
ENERGY RECOVERY, INC.

    

    CONTINUATION
AND LOAN AGREEMENT

    

    THIS
CONTINUATION AND LOAN AGREEMENT (“Loan Agreement”) is entered
into by and among Hold and Opt Investments Limited, a Bahamas company (“Lender”), with offices at
Deltec House, Lyford Cay, P.O. Box N-3229, Nassau, Bahamas, China Energy
Recovery, Inc., a Delaware corporation (the “Company”  or “CER”), and Mr. Wu Qinghuan, as
of this 31st day of December 2010.

    

    WHEREAS,
CER and the Lender entered into a term loan note and agreement (the “2009 Loan”) as of May 21,
2009, under which CER, through its subsidiary, CER Energy Recovery (Shanghai)
Co., Inc. (“CER
Shanghai”) borrowed from the Lender the amount of USD $5,000,000 on
September 28, 2009, which amount is due September 29, 2011.

    

    WHEREAS,
CER and the Lender wish that this Loan Agreement and the funding hereunder when
deemed made will be to modify the 2009 Loan, and this Loan Agreement shall be
deemed to be a continued lending arrangement between the Lender and CER, with
the consequence that the 2009 Loan will be modified in all respects, including
such provisions as the right of conversion into shares of common stock of CER
and related provisions. For clarity, any registration rights granted by separate
agreement by the Company at the time of the 2009 Loan shall continue to be
governed by such separate agreement and the termination of the 2009 Loan will
not affect that agreement in any way.

    

    WHEREAS,
CER and the Lender agree that the terms of this Loan Agreement will only take
effect  on September 29, 2011 and only when the Collateral (as defined
herein) shall be available as security for this Loan Agreement and the funding
hereunder, which date will be referred to as the “Loan Date.”

    

    WHEREAS,
as security for this Loan Agreement and the Loan (as hereinafter defined), Mr.
Wu Qinghuan, the Chief Executive Officer of CER will pledge 8,000,006 shares of
common stock of CER (the “Collateral”), which shares
will be held under the terms of a collateral agent agreement (the “Collateral Agreement”) for the
benefit of the Lender among the Lender, Mr. Wu and Golenbock Eiseman Assor Bell
& Peskoe LLP, as collateral agent (the “Collateral Agent”), which will
be entered into after (i) the Collateral is release from the terms of a loan
entered into by the Company and its subsidiaries made on February 1, 2010 (the
“2010 Loan”) and (ii)
before the Loan Date.  The shares comprising the Collateral have been
issued to Mr. Wu as “restricted securities” as that term is defined under Rule
144 (“Rule 144”) of the
United States Securities Act of 1933, as amended (the “33 Act”), and are subject to
the particular provisions of issuances by shell companies, therefore, it is
understood by the Lender that the nature of the Collateral has inherent
impairments as to the ability of the Lender to sell the Collateral, should it be
permitted to do so under the terms of this Loan and Collateral Agreement.
Because of this provision, Mr. Wu agrees to be a party to this Loan
Agreement.

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    NOW,
THEREFORE, in consideration of the respective representations, warranties and
agreements set forth herein, CER and the Lender, and to the extent applicable
Mr. Wu, agree as follows:

    

    1.       Loan and Interest; Late
Penalty.  As of the Loan Date, CER is continuing to borrow from
the Lender the aggregate sum of USD$ 5,000,000 (the “Loan Amount”). The outstanding
principal amount and any other financial obligations under this Loan Agreement
shall bear interest at the annual rate of 15.1%, compounded monthly, commencing
the Loan Date, and continuing until the principal is paid in full.  If
any payment of principal or interest is not made when due, then the payment will
bear a monthly penalty equal to 1.5% of the amount due, compounded monthly,
until paid in full.

     

    2.       Loan
Amount.  The Loan Amount shall continue the principal amount
due under the 2009 Loan.  As of the Loan Date, cash amounts due under
the 2009 Loan, other than the principal due thereunder, shall be paid in full,
provided however, if any cash amount or other cash obligation remains
outstanding under the 2009 Loan, then the terms of the 2009 Loan shall continue
as respect those terms only.  Because the amount due under the 2009
Loan is equal to the Loan Amount, the Lender will not provide any new cash
funding under this Loan Agreement to the Company or its subsidiaries or
affiliates.

     

    3.       Maturity Date; Interest;
Payments. The maturity date of the Loan Amount will be September 29, 2012
(the “Maturity
Date”).  Interest will accrue monthly and will be due and
payable at the Maturity Date. The payment of the Loan Amount, interest and any
other sums due under this Loan Agreement will be paid to the Lender without any
deduction for any withholding amounts imposed by any jurisdiction, taxes or
fees.

     

    4.       Prepayment. CER may prepay the
principal under this Loan Agreement in whole or in part, at any time or from
time to time, upon 30 days advance written notice to the Lender, without any
premium or other penalty. Each prepayment shall be accompanied by accrued
interest on the principal amount to be prepaid through the date of
payment.  Any prepayment will be paid without any deduction for any
withholding amounts imposed by any jurisdiction, taxes or fees.

     

    5.       Exchange Rate Differential
Payment.  As an additional inducement to the Lender to enter
into this Loan Agreement and to extend the Loan Amount, which payment will not
be considered interest hereunder, CER will compensate the Lender for any change
in the exchange rate between the RMB and United States Dollar (“USD”), after the Loan Date as
follows:  if the RMB exchange rate between the RMB and USD is less
than the agreed upon exchange rate on the Loan Date, such that the value of the
RMB is greater than the USD, then the difference in the principal and/or
interest and/or cash amount (such as penalties) due that are being paid
calculated at the rate of RMB to USD on such repayment date will be converted
into a US dollar amount and paid to the Lender.

     

    
      
         

      

      
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    The RMB
exchange rate between the RMB and USD, for the purposes of this provision, will
be determined as of the Loan Date, and will be confirmed in writing and approved
by mutual agreement between CER and the Lender.

     

    For the
purposes of this Loan Agreement, the above formula is as follows:

     {[(A
x B) – (A x C)] divided by C} = D

     

    A = US
dollar amount of payment.

    B = The
RMB to US$ exchange rate on date of Loan Date.

    C = The
RMB to US$ exchange rate on the payment date, determined by the Bank of
China.

    D =
Compensation amount, to be paid in cash to Lender

    

    6.       Obligation to Fund
Loan.  Although the funding of the Loan Amount is a funding of
an amount previously extended by the Lender under the 2009 Loan, the Loan Date
will not be effective until the following documentation has been fully executed
and exchanged among the parties:

     

    
      	
               
      

            	
              a.

            	
              The
      Loan Agreement among the Lender, CER and Mr.
Wu;

            

    

     

    
      	
               
      

            	
              b.

            	
              Evidence
      from the lenders under the 2010 Loan of full payment and discharge of all
      the obligations under the 2010 Loan, including any principal, interest and
      interest rate differential shares, such that the Collateral has been
      released and is free and clear of all encumbrances;
  and

            

    

     

    
      	
               
      

            	
              c.

            	
              Collateral
      Agreement among Mr. Wu, CER and the Lender, for the benefit of the Lender,
      it being understood that the Collateral Agent will not execute and deliver
      the Collateral Agreement until it receives satisfactory evidence of the
      full repayment and full discharge of the 2010 Loan and that the Collateral
      is free and clear of all encumbrances, except for the terms of the
      Collateral Agreement.

            

    

     

    7.
       Events of
Default.

     

    7.1           If
any of the following events (“Events of Default”) shall occur:

     

    
      	
               
      

            	
              (a)

            	
              if
      CER shall default in the payment of any part of the principal of or
      interest on this Loan Agreement after the same shall have become due and
      payable, whether at an installment date, maturity or at a date fixed for
      prepayment or by declaration or otherwise; or if CER shall default in any
      performance or payment obligation or compliance with any term contained in
      this Loan Agreement; or

            

    

     

    
      	
               
      

            	
              (b)

            	
              if
      there shall be a default by CER or Mr. Wu in the performance of or
      compliance with any term contained in Collateral Agreement;
    or

            

    

     

    
      
         

      

      
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              (c)

            	
              if
      CER or any subsidiary or affiliate shall default (as principal or
      guarantor or other surety) in the payment of any principal of or premium,
      if any, or interest on any indebtedness for borrowed money (other than the
      Loan Agreement) or with respect to any of the terms of any evidence of
      such indebtedness or of any mortgage, indenture or other agreement
      relating thereto which default accelerates the maturity of such
      indebtedness, and such default shall continue for more than the period of
      grace, if any, provided therein without being consented to or waived by
      such lender; or

            

    

     

    
      	
               
      

            	
              (d)

            	
              if
      CER or any subsidiary or affiliate shall make an assignment for the
      benefit of creditors, or shall admit in writing its inability to pay its
      debts as they become due, or shall file a voluntary petition in
      bankruptcy, or shall be adjudicated a bankrupt or insolvent, or shall file
      any petition or answer seeking for itself any reorganization, arrangement,
      composition, readjustment, liquidation, dissolution or similar relief
      under any present or future statute, law or regulation, or shall file any
      answer admitting or not contesting the material allegations of a petition
      filed against CER or any subsidiary or affiliate in any such proceeding,
      or shall seek or consent to or acquiesce in the appointment of any
      trustee, receiver or liquidator of CER or any subsidiary or affiliate or
      of all or any substantial part of the properties of CER or any subsidiary
      or affiliate, or CER or any subsidiary or affiliate shall take any
      corporate action looking to the dissolution or liquidation;
    or

            

    

     

    
      	
               
      

            	
              (e)

            	
              if,
      within 30 days after the commencement of an action against CER or any
      subsidiary or affiliate seeking any reorganization, arrangement,
      composition, readjustment, liquidation, dissolution or similar relief
      under any present or future statute, law or regulation, such action shall
      not have been dismissed or all orders or proceedings thereunder affecting
      the operations or the business of CER or any subsidiary or affiliate
      stayed, or if the stay of any such order or proceeding shall thereafter be
      set aside, or if, within 30 days after the appointment without the consent
      or acquiescence of CER or any subsidiary or affiliate or any trustee,
      receiver or liquidator of CER or any subsidiary or affiliate or of all or
      any substantial part of the properties of CER or any subsidiary or
      affiliate, such appointment shall not have been
  vacated;

            

    

     

    
      	
               
      

            	
              (f)

            	
              if
      any material portion of CER’s or any subsidiary’s or affiliate’s assets is
      attached, seized, subjected to a writ or distress warrant, levied upon, or
      comes into the possession of any third person, including any government
      body or agency;

            

    

     

    
      	
               
      

            	
              (g)

            	
              if
      CER or any subsidiary or affiliate is enjoined, restrained, or in any way
      prevented by court or government or regulatory agency order from
      continuing to conduct all or any material part of its business
      affairs;

            

    

     

    
      	
               
      

            	
              (h)

            	
              if
      one or more final judgments in excess of the amount covered by insurance,
      becomes a lien or encumbrance upon any of CER’s or any subsidiary’s or
      affiliate’s assets;

            

    

     

    
      
         

      

      
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              (i)

            	
              if
      any document or instrument that purports to create a lien on or with
      respect to the Collateral shall, for any reason, fail or cease to create a
      valid and perfected and, except to the extent permitted by the terms
      hereof or thereof, first priority lien on and security interest in the
      Collateral covered thereby; or

            

    

     

    
      	
               
      

            	
              (j)

            	
              any
      provision of the Loan Agreement or any document or instrument relating to
      or securing the Loan Agreement shall at any time for any reason be
      declared to be null and void, or the validity or enforceability thereof
      shall be contested by CER or any subsidiary or affiliate of CER, or Mr. Wu
      or a proceeding shall be commenced by CER or any subsidiary or affiliate
      of CER, or by Mr. Wu or by any governmental authority having jurisdiction
      over CER or any subsidiary or affiliate or Mr. Wu, seeking to establish
      the invalidity or unenforceability thereof, or CER or any subsidiary or
      affiliate of CER or Mr. Wu shall deny that it has any liability or
      obligation purported to be created
thereunder;

            

    

     

    then, the
Lender, may at any time (unless all defaults shall have theretofore been
remedied) at its option, (i) by written notice or notices to CER, declare all
the obligations of this Loan Agreement to be due and payable, whereupon the same
shall forthwith mature and become due and payable together with interest accrued
thereon, without presentment, demand, protest or notice, all of which are hereby
waived; and (ii) exercise in respect of the Collateral, in addition to other
rights and remedies provided for herein, or otherwise available to it, all the
rights and remedies of a secured party on default under the Uniform Commercial
Code or any other applicable law.

     

    In case
any one or more Events of Default shall occur and be continuing, the Lender may
proceed to protect and enforce the rights of the Lender by an action at law,
suit in equity or other appropriate proceeding, whether for the specific
performance of any agreement contained herein, or for an injunction against a
violation of any of the terms hereof, or in aid of the exercise of any power
granted hereby or by law.  In case of a default in the payment of any
principal of or interest under the Loan Agreement, CER will pay to the Lender
such further amount as shall be sufficient to cover the cost and expenses of
collection, including (without limitation) reasonable attorneys' fees, expenses
and disbursements.  No course of dealing and no delay on the part of
the Lender in exercising any right, power or remedy shall operate as a waiver
thereof or otherwise prejudice the Lender’s rights, powers and remedies under
any other agreement, rule principle, law or regulation.  No right,
power or remedy conferred hereby upon the Lender shall be exclusive of any other
right, power or remedy referred to herein or now or hereafter available at law,
in equity, by statute or otherwise.

    

    7.2       If
an Event of Default as stipulated in this Section 7 exists and at that time the
outstanding amounts due under this Note shall equal or exceed $1,000,000 in the
aggregate, the Lender will be permitted to exercise the rights set forth in the
Class B Preferred Stock, which include 100 shares of such class and have been
issued to the Lender (“Control
Preferred Stock”).  Such shares will be transferable, in whole
or in part, with all or a portion of this Loan Agreement in the discretion of
the Lender.  It is understood that because of this modification to the
2009 Loan, that the references in the Control Preferred Stock to Section 6 of
the 2009 Loan shall refer to Section 7 of this Loan Agreement.

     

    
      
         

      

      
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    8.       Guarantee and Security
Interest in Shares.

     

    8.1       
Shares as Limited
Guarantee. As an inducement to the Lender to enter into this Loan
Agreement, Mr. Qinghuan Wu, the Chief Executive Officer of CER (“Guarantor”)
will deposit the Collateral, which shall include distributions in respect of the
shares comprising the Collateral, as a guarantee and a security interest for the
repayment of the principal, interest and other obligations due under this Loan
Agreement.  The Collateral will be governed by the Collateral
Agreement.  The Guarantor has the right to enter into this Loan
Agreement and the Collateral Agreement, and the Collateral will be free and
clear of any encumbrances, including the provisions of the 2010 Loan and any
agreement related thereto on or before the Loan Date.  This guarantee
is a limited guarantee, and to the extent any of the Shares are distributed to
the Lender, the guarantee shall be discharged by the Guarantor as to the amounts
due under this Loan Agreement as calculated in the Collateral
Agreement.  The Guarantor and his heirs, executors and administrators
have no additional obligation under this guarantee other than to surrender the
Shares as provided in the Collateral Agreement.  The Guarantor, in
certain circumstances, additionally has the right to request the return of
Shares and reduce its liability under the terms of the guarantee.

     

    8.2       Conflicts
Waiver.  Guarantor, CER and the Lender are aware or have been
informed and acknowledge that the Collateral Agent is one of several counsel for
CER and Lender and its affiliated and subsidiary corporations and persons and
each of them agrees that the Collateral Agent may continue to represent CER and
its affiliated and subsidiary corporations and/or the Lender and its affiliates
after date hereof in all matters notwithstanding the performance of its duties
and obligations hereunder, including, without limitation, representation with
respect to the escrow agreement, this Loan Agreement and the transactions
contemplated thereunder.  Guarantor, CER and the Lender each hereby
waive any claim of conflict of interest relating to the Collateral Agent’s
duties, obligations and acts hereunder and waive any right or claim to object to
such continued legal representation by the Collateral Agent of CER and its
affiliated and subsidiary corporations or of the Lender and its affiliates on or
after the date hereof.

     

    9.       Right of First Refusal and
Consent to Future Fundings.

     

    9.1       Right of First
Refusal.  The Lender has the right of first refusal, to provide
any debt or equity financing to be undertaken by CER (including any subsidiary
or affiliate) that is for capital raising and similar capital purposes of CER
(including any subsidiary or affiliate), on the same terms as may be bona fide offered by any
lender or investor during the period while any of the principal or interest
under this Loan Agreement is outstanding, due or owing.  If the Lender
fails to accept in writing any bona fide third party proposal within thirty (30)
business days after receipt of a written notice from CER (for itself or on
behalf of any subsidiary or affiliate) containing such proposal, then the Lender
shall have no claim or right with respect to any such financing contained in any
such notice.  If, thereafter, such proposal is modified in any
material respect, CER (for itself or on behalf of any subsidiary or affiliate)
shall adopt the same procedure as with respect to the original proposed
financing.

     

    
      
         

      

      
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    9.2       Consent to Future
Financings.   The Lender has the right to approve the
entry into any debt or equity financing by CER, through itself or through any
subsidiary or affiliate, except for (i) debt financings for working capital and
similar purposes to CER (or any subsidiary or affiliate) from bank or
institutional lenders licensed to operate in China, and (ii) debt or equity
financings to CER (or any subsidiary or affiliate) where the principal, interest
and any other amount due and payable under this Note will be paid immediately
upon closing from the proceeds of such financing, without any requirement of
notice of demand from the Lender.

     

    10.       Representations of the
Lender.

     

    10.1       Access.  The
Lender has conducted its own independent review and analysis of the business,
operations, technology, assets, liabilities, results of operations, financial
condition and prospects of CER and its subsidiaries and affiliates, and
acknowledges that CER has provided the Lender access to the personnel,
properties, premises and books and records of CER and its subsidiaries and
affiliates for this purpose, and the Lender has had an opportunity to ask
questions of and receive responses from management of CER and its subsidiaries
and affiliates.

     

    10.2       Investment
Intent.  The Lender is making the loan evidenced hereby solely
for the purpose of investment and not with a view to, or for resale of any
securities of CER in connection with, any distribution thereof in violation of
the Securities Act of 1933, as amended.

     

    10.3       Accredited
Investor.  The Lender has the financial ability to bear the
economic risk of its investment, has adequate means for providing for its
current needs and financial contingencies and has no need for liquidity with
respect to its investment in CER and its subsidiaries and
affiliates.  The Lender has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of the
prospective investment.  Lender represents (A) it has not been
organized for the purpose of acquiring the Loan Agreement or (B) it is an entity
in which each of the equity owners is an accredited investor as defined in Rule
501(a) promulgated under the Securities Act of 1933, as amended.

     

    11.
       Representation of
CER.  As an inducement to the Lender to make the Loan under the
Loan Agreements, CER makes the following representation to the
Lender:

     

    11.1              SEC
Reports.  CER has filed all reports required to be filed by it
under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
through the period ended December 31, 2009.  The Annual Report for the
year ended December 31, 2009 was not filed timely, and the Quarterly Reports for
the three quarters ending during the year 2010 have not been filed and are
late.  CER is currently delinquent in its obligations to file its SEC
Reports.  Such reports required to be filed and as filed by CER under
the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, together
with any materials filed or furnished by CER under the Exchange Act, whether or
not any such reports were required are being collectively referred to herein as
the “SEC Reports” and,
together with this Loan Agreement, the “Disclosure
Materials”.  As of their respective dates, the SEC Reports when
filed by CER complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the SEC
promulgated thereunder, and none of the SEC Reports, when filed by CER,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.  The consolidated financial statements of CER and its
consolidated subsidiaries and affiliated controlled companies included in the
SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the SEC with respect thereto as in
effect at the time of filing.  Such financial statements were prepared
in accordance with United States generally accepted accounting principles
applied on a consistent basis during the periods involved (“GAAP”), except as
may be otherwise specified in such financial statements, the notes thereto and
except that unaudited financial statements may not contain all footnotes
required by GAAP or may be condensed or summary statements, and fairly present
in all material respects the consolidated financial position of CER and its
consolidated subsidiaries and affiliated controlled companies as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, year-end audit
adjustments.  All material agreements to which CER or any Subsidiary
is a party or to which the property or assets of CER or any Subsidiary are
subject are included as part of or identified in the SEC Reports, to the extent
such agreements are required to be included or identified pursuant to the rules
and regulations of the SEC.

     

    
      
         

      

      
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    11.2              Financial
Statements.  Other than the entry into a RMB 30,000,000 loan
facility with the Bank of China and a draw down under that facility and its
proposal to repay the 2010 Loan, since the date of the latest audited financial
statements included within the SEC Reports (i) there has been no event,
occurrence or development that, individually or in the aggregate, has had or
that would result in a material adverse effect on the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of CER, (ii) CER, on a consolidated basis,
has not incurred any material liabilities other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in CER’s
consolidated financial statements pursuant to GAAP or required to be disclosed
in filings made with the SEC, (iii) CER has not altered its method of accounting
or the changed its auditors, (iv) CER has not declared or made any dividend or
distribution of cash or other property to its stockholders, in their capacities
as such, or purchased, redeemed or made any agreements to purchase or redeem any
shares of its capital stock (except for repurchases by CER of shares of capital
stock held by employees, officers, directors, or consultants pursuant to an
option of CER to repurchase such shares upon the termination of employment or
services), and (v) CER has not issued any equity securities to any officer,
director or affiliate, except pursuant to existing CER stock-based
plans.  CER and its subsidiaries and affiliates (including controlled
companies) have not taken any steps to seek protection pursuant to any
bankruptcy law nor does CER have any knowledge or reason to believe that its or
its subsidiaries’’ or affiliates’ creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact which would
reasonably lead a creditor to do so.  CER and none of its subsidiaries
or affiliates, including CER Hong Kong, as of the date hereof, and after giving
effect to the transactions contemplated hereby to occur, is not and will not be
Insolvent (as defined below).  For purposes of this section, “Insolvent” means (i) the
present fair saleable value of CER assets is less than the amount required to
pay CER’s total indebtedness, (ii) CER is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (iii) CER intends to incur or believes
that it will incur debts that would be beyond its ability to pay as such debts
mature, or (iv) CER has unreasonably small capital with which to conduct the
business in which it is engaged as such business is now conducted and is
proposed to be conducted.

     

     

     

    
      
         

      

      
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    12.       Covenants.

     

    12.1       Reports.  (a)       So
long as this Loan Agreement remains outstanding, CER shall have its annual
consolidated financial statements audited and its interim consolidated financial
statements reviewed by a firm of independent registered accountants in
accordance with Statement on Auditing Standards 101 issued by the American
Institute of Certified Public Accountants (or any similar replacement
standard).  In addition, so long as this Loan Agreement is
outstanding, CER shall furnish to the Lender all annual and quarterly reports of
CER on Forms 10-K and 10-Q, respectively, and all current reports on Form 8-K,
in each case as and when filed by it with the Securities and Exchange Commission
(“SEC”).  If CER shall not be subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), it shall nevertheless furnish the Lender with (a) the financial
information that would be required to be contained in a filing on such annual or
quarterly report, including a “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and (b) all information that would be
required to be contained in filings with the SEC on Form 8-K.  All
such annual reports shall be furnished within 135 days after the end of the
fiscal year to which they relate, and all such quarterly reports shall be
furnished within 50 days after the end of the fiscal quarter to which they
relate.  All such current reports shall be furnished within the time
periods specified in the SEC’s rules and regulations for reporting companies
under the Exchange Act.

     

     (b)       At
CER’s option, CER shall either (i) distribute such information and such reports
(as well as the details regarding the conference call described below)
electronically to the Lender, and/or (ii) make available such information to the
Lender by posting such information on the Internet (which may be its own or
CER’s site, IntraLinks or any comparable password protected online data system
which will require a confidentiality acknowledgement or otherwise, and CER shall
provide such password thereto to the Lender and make such information readily
available to such holder, who agrees to treat such information as
confidential).

    

    12.2       Taxes.  CER
shall, and shall cause each of its subsidiaries and affiliates to, pay prior to
delinquency all material taxes, assessments, and governmental levies except as
contested in good faith and by appropriate proceedings.

     

    12.3       Limitations on
Liens.  CER and its subsidiaries and affiliates shall not
create, incur, assume or permit or suffer to exist any lien, claim or
encumbrance of any nature whatsoever against any of the Collateral, unless
contemporaneously therewith, such lien is subordinated in right of payment to
the Loan Agreement.

     

    12.4       Conduct of
Business.  CER shall not, and shall not permit any subsidiary
or affiliate to, engage in any business other than the business of designing,
manufacturing, installing and selling boilers and heat recovery systems, and
related items.

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

     

    12.5       Maintenance of Properties;
Insurance; Compliance with Law.

     

    (a)       CER
shall, and shall cause each of its subsidiaries and affiliates to, at all times
cause all properties used or useful in the conduct of their business to be
maintained and kept in good condition, repair and working order (reasonable wear
and tear excepted) and supplied with all necessary equipment, and shall cause to
be made all necessary repairs, renewals, replacements, necessary betterments and
necessary improvements thereto.

    

    (b)       CER
shall maintain, and shall cause to be maintained for each of its subsidiaries
and affiliates, insurance covering such risks as are usually and customarily
insured against by corporations similarly situated in the markets where CER its
subsidiaries and affiliates conduct their respective operations, in such amounts
as shall be customary for corporations similarly situated and with such
deductibles and by such methods as shall be customary and reasonably consistent
with past practice.

    

    (c)       CER
shall, and shall cause each of its subsidiaries and affiliates to, comply with
all statutes, laws, ordinances or government rules and regulations to which they
are subject, non compliance with which would materially adversely affect the
business, earnings, properties, assets or financial condition of the CER its
subsidiaries and affiliates taken as a whole.

    

    12.6       Legal
Existence.  CER for itself, and shall cause each of its
subsidiaries and affiliates for each respective entity, shall do or shall cause
to be done all things necessary to preserve and keep in full force and effect
its legal existence, in accordance with its organizational documents (as the
same may be amended from time to time). CER and its subsidiaries and affiliates
shall not be required to preserve any such right, license or franchise, or the
corporate, partnership or other existence of any of its subsidiaries and
affiliates if the respective board of directors and the board of
directors of CER shall determine that the preservation thereof is no longer
desirable in the conduct of the business of CER and its subsidiaries and
affiliates, taken as a
whole, and that the loss thereof is not adverse in any material respect
to the holders of the Loan Agreements.

     

    12.7       Assets. CER and its
subsidiaries and affiliates each has good and marketable title in all personal
property owned by it that is material to their respective businesses, in each
case free and clear of all liens and encumbrances.  The real property
owned or leased by CER and its subsidiaries and affiliates are held by them
under valid, subsisting and enforceable purchase contracts or leases of which
CER and its subsidiaries and affiliates are in material
compliance.   CER and its subsidiaries and affiliates will take
all action necessary, at its sole expense, to maintain the marketable title in
all its personal property and real property, whether owned or
leased.

     

    12.8       Limitations on Mergers,
Consolidations, etc.  (a) CER shall not, directly or
indirectly, in a single transaction or a series of related transactions, (i)
consolidate or merge with or into another person, or sell, lease, transfer,
convey or otherwise dispose of or assign all or substantially all of the assets
of CER and its subsidiaries or affiliates (taken individually or as a
whole) or (ii) adopt a plan of liquidation for either of the entities or
of any of the subsidiaries or affiliates unless, in either case:

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

     

    (A)           CER
will be the surviving or continuing person; or

    

    (B)           the
person or entity formed by or surviving such consolidation or merger or to which
such sale, lease, conveyance or other disposition shall be made (or, in the case
of a plan of liquidation, any person to which assets are transferred)
(collectively, the “Successor”) is a corporation,
limited liability company or limited partnership, and the Successor expressly
assumes, by agreements in form and substance reasonably satisfactory to the
holders of a majority in principal amount of the Loan Agreements, all of the
obligations of CER under this Loan Agreement and all the related
agreements.

    

    (b)       Upon
any consolidation, combination or merger of CER or any transfer of all or
substantially all of the assets of CER in accordance with the foregoing, in
which CER is not the continuing obligor under this Loan Agreement, the surviving
entity formed by such consolidation or into which CER is merged or the person to
which the conveyance, lease or transfer is made will succeed to, and be
substituted for, and may exercise every right and power of, CER under this Loan
Agreement, with the same effect as if such surviving entity had been named
therein and, except in the case of a lease, CER will be released from the
obligation to pay the principal of and interest under this Loan Agreements and
all of CER’s other respective obligations and covenants under this Loan
Agreement.

    

    (c)       Notwithstanding
the foregoing, any subsidiary or affiliate may consolidate with, merge with or
into or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all of its assets to CER or another
subsidiary.

    

    13.       Miscellaneous.

     

    13.1       Savings
Clause.  In no event shall the interest rate or rates payable
under this Loan Agreement, plus any other amounts paid
in connection herewith, exceed the highest rate permissible under any law that a
court of competent jurisdiction shall, in a final determination, deem
applicable. CER, in executing and delivering this Loan Agreement, and the Lender
in accepting it, intends legally to agree upon the rate or rates of interest and
manner of payment stated herein; provided, however, that,
anything contained herein to the contrary notwithstanding, if said rate or rates
of interest or manner of payment exceeds the maximum allowable under applicable
law, then, ipso facto, as of the date of this
Loan Agreement, CER is and shall be liable only for the payment of such maximum
as allowed by law, and payment received from CER in excess of such legal
maximum, whenever received, shall be applied to reduce the principal balance of
this Loan Agreement to the extent of such excess.

     

    13.2       Governing Law;
Venue.  This Loan Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, United States of
America.

     

    ALL
ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS LOAN AGREEMENT SHALL BE
TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF
DELAWARE; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY
PROPERTY MAY BE BROUGHT, AT THIS LOAN AGREEMENT HOLDER’S OPTION, IN THE COURTS
OF ANY JURISDICTION WHERE SUCH PROPERTY MAY BE FOUND.  THE COMPANY AND
HOLDER OF THIS LOAN AGREEMENT WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE
LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR
TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH
THIS SECTION 13.2.

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    13.3       Attorney-in-Fact.  CER
hereby irrevocably appoints the Lender its attorney-in-fact, with full authority
in the place and stead of CER and in the name of CER or otherwise, at such time
as an Event of Default has occurred and is continuing under this Loan Agreement
to take any action and to execute any instrument which the Lender may reasonably
deem necessary or advisable to accomplish the purposes of this Loan Agreement
including:

     

    (a)       to
ask, demand, collect, sue for, recover, compromise, receive and give acquittance
and receipts for moneys due and to become due under or in connection with this
Loan Agreement; and

    

    (b)       to
file any claims or take any action or institute any proceedings which the Lender
may deem necessary or desirable for the collection of amounts due or enforcement
of obligations under this Loan Agreement or otherwise to enforce the rights of
the Lender under this Loan Agreement.

    

           To
the extent permitted by law, CER hereby ratifies all that such attorney-in-fact
shall lawfully do or cause to be done by virtue hereof. This power of attorney
is coupled with an interest and shall be irrevocable until this Loan Agreement
is paid in full.

    13.4       Remedies
Cumulative.  The rights and remedies of Lender under this Loan
Agreement, shall be cumulative. The Lender shall have all the other rights and
remedies not inconsistent herewith as provided under the law, or in
equity.  No exercise by the Lender of one right or remedy shall be
deemed an election, and no waiver by the Lender of any Event of Default shall be
deemed a continuing waiver.  No delay by the Lender in the enforcement
of the terms of this Loan Agreement shall constitute a waiver, election, or
acquiescence by it.

     

    13.5       Amendment.  This
Loan Agreement and its terms only may be changed, waived or amended only by the
written consent of CER and the Lender.

     

    13.6       Severability.   In
case any provision contained herein (or part thereof) shall for any reason be
held to be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or other unenforceability shall not affect any other provision (or
the remaining part of the affected provision) hereof, but this Loan Agreement
shall be construed as if such invalid, illegal, or unenforceable provision (or
part thereof) had never been contained herein, but only to the extent that such
provision is invalid, illegal, or unenforceable.

     

    13.7       Assignment.    The
Lender may assign to one or more assignees (each an “Assignee”) all, or any ratable
part of all, of this Loan Agreement and the other rights and obligations of the
Lender hereunder and any of the Control Preferred Stock; provided, that CER may
continue to deal solely and directly with the Lender in connection with the
interest so assigned to an Assignee until (i) written notice of such assignment,
together with payment instructions, addresses, and related information with
respect to the Assignee, have been given to CER by the holders and the Assignee,
and (ii) the holder and its Assignee have delivered to CER a document reflecting
such assignment and acceptance reasonably acceptable to CER.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    13.8       Payment Set
Aside.  To the extent that CER makes a payment or payments to
the Lender hereunder or the Lender enforces or exercises its rights hereunder,
and such payment or payments or the proceeds of such enforcement or exercise or
any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
refunded, repaid or otherwise restored to CER by a trustee, receiver or any
other person under any law (including, without limitation, any bankruptcy law,
other law, common law or equitable cause of action), then to the extent of any
such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not
occurred.

     

    13.9       Independent Nature of
Lender’ Obligations and Rights.  The obligations of the Lender
under this Loan Agreement and related agreements (together, the “Transaction Documents”) are
several and not joint with the obligations of any other Lender, and no Lender
shall be responsible in any way for the performance of the obligations of any
other Lender under any Transaction Documents, except were actions are taken
jointly as provided in the Transaction Documents.  The decision of
each Lender to make their respective Loan pursuant to this Loan Agreement has
been made by such Lender independently of any other Lender and independently of
any information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of CER and its subsidiaries and
affiliates, taken as a whole. which may have been made or given by any other
Lender or by any agent or employee of any other Lender, and no Lender or any of
its agents or employees shall have any liability to any other Lender (or any
other person) relating to or arising from any such information, materials,
statements or opinions.  Nothing contained herein or in any
Transaction Document, and no action taken by any Lender pursuant thereto, shall
be deemed to constitute the Lender as a partnership, an association, a joint
venture or any other kind of entity.  Each Lender acknowledges that no
other Lender has acted as agent for such Lender in connection with making its
Loan under this Loan Agreement and that no other Lender will be acting as agent
of such Lender in connection with monitoring its investment
hereunder.

     

    13.10       Survival.  The
representations and warranties, agreements and covenants contained herein shall
survive the making of the Loan or advance of funds and the repayment of the Loan
or advance of funds, as herein contemplated.

     

    13.11       Execution.  This
agreement and all related agreements, instruments and documents may each be
executed in two or more counterparts, all of which when taken together shall be
considered one and the same agreement, instrument, or document and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that all parties need not sign the same
counterpart.  In the event that any signature is delivered by
facsimile transmission or email attachment, such signature shall create a valid
and binding obligation of the party executing (or on whose behalf such signature
is executed) with the same force and effect as if such facsimile or
email-attached signature page were an original thereof.

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    13.12       Headings.  Headings
and numbers have been set forth herein for convenience only.  Unless
the contrary is compelled by the context, everything contained in each section
applies equally to this entire Loan Agreement.

     

    

    

    [signature
on next page]

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    IN
WITNESS WHEREOF, the parties have caused this Loan Agreement to be signed in its
name as of the date above written.

    

    
      
        	
                CER
      ENERGY RECOVERY, INC

              
	 
      
	 
      
	
                By:  __________________________ 

              
	
                Name:
      Wu Qinghuan,

              
	
                Title:  Chief
      Executive Officer

              
	 
      
	
                WU
      QINGHUAN, Individually

              

      

    

    

    

    ______________________________

    

    

    

    AGREED
AND ACCEPTED BY:

    

    HOLD AND
OPT INVESTMENTS LIMITED

    

    

    By:   __________________________

    Name:
Timothy Fraser-Smith

    Title:   Authorized
Signatory for Hold And Opt Investments Limited

     

     

     

    
      
         

      

      
        15Exhibit
10.2

    

    COLLATERAL
AGREEMENT

    

    This
Collateral Agreement dated as of the 31st day of December, 2010 (“Collateral
Agreement”), is entered into by Qinghuan Wu (“Guarantor”), China
Energy Recovery, Inc., a Delaware corporation ( “CER”), and Hold and
Opt Investments Limited, a Bahamas company (“Lender”).  Golenbock
Eiseman Assor Bell & Peskoe LLP, a limited liability partnership ("Collateral Agent”)
shall enter into this Collateral Agreement not earlier than the date that the
Collateral (as herein defined) shall be free and clear of all encumbrances,
including the terms of that certain loan for US$4,000,000 for which the
Collateral is currently pledged.

    

    RECITALS

    

    WHEREAS,
CER is borrowing the principal sum of US$5,000,000 from the Lender for the
purpose of repaying a loan for an equal amount of principal entered into as of
May 21, 2009.  As a condition to the loan agreement between the Lender
and CER (“Loan Agreement”), Mr. Wu, the Guarantor, will place with the
Collateral Agent, 8,000,006 shares (“Shares”) of common
stock of CER, which will be available as a guarantee of the repayment of all or
a portion of the amounts due to the Lender under the Loan Agreement, which
payment will depend on the market value, from time to time, of the
Shares.

    

    WHEREAS,
this Collateral Agreement shall apply to the Shares, and any distributions of
additional shares or property in respect of the Shares (together being included
in the definition of the “Shares”).  As part of the delivery of the
Shares, the Guarantor will also deliver stock powers signed in
blank.

    

    WHEREAS,
the Shares are a limited guarantee of only the principal amount due under the
Loan Agreement, and is not a general guarantee by the Guarantor or a complete
guarantee of all the payments due under the Loan Agreement.

    

    In
consideration of the promises and agreements of the parties and for other good
and valuable consideration, the receipt of which is acknowledged, the parties
agree as follows:

    

     

    ARTICLE
1

     

    

    DEPOSIT
OF COLLATERAL

    

    1.01       Deposit.  Guarantor,
promptly upon receipt of notice of signing of this Collateral Agreement by all
the parties thereto and prior to the funding of the Loan Agreement, shall
deposit the Shares and the stock powers executed in blank (signature guaranteed
as required by the CER  transfer agent) with the Collateral
Agent.  Collateral Agent hereby agrees to act as Collateral Agent and
to hold and disburse the Shares only pursuant to the terms and conditions
hereof.  The Guarantor, upon request from the Collateral Agent, shall
provide additional stock powers executed in blank to the Collateral Agent, with
such forms of signature guarantee as may be required by the CER transfer agent,
time being of the essence.  The Guarantor also will deposit under this
Collateral Agreement any distributions of property or shares made in respect of
the Shares then held hereunder that are made after the date of this Collateral
Agreement until the termination of this Collateral Agreement.  For
purposes of determining any Shares to be distributed, the pro rata portion of
the distributions of property or shares made in respect of the Shares will be
distributed along with any Shares.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

    ARTICLE
2

     

     2.01       Delivery of Shares to
Lender.  The Lender may give written (electronic, fax or
otherwise) notice to the Collateral Agent that a sum is due and unpaid under the
Loan Agreement and request distribution of some or all the Shares, as provided
herein, to the Lender as specified in the notice.  A copy of the
written notice shall simultaneously be sent to the Guarantor.  If the
Guarantor objects either in whole or in part, to the specific distribution of
the Shares requested in the notice, then such objection shall be in writing to
the Lender and the Collateral Agent. If the Collateral Agent does not receive
any objection from the Guarantor to a distribution of the Shares within seven
business days of the date of the notice requesting distribution received from
the Lender, then the Collateral Agent shall deliver that number of the Shares
representing the market value equivalent of the amount stated in the notice as
due and unpaid under the Loan Agreement, using as the market value the closing
price of a Share on the last trading date on which a Share traded immediately
before the date of the notice from the Lender.  If there is an
objection to a distribution made by the Guarantor, then the Collateral Agent
will not make any distribution of the Shares with respect to a notice being
contested until there is a resolution of whether or not a distribution shall be
made as to the amount of Shares and distributees, as agreed between the
Guarantor and the Lender, which is communicated jointly in writing to the
Collateral Agent.

    

    2.02.       Delivery of Shares to
Guarantor. The Guarantor, on or within 20 business days after the payment
of any principal amount, interest due on such principal amount or other sums
then due under the Loan Agreement may give notice (electronic, fax or otherwise)
to the Collateral Agent requesting that a portion of the Shares be returned to
the Guarantor, as provided herein.  The portion of the Shares that may
be returned to the Guarantor is as follows:  (a) if the principal paid
was the full amount due and all the other financial obligations then due are
paid in full under the terms of the Loan Agreement, then all the Shares shall be
returned to the Guarantor, and (b) if the principal paid was a prepayment
thereof but the principal is not paid in full, then the distribution of Shares
will be that number of Shares representing the market value of 50% of the
principal prepaid under the Loan Agreement, where the market value of the Shares
is measured by the closing price of a Share on the last trading date on which a
Share traded immediately before the date of the written notice for the release
of Shares is given by the Guarantor.  A copy of the written notice
will simultaneously be sent to the Lender. If the Lender objects to a
distribution of the Shares, then such objection shall be in writing to the
Guarantor, and the Collateral Agent. If the Collateral Agent does not receive
any objection to a distribution of the Shares from the Lender within seven
business days of the date of the notice from the Guarantor, then the Collateral
Agent shall deliver that number of the Shares as requested by the Guarantor and
specified herein.  If there is an objection to a distribution to the
Guarantor, then the Collateral Agent will not make any distribution until there
is a resolution of whether or not a distribution shall be made and the amount of
Shares to be distributed betweem the Guarantor and the Lender, of which the
Collateral Agent is notified in a joint writing.

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    

    2.04       Satisfaction of
Guarantee.  Upon Collateral Agent's delivery of the Shares
after receipt of any notice pursuant to Section 2.01 above of this Collateral
Agreement, the Lender receiving the Shares hereby agrees that said portion of
the amounts due under the Loan Agreement will have been paid in full and all
guaranties and security therefore represented by the Shares shall have been
released without the necessity of further action by any
party.  However, all parties hereto agree to cooperate, without cost
to the Lender or the Collateral Agent, to execute such other documents
reasonably requested by any other party hereto to effect the
foregoing.

    

    2.05.       Objections to Notices
Unique.  For purposes of clarity, objection to a notice for a
distribution given hereunder by any party will not be considered an objection to
any other or subsequent notice for a distribution.  Each notice will
be considered a separate procedure requiring its own objection and resolution in
the event of a controversy.

    

    

    ARTICLE
3

    

    DUTIES
AND OBLIGATIONS OF COLLATERAL AGENT

    

    3.01       General
Duties and Obligations of Collateral Agent.

    

    (a)       This
Collateral Agreement expressly sets forth all the duties of Collateral Agent
with respect to any and all matters pertinent hereto. No implied duties or
obligations shall be read into this Collateral Agreement against Collateral
Agent.

    

    (b)       Collateral
Agent shall not be under any duty to give the Shares held by it hereunder any
greater degree of care than it gives similar property of its
clients.

    

    (c)       Collateral
Agent shall not be liable for actions or omissions hereunder, except for its own
gross negligence or willful misconduct and, except with respect to claims based
upon such gross negligence or willful misconduct that are successfully asserted
against Collateral Agent, the other parties hereto shall jointly and severally
indemnify and hold harmless Collateral Agent (and any successor Collateral
Agent) from and against any and all losses, liabilities, claims, actions,
damages and expenses, including reasonable attorneys' fees and disbursements,
arising out of and in connection with this Collateral Agreement.

    

    (d)       In
the event of any doubt or uncertainty by Collateral Agent as to its duties or
rights hereunder, the Collateral Agent shall be entitled to tender the Shares
and stock powers into a court of competent jurisdiction for a determination of
the rights of interested parties, and shall be entitled to recover from the
Guarantor or the Lender, jointly and severally, its attorneys' fees and costs in
connection therewith.

    

    (e)       The
Collateral Agent shall be entitled to rely upon any order, judgment,
certification, demand, notice, instrument or other writing delivered to it
hereunder without being required to determine the authenticity or the
correctness of any fact stated therein or the propriety or validity of the
service thereof. The Collateral Agent may act in reliance upon any instrument or
signature believed by it to be genuine and may assume that the person purporting
to give receipt or advice or make any statement or execute any document in
connection with the provisions hereof has been duly authorized to do so.
Collateral Agent may conclusively presume that the undersigned representative of
any party hereto which is an entity other than a natural person has full power
and authority to instruct Collateral Agent on behalf of that party unless
written notice to the contrary is delivered to Collateral Agent.

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    

    (f)       Collateral
Agent may act pursuant to the advice of counsel with respect to any matter
relating to this Collateral Agreement and shall not be liable for any action
taken or omitted by it in good faith in accordance with such
advice.

    

    (g)       Collateral
Agent does not have any interest in the Shares deposited hereunder but is
serving as the holder of collateral for the benefit of the Lender only and has
only possession thereof.

    

    (h)       Collateral
Agent makes no representation as to the validity, value, genuineness or
collectability of any security or other document or instrument held by or
delivered to it.

    

    (i)       Collateral
Agent (and any successor Collateral Agent) may at any time resign as such by
delivering the Shares and stock powers to any successor Collateral Agent jointly
designated by the other parties hereto in writing, or to any court of competent
jurisdiction, whereupon Collateral Agent shall be discharged of and from any and
all further obligations arising in connection with this Collateral Agreement.
The resignation of Collateral Agent will take effect on the earlier of (i) the
appointment of a successor (including a court of competent jurisdiction) or (ii)
the day which is thirty (30) days after the date of delivery of its written
notice of resignation to the other parties hereto. If, at that time, Collateral
Agent has not received a designation of a successor Collateral Agent, Collateral
Agent's sole responsibility after that time shall be to retain and safeguard the
Shares and stock powers until receipt of a designation of successor Collateral
Agent or a joint written disposition instruction by the other parties hereto or
a final, non-appealable order of a court of competent jurisdiction.

    

    (j)       Collateral
Agent is not a party to and is not bound by or charged with notice of, and is
not responsible or liable in any manner whatsoever for the sufficiency,
correctness, genuineness or validity of, any agreement or document out of which
this Collateral Agreement may arise; nor is Collateral Agent liable in any
manner for the identity or authority of any person executing the Collateral
Agreement or any other document out of which this Collateral Agreement may
arise.

    

    3.02       Collateral Agent’s
Representation of CER and Others. Guarantor, CER and the Lender are aware
or have been informed and acknowledge that the Collateral Agent is one of
several counsel for CER and its affiliated and subsidiary corporations and of
the Lender and its affiliates and agree that Collateral Agent may continue to
represent CER and its affiliated and subsidiary corporations and the Lender and
its affiliates after the date hereof in all matters notwithstanding the
performance of its duties and obligations hereunder, including, without
limitation, representation with respect to the this Collateral Agreement, the
Loan Agreement and the transactions contemplated hereunder and
thereunder.  Guarantor, CER and the Lender each hereby waive any claim
of conflict of interest relating to Collateral Agent’s duties, obligations and
acts hereunder and waive any right or claim to object to such continued legal
representation by Collateral Agent of CER and its affiliated and subsidiary
corporations and of the Lender and its affiliates on or after the date
hereof.

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    

    ARTICLE
4

    

    MISCELLANEOUS

    

    4.01       Successors and Assigns;
Survival.  This Collateral Agreement shall be binding on and
inure to the benefit of the parties to this Collateral Agreement and their
respective heirs, executors, administrators, successors and permitted
assigns.  Other than the specified third party beneficiaries, no other
persons shall have any rights under this Collateral Agreement.  Any
and all rights of any Collateral Agent hereunder shall terminate upon the
termination of this Collateral Agreement, the distribution of the Shares or the
resignation of such Collateral Agent.

    

    4.02       Third Party
Beneficiaries.  This Collateral Agreement shall be for the
benefit of the Lender pursuant to the terms of the Loan Agreement with CER, and
the Lender shall have the right to enforce this Collateral Agreement for its
benefit pursuant to the terms of the Loan Agreement with CER.

    

    4.03       Notices.  All
notices, requests, demands, and other communications required or desired to be
given hereunder shall be in writing and shall be deemed to have been
given:  (i) if personally delivered, upon such delivery; (ii) if
mailed by certified mail, return receipt requested, postage pre-paid, addressed
as follows (to the extent applicable for mailing), three (3) business days after
deposit in the mail as aforesaid; or (iii) if sent by regularly scheduled
overnight delivery service with delivery charges prepaid or an arrangement,
satisfactory with such service, made for the payment of such fees, addressed as
follows (to the extent applicable for overnight delivery), on the next business
day (as hereafter defined) after being so sent; upon confirmed receipt when sent
by telefax to the following numbers or by email or other electronic transmission
to the following addresses:

    

    If to
Guarantor:

    
      
        
          	
                  Mr.
      Qinghuan Wu

                
	
                  c/o
      7F, No. 267 Quyang Road, Hongkou District

                
	
                  Shanghai,
      China 200081

                
	
                  Fax
      Number: 86-21-6508-2138

                
	
                  Telephone
      Number: 86-21-5556-0020

                
	
                  Email
      Address:

                

        

      

    

    

    If to
CER:

    

    
      
        	
                CER
      Energy Recovery (Shanghai) Co., Ltd.

              
	
                7F,
      No. 267 Quyang Road, Hongkou District

              
	
                Shanghai,
      China 200081

              
	
                Fax
      Number: 86-21-6508-2138

              
	
                Telephone
      Number: 86-21-5556-0020

              
	
                Email
      Address:

              

      

    

    

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    

    
      
        
          
            	
                    If to Collateral Agent:

                  	
                    Golenbock
      Eiseman Assor Bell & Peskoe LLP

                  
	 
      	
                    Attn:
      Andrew D. Hudders

                  
	 
      	
                    437
      Madison Avenue

                  
	 
      	
                    New
      York, NY 10022

                  
	 
      	
                    Telephone:  (212)
      907-7349

                  
	 
      	
                    Telefax:  (212)
      754-0330

                  
	 
      	
                    Email:     ahudders@golenbock.com

                  

          

        

      

    

    

    
      
        
          	
                  If to the Lender:

                	
                  Hold
      and Opt Investments Limited

                
	 
      	
                  Attn:
      Timothy Fraser-Smith

                
	 
      	
                  Deltec
      House

                
	 
      	
                  P.O.
      Box N-3229

                
	 
      	
                  Lyford
      Cay

                
	 
      	
                  Nassau,
      New Providence, Bahamas

                
	 
      	
                  Telephone:
      (242) 302-4100

                
	 
      	
                  Fax:
      (242) 362-4623

                
	 
      	
                  E-mail:
      tis@deltec-bahamas.com

                

        

      

    

    

    

    or to any
other address that any party shall designate in writing to the other parties in
accordance with this provision.

    

    4.03       Governing
Law.  This Collateral Agreement shall be governed by and
construed in accordance with the laws of the State of New York without reference
to its conflict of laws principles.

    

    4.04       Waiver.  The
rights and remedies of the parties to this Collateral Agreement are cumulative
and not alternative. Neither the failure nor any delay by any party in
exercising any right, power or privilege under this Collateral Agreement or the
documents referred to in this Collateral Agreement will operate as a waiver of
such right, power or privilege, and no single or partial exercise of any such
right, power or privilege will preclude any other or further exercise of such
right, power or privilege or the exercise of any other right, power or
privilege. To the maximum extent permitted by applicable law, (a) no claim or
right arising out of this Collateral Agreement or the documents referred to in
this Collateral Agreement can be discharged by one party, in whole or in part,
by waiver or renunciation of the claim or right unless in writing signed by the
other party; (b) no waiver that may be given by a party will be applicable
except in the specific instance for which it is given; and (c) no notice to or
demand on one party will be deemed to be a waiver of any obligation of such
party or of the right of the party giving such notice or demand to take further
action without notice or demand as provided in this Collateral Agreement or the
documents referred to in this Collateral Agreement.

     

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    

    4.05       Entire Agreement and
Modification. This Collateral Agreement supersedes all prior agreements
among the parties with respect to its subject matter and constitutes (along with
the documents referred to in this Collateral Agreement) a complete and exclusive
statement of the terms of the agreement between the parties with respect to its
subject matter. This Collateral Agreement may not be amended except by a written
agreement executed by all parties hereto.

    

    4.06       Severability.  If
any article, paragraph, section or portion of this Collateral Agreement shall be
determined to be unenforceable or invalid, it shall not affect the remainder of
this Collateral Agreement, which shall be and remain binding and effective as
against all parties hereto.

    

    4.07       Execution in
Counterparts.  This Collateral Agreement and any amendments
hereto may be executed in any number of counterparts, either by the parties
hereto and their successors, or their duly authorized attorneys-in-fact, with
the same effect as if all parties had signed the same document.  All
counterparts shall be construed as and shall constitute one and the same
instrument.  An executed copy of this Collateral Agreement may be
delivered by one or more parties hereto by facsimile or other electronic
transmission pursuant to which the signature of or on behalf of such party can
be seen, and such execution and delivery shall be considered valid, binding and
effective for all purposes.  At the request of any party hereto, all
parties hereto agree to execute and deliver promptly an original of this
Collateral Agreement as well as any facsimile or other reproduction
hereof.

    

    Signature
page follows:

     

     

     

     

    
      
         

      

      
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    The
parties to this Collateral Agreement have duly executed this Agreement as of the
date first written above.

    

    
      
        	 
      
	
                GUARANTOR:

              
	 
      
	 
      
	
                _____________________________________

              
	
                Wu
      Qinghuan

              
	 
      
	 
      
	 
      
	
                CHINA
      ENERGY RECOVERY, INC.:

              
	 
      
	 
      
	
                By:__________________________________

              
	
                       Wu
      Qinghuan

              
	
                        Chief
      Financial Officer

              
	 
      
	 
      
	
                HOLD
      AND OPT INVESTMENTS LIMITED:

              
	 
      
	 
      
	
                By:__________________________________

              
	
                       Timothy
      Fraser-Smith

              
	
                        Authorized
      Signatory

              

      

    

    

    

    
      
        	
                COLLATERAL
      AGENT:

              
	 
      
	
                Golenbock
      Eiseman Assor Bell & Peskoe LLP

              
	 
      
	 
      
	
                By:__________________________________

              
	
                Name:
      _______________________________

              
	
                Title:
      ________________________________

              

      

    

    

    

    

    
      
         

      

      
        8

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