Zhaoheng Hydropower (ZHYLF) 10-Q 2009 Q4 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

OR

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: 000-52786

ZHAOHENG HYDROPOWER COMPANY

(Exact name of registrant as specified in its charter)

Nevada	41-1484782
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
F/19, Unit A, JinFengCheng Building 5015 Shennan Road Shenzhen PRC	518015
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (011-86) 755-8207-0966

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

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 o	Accelerated filer o
Non-Accelerated Filer o  (Do not check if a smaller reporting company)	Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x

As of May 8, 2009, there were 76,640,695 shares of the issuer’s common stock, $0.001 par value per share, outstanding.

INDEX

		Page
	PART I     FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008	1
	Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008 (unaudited)	2
	Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended March 31, 2009 (unaudited)	3
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
SIGNATURES

PART I — FINANCIAL INFORMATION

ITEM 1.                      FINANCIAL STATEMENTS

ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,		December 31,
	2009		2008
	（unaudited）
	$		$
ASSETS
Current Assets:
Cash and cash equivalent		1,632,963		5,804,797
Accounts receivable, net of allowance for doubtful accounts $309,949 and $309,521 respectively		2,603,781		4,214,919
Other receivables		737,560		50,751
Prepaid expenses and other current assets		114,104		196,507
Total current assets		5,088,408		10,266,974
Long-term Investment		572,631		571,912
Property, plant and equipment, net of accumulated depreciation of $48,854,827 and $41,288,337 respectively		86,608,957		75,152,685
Due from related parties		1,213,654		5,245,481
Other assets		366,449		325,678
Long-term deferred expense		62,375
Construction in progress		1,759,915		1,173,415
Property use rights, net		1,309,509		1,220,157
Total assets		96,981,898		93,956,302
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		389,418		72,483
Other payables		4,814,102		2,427,345
Salary payable and judgments payable		229,082		219,048
Taxes payable		727,070		841,318
Interest payable		117,711		143,598
Due to related parties		2,262,037		259,503
Advances from customers		65,005
Total current liabilities		8,604,425		3,963,295
Loans payable-long term		61,061,120		63,172,945
Minority interest		435,930		195,384
Stockholders’ Equity:
Preferred Stock: $.001 par value; 20,000,000 authorized, no shares issued and outstanding at December 31, 2008 and 2007, respectively		—		—
Common Stock: $.001 par value, 780,000,000 authorized, 71,692,999 issued  and outstanding at March 31, 2009 and  2008, respectively		71,693		71,693
Additional paid-in capital		15,371,094		15,371,094
Statutory surplus reserve		666,952		666,952
Retained earnings		6,831,916		6,621,983
Accumulated other comprehensive income		3,938,768		3,892,956
Total stockholders’ equity		26,880,423		26,624,678
Total liabilities and stockholders’ equity		96,981,898		93,956,302

See notes to audited consolidated financial statements

1

ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended March 31,
	2009			2008
	(unaudited)
	$			$
Revenues		3,184,487			1,290,939
Cost of revenues		1,281,181			464,377
Gross profit		1,903,306			826,562
Operating expenses:
Selling , general and administrative expenses		499,224			320,228
Operating income		1,404,082			506,334
Other income (expenses):
Interest income		29,221			1,167
Interest expense		(1,265,276	)		(309,665	)
Non-operating income		61,982
Other income		476			538
Other expense		-			(18,165	)
Investment income		28,630			27,377
Total other expenses		(1,144,967	)		(298,748	)
Income before income taxes		259,115			207,586
Income taxes		75,556			11,533
Income before minority interest		183,559			196,053
Minority interest		(26,374	)
Net income		209,933			196,053
Unrealized foreign currency translation gain		45,812			836,996
Comprehensive  income		255,745			1,033,049
Net income per common share- basic and diluted		0.003			0.003
Weighted average number of shares
outstanding-basic and diluted		71,692,999			71,692,999

See notes to audited consolidated financial statements.

2

ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

	Common Stock				Additional		Statutory Surplus Reserve		Retained Earnings		Accumulated Other Comprehensive Income		Total
	Shares		Amount		Paid-in Capital
			$				$						$
Balance, January 1, 2008		71,692,999		71,693		15,371,094		666,952		628,704		2,541,949		19,280,392
Recapitalization of reserve acquisition		—		—		—-		—		—		—		—
Interest forgiveness to related party		—		—		—-		—		—		—		—
Dividends		—		—		—-		—		—		—		—
Deemed dividends for minority interest purchase		—		—		—-		—		—		—		—
Comprehensive income:
Net income		—		—		—-		—		5,993,279		—		5,993,279
Unrealized foreign currency translation		—		—		—-		—		—		1,351,007		1,351,007
Subtotal														7,344,286
Balance, December 31, 2008		71,692,999		71,693		15,371,094		666,952		6,62,983		3,892,956		26,624,678
Comprehensive income:
Net income		—		—		—-		—		209,933		—		209,933
Unrealized foreign currency translation		—		—		—-		—		—		45,812		45,812
Subtotal														255,745
		71,692,999		71,693		15,371,094		666,952		6,831,916		3,938,768		26,880,423

3

ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Three Months Ended March 31,
	2009			2008
	(uaaudited)
	$			$
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		209,933			177,108
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		814,414			276,409
Minority interest		(26,374	)
Loss on disposal of fix assets		456
Changes in operating assets and liabilities:
Notes receivable					45,632
Accounts receivable		1,723,922			331,358
Dividend receivable					71,460
Other receivables		(664,427	)		(3,132	)
Prepaid expense and other current assets		230,022			(335,822	)
Other assets		(67,521	)		584
Long-term deferred expense		(35,592	)		—
Accounts payable and accrued expenses		(88,294	)		(84,071	)
Other payables		2,348,156			(60,199	)
Salary payable and judgment payable		(102,599	)
Taxes payable		(256,851	)		(40,200	)
Interest payable		(25,887	)
Dividend payable		—
Total adjustments		3,849,425			202,019
Net cash provided by operating activities		4,059,358			379,127
CASH FLOWS FROM INVESTING ACTIVITIES
Due from related parties		4,031,827			1,454,955
Due to related parties		(5,427,895	)		78,698
Acquisition of minority interests
Acquisition of Hubei subsidiary		(3,355,753	)
Acquisition of Guizhou subsidiary
Cash of subsidiaries on date of acquisition		897,072
Proceeds from sale of Juili subsidiary
Purchase of intangible assets		(94,889	)
Purchase of property, plant and equipment		(59,271	)		(376	)
Construction in progress		(586,500	)		(1,389,099	)
Net cash provided by (used in) investing activities		(4,595,409	)		144,178
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend paid		—
Repayment of current portion of long-term loans		(3,651,981	)
Proceeds from long-term loans		—
Net cash (used in) provided by financing activities		(3,651,981	)		—
NET INCREASE (DECREASE) IN CASH		(4,188,032	)		523,305
EFFECT OF EXCHANGE RATE CHANGES ON CASH		16,198			559,039
CASH, BEGINNING OF YEAR		5,804,797			994,719
CASH, END OF PERIOD		1,632,963			2,077,063
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest paid		1,262,098			309,665
Income tax paid		75,556			11,533

4

ZHAOHENG HYDROPOWER COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

Note 1 – ORGANIZATION AND BUSINESS OPERATIONS

Business and Organization

Zhaoheng Hydropower Company, a Nevada corporation formerly known as Certified Technologies Corporation (“Certified”), and its subsidiaries are referred to in this report as the “Company”, “we”, “us”, “our”, or “Zhaoheng Hydropower”.  Zhaoheng Investment Limited, a British Virgin Island corporation and a wholly owned subsidiary of Zhaoheng Hydropower Company is referred to in this report as “Zhaoheng BVI”.  Zhaoheng Hydropower (Hong Kong) Limited, a Hong Kong corporation and a wholly owned subsidiary of Zhaoheng BVI is referred to in this report as “Zhaoheng HK”.

On May 13, 2008, Zhaoheng BVI entered into a share exchange agreement (the “Share Exchange Agreement”) with Certified resulting in a change of control of Certified. Pursuant to the Share Exchange Agreement, Certified issued an aggregate of 69,686,970 shares of common stock, par value $0.001 (the “Common Stock”), to Embedded Internet Solutions Limited (“Embedded Internet”), a Cayman Islands company wholly owned by Guosheng Xu, our current Chief Executive Officer and Chairman of Board of Directors, in exchange for all of the common stocks of Zhaoheng BVI (the “Share Exchange”). The Share Exchange has been accounted for as a reverse acquisition and accordingly the Share Exchange has been treated as a recapitalization of Zhaoheng BVI, with Zhaoheng BVI as the acquirer.  On July 17, 2008, Certified reincorporated in the State of Nevada and changed the name to Zhaoheng Hydropower Company.

Contemporaneously with the closing of the Share Exchange, some shareholders of Certified also transferred approximately 572,170 shares of common stock to Embedded Internet pursuant to a stock purchase agreement (“Stock Purchase”). As a result of the completion of the Share Exchange and the Stock Purchase, Embedded Internet owns approximately 98% interest of our outstanding common stocks.

The Company is the sole stockholder of Zhaoheng BVI. Zhaoheng BVI owns 100% Zhaoheng HK, which is a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“PRC” or “China”). Zhaoheng HK is a holding company of the following four operating companies in November 2007(collectively, the “Operating Entities”): (1) Shenzhen Zhaoheng Hydropower Co., Ltd., (“Shenzhen Zhaoheng”) (2) Hunan Zhaoheng Hydropower Co., Ltd. (“Hunan Zhaoheng”), (3) Hunan Sanjiang Electric Power Co., Ltd., (“Hunan Sanjiang”) and (4) Hunan Jiuli Hydropower Construction Co., Ltd. (“Hunan Juili”), all of which are limited liability companies headquartered in, and organized under the laws of the PRC.

In December 2007, the Company entered into an equity transfer agreement to transfer its 100% interest in Hunan Juili to its related party, Shenzhen Zhaoheng Industrial Co., Ltd. All relevant procedures were completed in April 2008.

On June 15, 2008, the Company acquired Guizhou Jingrong Industrial Development Co., Ltd (“Jingrong”), which operates Yongfu Hydropower Station in Rongjiang County, Guizhou Province, China. This acquisition was undertaken to allow Jingrong to become one of fully owned subsidiaries of the Company and to diversify operations, improve financial condition and increase shareholder value.

In November 2008, the Company acquired 88% equity interest of Hubei Minyuan Huohe Hydropower Development Co., Ltd. (“Hubei Huohe”) from third parties, which operates Huohe Cascade II and Huohe Cascade III hydropower stations.

In January 2009, the Company acquired 85% equity interest of Hubei Hongping Power Generation Co., Ltd.  (“Hongping”) from third parties, which operates Qiujiabang Hydropower Station, Shunshuiping Hydropower Station and Huangjiawang Hydropower Station.

As of March 31, 2009, the Company owned eight hydropower stations (Hunan Sanjiang Hydropower Station, Hunan Zhaoheng Hydropower Station, Guizhou Jingrong Industrial Development Station, Hubei Huohe Cascade II hydropower station, Hubei Huohe Cascade III hydropower station, Qiujiabang Hydropower Station, Shunshuiping Hydropower Station and Huangjiawang Hydropower Station) and other relevant operating assets located in the PRC.

5

We are engaged in the generation and supply of hydropower in Southwestern and Midwestern China. We focus on small- to medium-sized hydropower plants and aim to become a leader in our industry.

We also acquire controlling interest of Chinese hydropower plants which we consolidate as either our wholly or majority owned subsidiaries. Through this ownership control, we can expand our operation in different areas in China through acquired hydropower plants and equipments and existing long-term power purchase agreements.

Basis of Presentation

The consolidated financial statements include Zhaoheng Hydropower Company and all its subsidiaries, including those operating outside the United States of America.  The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The company‘s year end is December 31. The company‘s consolidated statements include the financial statements of the Company and its controlled entities, including wholly owned subsidiaries, Zhaoheng BVI and Zhaoheng HK, as well as the financial statements of Shenzhen Zhaoheng, Hunan Zhaoheng, Hunan Sanjiang, Jingrong, Hubei Huohe and Hubei Hongping. All significant inter-company accounts and transactions have been eliminated in consolidation.

In November 2007, Guosheng Xu, the sole shareholder of Zhaoheng BVI, combined his equity interests in the following four operating companies (collectively, the “Operating Entities”): (1) Shenzhen Zhaoheng Hydropower Co., Ltd., (“Shenzhen Zhaoheng”) (2) Hunan Zhaoheng Hydropower Co., Ltd. (“Hunan Zhaoheng”), (3) Hunan Sanjiang Electric Power Co., Ltd., (“Hunan Sanjiang”) and (4) Hunan Jiuli Hydropower Construction Co., Ltd. (“Hunan Juili”), each incorporated under laws of the PRC, and injected them into the Company in December 2007. This combination of ownership is collectively referred to as “Capital Injection”.

Hereafter, Zhaoheng BVI, Zhaoheng HK, the Operating Entities, Zhaoheng Hydropower Company, and any subsequent acquisition to the Capital Injection are referred to as the “Company”, unless specific reference is given to a specific company. All assets and liabilities are recorded at their historical costs.

In December 2007, one of the Company’s subsidiaries Hunan Sanjiang entered into an equity transfer agreement to transfer its 100% interest in Hunan Jiuli to related party, Shenzhen Zhaoheng Industrial Co., Ltd. All relevant procedures were completed in April 2008.

On June 15, 2008, the Company acquired Jingrong in Rongjiang County, Guizhou Province, China. The acquisition was undertaken to allow the Company to diversify operations, improve financial condition and increase shareholder value.

The Company uses the purchase method to account for qualifying business combinations. Under the purchase method, the assets and liabilities of acquired entities are recorded at their estimated fair values at the date of acquisition. The excess of cost over their fair values is recognized as an intangible asset. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, identified intangible assets are amortized over their estimated useful lives. The equity consideration for acquisition of Jingrong was initially estimated at $2,334,335 and the amount was paid on June 30, 2008. Based on the acquisition agreement, the Company may have contingency payments for assumed liabilities or potential liabilities of Jingrong. On March 31, 2009, the final acquisition cost for Jingrong of $2,693,961 was paid. The Company had paid the difference of initial estimate and final cost by March 31, 2009. The total acquisition cost for Jingrong acquisition was $430,659 higher than the net book value, but lower than the appraisal value assessed by Jones Lang LaSalle Sallmanns Limited. The excess cost of $430,659 was allocated to the acquired identified assets and amortized through the useful lives of the allocated identified assets.

In November 2008, the Company acquired 88% equity interest of Hubei Minyuan Huohe Hydropower Development Co., Ltd. (“Hubei Huohe”) from third parties, which operates Huohe Cascade II and Huohe Cascade III hydropower stations.  The total cost the Company paid for Hubei Huohe acquisition was $1,143,701 higher than the net book value of Hubei Huohe, $3,818,726, but lower than the appraisal value assessed by Jones Lang LaSalle Sallmanns Limited. The excess cost of $1,143,701 was allocated to the acquired identified assets and amortized through the useful lives of the allocated identified assets.

6

In January 2009, the Company acquired 85% equity interest of Hubei Hongping Power Generation Co., Ltd. (“Hubei Hongping”) for $3,359,968 from third parties, which operates Qiujiabang Hydropower Station, Shunshuiping Hydropower Station and Huangjiawang Hydropower Station. On the date of acquisition, the book value of Hubei Hongping was $1,511,163. Thus, the total acquisition cost of Hubei Hongping was $1,848,805 higher than the net book value of Hubei Hongping, but lower than the appraisal value assessed by Jones Lang LaSalle Sallmanns Limited. The excess cost of   $1,848,805 was allocated to the acquired identified assets and amortized through their useful lives of the allocated identified assets.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates include the allowance for doubtful accounts of accounts receivable, and the useful life of property, plant and equipment, and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred assets, accruals for taxes due.

Fair Value of Financial Instruments

The Company adopted SFAS 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, accounts receivable, notes receivables, loans payable-long term, accounts payable and accrued expenses, and amounts due from/to related parties approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with SFAS 157.

Cash and Cash Equivalents

For purposes of the consolidated cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC.  Balances in banks in the PRC are uninsured.

Cash includes cash on hand and demand deposits in accounts maintained with state-owned banks within the People’s Republic of China. Total cash in state-owned banks at March 31, 2009 and December 31，2008 amounted to $1,632,963 and $5,804,797 respectively, of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

Concentrations of Credit Risk

7

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 environment in the PRC, and by the general state of the PRC’s economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. 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.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company's sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms.  The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.  At March 31, 2009 and December 31, 2008, the Company’s bank deposits by geographic area were as follows:

	March 31,				December 31,
	2009				2008
Country:
United States		—	—			—	—
China		1,632,963	100	%		5,804,797	100	%
Total cash and cash equivalents		1,632,963	100	%		5,804,797	100	%

Accounts Receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The company maintains allowances for doubtful accounts for estimated losses. The company reviews the accounts receivable on a periodic basis and makes general and specific allowance when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At March 31, 2009 and 2008, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amount of $309,947 and $309,521 respectively.

Long-term Investment

Long-term investment is carried at cost. Dividends received are included in investment income. Dividends received in excess of the Company’s proportionate share of accumulated earnings of an investment are recorded as a reduction of the cost of the investment. There were no reductions in excess of the investment cost for the three months ended March 31, 2009 and 2008.

Property, Plant and Equipment

Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.  When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

8

Property and equipment have a residual value of 10% of actual cost. The estimated lives used in determining depreciation are:

Classification	Useful Years
Dams	50 years
Buildings	20 -50 years
Machine equipment	10-30 years
Electronic and other equipment	3-10 years

Construction in Progress

Construction in progress consists of factories and office buildings under construction and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and ready for their intended use.

For the Hunan Zhaoheng Hydropower Station construction, the Company separated it into two projects, central unit project and auxiliary project. The central unit project mainly included the constructions of buildings, plant and equipment. The auxiliary project was for landscaping and environment decoration of the station. The central unit project was completed for operation in April 2008 and the auxiliary project was expected to be finished in 2009.

As of March 31, 2009, construction in progress consists of the auxiliary project of the Hunan Zhaoheng Hydropower Station, Jingrong’s expansion project which the Company is planning to expand its installed capacity for more electricity output and the construction project of Huangjiawang Hydropower Station operated by Hongping.

Intangible Assets

Intangible assets represent property use rights and Management Software. Property use rights represent the land use rights in China. There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. Property use rights are carried at cost and are amortized on a straight-line basis over the specified terms of the land use rights granted by China government. The Company examines the possibility of decreases in the value of intangible assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

The Management Software is a new software used to help us remotely and efficiently control our cost, budget and internal control..

Impairment of Long-lived Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews, long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charges during the three months ended March 31, 2009 and 2008.

Minority Interest

Under generally accepted accounting principles when losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, the excess is not charged to the majority interest since there is no obligation of the minority interest to assume liability on such losses. The Company, therefore, has absorbed all losses applicable to a minority interest where applicable. If future earnings do materialize, minority interest shall be credited to the extent of such losses previously absorbed.

9

Derivative Instruments and Hedging Activities

The Company accounts for derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”).  SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value.  Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship.

The Company engages in activities that expose it to market risks, including the effects of changes in interest rates and fuel prices. Financial exposures are evaluated as an integral part of the Company's risk management program, which seeks, from time to time, to reduce potentially adverse effects that the volatility of the interest rate and fuel markets may have on operating results. The Company does not regularly engage in speculative transactions, nor does it regularly hold or issue financial instruments for trading purposes. At March 31, 2009, there were no outstanding derivatives. In addition, management has reviewed their financial obligations as of March 31, 2009, and has determined that there are no derivative liabilities that can be readily determined or valued.

Income Taxes

The Company is governed by the Income Tax Law of the People’s Republic of China and the United States.  Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns.

The Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statements No. 109”, as of January 1, 2007.  Under FIN 48, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.  The adoption had no effect on the Company’s consolidated financial statements.  

Value Added Taxes (VAT)

The Company is required to charge and to collect for value added taxes on their sales. In addition, the Company pays value added taxes on their primary purchases, recorded as a receivable. These amounts are netted for financial statement purposes.

Revenue Recognition

The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition.  In general, the Company records revenue when persuasive evidence of an arrangement exists, power have been delivered , the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

Employee Benefits

The Company’s operations and employees are all located in the PRC.  The Company makes mandatory contributions to the PRC government’s health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws, which is approximately 25% of salaries. The costs of these payments are charged to income in the same period as the related salary costs and are not material.

10

Foreign Currency Translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company is the local currency, the Chinese Renminbi (“RMB”). Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.  The cumulative translation adjustment and effect of exchange rate changes at March 31, 2009 and December 31, 2008 was $3,938,768 and $3,892,956 respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter any material transaction in foreign currencies and accordingly, transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

Asset and liability accounts at March 31, 2009 and December 31, 2008 were translated at RMB6.8456 to $1.00 and at RMB6.8542 to $1.00, respectively. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the three months ended March 31, 2009 and 2008 were RMB6.8459 and RMB7.1593 to $1.00, respectively.  In accordance with Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows”, cash flows from the Company's operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Income per Share of Common Stock

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company not issued any preferred stock, common stock warrants, or options during the three months March 31, 2009 and 2008, thus, has no the potentially dilutive common shares.

The following table presents a reconciliation of basic and diluted net income per share:

	For the three months ended March 31,
	2009		2008
	$		$
Net income available to common shareholders for basic and diluted net income per common share		255,744		1,033,049
Weighted average common shares outstanding – basic		71,692,999		71,692,999
Effect of dilutive securities:
Preferred stock		—		—
Unexercised warrants		—		—
Weighted average common shares outstanding– diluted		71,692,999		71,692,999
Net income per common share  - basic		0.003		0.003
Net income per common share  - diluted		0.003		0.003

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Accumulated Other Comprehensive Income

The Company follows Statement of Financial Accounting Standards No. 130 (“SFAS 130”) “Reporting Comprehensive Income” to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the three months ended March 31, 2009 and 2008 included net income and unrealized gains from foreign currency translation adjustments.

Related Parties

Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company shall disclose all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.

Major Suppliers

The Company’s supplies are mainly related to spare parts of low value that are used for maintenance of the hydropower factories. As the Company could source the supplies from various suppliers on comparable terms, no concentration risk is perceived.

Major Customers

For the three months March ended 31, 2009 and 2008, the major five customers accounted for approximately 100% and 88%, respectively, of the Company’s total sales. As at March 31, 2009 and December 31, 2008, accounts receivables from these customers were 100% and 83% of the total outstanding balance.

Acquisitions

The Company accounts for acquisitions using the purchase method of accounting in accordance with SFAS No. 141.  In each of our acquisitions we determined that fair values were equivalent to the acquired historical carrying costs. The estimated purchase price and the preliminary adjustments to historical book value of business entities acquired were recorded by the Company at the pre-acquisition carrying amount.

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008, and applies to any business combinations which occur after December 31, 2008. The adoption of SFAS 141(R), effective January 1, 2009, may have an impact on accounting for future business combinations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS 157 are effective for the fiscal years beginning after November 15, 2007. Therefore, the Company adopted this standard on January 1, 2008, and the adoption of this statement did not have a material impact to the Company’s financial condition or results of operations.

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On October 10, 2008, the FASB issued SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”. This FASB Staff Position (“FSP”) clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Statement 157 was issued in September 2006, and is effective for financial assets and financial liabilities for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS 157-3 and determined that it had minimal impact, if any, as of December 31, 2008 and for the year then ended. The Company will continue to evaluate the impact, if any, of SFAS 157-3 on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires (a) recognition of the funded status (measured as the difference between the fair value of the plan assets and the benefit obligation) of a benefit plan as an asset or liability in the employer’s statement of financial position, (b) measurement of the funded status as of the employer’s fiscal year-end with limited exceptions, and (c) recognition of changes in the funded status in the year in which the changes occur through comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006. The requirement to measure the plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. This Statement has no current applicability to the Company’s financial statements. Management adopted this Statement on January 1, 2007, and the adoption of SFAS 158 did not have a material impact to the Company’s financial position, results of operations, or cash flows.   

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This statement permits companies to choose to measure many financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Therefore, the Company adopted this standard on January 1, 2008, and the adoption of this statement did not have a material impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not expect SFAS No. 160 to have a material impact on the preparation of its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not expect SFAS No. 161 to have a material impact on the preparation of its consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect SFAS No. 162 to have a material impact on the preparation of the Company’s consolidated financial statements.

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Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

Note 2 – ACCOUNTS RECEIVABLE

At March 31, 2009 and December 31, 2008, accounts receivable consisted of the following:

	March 31		December 31,
	2009		2008
	$		$
Accounts receivable		2,913,730		4,524,480
Less: allowance for doubtful accounts		-309,949		-309,561
		2,603,781		4,214,919

Note 3 – OTHER RECEIVABLES

Other receivables at March 31, 2009 and December 31, 2008 amounted to $737,560 and $50,751, respectively. Other receivables primarily consist of payments to secure green field development rights of Baishadu Hydropower Station and Huanghugang Hydropower Station and advances to employees for business travel purpose.

Note 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of advances to suppliers and tax refund. Prepaid expenses and other current assets at March 31, 2009 and December 31, 2008 amounted to $114,104 and $196,507, respectively.

Note 5 – LONG-TERM INVESTMENT

As of March 31, 2009 and December 31, 2008, Hunan Zhaoheng invested $572,631 and $571,912 respectively for a 49% equity interests in Zhaoheng Winner Tungsten (Shimen), Ltd. (“Winner”). According to memorandum and articles of association of Winer, Hunan Zhaoheng does not participate in the management of Winner, but receives annual dividend at a fixed rate of 20% of its investment in Winner starting from the date Winner commenced production. The other shareholders of Winner committed to buy back equity interests held by Hunan Zhaoheng progressively at historical cost, the investment income was then adjusted in accordance with Hunan Zhaoheng’s equity interest in Winner based on the above investment term. Winner commenced its operation in October 2007.

The investment was accounted for at cost basis. The dividend generated from this investment was presented as investment income in our unaudited consolidated financial statements. The dividend income was then calculated based on the above investment term. Total dividend incomes for the three months ended March 31, 2009 and 2008, were $28,630 and $27,377, respectively.

Note 6 – PROPERTY, PLANT AND EQUIPMENT

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Property, plant and equipment as of March 31, 2009 and December 31, 2008 are summarized as follows:

	March 31			December 31,
	2009			2008
	$			$
Dams		95,093,123			76,382,522
Buildings		847,335			762,976
Machine equipment		38,502,419			37,036,230
Electronic and other equipment		1,020,906			2,259,294
Total		135,463,784			116,441,022
Less: Accumulated Depreciation		(48,854,827	)		(41,288,337	)
		86,608,957			75,152,685

As of March 31, 2009, $3,423,165 of dam was allocated from the excess cost in the acquisition of Jingrong, Hubei Huohe and Hongping. Depreciation expenses for the three months March ended 31, 2009 and 2008 amounted to $807,344 and $270,343, respectively.

Note 7 – OTHER ASSETS

Other assets consisted of the following:

	March 31		December 31,
	2009		2008
	$		$
Spare parts		366,449		294,308
Deposit		—		4,620
Setup expenses		—		26,750
		366,449		325,678

Note 8 – CONSTRUCTION IN PROGRESS

As of March 31, 2009, construction in progress amounted to $1,759,915 and consists of auxiliary project of Hunan Zhaoheng Hydropower Station such as landscaping and slope, Jingrong’s Expansion project which the Company is planning to expand its hydropower station for more electricity and construction project of Huangjiawang Hydropower Station.

As of December 31, 2008, construction in progress amounted to $1,173,415 and consists of auxiliary project of Hunan Zhaoheng Hydropower Station such as landscaping and slope and Jingrong’s Expansion project.

Note 9 –INTANGIBLE ASSETS

Intangible assets consist of the following as of March 31, 2009 and December 31, 2008.

	March 31			December 31,
	2009			2008
	$			$
Property use right		1,414,047			1,412,273
Management software		94,889			—
Less: Accumulated amortization		(199,427	)		(192,116	)
		1,309,509			1,220,157

Amortization expenses for the three months March ended 31, 2009 and 2008 amounted to $7,070 and $6,066 respectively.

Note 10 – TAXES PAYABLE

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Taxes payable at March 31, 2009 and December 31, 2008 amounted to $727,070 and $841,318 respectively. Taxes payable are summarized below:

	March 31		December 31,
	2009		2008
	$		$
Business tax payable		23,953		154,295
Value added tax payable		114,328		185,161
Property tax payable		29,448		29,002
Income tax payable		88,883		71,318
Government fees		450,060		362,188
Other taxes		20,398		39,354
		727,070		841,318

Note 11 – OTHER PAYABLES

Other payables at March 31, 2009 and December 31, 2008 amounted to $4,814,102 and $2,427,345, respectively. Other payables primarily consisted of payables to contractors and suppliers as quality warrant bond for the construction of Hunan Zhaoheng Hydropower Station, as well as payables in the amount of $3,703,576 to the original shareholders in the acquisition of Hubei Huohe and Hongping.

Note 12 – LONG-TERM LOANS

The Company was obligated for the following long-term loans as of March 31, 2009 and December 31, 2008:

	March 31		December 31
Lenders and Terms	2009		2008
	$		$
Due to Construction Bank of China on April 30, 2010. Interest rate is adjusted every 12 months based on the bench mark rate set by the People’s Bank of China. For the years of 2008 and 2007, the average interest rate was 7.65% and 7.2% respectively. Pledged with property, plant and equipment.		6,281,407		6,273,525
Due to Construction Bank of China on July 30, 2011. Interest rate is adjusted every 12 months based on the bench mark rate set by the People’s Bank of China. For the years of 2008 and 2007, the average interest rate was 7.65% and 6.8% respectively. Pledged with property, plant and equipment and guaranteed by Shenzhen Zhaoheng Industrial Co., Ltd., one of our related companies.		2,921,585		2,917,919
Due to Construction Bank of China on August 30, 2011. Interest rate is adjusted every 12 months based on the bench mark rate set by the People’s Bank of China. For the years of 2008 and 2007, the average interest rate was 7.65% and 7.02% respectively. Pledged with property, plant and equipment and guaranteed by Shenzhen Zhaoheng Industry Co., Ltd.		8,764,754		8,753,757
Due to Bank of China on March 3, 2012. Interest rate is Floated based on the prime rate set by the People’s Bank of China. For the years of 2008 and 2007, the average interest rate are 7.74% and 6.84% respectively. Pledged with 66.7% ownership of Hunan Zhaoheng Hydropower Co., Ltd, one of our subsidiaries, and guaranteed by Shenzhen Zhaoheng Industry Co., Ltd.		18,259,904		21,884,392
Due to Industrial & Commerce Bank of China on March 23, 2022. Fixed interest rate of 7.11% in 2008. Guaranteed by Shenzhen Zhaoheng Industry Co., Ltd.		23,372,678		23,343,352
Due to Zhushan Rural Credit Cooperative on November 24,2010. For the years of 2008,the average interest rate are 7.56%.		1,460,792
Total		61,061,120		63,172,945
Less: short-term loans				–
Long-term loans		61,061,120		63,172,945

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For the three months ended March 31, 2009, the Company had repaid $3,651,981 loan to Bank of China.

Note 13 – STOCKHOLDERS’ EQUITY

Reverse Merger

On May 13, 2008, Zhaoheng BVI entered into a share exchange agreement (the “Share Exchange Agreement”) with Certified resulting in a change of control of Certified. Pursuant to the Share Exchange Agreement, Certified issued an aggregate of 69,686,970 shares of common stock, par value $0.001 (the “Common Stock”), to Embedded Internet Solutions Limited (“Embedded Internet”), a Cayman Islands company wholly owned by Guosheng Xu, the Company’s current Chief Executive Officer and Chairman of Board of Directors, in exchange for all of the common stocks of Zhaoheng BVI (the “Share Exchange”). The Share Exchange has been accounted for as a reverse acquisition and accordingly the Share Exchange has been treated as a recapitalization of Zhaoheng BVI, with Zhaoheng BVI as the acquirer.  On July 17, 2008, Certified reincorporated in the State of Nevada and changed the name to Zhaoheng Hydropower Company.

Contemporaneously with the closing of the Share Exchange, some shareholders of Certified also transferred approximately 572,170 shares of common stock to Embedded Internet pursuant to a stock purchase agreement (“Stock Purchase”). As a result of the completion of the Share Exchange and the Stock Purchase, Embedded Internet owns approximately 98% interest of the Company’s outstanding common stocks.

Statutory Reserve

Shenzhen Zhaoheng, Hunan Zhaoheng and Hunan Sanjiang are foreign-invested companies in PRC, according to relevant laws and regulations in China, the companies reserve some profit as reserve fund, enterprise development fund with the exact amount decided by the board of directors. As of March 31, 2009 and December 31, 2008, the Company had a statutory surplus reserve of $666,952.

Domestic companies located in the PRC are required to make appropriations to statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with law of the PRC. Appropriation to the statutory surplus reserve should be 10% of the after tax net income determined in accordance with the generally accepted accounting principles of the People’s Republic of China(“PRC GAAP) until the reserve is equal to 50% of the entitles’ registered capital or members’ equity.

The company, as an entity registered in Nevada, does not need to provide statutory reserves.

Retained Earnings

As of March 31, 2009 and December 31, 2008, the details of retained earnings are listed as below:

	March 31		December 31,
	2009		2008
	$		$
Retained earnings		6,831,916		6,621,983
Statutory surplus reserve		666,952		666,952
		7,498,868		7,288,935

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Note 14 – INCOME TAXES

Refer to the table below for general description of tax treatments for each of the six major operating entities as mentioned.

Entity	Tax treatments
Hunan Zhaoheng	-Preferential rate of 15%, and will be increased to 25% progressively within the next five years from January 1, 2008 onwards. -40% purchase price of domestic equipments can be used as tax credit. -Based on related regulation of PRC, this company fulfills the condition of applying 2 years tax exemption and subsequently 3 years 50% reduction in income tax from January 1, 2008 onwards.
Hubei Huohe	-25% of income tax rate from January 1, 2008.
Hongping	-25% of income tax rate from January 1, 2008.
Jingrong	-Preferential rate of 15% and will be increased to 25% progressively within the next five years from January 1, 2008 onwards. -Based on related regulation of PRC, this company fulfills the condition of applying 2 years tax exemption and subsequently 3 years 50% reduction in income tax from January 1, 2008 onwards, However, we still need to get final approval from tax authorities and we are currently in the process of the application.
Hunan Sanjiang	-Preferential rate of 15% and will be increased to 25% progressively within the next five years from January 1, 2008 onwards. -Two years tax exemption from the first profitable year (2005) and subsequently 50% reduction in income tax for the next 3 years including years ended December 31, 2007, 2008 and 2009.
Shenzhen Zhaoheng	-15% of income tax rate for the years ended December 31, 2007 and 2006 and will increase to 25% progressively within the next five years from January 1, 2008 onwards.

Deferred income taxes arise from temporary timing differences in the recognition of income and expenses for financial reporting and tax purposes. The Company's deferred tax assets consist entirely of the benefit from net operating loss (“NOL”) carryovers of our subsidiaries Shenzhen Zhaoheng, Guizhou Jingrong and Hubei Hongping in prior years. As of March 31, 2009 and December 31, 2008, the net operating losses for Shenzhen Zhaoheng, Hubei Huohe and Hubei Hongping were $2,531,686 and $811,336 respectively. According to the PRC regulations, all unused net operating loss can be carried forward for a time frame of five years. The Company's deferred tax assets are offset by a valuation allowance due to the uncertainty of the realization of net operating loss carryovers. Net operating loss carryovers may be further limited by other provisions of tax laws in China. With regards to the Company’s US corporate parent, they have incurred an aggregate net operating loss, since the May 13, 2008 Share Exchange, of approximately $493,000. This loss carry forward will expire, if not utilized, through 2028. Management believes that the realization of benefits from this loss appears not more than likely, due to the Company’s limited operating history. Accordingly, the Company has provided a 100% valuation allowance on this US deferred tax asset. Management has determined that losses incurred by the US corporate parent prior to the Share Exchange might be subject to rules under Internal Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. Such change might have occurred as a result of the Share Exchange.

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The components of income (loss) before income tax consist of the following:

	For the three months Ended March 31,
	2009			2008
	$			$
U.S. Operations		(38,442	)		—
Chinese Operations		297,557			207,586
		259,115			207,586

Note 15 – RELATED PARTY TRANSACTIONS

Due from related party

The Company distributed power to its related party Hunan Jiuli at market price. For the three months ended March 31, 2009 and 2008, the total sales amounted to $353,800 and $341,859 respectively.

The Company leases its warehouse, plant and operating space to its related party Zhaoheng Winner Tungsten (Shimen) Company limited for 5 years since June 1, 2006 under operating lease agreements. The rental is $1,340 each month with exemption period of 5 months.

At March 31, 2009 and December 31, 2008, due from related parties was due from the following:

		March 31		December 31
Related party	Relationship	2009		2008		Interest rate
		$		$
Zhaoheng Winner Tungsten (Shimen) Co., Ltd.	49% owned by the Company as long-term investment		1,213,654		1,155,072	12% annual; without security
Hunan Jiuli Hydropower Construction Co., Ltd.	Both Jiuli and the Company are beneficially controlled by our Chairman and CEO Mr. Guosheng Xu				178,778	Interest free; without security
Shenzhen Zhaoheng Industrial Co., Ltd.	Both Zhaoheng Industrial and the Company are beneficially controlled by our Chairman and CEO Mr. Guosheng Xu				3,911,631	120% of the bench mark rate set the People’s Bank of China and adjusted annually; without security
			1,213,654		5,245,481

As of March 31, 2009, due from Zhaoheng Winner consisted of the amount of $12,493 for factory building lease and $1,201,161 for non-operating fund disposition; due from Hunan Jiuli consisted of due to Hunan Sanjiang in the amount of $439,341 for electricity purchase; due from Hunan Jiuli consisted of the amount of $439,341 for electricity sold from the Company.

Due to related party

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At March 31, 2009 and December 31, 2008, due to related parties was due from the following:

		March 31		December 31
Related party	Relationship	2009		2008		Interest rate
		$		$
Shenzhen Zhaoheng Industrial Co., Ltd.	Both Zhaoheng Industrial and the Company are beneficially controlled by our Chairman and CEO Mr. Guosheng Xu		1,122,044			Interest free; without security
Hubei JinYuan Hydropower Development Co., Ltd.	15% shareholder of our subsidiary Hongping		898,485			Benmark rate of People’s Bank of China
Zhushan Jinfeng Industrial Co., Ltd.	12% shareholder of Hubei Huohe		241,508		259,503	Benmark rate of People’s Bank of China
			2,262,037		259,503

Note 16 – OPERATING RISKS

(a) Country risk

Currently, the Company's revenues are derived fully from distribution of power in the Peoples Republic of China (“PRC”). A change in relevant regulations or downturn in the economic environment of the PRC could have a material adverse effect on the Company's financial condition.

(b) Products risk

The Company competes with larger companies, who have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel. There can be no assurance that the Company will remain competitive with larger competitors.

(c) Exchange risk

The Company generates and distributes power locally in the PRC. All transactions are settled in local currency. Therefore, the Company believes that the relevant exchange risk exposure should not be significant.

(d) Political risk

Currently, the PRC is in a period of growth and is openly promoting business development in order to bring more business into the PRC. Additionally, the PRC allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations are changed by the PRC government, the Company's ability to operate in the PRC could be affected.

(e) Key personnel risk

The Company's future success depends on the continued services of executive management in China. The loss of any of their services would be detrimental to the Company and could have an adverse effect on business development. The Company does not currently maintain key-man insurance on their lives. Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial and other employees. Competition for these individuals is intense and increasing.

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(f) Governmental regulation risk

Despite efforts to develop the legal system over the past several decades, including but not limited to legislation dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, the PRC continues to lack a comprehensive system of laws. Further, the laws that do exist in the PRC are often vague, ambiguous and difficult to enforce, which could negatively affect the Company’s ability to do business in China and compete with other companies in the Company’s hydropower subsidiaries. Legal protections afforded to the Company and its shareholders in the US might not be available in the PRC.

In September 2006, the Ministry of Commerce (“MOFCOM”) promulgated the Regulations on Foreign Investors' Mergers and Acquisitions of Domestic Enterprises (“M&A Regulations”) in an effort to better regulate foreign investment in China. The M&A Regulations were adopted in part as a needed codification of certain joint venture formation and operating practices, and also in response to the government's increasing concern about protecting domestic companies in perceived key industries and those associated with national security, as well as the outflow of well-known trademarks, including traditional Chinese brands.

As a U.S. based company doing business in China, we seek to comply with all PRC laws, rules and regulations and pronouncements, and endeavor to obtain all necessary approvals from applicable PRC regulatory agencies such as the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange.

Note 17 – SUBSEQUENT EVENTS

On April 10, 2009, two of the Company’s subsidiaries, Shenzhen Zhaoheng and Hunan Zhaoheng, entered into an equity transfer agreement (“Transfer Agreement”). Pursuant to Transfer Agreement, Hunan Zhaoheng transferred 100% interest of Jingrong to Shenzhen Zhaoheng.  Jingrong owns Yongfu Hydropower Station which is located in Rongjiang County of Guizhou Province in China.  The total installed capacity of Jingrong is 7.5MW.

On April 24, 2009, the Company completed a private placement of equity to 52 investors for an aggregate purchase price of $5,689,853, agreeing to issue 4,947,699 shares of its Common Stock, par value $0.001 per share pursuant to a Subscription Agreement signed by and between the Investors and the Company on April 24, 2009.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this quarterly report. This discussion, as well as various other sections of this quarterly report, contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include statements regarding, among other things, (a) our future financial performance, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for working capital. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “estimate,” “believe,” “intend,” “objective,” “predict,” “potential,” “project” or “continue,” or the negative of these words or other variations on these words or comparable terminology. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements. These statements are only predictions and actual events or results may differ materially.

Readers are urged to carefully review and consider the various disclosures made by us in this quarterly report and our other public filings with the United States Securities and Exchange Commission (the “SEC”), including the risks and uncertainties described in the Risk Factors section in Part I, Item 1A of our Form 10-K filed on April 15, 2009. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We undertake no duty to update or revise any forward-looking statement after the date of this report to reflect actual results or to changes in our expectations or future events.

Company Overview

We were incorporated under the laws of the State of Minnesota in January 1984 with registered name of “Certified Technologies Corporation” (“Certified”). On February 21, 2008, we reincorporated in the State of Nevada. As a result of a share exchange or “reverse acquisition” transaction consummated on May 13, 2008, we are now engaged in the investment, operation, and development of environmentally friendly small- to medium-sized hydropower plants in China through an indirect operating subsidiary, Zhaoheng Hydropower (Hong Kong) Limited (“Zhaoheng HK”), a company operating in China. As our wholly owned subsidiary, Zhaoheng Investment Limited (BVI), a British Virgin Islands corporation (“Zhaoheng BVI”), owns 100% of the capital stock of Zhaoheng HK.

On July 17, 2008, Certified changed its corporate name from “Certified Technologies Corporation” to our current corporate name, “Zhaoheng Hydropower Company”.

Our Common Stock is currently traded on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “ZHYP.OB”.

Results of Operations

With the commencement of operations of two new generating units at Hunan Zhaoheng Hydropower Co., Ltd. (“Hunan Zhaoheng”) in April 2008, the acquisition of Jingrong Industrial Development Co., Ltd. (“Jingrong”), Hubei Minyuan Huohe Hydropower Development Co., Ltd. (“Hubei Huohe”) and Hubei Hongping Power Generation Co., Ltd. (“Hongping”) in June 2008, November 2008 and January 2009, respectively, we currently own and operate eight facilities in Hunan, Hubei and Guizhou Provinces, including Hunan Sanjiang Hydropower Station, Hunan Zhaoheng Hydropower Station, Guizhou Yongfu Hydropower Station, Huohe Cascade II Hydropower Station and Huohe Cascade III Hydropower Station, with a total installed capacity of 149.3MW, an increase of 139% from March 31, 2008. Currently, all generating units are in good working condition.

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The following table sets forth certain operating data for the periods indicated:

	For Three Months Ended March 31
	2009			2008
	$			$
Revenues		3,184,487			1,290,939
Cost of revenues		1,281,181			464,377
Gross profit		1,903,306			826,562
Operating Expenses		499,224			320,228
Operating income		1,404,082			506,334
Interest Income		29,221			1,167
Interest Expense		(1,265,276	)		(309,665	)
Net Income		209,933			196,053
Gross Margin		59.8	%		64.0	%
Operating Margin		44.1	%		39.2	%
Net Income Margin		7.0	%		15.2	%

Revenues

Revenues for the three months ended March 31, 2009 were $3,184,487, an increase of $1,893,548 or 146.7% from $1,290,939 for the three months ended March 31, 2008. The increase in revenues was primarily due to an increase in electricity on-grid tariffs and an increase in output due to increased total installed capacity. Since July 2008, the benchmark on-grid tariff of our two Hunan facilities was increased from RMB0.28/kWh to RMB0.295/kWh. Our total installed capacity increased from 62.5MW as of March 31, 2008to 149.3MW as of March 31, 2009 as a result of the commencement of operation of two new generating units with an aggregate installed capacity of 50MW in April 2008, the acquisition of Guizhou Yongfu Hydropower Station with total installed capacity of 7.5MW in June 2008, the acquisition of Huohe Cascade II and Huohe Cascade III hydropower stations with total installed capacity of 12.85MW in November 2008, and the acquisition of Shunshuiping Hydropower Station, Qiujiabang Hydropower Station, Huangjiawang Hydropower Station in January 2009. These seven newly constructed or newly acquired hydropower stations contributed $1,487,209 toward our total revenues for the three months ended March 31, 2009.

Cost of Revenues

Cost of revenues consisted of power purchase, depreciation expense of property, plant and equipment, equipment maintenance cost, direct labor, overhead and state taxes (not including value-added tax, price exclusive tax and corporate income tax).

Cost of revenues for the three months ended March 31, 2009 was $1,281,181 or 40.2% of revenues, an increase of $816,804, or 175.9%, from $464,377 or 36.0% of revenues for the three months ended March 31, 2008.

In connection with the expansion of our existing facilities and the acquisition of new facilities, our fixed asset depreciation increased to $807,344, or 25.4% of revenues, for the three months ended March 31, 2009, from $270,343, or 20.9% of revenues for the three months ended March 31, 2008; our maintenance cost increased to $124,364, or 3.9% of revenues for the three months ended March 31, 2009, from $48,675, or 3.8% of revenues for the three months ended March 31, 2008; and our labor cost increased to $146,949, or 4.6% of revenues for the three months ended March 31, 2009, from $77,766, or 6.0% of revenues for the three months ended March 31, 2008.

Gross Profit

As a result of the foregoing, our gross profit increased from $826,562 for the three months ended March 31, 2008 to $1,903,306 for the three months ended March 31, 2009, representing an increase of $1,076,744, or 130.3%. The increase in our gross profit was mainly attributable to the increase in the benchmark on-grid tariff of both Hunan Sanjiang Electric Power Co., Ltd. (“Hunan Sanjiang”) and Hunan Zhaoheng from RMB0.28/kWh to RMB0.295/kWh since July 2008, and an increase in total installed capacity from 62.5MW as of March 31, 2008 compared to 149.3MW as of March 31, 2009. However, our gross margin decreased to 59.8% for the three months ended March 31, 2009 from 64.0% for the three months ended March 31, 2008.

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Operating Expenses

Total operating expenses, which include selling, general and administrative expenses, increased by $178,996, or 55.9% to $499,224 for the three months ended March 31, 2009 from $320,228 for the three months ended March 31, 2008. The increase in operating expenses for the three months period was mainly due to: (i) an increase of $93,970 attributable to our three newly acquired operating entities including Jingrong, Hubei Huohe and Hongping; (ii) an increase of $308,200 attributable to an increase in overhead at our headquarters, which largely consists of $102,461 in wage expenditure and $134,463 in professional service fees including legal fees and audit fees, partly offset by: (i) a decrease of $63,806 attributable to the sale of Hunan Jiuli Hydropower Construction Co., Ltd. (“Hunan Jiuli”) to Shenzhen Zhaoheng Industrial Co., Ltd.(“Zhaoheng Industrial”), a related party, in April 2008; and (ii) a decrease of $167,881 in the operating expense of Hunan Sanjiang and Hunan Zhaoheng, our subsidiaries. However, operating expenses as a percentage of revenues decreased to 15.7% for the three months ended March 31, 2009 from 24.8% for the three months ended March 31, 2008.

Operating Income

Operating income was $1,404,082 for the three months ended March 31, 2009, an increase of $897,748, or 177.3%, from $506,334 for the three months ended March 31, 2008.  However, our operating income margin was 44.1% for the three months ended March 31, 2009 as compared to 39.2% for the three months ended March 31, 2008. The increase in operating income margin was due to the decrease in our operating expenses as a percentage of revenues as discussed above.

Interest Income

For the three months ended March 31, 2009, we realized interest income of $29,221, compared with interest income of $1,167 for the three months ended March 31, 2008. Interest income was generated from loans to our related party Zhaoheng Winner (Shimen) Tungsten Industry Company Limited (“Winner”). Interest rates charged on loans to related parties were 12% in the three months ended March 31, 2009. As of March 31, 2009, the loans to Winner amounted to $1,155,072, compared to $1,213,654 as of March 31, 2008.

Interest Expense

Interest expense was $1,265,276 for the three months ended March 31, 2009, as compared to $309,665 for the three months ended March 31, 2008. This significant increase was mainly due to the fact that: (i) the interest expenses of $794,212 for the three months ended March 31, 2008 incurred by Hunan Zhaoheng were capitalized and not included in our statement of operations because the project was under construction, while for the three months ended March 31, 2009, interest expenses of Hunan Zhaoheng amounted to $878,216 and were included in our statement of operations; (ii) we paid interest of $42,226 on loans that we assumed when we acquired Hubei Huohe and Hongping in November 2008 and January 2009 respectively; and (iii) we borrowed loans and paid interest on such loans in Renminbi while the average foreign currency exchange rate between U.S. dollar and Renminbi decreased between the three months ended March 31, 2008 and the three months ended March 31, 2009.

Investment Income

Total investment income was $28,630 for the three months ended March 31, 2009 as compared to $27,377 for the three months ended March 31, 2008. The investment income was generated from the long-term investment in Winner. As of March 31, 2009 and December 31, 2008, our investment in Winner was $572,631 and $571,912, respectively, for a 49% equity interest in Winner. The difference in investment amount resulted from the change in the foreign currency exchange rate. The investment amount was unchanged in Renminbi. According to the memorandum and articles of association of Winner, Hunan Zhaoheng does not participate in the management of Winner, but is to receive an annual dividend at a fixed rate of 20% of its investment in Winner starting from the date Winner commenced production. In addition, the other shareholders of Winner have committed to buy back the equity interests held by Hunan Zhaoheng progressively at historical cost and the dividend income was adjusted in accordance with Hunan Zhaoheng’s equity interest in Winner based on the above investment term. Winner commenced its operation in October 2007.

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Non Operating Income

Non operating income for the three months ended March 31, 2009 was $61,982. Non operating income came from interest forfeited by original shareholders when we assumed shareholder loans as part of our acquisition of Hongping.  We did not generate non operating income for the three months ended March 31, 2008.

Income Taxes

We did not conduct any business or maintain any office in the United States for the three months ended March 31, 2009 and 2008. Therefore, no provision for U.S. federal income taxes has been made.

For the three months ended March 31, 2009 and 2008, our operations were conducted solely in China and governed by the PRC Enterprise Income Tax Law. PRC enterprise income tax is calculated based on taxable income determined under PRC GAAP. In accordance with the Income Tax Laws, a PRC domestic company is subject to enterprise income tax (“EIT”) at the rate of 25% effective January 1, 2008. However, the Income Tax Laws provide certain favorable tax treatment to a foreign invested company in the energy industry. Additionally, the PRC government at the provincial, municipal and local levels can provide many tax incentives and abatements based on a number of programs at each level.

For the three months ended March 31, 2009, our income taxes were $75,556 and came entirely from our subsidiary Hunan Sanjiang. Applicable income tax rate for Hunan Sanjiang for the three months ended March 31, 2009 was 10% due to certain preferential income tax policies including: (i) a “two-year exemption followed by a three-year 50% reduction” income tax policy granted to energy and infrastructure sectors; (ii) a 15% preferential income tax rate granted to hydropower operators; and (iii) a mandatory tax rate increase from 15% to a uniform 25% progressively in five years starting from 2008. Under the same “two-year exemption followed by a three-year 50% reduction” income tax policy, Hunan Zhaoheng was exempted from income tax for the three months ended March 31, 2009. Further, the income before tax of Shenzhen Zhaoheng, Jingrong and Hubei Huohe was offset by net operating loss carryovers from previous years, so there were no income tax expenses for these three subsidiaries for the three months ended March 31, 2009.

For the three months ended March 31, 2008, our income taxes were $11,533 and came entirely from our subsidiary Hunan Sanjiang. Applicable income tax rate for Hunan Sanjiang for the three months ended March 31, 2008 was 9% due to preferential income tax policies including: (i) a “two-year exemption followed by a three-year 50% reduction” income tax policy granted to energy and infrastructure sectors; and (ii) a 15% preferential income tax rate granted to hydropower operators.

Net Income

Net income increased to $209,933 for the three months ended March 31, 2009 from $196,053 for the three months ended March 31, 2008. As a percentage of revenue, net income was 6.6% for the three months ended March 31, 2009, as compared to 15.2% for the three months ended March 31, 2008.

The decrease in net income as a percentage of revenue was mainly due to an increase in both cost of revenues and interest expense as a percentage of revenues.

Changes in Financial Condition

Cash and Cash Equivalent

Our cash and cash equivalent decreased by $4,171,834 to $1,632,963 as of March 31, 2009 from $5,804,797 as of December 31, 2008, primarily due to  $4,595,409 used in investing activities and $4,188,032 used in financing activities, partly offset by $4,059,358 generated from operating activities..

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Accounts Receivable

Our accounts receivable, net of allowance for doubtful accounts, decreased by $1,611,138 to $2,603,781 as of March 31, 2009 from $4,214,919 as of December 31, 2008. The decrease in accounts receivable was mainly due to the receipt of payment by Hunan Sanjiang and Hunan Zhaoheng, our two subsidiaries, from the State Grid Corporation of China.

Other Receivables

Other receivables increased by $686,809 to $737,560 as of March 31, 2009 from $50,751 as of December 31, 2008, primarily due to advances of $262,942 and $401,718 to a hydropower development company for the preparation work in connection with the construction of Baishadu Hydropower Station and Huanghugang Hydropower Station.

Property, Plant and Equipment

Property, plant and equipment increased by $11,456,272 to $86,608,957 as of March 31, 2009 from $75,152,685 as of December 31, 2008, primarily as a result of new acquisitions and the transfer of construction in progress of Hunan Zhaoheng Hydropower Station to property, plant and equipments..

Due from/to Related Parties

Amounts due from related parties decreased by $4,031,827 to $1,213,654 as of March 31, 2009 from $5,245,481 as of December 31, 2008. Amounts due to related parties increased by $2,002,534 to $2,262,037 as of March 31, 2009 from $259,503 as of December 31, 2008. See Note 15 to our financial statements.

Construction in Progress

Construction in progress increased by $586,500 to $1,759,915 as of March 31, 2009 from $1,173,415 as of December 31, 2008, primarily due to the ongoing auxiliary project of Hunan Zhaoheng Hydropower Station, such as landscaping and slope and the consolidation of construction in progress of Huangjiawang Hydropower Station (“Huangjiawang”) in our balance sheet when we acquired Huangjiawang in January 2009.

Other payables

Other payables increased by $2,386,757 to $4,814,102 as of March 31, 2009 from $2,427,345 as of December 31, 2008, mainly as a result of the payment of $3,703,576 to the original shareholders for the acquisition of Hubei Huohe and Hongping.

Liquidity and Capital Resources

Historically, we financed our operations and capital expenditures with equity financing from our stockholders, cash flows from operations and bank loans. Over the years, we developed good working relationships with the Bank of China, Industrial and Commercial Bank of China, China Construction Bank and China Agriculture Bank. To keep pace with the rapid growth and expansion of our business, we may need to raise additional capital, primarily to acquire developed hydropower stations or to construct new stations. As a result, we will seek to raise additional funds to finance our future growth.

Cash Flow

Cash is primarily used to fund the acquisition of new facilities and working capital. The following table sets forth changes in cash flows for each of the periods ended March 31, 2009 and 2008:

	Three Months Ended March 31,
	2009			2008
	$			$
Cash and cash equivalents at beginning of period		5,804,797			994,719
Cash flows from operating activities		4,059,358			379,127
Cash flows from investing activities		(4,595,409	)		144,178
Cash flows from financing activities		(3,651,981	)		—
Net increase/(decrease) in cash and cash equivalents		(4,188,032	)		523,305
Cash and cash equivalents at end of period		1,632,963			2,077,063

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Operating Activities

Cash flow from operating activities reflects profits for the quarter adjusted for non-cash items such as depreciation and amortization expenses and the effects of changes in working capital, such as trade and other receivables and trade and other payables.

For the three months ended March 31, 2009, we had net cash inflow from operating activities of $4,059,358, primarily as a result of net income of $209,933, adjusted for changes in depreciation and amortization expenses due to operation of new facilities, accounts receivable, other payables, other receivables and taxes payable.

For the three months ended March 31, 2008, we had net cash inflow from operating activities of $379,127, primarily as a result of net income of $177,108, adjusted for changes in depreciation and amortization expenses due to operation of new facilities, accounts receivable, and prepaid expense and other current assets.

Investing Activities

Cash flow used in investing activities reflects amounts due to related parties, cash used in acquisitions, construction in progress, cash used to purchase intangible assets as well as property, plant and equipment.

For the three months ended March 31, 2009, our net cash outflow used in investing activities was $4,595,409. Our net cash outflow used in investing activities mainly consisted of: (i) decrease in amounts due to related parties, including Zhaoheng Industrial and the original shareholders of Hubei Huohe and Hongping, which amounted to $5,427,895; (ii) cash used in the acquisition of Hubei Huohe which amounted to $3,355,753; and (iii) cash used in construction in progress in the amount of $586,500, partly offset by (i) decrease in amounts due from related parties, including Hunan Jiuli and Zhaoheng Industrial in the amount of $4,031,827; and (ii) cash assumed from acquired subsidiaries in the amount of $897,072.

For the three months ended March 31, 2008, our net cash inflow from investing activities was $144,178. Our net cash inflow from investing activities mainly consisted of an increase in amounts due from related parties of $1,454,955, partly offset by cash used in construction in progress in the amount of $1,389,099.

Financing Activities

Cash flow used in financing activities reflects cash used to repay long-term bank loans.

For the three months ended March 31, 2009, our net cash outflow used in financing activities was $3,651,981. This entire amount was used in the repayment of long-term loans from the Bank of China.

We did not have cash flow from financing activities for the three months ended March 31, 2008.

Critical Accounting Policies

Management's discussion and analysis of its financial condition and results of operations is based upon our unaudited consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to the unaudited consolidated financial statements, “Summary of Significant Accounting Policies”. Management makes its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the following reflects the most critical accounting policies that currently affect our financial condition and results of operations:

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Consolidation

The unaudited consolidated financial statements include the accounts of our Company and our subsidiaries. Significant intercompany transactions have been eliminated in consolidation. Investments in which we have a 20 percent to 50 percent voting interest and where we exercise significant influence over the investee are accounted for using the equity method.

The following table sets forth details of our subsidiaries as of March 31, 2009:

Name of Company	Place of Incorporation	Date of Incorporation	Attributable Equity Interest	Registered Capital
			(%)	(RMB)
Shenzhen Zhaoheng Hydropower Co., Ltd.	China	August 3, 1999	100	11,000,000
Hunan Sanjiang Electric Power Co., Ltd.	China	November 8, 2001	100	199,400,000
Hunan Zhaoheng Hydropower Co., Ltd.	China	June 25, 2003	100	150,000,000
Jingrong Industrial Development Co., Ltd.	China	January 24, 2002	100	1,000,000
Hubei Minyuan Huohe Hydropower Development Co., Ltd.	China	December 12, 2004	88	10,000,000
Hubei Hongping Power Generation Co., Ltd.	China	April 6, 1998	85	22,000,000

Economic and Political Risks

Our operations are conducted in China. Accordingly, our business, financial condition, and results of operations may be influenced by the political, economic and legal environment in China.

Our operations in China are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The operating results may be adversely affected by changes in the political and social conditions in China, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, our management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting year. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of plant and machinery. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the consolidated cash flow statements, we consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

Investment in Subsidiaries

We use the cost method to account for investments in common stock of entities in which we have a minority voting interest or in which we otherwise have the ability to exercise significant influence or the right to share any net earnings or losses of the entity. Under the cost method, the investment is originally recorded at cost. We are recording the investment in Winner as an investment under the cost method of accounting.

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Winner is 49% owned by us and is engaged in downstream processing and sales of tungsten.

Accounts and Other Receivable

Accounts and other receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. We extend unsecured credit to customers in the normal course of business and does not accrue interest on trade accounts receivable. Allowance for uncollectible accounts as of March 31, 2009 was not significant.

Bad Debt Recognition Standard and Calculation Method

(a) Bad Debt Recognition Standard

(i) Uncollectible debt due to debtor's bankruptcy or death.

(ii) Uncollectible debt due to debtor’s inability to keep account current for over half year, which is also approved by the board as bad debt.

(b) Allowance Method of Accounting for Bad Debt

Our accounting method for bad debt allowance is based on the aging of receivables (including receivables and other receivables), with consideration of debtor’s financial situation.  The allowance for bad debt is calculated as following:

Aging of Receivables	Rate for Bad Debt Allowance
Within 30 days		1	%
30-60 days		3	%
60-90 days		6	%
90-180 days		30	%
180-360 days		50	%
Over 360 days		100	%

Revenue recognition

Our revenue recognition policies are structured to comply with Staff Accounting Bulletin No. 104 (“SAB104”). SAB 104 requires that revenue can only be recognized when it is realized or realizable and earned. Revenue generally is realized or realizable and earned when all four of the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price is fixed and determinable; and (4) collectability is reasonably assured.

Determination of criterion (4) is based on our judgment regarding the collectability of those amounts. Historically, we have not encountered any significant problems with collectability and thus have determined that it is not necessary to defer revenue recognition on that basis. Should changes in conditions cause us to determine this criterion is not met for certain future transactions, revenues for any reporting period could be adversely affected by delaying recognition of such revenues.

Property, Plant and Equipment

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation. Depreciation is recorded by the straight-line method over the estimated original useful lives of the assets. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to property, plant and equipment used in production is reported in cost of sales.

Long-term assets are reviewed annually as to whether their carrying value has become impaired. We did not record any impairment charges during the three months ended March 31, 2009 or 2008.

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Intangible Asset

Intangible assets are stated at cost less amortization and accumulated impairment loss. Amortization is provided over their estimated useful lives, using the straight-line method.

Construction in Progress

Construction in progress represents the cost of constructing new hydropower station. The major cost of construction includes construction materials, direct labor and overhead.

Completed items are transferred from construction in progress to property, plant and equipment, when they are ready for their intended use.

Foreign Currency Translation

Transactions and balances originally denominated in Chinese dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation”, and are included in determining net income or loss.

Our reporting currency is the U.S. dollar. The functional currency of our PRC subsidiaries is the Renminbi. For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into Chinese dollars at the exchange rate prevailing at the balance sheet date and weighted average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations.

The Renminbi is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the Renminbi amounts could have been, or could be, converted into U.S. dollar at the rates used in translation.

Income Tax

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Pursuant to the tax laws of the PRC, general enterprises are subject to income tax at a new effective rate of 25% since January 1, 2008.

We are engaged in the energy industry whose development is encouraged by the PRC government. According to the income tax regulation, any company engaged in the hydropower industry enjoys a favorable tax rate. We are exempt from corporate income tax for the first two years and entitled to a 50% tax reduction for the following three years. Refer to the table below for general description of tax treatments for each of the entities as mentioned.

Entity	Tax treatments
Hunan Zhaoheng	-Preferential rate of 15% (income tax), and will increase to 25% progressively within the next five years from January 1, 2008 onwards. -40% reduction of income tax for the purchase of locally manufactured equipments. -Based on related regulation of PRC, this company fulfills the condition of applying 2 years tax exemption and subsequently 3 years 50% reduction in income tax from January 1, 2008 onwards, related application is now processing.
Jingrong	-Preferential rate of 15% (income tax) and will be increased to 25% progressively within the next five years from January 1, 2008 onwards
Hunan Sanjiang	-Preferential rate of 15% (income tax), and will increase to 25% progressively within the next five years from January 1, 2008 onwards. -Two years tax exemption from the first profit year (2005) and subsequently 50% reduction in income tax for the next 3 years including years ended December 31, 2007, 2008 and 2009.
Shenzhen Zhaoheng	-15% of income tax rate for the years ended December 31, 2007 and 2006 and will increase to - 25% progressively within the next five years from January 1, 2008 onwards.

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ITEM 3.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item is not required for a smaller reporting company.

ITEM 4T.                      CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

During the fiscal period covered by this report, our management, with the participation of our Chief Executive Officer and Vice President of Finance, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such evaluation, our Chief Executive Officer and Vice President of Finance have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the required time periods and are designed to ensure that information required to be disclosed in our reports is accumulated and communicated to our management, including our Chief Executive Officer and Vice President of Finance, as appropriate, to allow timely decisions regarding required disclosure.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of March 31, 2009, our management identified the following material weaknesses:

1. Insufficient number of independent non-executive directors on our board of directors. In addition, we have yet to establish an audit committee, compensation committee, nominating committee and corporate governance committee. In the absence of an audit committee and an internal audit function, the board of directors is not able to exercise oversight responsibility related to financial reporting and related internal controls.

The control environment sets the tone of an organization, influences the control consciousness of its employees, and is the foundation of all other components of internal control over financial reporting. The material weaknesses in the control environment listed above, together with the limitation of the board of directors to exercise oversight responsibility over the internal controls over financial reporting, contributed to the material weakness listed below.

2. Insufficient number of finance personnel with an appropriate level of knowledge, expertise and training in the application of U.S. GAAP and in internal controls over financial reporting commensurate with our reporting requirements, which resulted in a significant number and magnitude of out-of-period adjustments to our consolidated financial statements and in previously reported restatements, including the accounts of construction-in-progress, revenues, interest income, cost of revenues, general and administrative expenses, interest expenses, income tax and accrued expenses.

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Our annual report on Form 10-K did not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in our annual report on Form 10-K.

Changes in Internal Control Over Financial Reporting

In January 2009, we acquired 85% equity interest in Hongping, as more fully described in Note 1 to the Condensed Consolidated Financial Statements. Commencing in April 2009, we have initiated a transition period in which we are attempting to review, evaluate, improve and integrate Hongping’s existing internal control structure into our internal control system. The implementation process is expected to be completed during the fiscal year ending December 31, 2009. Because we are in the process of evaluating the internal controls over financial reporting associated with this acquisition, any material changes that may result from this acquisition have not been disclosed in this report. We intend to disclose all material changes resulting from this acquisition within, or prior to the time of, our annual assessment of internal control over financial reporting for the fiscal year ending December 31, 2009.

Other than as set forth above, there were no changes in our internal controls over financial reporting during the three months ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.                      LEGAL PROCEEDINGS

We are not a party to any legal proceedings.

ITEM 1A.                       RISK FACTORS

There are no material changes to the risk factors previously disclosed in our annual report on Form 10-K filed with the SEC on April 15, 2009.

ITEM 2.                      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.  

ITEM 3.                      DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.                       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.                      OTHER INFORMATION

None.

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ITEM 6.                        EXHIBITS

Exhibit No.	Description
31.1	Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification of the Vice President of Finance pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002*
32.2	Certification of the Vice President of Finance pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002*

_________________________

* filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ZHAOHENG HYDROPOWER COMPANY
Dated: May 14, 2009	By:	/s/ Guosheng Xu
		Name: Guosheng Xu
		Title:  Chairman and Chief Executive Officer
		(principal executive officer and duly authorized officer)
Dated: May 14, 2009	By:	/s/ Changbing Huang
		Name: Changbing Huang
		Title:  Vice President of Finance