UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10−Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended: September 30, 2008
|
o
|
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:
333-83375
CHINA
NEW ENERGY GROUP COMPANY
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
|
65-0972647
|
|
(State
or other jurisdiction
of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
17th
Floor, HongJi Building, JinWei Road
HeBei
District, Tianjin, China
(Address
of principal executive offices, Zip Code)
(86
22) 2626 9216
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 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.
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
The
number of shares outstanding of each of the issuer’s classes of common equity,
as of November 14, 2008 is as follows:
|
Class
of Securities
|
|
Shares
Outstanding
|
|
Common
Stock, $0.001 par value
|
|
100,000,041
|
|
Series
A Convertible Preferred Stock, $0.001 par value
|
|
1,857,372
|
TABLE
OF CONTENTS
|
|
PART
I
|
|
|
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS.
|
1
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
14
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
22
|
|
ITEM
4.
|
CONTROLS
AND PROCEDURES.
|
23
|
|
|
|
|
|
|
PART
II
|
|
|
|
OTHER
INFORMATION
|
|
|
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS.
|
24
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
24
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES.
|
24
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
24
|
|
ITEM
5.
|
OTHER
INFORMATION.
|
24
|
|
ITEM
6.
|
EXHIBITS.
|
25
|
PART
I
FINANCIAL
INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS.
China
New Energy Group Company
Condensed
Consolidated Financial Statements
For
the
three and nine months ended
September
30, 2008
(Stated
in US dollars)
China
New
Energy Group Company
Condensed
Consolidated Financial Statements
Three
and nine months ended September 30, 2008
Index
to
Condensed Consolidated Financial Statements
|
|
|
Page
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
|
2
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive
Loss
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Statement of Changes in Stockholders’ Equity
|
|
5
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
6-13
|
China
New Energy Group Company
Condensed
Consolidated Balance Sheets
|
|
|
(Unaudited)
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
2008
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Plant
and equipment
|
|
|
|
|
|
|
|
|
Plant
in service
|
|
$
|
9,257,932
|
|
$
|
8,970,843
|
|
|
Construction
work in progress
|
|
|
960,275
|
|
|
3,057,903
|
|
|
|
|
|
10,218,207
|
|
|
12,028,746
|
|
|
Less
- Allowance for depreciation
|
|
|
454,979
|
|
|
322,167
|
|
|
|
|
|
9,763,228
|
|
|
11,706,579
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Cash
and Bank Deposits
|
|
|
7,208,602
|
|
|
2,311,028
|
|
|
Escrow
Account
|
|
|
250,000
|
|
|
-
|
|
|
Accounts
Receivable
|
|
|
1,248,058
|
|
|
869,459
|
|
|
Inventories
|
|
|
137,171
|
|
|
373,490
|
|
|
Deposit
& Other receivable - Related
|
|
|
92,157
|
|
|
448,186
|
|
|
Deposit
& Other receivable - Third Party
|
|
|
1,099,052
|
|
|
-
|
|
|
Total
current assets
|
|
|
10,035,040
|
|
|
4,002,163
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in an associated company
|
|
|
4,800,523
|
|
|
-
|
|
|
Intangible
assets, net
|
|
|
413,512
|
|
|
2,033,152
|
|
|
Total
assets
|
|
|
25,012,303
|
|
|
17,741,894
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
512,333
|
|
|
1,266,968
|
|
|
Accruals
& Other payable-Related
|
|
|
29,456
|
|
|
148,010
|
|
|
Accruals
& Other payable - Third Party
|
|
|
1,598,958
|
|
|
2,389,047
|
|
|
Dividends
payable
|
|
|
59,000
|
|
|
-
|
|
|
Business
tax payable
|
|
|
769,322
|
|
|
1,242,024
|
|
|
Total
current liabilities
|
|
|
2,969,069
|
|
|
5,046,049
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
125,245
|
|
|
97,875
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred stock, 10,000,000 shares authorized and 1,857,373 shares
issued,
|
|
|
|
|
|
|
|
|
par
value $0.001
|
|
|
1,857
|
|
|
-
|
|
|
Common
stock, 500,000,000 shares authorized and 100,000,041 shares issued,
|
|
|
|
|
|
|
|
|
par
value $0.001
|
|
|
100,000
|
|
|
100,000
|
|
|
Additional
paid in capital
|
|
|
20,165,567
|
|
|
5,619,219
|
|
|
Earned
Sunplus
|
|
|
2,319,061
|
|
|
1,903,034
|
|
|
Retained
earnings
|
|
|
(1,234,909
|
)
|
|
4,786,707
|
|
|
Other
Comprehensive Income
|
|
|
566,413
|
|
|
189,010
|
|
|
Total
stockholders' equity
|
|
|
21917,989
|
|
|
12,597,970
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
25,012,303
|
|
$
|
17,741,894
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
China
New Energy Group Company
Condensed
Consolidated Statements of Operations and Comprehensive Loss
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
For
the three months periods ended
|
|
For
the nine months periods ended
|
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,253,858
|
|
$
|
1,786,174
|
|
|
4,236,987
|
|
$
|
3,041,306
|
|
|
Cost
of revenue
|
|
|
(575,626
|
)
|
|
(478,812
|
)
|
|
(1,128,901
|
)
|
|
(785,387
|
)
|
|
Operating
margin
|
|
|
1,678,232
|
|
|
1,307,362
|
|
|
3,108,086
|
|
|
2,255,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
(346,094
|
)
|
|
(85,094
|
)
|
|
(813,975
|
)
|
|
(321,110
|
)
|
|
Income
from operations
|
|
|
1,332,138
|
|
|
1,222,268
|
|
|
2,294,111
|
|
|
1,934,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(loss), net
|
|
|
3,702
|
|
|
(8,489
|
)
|
|
9,974
|
|
|
(7,095
|
)
|
|
Total
other expenses
|
|
|
3,702
|
|
|
(8,489
|
)
|
|
9,974
|
|
|
(7,095
|
)
|
|
Income
from continuing operations before income tax
|
|
|
1,335,840
|
|
|
1,213,779
|
|
|
2,304,085
|
|
|
1,927,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
(391,358
|
)
|
|
(353,326
|
)
|
|
(705,244
|
)
|
|
(598,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before minority interest
|
|
|
944,482
|
|
|
860,453
|
|
|
1,598,841
|
|
|
1,329,521
|
|
|
Minority
interest
|
|
|
(37,009
|
)
|
|
(8,147
|
)
|
|
(46,277
|
)
|
|
(13,672
|
)
|
|
Income
from continuing operations
|
|
|
907,473
|
|
|
852,306
|
|
|
1,552,564
|
|
|
1,315,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
from discontinued operations, net of tax
|
|
|
(7,116
|
)
|
|
174,473
|
|
|
223,410
|
|
|
333,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
900,357
|
|
$
|
1,026,779
|
|
|
1,775,974
|
|
$
|
1,648,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend on preferred shares issued
|
|
|
(7,031,818
|
)
|
|
-
|
|
|
(7,031,818
|
)
|
|
-
|
|
|
Dividend
on preferred shares
|
|
|
(59,000
|
)
|
|
-
|
|
|
(59,000
|
)
|
|
-
|
|
|
Net
loss attributed to common stockholders
|
|
|
(6,190,461
|
)
|
|
1,026,779
|
|
|
(5,314,844
|
)
|
|
1,648,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
37,114
|
|
|
45,918
|
|
|
377,403
|
|
|
91,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
(6,153,347
|
)
|
|
1,072,697
|
|
|
(4,937,441
|
)
|
|
1,740,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per average share outstanding
|
|
$
|
(0.00900
|
)
|
$
|
0.01027
|
|
|
(0.01776
|
)
|
$
|
0.01649
|
|
|
Weighted
average common equivalent shares outstanding -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
100,000,041
|
|
|
100,000,041
|
|
|
100,000,041
|
|
|
100,000,041
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
China
New Energy Group Company
Condensed
Consolidated Statements of Cash Flows
|
|
|
(Unaudited)
|
|
|
|
|
For the six months periods ended
|
|
|
|
|
September
30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,775,974
|
|
$
|
1,648,869
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income/(loss) to net cash used in
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
125,592
|
|
|
90,476
|
|
|
Amortization
|
|
|
6,429
|
|
|
5,815
|
|
|
`
Minority
interest
|
|
|
27,371
|
|
|
13,672
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivables
|
|
|
(374,181
|
)
|
|
(60,003
|
)
|
|
Inventory
|
|
|
174,757
|
|
|
14,347
|
|
|
Deposits
and other receivables - Third Party
|
|
|
(650,954
|
)
|
|
(220,899
|
)
|
|
Accounts
payables
|
|
|
(398,948
|
)
|
|
708,066
|
|
|
Accrued
liabilities and other payables-Third Party
|
|
|
(790,089
|
)
|
|
(751,196
|
)
|
|
Business
taxes & government suncharge
|
|
|
(397,601
|
)
|
|
(165,347
|
)
|
|
Net
cash (used in)/provided by operating activities
|
|
|
(501,650
|
)
|
|
1,283,800
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investing activities
|
|
|
|
|
|
|
|
|
Acquisition
of assets
|
|
|
(97,692
|
)
|
|
(23,845
|
)
|
|
Acquisition
of work in progress
|
|
|
(960,375
|
)
|
|
(35,605
|
)
|
|
Acquisition
of an associated company
|
|
|
483,512
|
|
|
-
|
|
|
Net
cash (used in) investing activities
|
|
|
(574,555
|
)
|
|
(59,450
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
Cash
advanced from directors/shareholders
|
|
|
(210,711
|
)
|
|
64,204
|
|
|
Proceeds
from sale of preferred stock
|
|
|
9,000,000
|
|
|
-
|
|
|
Payment
of offering costs associated with preferred
stock
|
|
|
(1,507,144
|
)
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
7,282,145
|
|
|
64,204
|
|
|
|
|
|
|
|
|
|
|
|
Cummulative
Translation Adjustment
|
|
|
(1,308,366
|
)
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
Net
(decrease) increase
|
|
|
4,897,574
|
|
|
1,288,726
|
|
|
Balance
at beginning of period
|
|
|
2,311,028
|
|
|
327,918
|
|
|
Balance
at end of period
|
|
|
7,208,602
|
|
|
1,616,644
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
|
-
|
|
|
400
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
China
New Energy Group Company
Condensed
Consolidated Statements of Changes in Stockholders’ Equity
For
Three Months Ended September 30, 2008 (Unaudited) and Year Ended December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATUTORY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL
|
|
SURPLUS
|
|
|
|
CUMULATIVE
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAID-IN
|
|
RESERVE
|
|
RETAINED
|
|
TRANSLATON
|
|
STOCKHOLDERS'
|
|
|
|
|
NUMBER
OF SHARES
|
|
PAID-IN
REGISERED CAPITAL
|
|
CAPITAL
|
|
FUND
|
|
EARNINGS
|
|
ADJUSTMENT
|
|
EQUITY
|
|
|
|
|
Common
|
|
Preferred
|
|
Warrants
|
|
Common
|
|
Preferred
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
100
|
|
|
-
|
|
|
-
|
|
$
|
100
|
|
$
|
-
|
|
$
|
-
|
|
$
|
5,355,882
|
|
$
|
233,524
|
|
$
|
1,569,100
|
|
$
|
-
|
|
$
|
7,158,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
upon reverse merger
|
|
|
99,999,941
|
|
|
-
|
|
|
-
|
|
|
99,900
|
|
|
-
|
|
|
-
|
|
|
(99,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
659,869
|
|
|
(659,869
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,934,450
|
|
|
-
|
|
|
1,934,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,035
|
|
|
(36,366
|
)
|
|
-
|
|
|
5,339
|
|
|
(14,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
100,000,041
|
|
|
-
|
|
|
-
|
|
|
100,000
|
|
|
-
|
|
|
-
|
|
|
5,272,017
|
|
|
857,027
|
|
|
2,843,681
|
|
|
5,339
|
|
|
9,078,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
889,863
|
|
|
(889,863
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,832,889
|
|
|
-
|
|
|
2,832,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
347,202
|
|
|
156,144
|
|
|
-
|
|
|
183,671
|
|
|
687,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31,2007
|
|
|
100,000,041
|
|
|
-
|
|
|
-
|
|
|
100,000
|
|
|
-
|
|
|
-
|
|
|
5,619,219
|
|
|
1,903,034
|
|
|
4,786,707
|
|
|
189,010
|
|
|
12,597,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of shares for private placement
|
|
|
-
|
|
|
1,857,373
|
|
|
|
|
|
-
|
|
|
1,857
|
|
|
|
|
|
7,740,999
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,742,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
for the nine months ended September 30, 2008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,775,974
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend on
preferred shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,031,818
|
|
|
|
|
|
(7,031,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,000
|
)
|
|
|
|
|
(59,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
706,772
|
|
|
(706,772
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(226,469
|
)
|
|
(290,745
|
)
|
|
-
|
|
|
377,403
|
|
|
(139,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2008
|
|
|
100,000,041
|
|
|
1,857,373
|
|
|
0
|
|
$
|
100,000
|
|
$
|
1,857
|
|
$
|
0
|
|
$
|
20,165,567
|
|
$
|
2,319,061
|
|
$
|
(1,234,909
|
)
|
$
|
566,413
|
|
$
|
21,917,989
|
|
CHINA
NEW
ENERGY GROUP COMPANY
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
The Company
Travel
Hunt Holdings, Inc. (t
he
"Company") was incorporated under the laws of the State of Florida on December
17, 1999. On July 15, 2003, Travel Hunt Holdings, Inc. acquired all the
outstanding shares of Travel Hunt, Inc., an inactive Florida corporation with
no
assets or liabilities for 700,000 common shares of Travel Hunt Holdings, Inc.
The transaction was accounted for as a combination of entities under common
control and accordingly we recorded the merger at historical cost. Accordingly,
all shares and per share amounts have been retroactively restated. From and
after April 26, 2007, the Company ceased its prior business operations and
began
exploring potential targets for a business combination through a purchase of
assets, share purchase or exchange, merger or similar type of transaction.
On
August
29, 2007, the Board of Directors approved a 1 for 10 reverse stock split in
connection with the reincorporation of the Company from Florida to Delaware.
This reincorporation and reverse stock split was effected on October 11, 2007.
The
reincorporation merger agreement provided for the merger of the Company with
and
into Travel Hunt Holdings, Inc., a Delaware corporation (referred to for
purposes of this section as TVLH-Delaware), and resulted in:
·
a
change of domicile of the Company from the State of Florida to the State of
Delaware;
·
the
right of the Company's shareholders to receive one (1) share of common stock,
par value $0.001 per share, of TVLH-Delaware for each ten (10) shares of the
Company's common stock, par value $0.001 per share, owned as of the effective
time of the reincorporation merger;
·
the
persons presently serving as the Company's executive officers and directors
serving in their same respective positions with TVLH-Delaware;
·
the
adoption of a new Certificate of Incorporation under the laws of Delaware
pursuant to which the Company's authorized capital stock remained 110,000,000
shares of authorized capital stock, consisting of 100,000,000 shares of common
stock, par value $0.001 per share, and 10,000,000 shares of "blank check"
preferred stock, par value $0.001 per share, with the right conferred upon
the
Board of Directors to set the dividend, voting, conversion, liquidation and
other rights, as well as the qualifications, limitations and restrictions,
with
respect to the preferred stock as the Board of Directors may determine from
time
to time; and the adoption of new Bylaws under the laws of the State of Delaware.
The
Company owns all of the issued and outstanding capital stock of Willsky
Development Limited, a British Virgin Islands company ("Willsky Development"),
which in turn owns 99% of the outstanding capital stock of SingOcean. The
remaining 1% of SingOcean is owned by Tianjin Nanyang Mechanical and Electrical
Equipments Installment Project Co. SingOcean owns 100% of each of Acheng
SingOcean and Dashiqiao SingOcean, and 99% of Hunchun SingOcean. The remaining
1% of Hunchun SingOcean is owned by an individual. Aching SingOcean and
Dashiqiao SingOcean are divisions of SingOcean and not separate entities. These
divisions are principally responsible for the construction and operation of
the
natural gas distribution networks in the cities of Acheng and Dashiqiao,
respectively.
On
May
27, 2008, the Company changed its name to China New Energy Group
Company.
On
September 16, 2008, the Company, through its wholly-owned subsidiary
Tianjin SingOcean Public Utility Development Co., Ltd., entered into an Equity
Swap Agreement with Mr. Xiu Hai Tian, whereby the Company
acquired from Mr. Xiu a 49% ownership interest in Qinhuangdao
Chensheng Gas Ltd., or Chensheng Gas, in exchange for the Company's 99%
ownership in Hunchun SingOcean Energy Ltd. , or Hunchun SingOcean. The parties
to the Equity Swap Agreement determined that the value of the 49% interest
in
Chensheng Gas and the 99% interest in Hunchun SingOcean were approximately
equal
and therefore there was no cash consideration involved in the transaction from
either party.
The
following chart reflects the Company’s organizational structure as of the date
of this report.
The
Company is a vertically integrated natural gas company engaged in the
development of natural gas distribution networks, the distribution of natural
gas to residential and industrial customers in small and medium sized cities
in
China and the exploration and recovery of natural gas reserves.
2.
Summary of Significant Accounting Policies
(a)
Basis of Presentation
The
financial statements are prepared in accordance with the accounting principles
generally accepted in the United States of America (“US GAAP”).
(b)
Use of Estimates
In
preparing consolidated financial statements in conformity with US GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and
expenses during the reported periods. Significant estimates include
depreciation. Actual results could differ from those estimates.
(c)
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and all
of
its subsidiaries. All significant intercompany transactions and accounts have
been eliminated in consolidation. Certain prior year amounts have been
reclassified to conform with current year classifications.
(d)
Cash and Cash Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents. As of
September 30, 2008 and 2007, the Group did not have any cash
equivalents.
(e)
Plant and Equipment
Plant
and
equipment is stated at cost. Depreciation is provided principally by use of
the
straight-line method over the useful lives of the related assets, except for
leasehold properties, which are depreciated over the terms of their related
leases or their estimated useful lives, whichever is less. Expenditures for
maintenance and repairs, which do not improve or extend the expected useful
life
of the assets, are expensed to operations while major repairs are
capitalized.
The
estimated useful lives are as follows:
|
Leasehold
improvements
|
|
3
years
|
|
Computer
equipment
|
|
3
years
|
|
Furniture
& fixture
|
|
5
years
|
|
Office
equipment
|
|
5
years
|
|
Exploration
equipment
|
|
5
years
|
|
Motor
vehicle
|
|
5
years
|
|
Gas
transportation vehicle
|
|
5
years
|
|
Gas
station
|
|
40
years and 50 years
|
|
Underground
gas pipeline
|
|
40
years and 50 years
|
The
gain
or loss on disposal of property, plant and equipment is the difference between
the net sales proceeds and the carrying amount of the relevant assets, and,
if
any, is recognized in the statement of operations.
(f)
Intangible
Assets
Intangible
asset consist of land use right in both Daishiquiao City and Acheng City.
According
to Chinese regulations, land belongs to the nation. Land use right refers to
the
purchase of the legal right to use land from the government. The term of the
land use right is 50 years. The land use right is amortized using the
straight-line method over their estimated useful life 50 years.
(g)
Inventories
Inventories
consist of IC card, gas meter, PE valves and natural gas and are valued at
the
lower of cost or market value using weighted average cost method of accounting.
(h)
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired in a business combination,
In accordance with Statement of Financial Accounting Standards No. 142 or SFAS
No. 142, “Goodwill” and Other Intangible Assets”, goodwill is no longer subject
to amortization. Rather, goodwill is subject to at least an annual assessment
for impairment, applying a fair-value based test fair value is generally
determined using a discounted cash flow analysis.
(i)
Impairment of Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets", the Company
evaluates its long-lived assets to determine whether later events and
circumstances warrant revised estimates of useful lives or a reduction in
carrying value due to impairment. If indicators of impairment exist and if
the
value of the assets is impaired, an impairment loss would be recognized. As
of
September 30, 2008 and 2007, no impairment loss has been
recognized.
(j)
Income Taxes
The
Group
accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes".
Under SFAS No. 109, deferred tax assets and liabilities are recognized for
the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(k)
Revenue Recognition
Natural
gas revenues are recorded based on the amount of product delivered to customers
through its pipeline and checked by its gas meter.
Connection
fees which relate to the hookup from the street pipeline to the customer are
charged to both residential and commercial customers. This revenue segment
accounts for a majority of the Company’s revenue. The connection fees are
recognized as revenue upon the completion of the jobs by the contractor, the
installation is checked and accepted by the Company’s technical staff and
acceptance by the customer.
(l)
Foreign Currency Transactions
The Company
functional currency is Renminbi (“RMB”) and its reporting currency is U.S.
dollars. The Company’s consolidated balance sheet accounts are translated into
U.S. dollars at the year-end exchange rates and all revenue and expenses are
translated into U.S. dollars at the average exchange rates prevailing during
the
periods in which these items arise. Translation gains and losses are deferred
and accumulated as a component of other comprehensive income in stockholders’
equity. Transaction gains and losses that arise from exchange rate fluctuations
from transactions denominated in a currency other than the functional currency
are included in the statement of operations as incurred. The translation and
transaction gains and losses were immaterial for the period ended September
30,
2008 and 2007.
The
PRC
government imposes significant exchange restrictions on fund transfers out
of
the PRC that are not related to business operations. These restrictions have
not
had a material impact on the Company because it has not engaged in any
significant transactions that are subject to the restrictions.
(m)
Fair Value of Financial Instruments
SFAS
No.
107, “Disclosures about Fair Values of Financial Instruments”, requires
disclosing fair value to the extent practicable for financial instruments that
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of
the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
For
certain financial instruments, including cash, accounts and other receivables,
accounts payable, accruals and other payables, it was assumed that the carrying
amounts approximate fair value because of the near term maturities of such
obligations. The carrying amounts of long-term loans approximate fair value
as
the interest on these loans is minimal.
(n)
Earnings Per Share
Basic
earnings per share is computed by dividing the earnings for the year by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities by including
other potential common stock, including stock options and warrants, in the
weighted average number of common shares outstanding for a period, if
dilutive.
(o)
Accumulated Other Comprehensive Income
Accumulated
other comprehensive income represents the change in equity of the Group during
the periods presented from foreign currency translation
adjustments.
(p)
Profit
Appropriation
In
accordance with PRC regulations, the Company is required to make appropriations
to the statutory surplus reserve, based on after-tax net income determined
in
accordance with PRC GAAP. Appropriation to the statutory surplus reserve should
be at least 10% of the after-tax net income determined in accordance with the
PRC GAAP until the reserve is equal to 50% of the entity’s registered capital.
Statutory surplus reserve is non-distributable other than in liquidation.
(q)
Stock-Based Compensation
In
March
2004, the FASB issued a proposed statement, Share-Based Payment, which addresses
the accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for equity instruments of the enterprise
or liabilities that are based on the grant-date fair value of the enterprise's
equity instruments or that may be settled by the issuance of such equity
instruments. The proposed statement would eliminate the ability to account
for
share-based compensation transactions using Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and generally would
require instead that such transactions be accounted for using a fair-value-based
method. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which is a revision of SFAS No. 123. Generally, the approach in SFAS No. 123(R)
is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their
grant-date fair values. Pro forma disclosure is no longer an alternative.
As
permitted by SFAS No. 123, for 2005, the Company accounted for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and,
as
such, generally recognized no compensation cost for employee stock options.
Effective
January 1, 2006, we have adopted SFAS No. 123(R)'s fair value method of
accounting for share based payments. Accordingly, the adoption of SFAS No.
123(R)'s fair value method may have a significant impact on the Company's
results of operations as we are required to recognize the cost of employee
services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards. SFAS No. 123(R) permits public companies
to adopt its requirements using either the "modified prospective" method or
the
"modified retrospective" method.
The
Company adopted SFAS No. 123(R) using the modified prospective method. In April
2005, the SEC delayed the effective date of SFAS No. 123(R), which is now
effective for public companies for annual, rather than interim periods that
begin after June 15, 2005. The impact of the adoption of SFAS No. 123(R) cannot
be predicted at this time because it will depend on levels of share-based
payments granted in the future.
(r)
Seasonality
Our
pipeline distribution networks are primarily located in northeastern China,
which is extremely cold during the winter months. During such time, we are
unable to construct primary gas pipelines. However, if a primary pipeline is
already in place, we are able to connect new customers to our distribution
network during the winter months.
Additionally,
gas consumption by residential customers is higher in the winter months for
heating purposes, and we see a corresponding increase in usage fees during
that
time.
(s)
New Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” and is effective for fiscal years
beginning after November 15, 2007. This Statement permits entities to choose
to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. The Company is currently assessing the impact the
adoption of this pronouncement will have on the financial
statements.
In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51” and is effective
for fiscal years beginning after December 5, 2008. This Statement establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The Company is currently
assessing the impact the adoption of this pronouncement will have on the
Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS 141 (Revised) is effective for fiscal years beginning after December 13,
2008. This Statement establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements
the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The Statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
Company is currently assessing the impact the adoption of this pronouncement
will have on the Company’s financial statements.
In
February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157”
(“FSP FAS 157-2”), which delays the effective date of Statement of Financial
Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”)
for all non-financial assets and non-financial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually) for fiscal years beginning after November
15, 2008, and interim periods within those fiscal years for items within the
scope of this FSP. We are currently evaluating the impact of adopting FSP FAS
157-2 for non-financial assets and non-financial liabilities on our financial
position, cash flows, and results of operations. We have considered all other
recently issued accounting pronouncements and do not believe the adoption of
such pronouncements will have a material impact on our consolidated financial
statements.
3.
Reverse Merger
On
March
28, 2008, we completed a reverse acquisition transaction with Willsky
Development whereby we issued to the shareholders of Willsky Development
94,908,650 shares of our common stock in exchange for all of the issued and
outstanding capital stock of Willsky Development. Willsky Development thereby
became our wholly owned subsidiary and the former shareholders of Willsky
Development became our controlling stockholders.
For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition with Willsky Development as the acquirer and Travel Hunt Holdings,
Inc. as the acquired party. When we refer in this report to business and
financial information for periods prior to the consummation of the reverse
acquisition, we are referring to the business and financial information of
Willsky Development on a consolidated basis unless the context suggests
otherwise.
In
connection with consummation of the transactions contemplated by the Share
Exchange Agreement, we issued Warrants for the purchase of a number of
shares of our common stock equal to an aggregate of two percent (2%) of our
issued and outstanding common stock as of immediately after the closing of
our
next private placement transaction in which we receive gross proceeds of at
least $8,000,000 million. The term of the Warrants is 5 years and each has
an
exercise price equal to 150% of the price attributable to a share of common
stock at the valuation attributable to us in the transaction on “post-money”
basis.
The
fair
value of the share purchase warrants issued on March 28, 2008, was in the amount
of $910,000, which was determined using the Black-Scholes option value model
with the following assumptions:
|
|
|
|
0.00
|
%
|
|
Risk
Free Interest Rate
|
|
|
4.00
|
%
|
|
Expected
Volatility
|
|
|
00.00
|
%
|
|
Expected
Option Life (in years average)
|
|
|
5.00
|
|
The
fair
value amount is included on the balance sheet as accrued derivative liability
in
the amount of $910,000 with a like amount included as other expense on the
statement of operations.
The
Company also issued Promissory Notes in the aggregate principal amount of
$660,000 bearing interest at the rate of 2.5% per annum. The principal and
accrued interest is payable on September 30, 2008, except that the Notes will
accelerate and become payable upon the consummation of a private placement
transaction in which the Company sells or issues shares of common stock in
which
gross proceeds are $1,000,000 or more. If the principal and accrued interest
is
not paid in full at maturity or upon the acceleration described above, or upon
an event of default, the notes will become convertible into shares totaling
15%
of then outstanding common stock. Management has not recorded the beneficial
conversion feature of this convertible note since it intends to pay the Notes
in
cash as they become due.
4.
Retirement and Welfare Benefits
The
Group
has no retirement plans or post-employment benefit for its
employees.
5.
Capital stock transactions
Series
A Convertible Preferred Stock
In
connection with the August 20, 2008 private placement, the Company filed a
Certificate of Designations of Preferences, Rights and Limitations of Series
A
Convertible Preferred Stock with the Secretary of State of the State of Delaware
(the "Certificate"). Pursuant to the Certificate, there are 5,550,000
shares of Series A Convertible Preferred Stock ("Preferred Stock")
authorized. On August 20, 2008, the Company issued 1,857,373 shares of
Preferred Stock to China Hand Fund I, LLC. Pursuant to the terms of
the Certificate, the holders of the Preferred Stock will be entitled to
cumulative dividends at a rate of 6% of the price paid per share, as may be
adjusted in accordance with the Certificate, per annum compounded daily and
payable semi-annually. In addition to the right to vote as a separate class
of securities, the holders of the Preferred Stock are entitled to vote together
with the holders of the Company’s common stock, with each such holder of
Preferred Stock entitled to the number of votes equal to the number of shares
of
the Company’s common stock in to which such Preferred Stock would be converted
if converted on the record date for the taking of a vote.
Each
share of Preferred Stock is initially convertible, at any time at the sole
option of the holder of such Preferred Stock, into 35 shares of the Company’s
common stock, subject to future adjustments as provided for in the Certificate.
The Preferred Stock shall automatically convert into shares of the Company’s
common stock immediately prior to any transaction resulting in a change in
control of the Company. Further, the Company shall have the right to convert
the
preferred stock at any time following the achievement of certain
performance milestones as prescribed by the Certificate. The Company has
determined that there is no derivative liability attached to the preferred
stock
conversion rights as of September 30, 2008.
Warrants
On
August
20, 2008, the Company consummated a private placement transaction in which
it
issued and sold to China Hand Fund I, LLC 1,857,373 shares of the Company's
Series A Preferred Stock and warrants to purchase 13,001,608 shares of the
Company's common stock at an initial exercise price of $0.187 per share (subject
to adjustments) for a period of 5 years following the date of issuance, for
a
purchase price of $9 million. Currently, none of the warrants have been
exercised. The Company has determined that the requirements of EITF 00-19 do
not
apply to this transaction.
The
fair
value of the 13,001,608 warrants issued with the Series A Convertible Preferred
Stock was $1,968,182. The fair value was computed using the Black-Scholes
model
under the following assumptions: (1) expected life of 5 years, (2) volatility
of
66%, (3) risk free interest rate of 3% and dividend rate of 0%. In addition,
since this convertible preferred stock is convertible into shares of common
stock at a one to thirty-five ratio an embedded beneficial conversion feature
was recorded as a discount to additional paid-in capital in accordance with
Emerging Issues Task Force No. 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments.” The intrinsic value of the beneficial conversion
feature has been recorded as a preferred stock dividend at the date of issuance.
The Company recognized $7,031,818 of preferred dividends related to the
beneficial conversion feature.
6.
Concentrations and Credit Risk
The
Group
operates principally in the PRC and grants credit to its customers in this
geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
Financial
instruments that potentially subject the Group to a concentration of credit
risk
consist of cash and accounts receivable.
The
Company does not require collateral to support financial instruments that are
subject to credit risk.
7.
Discontinued Operations
As
discussed in Note 1 to the financial statements effective September 26, 2008,
the Company entered into an asset swap in which it disposed of subsidiary
Hunchun SingOcean including substantially all of the assets.
In
accordance with SFAS No. 144, “Accounting for the Impairment of
Long-Lived Assets”, Hunchun SingOcean operation is being accounted for as
discontinued operations and, accordingly, its operating results is segregated
and reported as discontinued operations in the accompanying consolidated
statement of operations in 2008 and 2007. The results of operations of Hunchun
SingOcean operation for the period ended September 30, 2008 and 2007 are as
follows:
|
|
|
Period
ended
September
30, 2008
|
|
Period
ended
September
30, 2007
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
459,506
|
|
|
761,956
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income/(loss)
|
|
|
295,701
|
|
|
494,505
|
|
8.
Commitments and Contingencies
The
Company is obligated to provide uninterrupted piped gas to connected users
and
to ensure the safety in the process of piped gas operation. The volume of gas
to
be supplied by the Company will grow with the increase of gas users. The Company
has selected three qualified gas resource suppliers to ensure the stable
operation to meet its’ obligation.
From
time
to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. The Company is
currently not aware of any such legal proceedings or claims that we expect
will
have a material adverse affect on our business, financial condition or operating
results.
However,
litigation is subject to inherent uncertainities, and an adverse result in
these
or other matters may arise from time to time that may harm our
business.
9.
Operational Rights and Right to Supply and Operate Gas
Pipeline
The
Company has signed the “Investment Agreement of Piped Gas Project Construction
in Daishiquiao” which states that the Company is in charge of operations and
management of the piped gas project in Daishiquiao. On June 16, 2005, the
Daishiquiao City Construction Bureau gave the Company a certificate which
confirmed that the Company has exclusive operational rights for thirty years
in
Daishiquiao.
The
Company has signed an “Investment Agreement of Pipes Gas Project Construction in
Acheng” which states that the Company has the exclusive right to invest in and
operate gas pipeline system in Acheng for thirty years.
10.
Environmental Matters
The
Company does not anticipate any material future cash requirements relating
to
environmental issues. If circumstances change the Company will record the
estimated charges to return sites to their original condition.
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
Special
Note Regarding Forward Looking Statements
This
Quarterly Report on Form 10-Q, including the following “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements that are based on the beliefs of our management,
and
involve risks and uncertainties, as well as assumptions, that, if they ever
materialize or prove incorrect, could cause actual results to differ materially
from those expressed or implied by such forward-looking statements. The words
“believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,”
“aim,” “will” or similar expressions are intended to identify forward-looking
statements. All statements, other than statements of historical fact, are
statements that could be deemed forward-looking statements, including statements
regarding new and existing products and services, technologies and
opportunities; statements regarding market and industry segment growth and
demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; uncertainties
related to conducting business in China; any statements of belief or intention;
any of the factors and risks mentioned in the “Risk Factors” sections of our
Current Report on Form 8-K filed with the Securities and Exchange Commission
on
March 31, 2008, as amended on April 11, 2008 and June 26, 2008, and any
statements of assumptions underlying any of the foregoing. All forward-looking
statements included in this report are based on information available to us
on
the date of this report. We assume no obligation and do not intend to update
these forward-looking statements, except as required by law.
Certain
Terms
In
this
report, unless indicated otherwise, references to:
“China
New Energy,” the “Company,” “we,” “us,” or “our” refer to China New Energy Group
Company and all of its subsidiaries and divisions;
“Willsky
Development” refer to Willsky Development, Ltd.
“SingOcean”
refer to Tianjin SingOcean Public Utility Development Co., Ltd.;
“Hunchun
SingOcean” refer to Hunchun SingOcean Ocean Energy Co., Ltd.;
“Acheng
SingOcean” refer to Tianjin Sing Ocean Public Utility Development Co., Ltd. -
Acheng Division;
“Dashiquio
SingOcean” refer to Tianjin Sing Ocean Public Utility Development Co., Ltd. -
Dashiquio Division;
“Chensheng
Gas” refer to Qiuhuangdao Chensheng Gas Co., Ltd.
“China,”
“Chinese” and “PRC” refer to the People’s Republic of China;
“BVI”
refer to the British Virgin Islands;
“SEC”
refer to the United States Securities and Exchange Commission;
“Securities
Act” refer to the Securities Act of 1933, as amended;
“Exchange
Act” refer to the Securities Exchange Act of 1934, as amended;
“RMB”
refer to Renminbi, the legal currency of China; and
“U.S.
dollar,” “$” and “US$” refer to the legal currency of the United
States.
Overview
of Our Business
We
are a
vertically integrated natural gas company engaged in the development of natural
gas distribution networks, the distribution of natural gas to residential and
industrial customers in small and medium sized cities in China and the
exploration and recovery of natural gas reserves.
We
currently own the exclusive rights to develop distribution networks to provide
natural gas to industrial, commercial and domestic consumers in the cities
of
Dashiqiao, Acheng and Nandaihe. Currently, these distribution networks provide
natural gas to an aggregate of approximately 45,000 consumers in these cities,
and we anticipate that we will be able to extend these distribution networks
to
connect in excess of 53,000 consumers in these cities.
We
presently have the capability to provide both natural gas and liquefied
petroleum gas, or LPG, and to deliver natural gas or LPG in a variety of ways.
Pure LPG and air-mixed LPG are transmitted through pipelines and natural gas
in
the form of compressed natural gas, or CNG, or liquefied natural gas, or LNG,
are transported in trucks and then transmitted through pipelines after
depressurization or vaporization, respectively.
We
are
able to procure our natural gas in two ways. We can either mine the natural
gas
ourselves from deposits for which we have exclusive exploitation rights, or
we
can purchase natural gas from third-party suppliers. Historically, we have
purchased the majority of our gas from natural gas suppliers, though as we
begin
more extensive exploration and exploitation activities on our deposits, we
may
rely more heavily on self-procurement.
Once
natural gas is extracted, all water content and impurities are removed. Natural
gas is then delivered by truck to either (1) our natural gas supply stations,
where the gas is either depressurized and then delivered to households through
pipelines or delivered directly to customers in pressurized tanks, or (2) to
gas
stations where the gas is sold for use in motor vehicles.
Our
major
business activities include development and construction of local gas
distribution networks, transportation of natural gas from suppliers to our
storage facilities in a given operational location, and operating and
maintaining the gas distribution networks. However, our primary strategic focus
is the exploration and recovery of natural gas resources, which will allow
us to
control every aspect of our supply chain from the mining of the natural gas
to
the transportation of the gas to our holding facilities, such as supply stations
and gas stations, to the delivery of our gas to our customers.
In
connection with this private placement, we agreed to certain make good
provisions that will require us to issue to China Hand up to an aggregate of
1,114,442 (557,221 shares for each of 2008 and 2009) additional shares of our
Series A Preferred Stock if we do not achieve the targeted after-tax net income
and earnings per share targets for 2008 and 2009. The 2008 after tax net income
target is $4.3 million and the 2008 earnings per share target is 0.0261 on
a
fully-diluted basis. The 2009 after tax net income target, or the 2009 ATNI
Target, is $6.0 million and the 2009 earnings per share target, or 2009 EPS
Target, is $0.0294 on a fully diluted basis; provided that if a subsequent
closing under this private placement does not occur within 30 days of the filing
of our 2008 annual report on Form 10-K, then the 2009 ATNI Target is reduced
to
$4.5 million and the 2008 EPS Target is reduced to $0.0273.
Private
Placement
On
August
20, 2008, we completed a private placement in which we sold to China Hand
and
its designees 1,857,373 shares of our Series A Preferred Stock and warrants
to
purchase 13,001,608 shares of our common stock at an initial exercise price
of
$0.187 per share (subject to adjustments) for a period of 5 years following
the
date of issuance, for a purchase price of $9,000,000.
As
a
result of this private placement, we raised approximately $9 million in gross
proceeds, which left us with approximately $6.8 million in net proceeds after
the deduction of offering expenses in the amount of approximately $2.2 million.
Kuhns Brothers Securities Corporation, or Kuhns Brothers, acted as placement
agent in connection with this private placement. As compensation for its
services, Kuhns Brothers received a cash fee equal to $900,000, representing
10%
of the gross proceeds received from the private placement, as well as warrants
to purchase 6,500,804 shares of our common stock, representing 10% the aggregate
number of shares of common stock issuable to China Hand in the private placement
upon conversion of the Series A Preferred Stock. We are under contractual
obligation to register the shares of our common stock within a pre-defined
period.
Our
Current Organizational Structure
On
March 28, 2008, we completed a reverse acquisition
transaction with Willsky Development whereby we issued to the shareholders
of
Willsky Development 94,908,650 shares of our common stock in exchange for all
of
the issued and outstanding capital stock of Willsky Development. Willsky
Development thereby became our wholly owned subsidiary and the former
shareholders of Willsky Development became our controlling stockholders. For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition with Willsky Development as the acquirer and Travel Hunt Holdings,
Inc. as the acquired party. On May 27, 2008, we changed our name from Travel
Hunt Holdings, Inc. to China New Energy Group Company.
We
own
all of the issued and outstanding capital stock of Willsky Development, which
in
turn owns 99% of the outstanding capital stock of SingOcean. The remaining
1% of
SingOcean is owned by Tianjin Nanyang Mechanical and Electrical Equipments
Installment Project Co. SingOcean owns 100% of each of Acheng SingOcean and
Dashiqiao SingOcean, and 49% of Chensheng Gas. The remaining 51% of Chensheng
Gas is owned by 16 individuals, though we expect to acquire this remaining
51%
by the end of 2008. Aching SingOcean and Dashiqiao SingOcean are divisions
of
SingOcean and not separate entities. These divisions are principally responsible
for the construction and operation of the natural gas distribution networks
in
the cities of Acheng and Dashiqiao, respectively. Chensheng Gas is a natural
gas
distribution company operating in the Nandaihe area in Northern China, which
could potential provide natural gas to 50,000 individuals, and we anticipate
that it will connect to an excess of 20,000 customers over the next three to
five years.
On
September 16, 2008, we, through our
wholly-owned subsidiary Tianjin SingOcean Public Utility Development Co., Ltd.,
entered into an Equity Swap Agreement with Mr. Xiu Hai Tian, whereby we
acquired from Mr. Xiu a 49% ownership interest in Chensheng Gas, in
exchange for our 99% ownership in Hunchun SingOcean. The parties to the
Equity Swap Agreement determined that the value of the 49% interest in Chensheng
Gas and the 99% interest in Hunchun SingOcean were approximately equal and
therefore there was no cash or other consideration involved in the transaction
from either party. The foregoing description of the Agreement is qualified
in
its entirety by reference to the full text of the Equity Swap Agreement filed
as
Exhibit 10.1 hereto.
The
following chart reflects our organizational structure as of the date of this
report.
Third
Quarter Financial Performance Highlights
We
continued to experience strong demand for our products and services during
the
third fiscal quarter of 2008 and growth in our revenues and net
income.
The
following are some financial highlights for the third quarter of 2008:
|
|
·
|
Revenues:
Our revenues were $2,253,858 for the third fiscal quarter of 2008,
and
increase of 26.18% from the same period of 2007.
|
|
|
·
|
Gross
Margin: Gross margin was $1,678,232 for the third fiscal quarter
of 2008,
an increase of 26.06% from the same period of 2007.
|
|
|
·
|
Operating
Income: Operating Income was $1,332,138 for the third fiscal quarter
of 2008,
as
compared to a profit from operations of $1,222,268 during the same
period
of 2007
.
|
|
|
·
|
Net
Income: Net Income was $900,357 for the third fiscal quarter of 2008,
as compared to net income of $1,026,779 during the same period of
2007.
|
|
|
·
|
Fully
diluted loss per share was $0.009 for the third fiscal quarter of
2008.
|
Results
of Operations
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
The
following table summarizes the results of our operations during the nine-month
periods ended September 30, 2008 and ended September 30, 2007, and provides
information regarding the dollar and percentage increase or (decrease) from
the
nine-month period ended September 30, 2007 to the nine-month period ended
September 30, 2008.
All
amounts in thousands of U.S. dollars, except percentages
|
|
|
Nine Months
Ended
September 30,
2008
|
|
Nine Months
Ended
September 30,
2007
|
|
Percentage
Change
(Decrease)
|
|
|
Revenues
|
|
$
|
4,236,987
|
|
$
|
3,041,306
|
|
|
39.3
|
%
|
|
Cost
of revenue
|
|
$
|
(1,128,901
|
)
|
$
|
785,387
|
|
|
43.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$
|
3,108,086
|
|
$
|
2,255,919
|
|
|
37.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$
|
(813,975
|
)
|
$
|
321,110
|
|
|
545
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Expenses)
|
|
$
|
2,294,111
|
|
$
|
1,934,809
|
|
|
(18.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
$
|
(46,277
|
)
|
$
|
13,672
|
|
|
238.1
|
%
|
|
Other
income (expense)
|
|
$
|
9,974
|
|
$
|
(7,095
|
)
|
|
240.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
$
|
2,304,085
|
|
$
|
1,927,714
|
|
|
(19.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
(705,244
|
)
|
$
|
598,193
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,775,974
|
|
$
|
1,648,869
|
|
|
(7.7
|
)%
|
Revenues
.
Revenues are derived primarily from connection fees and sales of natural gas.
Revenues increased $1,195,681, or 39.3% to $4,236,987 for the nine months ended
September 30, 2008 from $3,041,306 for the same period in 2007. This increase
was mainly attributable to the increase in our customer base.
Cost
of Sales.
Cost of
sales consist primarily of the purchase of natural gas from our suppliers.
Our cost
of sales increased $343,514, or 43.7%, to $1,128,901 for the nine months ended
September 30, 2008 from $785,387 during the same period in 2007. As a percentage
of revenues, the cost of sales increased to 26.6% during the nine months ended
September 30, 2008 from 25.8% in the same period in 2007, which was mainly
attributable to an increase in our customer base as well as an increase in
our
purchasing price of natural gas.
Gross
Profit.
Our
gross profit increased $852,167, or 37.8%, to $3,108,086 for the nine months
ended September 30, 2008 from $2,255,919 during the same period in 2007. Gross
profit as a percentage of revenues was 73.4% for the nine months ended September
30, 2008, a decrease of 0.8% from 74.2% during the same period in 2007. Such
percentage decrease was mainly due to an increase in our purchasing price of
natural gas.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses, including sales representative commissions,
promotion fees, salesperson salaries and expenses, depreciation charges and
other fees increased $492,865, or 153%, to $813,975 for the nine months ended
September 30, 2008 from $321,110 during the same period in 2007. As a percentage
of revenues, selling expenses increased to 19.2% for the nine months ended
September 30, 2008 from 10.6% for the same period in 2007. Such dollar increase
of selling, general and administrative expenses was mainly attributable to
an
increase in our operations since September 30, 2007.
Income
Taxes
. Our
subsidiaries SingOcean, Acheng SingOcean Dashiqiao SingOcean are subject to
enterprise income tax, or EIT, at a rate of 25% and 33.0% of assessable profits
for the nine months ended September 30, 2008 amd 2007, respectively, sales
tax
at a rate of 3% on connection revenue and sales tax at a rate of 4% on gas
sales
revenue.
Net
Income.
Net
income increased $127,105 to $1,775,974 for the nine months ended September
30,
2008 from net income of $1,648,869 for the same period of 2007, as a result
of
the factors described above.
Three
months ended September 30, 2008 Compared to Three months ended September 30,
2007
The
following table summarizes the results of our operations during the three-month
periods ended September 30, 2008 and ended September 30, 2007, and provides
information regarding the dollar and percentage increase or (decrease) from
the
three-month period ended September 30, 2007 to the three-month period ended
September 30, 2008.
All
amounts in thousands of U.S. dollars, except percentages
|
|
|
Three Months
Ended
September 30,
2008
|
|
Three Months
Ended
September 30,
2007
|
|
Percentage
Change
(Decrease)
|
|
|
Revenues
|
|
$
|
2,253,858
|
|
$
|
1,786,174
|
|
|
26.2
|
%
|
|
Cost
of sales
|
|
$
|
(575,626
|
)
|
$
|
478,812
|
|
|
20.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$
|
1,678,232
|
|
$
|
1,307,362
|
|
|
28.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$
|
(346,094
|
)
|
$
|
85,094
|
|
|
306.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Expenses)
|
|
$
|
1,332,138
|
|
$
|
1,222,268
|
|
|
.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest (expense)
|
|
$
|
(37,009
|
)
|
$
|
(8,147
|
)
|
|
354.3
|
%
|
|
Other
income (expense)
|
|
$
|
3,702
|
|
$
|
(8,489
|
)
|
|
143.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
$
|
1,335,840
|
|
$
|
1,213,779
|
|
|
(10.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
391,358
|
|
$
|
353,326
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
900,357
|
|
$
|
1,026,779
|
|
|
(12.3
|
)%
|
Revenues
.
Revenues are derived primarily from connection fees and sales of natural gas.
Revenues increased $467,684, or 26.2% to $2,253,858 for the three months ended
September 30, 2008 from $1,786,174 million for the same period in 2007. This
increase was mainly attributable to an increase in our customer
base.
Cost
of Sales.
Cost of
sales consists primarily of the purchase of natural gas from our suppliers.
Our cost
of sales increased $96,814, or 20.2%, to $575,626 for the three months ended
September 30, 2008 from $478,812 during the same period in 2007, which was
mainly attributable to an increase in our customer base as well as an increase
in our purchasing price of natural gas. As a percentage of revenues, the cost
of
sales decreased to 25.5% during the three months ended September 30, 2008 from
26.8% in the same period in 2007.
Gross
Profit.
Our
gross
profit increased $370,870, or 28.4%, to $1,678,232 for the three months ended
September 30, 2008 from $1,307,362 during the same period in 2007. Gross profit
as a percentage of revenues was 74.5% for the three months ended September
30,
2008, a increase of 1.3% from 73.2% during the same period in 2007. Such
percentage increase was mainly due to continued sales of natural gas do to
existing customers, which does not have the same one-time connection cost as
new
customers.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses, including sales representative commissions,
promotion fees, salesperson salaries and expenses, depreciation charges and
other fees increased $261,000, or 306.7%, to $346,094 for the three months
ended
September 30, 2008 from $85,094 during the same period in 2007. As a percentage
of revenues, selling expenses increased to 71.1% for the three months ended
September 30, 2008 from 4.8% for the same period in 2007. Such increase of
selling, general and administrative expenses was mainly attributable to a
significant increase in our operations since June 30, 2007.
Income
Taxes
. Our
subsidiaries SingOcean, Acheng SingOcean, Chensheng Gas and Dashiqiao SingOcean
are subject to enterprise income tax, or EIT, at a rate of 25% and 33.0% of
assessable profits for the three months ended September 30, 2008 and 2007,
respectively, sales tax at a rate of 3% on connection revenue and sales tax
at a
rate of 4% on gas sales revenue.
Net
Income.
Net
income decreased $126,422, or 12.3% to $900,357 for the three months ended
September 30, 2008 from net income of $1,026,779 for the same period of 2007,
as
a result of the factors described above.
Liquidity
and Capital Resources
General
As
of
September 30, 2008, we had cash and cash equivalents (excluding restricted
cash)
of approximately $7,208,602. The following table provides detailed information
about our net cash flow for all financial statement periods presented in this
report.
Cash
Flow
(all
amounts in thousands of U.S. dollars)
|
|
|
Nine months ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
(501,650
|
)
|
$
|
1,283,800
|
|
|
Net
cash provided by (used in) investing activities
|
|
$
|
(574,555
|
)
|
$
|
(59,450
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
$
|
7,282,145
|
|
$
|
64,204
|
|
|
Cumulative
translation adjustment
|
|
$
|
(1,308,366
|
)
|
$
|
172
|
|
|
Net
cash flow
|
|
$
|
7,208,602
|
|
$
|
1,616,644
|
|
Operating
Activities
Net
cash
used in operating activities was approximately $501,650 for the nine-month
period ended September 30, 2008, which is a difference of approximately
$1,785,450 from approximately $1,283,800 net cash provided by operating
activities for the same period of 2007. The increase of the cash used in
operating activities was mainly attributable to an increase in accrued
liabilities as well as a decrease in our accounts receivable, an increase in
derivative liability of $910,000 as the fair value of warrants issued in
connection with our reverse acquisition transaction with Willsky Development
described above.
Investing
Activities
Our
main
uses of cash for investing activities are for constructing gas pipelines and
distribution stations.
Net
cash
used in investing activities for the nine-month period ended September 30,
2008
was approximately $574,555, which is an increase of approximately $515,105
from
net cash used in investing activities of approximately $59,450 for the same
period of 2007 due to cash used in pipeline investment activities in
2008.
Financing
Activities
Net
cash
provided by financing activities for the nine-month period ended September
30,
2008 was approximately $7,282,145, which is an increase of approximately
$7,346,349 from approximately $64,204 net cash provided by financing activities
during the same period of 2007. The increase of the cash provided by financing
activities was mainly attributable to the private placement we consummated
on
August 20, 2006, as described above, as well as an increase in cash advanced
from directors and shareholders in 2008.
As
of
September 30, 2008, there were no bank loans outstanding.
Private
Placement
On
August
20, 2008, we completed a private placement in which we sold to China Hand
and
its designees 1,857,373 shares of our Series A Preferred Stock and warrants
to
purchase 13,001,608 shares of our common stock at an initial exercise price
of
$0.187 per share (subject to adjustments) for a period of 5 years following
the
date of issuance, for a purchase price of $9,000,000.
As
a
result of this private placement, we raised approximately $9 million in
gross
proceeds, which left us with approximately $6.8 million in net proceeds
after
the deduction of offering expenses in the amount of approximately $2.2
million.
Kuhns Brothers Securities Corporation, or Kuhns Brothers, acted as placement
agent in connection with this private placement. As compensation for its
services, Kuhns Brothers received a cash fee equal to $900,000, representing
10%
of the gross proceeds received from the private placement, as well as warrants
to purchase 6,500,804 shares of our common stock, representing 10% the
aggregate
number of shares of common stock issuable to China Hand in the private
placement
upon conversion of the Series A Preferred Stock. We are under contractual
obligation to register the shares of our common stock within a pre-defined
period.
Inflation
Our
results of operations have not been affected by inflation and management does
not expect that inflation risk would cause material impact on its operations
in
the future.
Seasonality
Our
pipeline distribution networks are primarily located in northeastern China,
which is extremely cold during the winter months. During such time, we are
unable to construct primary gas pipelines. However, if a primary pipeline is
already in place, we are able to connect new customers to our distribution
network during the winter months.
Additionally,
gas consumption by residential customers is higher in the winter months for
heating purposes, and we see a corresponding increase in usage fees during
that
time.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures
of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
Plant
and Equipment
Plant
and
equipment is stated at cost. Depreciation is provided principally by use of
the
straight-line method over the useful lives of the related assets, except for
leasehold properties, which are depreciated over the terms of their related
leases or their estimated useful lives, whichever is less. Expenditures for
maintenance and repairs, which do not improve or extend the expected useful
life
of the assets, are expensed to operations while major repairs are
capitalized.
The
estimated useful lives are as follows:
|
Leasehold
improvements
|
3
years
|
|
Computer
equipment
|
3 years
|
|
Furniture
& fixture
|
5 years
|
|
Office
equipment
|
5 years
|
|
Exploration
equipment
|
5 years
|
|
Motor
vehicle
|
5 years
|
|
Gas
transportation vehicle
|
5 years
|
|
Gas
station
|
40 years and 50 years
|
|
Underground
gas pipeline
|
40 years and 50 years
|
The
gain
or loss on disposal of property, plant and equipment is the difference between
the net sales proceeds and the carrying amount of the relevant assets, and,
if
any, is recognized in the statement of operations.
Intangible
Assets
Intangible
asset consist of land use right in both Daishiquiao City and Acheng City.
According
to Chinese rules, land belongs to the nation. Land use right refers to the
purchase of the legal right to use land from the government. The term of the
land use right is 50 years. The land use right is amortized using the
straight-line method over their estimated useful life 50 years.
Inventories
Inventories
consist of IC card, gas meter, PE valves and natural gas and are valued at
the
lower of cost or market value using weighted average cost method of accounting.
Impairment
of Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets", the Company
evaluates its long-lived assets to determine whether later events and
circumstances warrant revised estimates of useful lives or a reduction in
carrying value due to impairment. If indicators of impairment exist and if
the
value of the assets is impaired, an impairment loss would be recognized. As
of
September 30, 2008 and 2007, no impairment loss has been
recognized.
Revenue
Recognition
Natural
gas revenues are recorded based on the amount of product delivered to customers
through its pipeline and checked by its gas meter.
Recently
issued accounting pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” and is effective for fiscal years
beginning after November 15, 2007. This Statement permits entities to choose
to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. The Company is currently assessing the impact the
adoption of this pronouncement will have on the financial
statements.
In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51” and is effective
for fiscal years beginning after December 5, 2008. This Statement establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The Company is currently
assessing the impact the adoption of this pronouncement will have on the
Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS 141 (Revised) is effective for fiscal years beginning after December 13,
2008. This Statement establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements
the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The Statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
Company is currently assessing the impact the adoption of this pronouncement
will have on the Company’s financial statements.
In
February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157”
(“FSP FAS 157-2”), which delays the effective date of Statement of Financial
Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”)
for all non-financial assets and non-financial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually) for fiscal years beginning after November
15, 2008, and interim periods within those fiscal years for items within the
scope of this FSP. We are currently evaluating the impact of adopting FSP FAS
157-2 for non-financial assets and non-financial liabilities on our financial
position, cash flows, and results of operations. We have considered all other
recently issued accounting pronouncements and do not believe the adoption of
such pronouncements will have a material impact on our consolidated financial
statements.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources that is material to investors.
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Not
Applicable.
|
ITEM
4.
|
CONTROLS
AND PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures.
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) that are designed to ensure that information that would be
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As
required by Rule 13a-15 under the Exchange Act, our management, including Mr.
Jiaji Shang, our Chief Executive Officer and Ms. Xiaoling Li, our Chief
Financial Officer, evaluated the effectiveness of the design and operation
of
our disclosure controls and procedures as of September 30, 2008. Based on that
evaluation, Mr. Shang and Ms. Li concluded that as of September 30, 2008, and
as
of the date that the evaluation of the effectiveness of our disclosure controls
and procedures was completed, our disclosure controls and procedures were
effective to satisfy the objectives for which they are intended.
Changes
in Internal Control Over Financial Reporting.
During
the fiscal quarter ended September 30, 2008, there were no changes in our
internal control over financial reporting identified in connection with the
evaluation performed during the fiscal year covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART
II
OTHER
INFORMATION
|
ITEM
1.
|
LEGAL
PROCEEDINGS.
|
From
time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. We are currently not aware of any
such
legal proceedings or claims that we expect will have a material adverse affect
on our business, financial condition or operating results. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business.
|
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.
|
On
September 16, 2008, the Company, through its wholly-owned subsidiary
Tianjin SingOcean Public Utility Development Co., Ltd., entered into an Equity
Swap Agreement with Mr. Xiu Hai Tian, whereby the Company
acquired from Mr. Xiu a 49% ownership interest in Chensheng Gas in
exchange for the Company's 99% ownership in Hunchun SingOcean Energy Ltd. ,
or Hunchun SingOcean. The parties to the Equity Swap Agreement determined that
the value of the 49% interest in Chensheng Gas and the 99% interest in Hunchun
SingOcean were approximately equal and therefore there was no cash consideration
involved in the transaction from either party. The foregoing description of
the
Agreement is qualified in its entirety by reference to the full text of the
Equity Swap Agreement filed as Exhibit 10.1 hereto.
Chensheng
Gas is a natural gas distribution company operating in the Nandaihe area in
Northern China, which could potential provide natural gas to 50,000 individuals.
At present, Chensheng Gas has laid in excess of 12km of medium pressure pipe
in
Nandaihe and has installed distribution pipes for approximately twenty
residential areaas with an aggregate of approximately 10,000 customers.
Chensheng Gas has signed a distribution contract to provide natural gas services
to a high-rise building with approximately 4,000 potential customers.
Hunchun
SingOcean is a natural gas distribution company operating in Hunchun in Northern
China. Hunchun SingOcean provides natural gas services to
approximately 12,898 customers. Hunchun SingOcean also owns the exclusive
rights to develop a coal bed methane, or CBM, reserve near Hunchun, which
contains approximately 3.3 billion cubic meters of CBM.
ITEM
6.
EXHIBITS.
The
following exhibits are filed as part of this report or incorporated by
reference:
|
Exhibit
No.
|
|
Description
|
|
10.1
|
|
Equity
Swap Agreement, dated September 16, 2008, between Tianjin SingOcean
Public
Utility Development Co., Ltd. and Xiu Hai Tian. (English
Translation)
|
|
31.1
|
|
Certification
of Principal Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification
of Principal Financial Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
Certifications
of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
|
32.2
|
|
Certifications
of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
November 19, 2008
|
CHINA
NEW ENERGY GROUP COMPANY
|
|
|
|
|
|
|
|
By:
|
/s/
Jiaji Shang
|
|
|
Jiaji
Shang
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
By:
|
/s/
Xiaoling Li
|
|
|
Xiaoling
Li
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|
EXHIBIT
INDEX
|
Exhibit
No.
|
|
Description
|
|
10.1
|
|
Equity
Swap Agreement, dated September 16, 2008, between Tianjin SingOcean
Public
Utility Development Co., Ltd. and Xiu Hai Tian. (English
Translation)
|
|
31.1
|
|
Certification
of Principal Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
Certification
of Principal Financial Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
Certifications
of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
|
32.2
|
|
Certifications
of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
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