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: March 31, 2009
|
¨
|
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.)
|
20/F,
Center Plaza, No.188 Jie Fang Road
He
Ping District, Tianjin, China 300042
(Address
of principal executive offices, Zip Code)
(86
22) 5829 9778
(Registrant’s
telephone number, including area code)
No.
1703 and 1704, A Building, No. 1, Hongji Apartment, Jin Wei Road
He
Bei District, Tianjin, China
(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
¨
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
¨
No
¨
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
¨
|
Accelerated
Filer
¨
|
|
Non-Accelerated Filer
¨
(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
¨
No
x
The
number of shares outstanding of each of the issuer’s classes of common equity,
as of May 19, 2009 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
|
|
1,857,373
|
|
Series
B Convertible Preferred Stock, $0.001 par value
|
|
1,116,388
|
Quarterly
Report on FORM 10-Q
Three
Months Ended March 31, 2009
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.
|
|
|
18
|
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
|
|
23
|
|
|
ITEM
4T.
|
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.
|
|
|
26
|
|
PART
I
FINANCIAL
INFORMATION
|
ITEM
1.
|
FINANCIAL
STATEMENTS.
|
China
New Energy Group Company
Condensed
Consolidated Financial Statements
For the
three months ended
March 31,
2009
(Stated
in US dollars)
China
New Energy Group Company
Condensed
Consolidated Financial Statements
Three
months ended March 31, 2009
Index to
Condensed Consolidated Financial Statements
|
|
|
Page
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Balance Sheets
|
|
|
3
|
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations and Comprehensive
Loss
|
|
|
4
|
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
|
|
|
5
|
|
|
|
|
|
|
|
|
Unaudited
Condensed Consolidated Statement of Changes in Stockholders’
Equity
|
|
|
6
|
|
|
|
|
|
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
|
|
7
|
|
CHINA
NEW ENERGY GROUP COMPANY
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Stated
in US Dollars)
|
|
|
March 31
|
|
|
December 31
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,854,769
|
|
|
$
|
5,833,508
|
|
|
Accounts
receivable, net of allowances of $0
|
|
|
1,685,239
|
|
|
|
2,183,087
|
|
|
Other
receivables
|
|
|
2,371,165
|
|
|
|
2,254,997
|
|
|
Inventories,
net
|
|
|
284,438
|
|
|
|
254,585
|
|
|
Related
parties receivables
|
|
|
-
|
|
|
|
84,120
|
|
|
Prepayment
|
|
|
1,874,575
|
|
|
|
1,558,361
|
|
|
Other
current assets
|
|
|
2,338
|
|
|
|
3,340
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
10,072,524
|
|
|
|
12,171,998
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
6,797,934
|
|
|
|
6,844,262
|
|
|
Construction
in progress
|
|
|
5,673,904
|
|
|
|
5,589,551
|
|
|
Intangible
assets, net
|
|
|
1,837,165
|
|
|
|
1,814,316
|
|
|
Total
assets
|
|
$
|
24,381,527
|
|
|
$
|
26,420,127
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
226,031
|
|
|
$
|
111,660
|
|
|
Accrued
expenses
|
|
|
253,084
|
|
|
|
256,071
|
|
|
Other
payables
|
|
|
1,247,850
|
|
|
|
3,046,393
|
|
|
Related
party payables
|
|
|
97,912
|
|
|
|
97,650
|
|
|
Tax
payable
|
|
|
221,209
|
|
|
|
693,116
|
|
|
Dividend
payable
|
|
|
329,000
|
|
|
|
194,000
|
|
|
Total
current liabilities
|
|
|
2,375,086
|
|
|
|
4,398,890
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
New Energy Group Company stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Common
stock: (500,000,000 shares authorized, $0.001 par value, 100,000,041
shares issued and outstanding)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
Preferred
shares: (10,000,000 shares authorized, 1,857,373 shares issued
and outstanding)
|
|
|
1,857
|
|
|
|
1,857
|
|
|
Additional
paid in capital
|
|
|
19,725,482
|
|
|
|
19,725,482
|
|
|
Accumulated
deficits
|
|
|
(1,072,302
|
)
|
|
|
(619,357
|
)
|
|
Statutory
surplus reserve fund
|
|
|
1,903,034
|
|
|
|
1,903,034
|
|
|
Accumulated
other comprehensive income
|
|
|
719,379
|
|
|
|
730,168
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
China New Energy Group Company stockholders’ equity
|
|
|
21,377,450
|
|
|
|
21,841,184
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
|
628,991
|
|
|
|
180,053
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
|
22,006,441
|
|
|
|
22,021,237
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
24,381,527
|
|
|
$
|
26,420,127
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements
CHINA
NEW ENERGY GROUP COMPANY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
– (UNAUDITED)
(Stated
in US Dollars)
|
|
|
For The Three Months Ended
|
|
|
|
|
March 31
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
325,017
|
|
|
$
|
101,755
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
262,500
|
|
|
|
75,937
|
|
|
Gross
profit
|
|
|
62,517
|
|
|
|
25,818
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
408,199
|
|
|
|
246,419
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
408,199
|
|
|
|
246,419
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
|
(345,682
|
)
|
|
|
(220,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (expenses)
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
8,357
|
|
|
|
-
|
|
|
Interest
(expenses)
|
|
|
(671
|
)
|
|
|
(124
|
)
|
|
Other
income
|
|
|
93
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
7,779
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations, before income taxes
|
|
|
(337,903
|
)
|
|
|
(220,725
|
)
|
|
Income
taxes
|
|
|
(997
|
)
|
|
|
-
|
|
|
Loss
from continuing operations, net of tax
|
|
(338,900)
|
|
|
(220,725)
|
|
|
Loss
from discontinued operations, net of tax
|
|
|
-
|
|
|
|
(17,838
|
)
|
|
Net
Loss
|
|
|
(338,900
|
)
|
|
|
(238,563
|
)
|
|
Add: Net
loss attributable to non controlling interest
|
|
|
20,955
|
|
|
|
1,166
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to China New Energy Group Company
|
|
|
(317,945
|
)
|
|
|
(237,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
(10,789
|
)
|
|
|
127,843
|
|
|
Comprehensive
loss attributable to the non-controlling interest
|
|
|
5,026
|
|
|
|
1,291
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss attributable to China New Energy Group Company
|
|
$
|
(323,708
|
)
|
|
$
|
(108,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share – Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations attributable to the Company's common
stockholders
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
Discontinuing
operations attributable to the Company's common
stockholders
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
Net
loss attributable to the Company's common stockholders
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Weighted average shares outstanding:
|
|
|
100,000,041
|
|
|
|
100,000,000
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements
CHINA
NEW ENERGY GROUP COMPANY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)
(Stated
in US Dollars)
|
|
|
For
The
Three
Months
Ended
|
|
|
|
|
March
31
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
(loss) attributable to the Company
|
|
$
|
(317,945
|
)
|
|
$
|
(237,397
|
)
|
|
Adjustments
to reconcile net (loss) to net cash (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Loss
attributable to non-controlling interest
|
|
|
(20,955
|
)
|
|
|
(1,166
|
)
|
|
Depreciation
|
|
|
90,836
|
|
|
|
40,290
|
|
|
Amortization
|
|
|
3,193
|
|
|
|
2,044
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
497,969
|
|
|
|
358,960
|
|
|
Other
receivables
|
|
|
(111,480
|
)
|
|
|
-
|
|
|
Inventories
|
|
|
(29,838
|
)
|
|
|
223,063
|
|
|
Prepayment
|
|
|
(316,117
|
)
|
|
|
12,201
|
|
|
Other
current assets
|
|
|
1,002
|
|
|
|
-
|
|
|
Accounts
payable
|
|
|
114,362
|
|
|
|
(276,517
|
)
|
|
A
ccrued
expense
|
|
|
(3,002
|
)
|
|
|
(332,724
|
)
|
|
Other
payables
|
|
|
(1,798,281
|
)
|
|
|
-
|
|
|
Tax
payable
|
|
|
(471,940
|
)
|
|
|
1,620
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(2,362,196
|
)
|
|
|
(209,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Addition
of fixed assets
|
|
|
(44,108
|
)
|
|
|
(407
|
)
|
|
Addition
of construction in progress
|
|
|
(84,025
|
)
|
|
|
(228,005
|
)
|
|
Repayment
from related parties
|
|
|
77,515
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(50,618
|
)
|
|
|
(228,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Contribution
from non-controlling interest
|
|
|
438,852
|
|
|
|
59,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows provided by financing activities:
|
|
|
438,852
|
|
|
|
59,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes in cash
|
|
|
(4,777
|
)
|
|
|
60,043
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(1,978,739
|
)
|
|
|
(318,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash-
beginning of period
|
|
|
5,833,508
|
|
|
|
2,311,028
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-
end of period
|
|
$
|
3,854,769
|
|
|
$
|
1,992,689
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Interest
paid in cash
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxed paid in cash
|
|
$
|
-
|
|
|
$
|
-
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements
CHINA
NEW ENERGY GROUP COMPANY
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Stated in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Statutory
|
|
|
Retained
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
Paid-in
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserve
Fund
|
|
|
(Deficit)
|
|
|
Income
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007
|
|
|
94,908,650
|
|
|
$
|
94,909
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
5,624,310
|
|
|
$
|
1,903,034
|
|
|
$
|
4,786,707
|
|
|
$
|
189,010
|
|
|
$
|
12,597,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
effectively issued to former shareholders as part of the
recapitalization
|
|
|
5,091,391
|
|
|
$
|
5,091
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
placement
|
|
|
|
|
|
|
|
|
|
|
1,857,373
|
|
|
|
1,857
|
|
|
|
7,074,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,076,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend on issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,031,818
|
|
|
|
|
|
|
|
(7,031,818
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194,000
|
)
|
|
|
|
|
|
|
(194,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,819,754
|
|
|
|
|
|
|
|
1,819,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
541,158
|
|
|
|
541,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2008
|
|
|
100,000,041
|
|
|
$
|
100,000
|
|
|
|
1,857,373
|
|
|
$
|
1,857
|
|
|
$
|
19,725,482
|
|
|
$
|
1,903,034
|
|
|
$
|
(619,357
|
)
|
|
$
|
730,168
|
|
|
$
|
21,841,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(135,000
|
)
|
|
|
|
|
|
|
(135,000
|
)
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317,945
|
)
|
|
|
|
|
|
|
(317,945
|
)
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,789
|
)
|
|
|
(10,789
|
)
|
|
BALANCE,
March 31, 2009 - unaudited
|
|
|
100,000,041
|
|
|
$
|
100,000
|
|
|
|
1,857,373
|
|
|
$
|
1,857
|
|
|
$
|
19,725,482
|
|
|
$
|
1,903,034
|
|
|
$
|
(
1
,
072,302
|
)
|
|
$
|
719,379
|
|
|
$
|
21,377,450
|
|
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
financial statements are prepared in accordance with the accounting principles
generally accepted in the United States of America (“US GAAP”). This
basis differs from that used in the statutory accounts of our subsidiaries in
China, which were prepared in accordance with the accounting principles and
relevant financial regulations applicable to enterprises in the
PRC. All necessary adjustments have been made to present the
financial statements in accordance with US GAAP.
The
interim condensed consolidated financial statements included herein, presented
in accordance with United States generally accepted accounting principles and
stated in US dollars, have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These statements reflect all adjustments, consisting
of normal recurring adjustments, which, in the opinion of management, are
necessary for fair presentation of the information contained therein. It is
suggested that these interim condensed consolidated financial statements be read
in conjunction with the financial statements of the Company for the year ended
December 31, 2008 and notes thereto included in the Form 10K of China New Energy
Group Company filed on April 15, 2009. The Company follows the same accounting
policies in the preparation of interim reports.
Results
of operations for the interim periods are not indicative of annual
results.
|
2.
|
Organization
and Nature of Business
|
China New
Energy Group Company (the “Company”) was incorporated on March 28, 2008 in the
state of Delaware USA. The principal activity of the Company is investment
holding. Details of the Company’s subsidiaries and its subsidiary’s branch
companies and subsidiary (which together with the Company are collectively
referred to as the “Group”) and their principal activities as of March 31, 2009
were as follows:
|
Name
|
|
Place of
Registration
|
|
% of
shareholding
|
|
Principal Activities
|
|
Willsky
Development LTD.
|
|
BVI
|
|
|
100
|
%
|
Company Holding
|
|
Tianjin
SingOcean Public Utility
Development
Co. Ltd.
|
|
The
PRC
|
|
|
99
|
%
|
Company Holding
|
|
QinHuangDao
ChenSheng
Gas
Co, Ltd.
|
|
The
PRC
|
|
|
100
|
%
|
Construction
of District Gas-pipeline and supply of natural gas
|
|
Yingkou
Zhongneng Gas Development Co., Ltd.
|
|
The
PRC
|
|
|
70
|
%
|
Construction
of District Gas-pipeline and supply of natural gas
|
|
China
New Energy (Tianjin) Investment & Consulting Co., Ltd.
|
|
The
PRC
|
|
|
100
|
%
|
Company Holding
|
Willsky
Development LTD. was incorporated on May 31, 2005 in the British Virgin Islands.
On March 28, 2008, Travel Hunt Holdings, Inc. completed a reverse acquisition
transaction with Willsky Development whereby Travel Hunt Holdings, Inc. issued
to the shareholder of Willsky Development 94,908,650 shares of Travel Hunt
Holdings, Inc. common stock in exchange for all of the issued and outstanding
capital stock of Willsky Development. Simultaneous with the consummation of the
Share exchange agreement, the shareholder of Willsky, Eternal International
Holding Group Ltd, a Hong Kong corporation, or Eternal International,
distributed 85,417,785 shares of Travel Hunt Holdings, Inc. common stock as a
dividend. Accordingly, following this distribution, Eternal International
beneficially owns approximately 9.49% of Travel Hunt Holdings, Inc.’s
outstanding capital stock. Willsky Development thereby became Travel Hunt
Holdings, Inc.’s wholly-owned subsidiary and the former shareholders of Willsky
Development became Travel Hunt Holdings, Inc. controlling
stockholders.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
Organization
and Nature of Business - continued
|
For
accounting purposes, the acquisition was accounted for as a
recapitalization effected by a share exchange, and the transaction treated as a
reverse acquisition with Willsky Development as the acquirer and Travel Hunt
Holdings, Inc. as the acquired party. The assets and liabilities of the acquired
entity (Willsky) were brought forward at their book value and no goodwill was
recognized.
On May
27, 2008, we changed our name from Travel Hunt Holdings, Inc. to China New
Energy Group Company.
Tianjin
SingOcean Public Utility Development Co. Ltd. (SingOcean) is an equity joint
venture established in the PRC to be operated for a period of 50 years until
January 18, 2054. It is a subsidiary of the Company and it’s consolidated into
the Company’s financial statements. It has a branch division in
Acheng, Tianjin SingOcean Public Utility Development Co., Ltd (Acheng
SingOcean”) and established in the PRC to be operated for a period of 50 years
until January 18, 2054.
QinHuangDao
ChenSheng Gas Co,Ltd. (“Chensheng Gas”) - On September 16, 2008, we,
through our 99%-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
Ocean Energy Co., Ltd. (“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.
On
December 10, 2008, the Company entered into an Agreement for Equity Transfer
with the holders of the remaining 51% outstanding equity in Chensheng
Gas. Pursuant to the Agreement for Equity Transfer, the Company
agreed to purchase the remaining 51% of the outstanding equity of Chensheng Gas
from 17 individuals for an aggregate purchase price of RMB 12.56 million
(approximately $1.84 million). The transaction was consummated on
December 30, 2008, following which the Company now owns 51% of the equity of
Chensheng Gas, and Tianjin SingOcean now owns 49% of the equity of Chensheng
Gas.
Yingkou
Zhongneng Gas Development Co., Ltd (Zhongneng Gas ) is a subsidiary of the
Company and established in the PRC to operate a natural gas distribution network
in the city of Dashiqiao.
China New
Energy (Tianjin) Investment & Consulting Co., Ltd (Tianjin CNE) is a
subsidiary of the Company and established in the PRC for investment holding
purposes
|
3.
|
Summary
of Significant Accounting Policies
|
(a) 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.
(b)
Principles of Consolidation
The
condensed 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 because of the
acquisition of Chensheng Gas.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
3
|
Summary
of Significant Accounting Policies -
continued
|
(c)
Intangible Assets
Intangible
assets consist of land use rights in Daishiquiao City, Acheng City, and Nan Dai
He.
According
to Chinese regulations, land belongs to the nation. Land use rights refer to the
purchase of the legal right to use land from the government. The term of the
land use rights is 50 years. The land use rights are amortized using the
straight-line method over their estimated useful life of 50 years.
(d)
Income Taxes
The
Company 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. Also, the Company had no material
adjustments to its liabilities for unrecognized income tax benefits according to
the provisions of FIN 48.
(e)
Revenue Recognition
We
recognize revenue upon meeting the recognition requirements of Staff Accounting
Bulletin (“SAB”) No. 104, Revenue Recognition. Natural gas revenues
are recorded based on the amount of product delivered to customers through
pipelines and checked by gas meters.
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 being checked and accepted by the Company’s technical staff, and
acceptance by the customer.
(f)
Foreign Currency Transactions
The Company’s
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 periods ended March 31,
2009 and 2008.
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.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
3
|
Summary
of Significant Accounting Policies -
continued
|
(g) 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.
(h)
Reclassifications
Certain
prior year amounts on the consolidated balance sheets have been reclassified to
conform to current classifications.
|
4.
|
New
Accounting Pronouncements
|
We have
considered all recently issued accounting pronouncements and do not believe the
adoption of such pronouncements will have a material impact on our consolidated
financial statements.
Net loss
per common share is computed pursuant to Statement of Financial Accounting
Standards No. 128 “Earnings Per Share” (“SFAS No. 128”). Basic net
loss per common share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during each
period. Diluted net loss per common share is computed by dividing net
loss by the weighted average number of shares of common stock and potentially
outstanding shares of common stock during each period to reflect the potential
dilution that could occur from common shares issuable through common stock
equivalents.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Components
of basic and diluted earnings per share were as follows:
|
|
|
March 31
|
|
|
March 31
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted EPS:
|
|
|
|
|
|
|
|
Net
loss attributable to China New Energy Group
|
|
$
|
(317,945
|
)
|
|
$
|
(237,397
|
)
|
|
Dividend
accrued on Preferred Stock
|
|
|
(135,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss – attributable to common stockholders
|
|
$
|
(452,945
|
)
|
|
$
|
(237,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted LPS
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
100,000,041
|
|
|
|
100,000,000
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The
following table shows the weighted-average number of potentially dilutive shares
excluded from the diluted net loss per share calculation for the three months
ended March 31, 2009 and 2008:
|
Weighted
average shares of preferred stock outstanding
|
|
|
1,857,373
|
|
|
|
-
|
|
|
Dilutive
effect of options, warrants, and contingently issuable
shares
|
|
|
7,800,965
|
|
|
|
-
|
|
|
Total
|
|
|
9.658,338
|
|
|
|
-
|
|
6. Inventories
Inventories
consist of the following:
|
|
|
March 31
|
|
|
December 31
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Raw
materials
|
|
$
|
284,438
|
|
|
$
|
254,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
284,438
|
|
|
$
|
254,585
|
|
7. Property,
Plant and Equipment, net
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
At
cost
|
|
|
|
|
|
|
|
Office
equipment
|
|
$
|
78,004
|
|
|
$
|
33,893
|
|
|
Motor
vehicles
|
|
|
187,148
|
|
|
|
187,137
|
|
|
Gas
transportation vehicles
|
|
|
424,962
|
|
|
|
424,937
|
|
|
Gas
station
|
|
|
2,102,735
|
|
|
|
2,102,612
|
|
|
Underground
gas pipelines
|
|
|
4,723,797
|
|
|
|
4,723,520
|
|
|
|
|
|
7,516,646
|
|
|
|
7,472,099
|
|
|
Less:
accumulated depreciation
|
|
|
(718,712
|
)
|
|
|
(627,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,797,934
|
|
|
$
|
6,844,262
|
|
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The gas
pipelines, gas station, and other constructed assets belong to the Company, not
to the municipalities or other units that contract with the Company to provide
the hookups and the gas distribution to the households. Depreciation is provided
for these assets as they are used in operations.
During
the three months ended March 31, 2009, depreciation expenses amounted to
$90,836, of which $81,281 and $9,555 were recorded as cost of sales and general
and administrative expenses, respectively.
During
the three months ended March 31, 2008, depreciation expenses amounted to
$40,290, of which $37,991 and $2,299 were recorded as cost of sales and general
and administrative expenses, respectively.
|
8.
|
Intangible
Assets, net
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
At
cost
|
|
|
|
|
|
|
|
Land
use rights
|
|
$
|
587,464
|
|
|
$
|
587,429
|
|
|
Goodwill
|
|
|
1,289,505
|
|
|
|
1,263,491
|
|
|
|
|
|
1,876,969
|
|
|
|
1,850,920
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
(39,804
|
)
|
|
|
(36,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,837,165
|
|
|
$
|
1,814,316
|
|
Amortization
expense for the three months ended March 31, 2009 and 2008 was $3,193 and
$2,044, respectively.
Estimated
amortization for the next five years and thereafter is as follows:
|
|
|
|
|
|
Remainder
of 2009
|
|
$
|
9,576
|
|
|
2010
|
|
|
12,768
|
|
|
2011
|
|
|
12,768
|
|
|
2012
|
|
|
12,768
|
|
|
2013
|
|
|
12,768
|
|
|
Thereafter
|
|
|
487,012
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
547,660
|
|
The
Company, its subsidiary and branch divisions are subject to income taxes on an
entity basis on income arising in, or derived, from the tax jurisdiction in
which they operated. As the Company had no income generated in the United
States, there was no tax expense or tax liability due to the Internal Revenue
Service of the United States as of March 31, 2009. A subsidiary of
the Company was incorporated under the international Business Companies Act of
British Virgin Islands and, accordingly is exempted from payment of British
Virgin Islands income taxes. Pursuant to the PRC Income Tax Laws, the prevailing
statutory rate of enterprise income tax is 25% for SingOcean, Zhongheng Gas, and
Tianjin CNE, whereas Chensheng Gas is being taxed on 0.8% of its
annual sales.
The
Company had no material adjustments to its liabilities for unrecognized income
tax benefits according to the provisions of FIN 48. The income tax
expense was $997 and $0 for the three months ended March 31, 2009 and 2008,
respectively. The Company has recorded no deferred tax assets or
liabilities as of March 31, 2009 and 2008, since nearly all differences in tax
basis and financial statement carrying values are permanent
differences.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
For The Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Current
tax
|
|
|
997
|
|
|
|
-
|
|
|
Deferred
tax
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
997
|
|
|
|
-
|
|
All of
the Company’s income (loss) before income taxes is from PRC sources. Actual
income tax expenses reported in the consolidated statements of income and
comprehensive income differ from the amounts computed by applying the PRC
statutory income tax rate of 25% for the fiscal year of 2009 and 2008
respectively to income (loss) before income taxes for the three months ended
March 31, 2009 and 2008 for the following reasons:
|
|
|
For The Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
$
|
(337,902
|
)
|
|
$
|
(220,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Computed
“expected” income tax expense at 25%
|
|
|
(84,475
|
)
|
|
|
(55,181
|
)
|
|
Tax
effect on net taxable temporary differences
|
|
|
5,893
|
|
|
|
-
|
|
|
Effect
of cumulative tax losses
|
|
|
79,579
|
|
|
|
55,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
997
|
|
|
$
|
-
|
|
|
10.
|
Related Party
Transactions
|
As of
March 31, 2009 and December 31, 2008, the Group has the following payables
with related parties:
|
(a)
|
Tianjin
Nan Yang Electromechanical Equipment Installation Project Co. ("Nan
Yang"), a shareholder of the Company's subsidiary TSOPUDCD, up until
January 14, 2009
|
|
(b)
|
Huan
Long is a shareholder of the Company's subsidiary SingOcean since
January 14, 2009
|
|
(c)
|
Eternal
International Holding Group Ltd. ("Eternal"), a shareholder of the
Company.
|
|
(d)
|
Qu
Qiangxi is the director of the
subsidiary.
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Nan
Yang
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Eternal
|
|
|
-
|
|
|
|
-
|
|
|
Huan
Long
|
|
|
97,912
|
|
|
|
-
|
|
|
Qu
Qiangxi
|
|
|
-
|
|
|
|
97,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,912
|
|
|
$
|
97,650
|
|
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
balances have no stated terms for repayment and are not interest
bearing.
|
11.
|
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 have concentrations of business with
any customer constituting greater than 10% of the Company’s gross
sales.
For the
three month periods ended March 31 2009, revenue attributed to connection fees
was 45% of total revenue whereas gas revenue contributed the remaining
55%.
At March
31, 2009, three major customers accounted for 16%, 15% and 11% of net accounts
receivable respectively. At December 31, 2008, two major customers
accounted for 19% and 11% of net accounts receivable respectively.
The
Company does not require collateral to support financial instruments that are
subject to credit risk.
|
12.
|
Commitments
and Contingencies
|
Operating
Leases - In the normal course of business, the Company rents land, primarily for
office space, staff quarters and parking space for Company vehicles. The
operating lease agreements generally contain renewal options that may be
exercised at the Company’s discretion after the completion of the base rental
terms. The Company was obligated under operating leases requiring minimum
rentals as follows:
|
As
of March 31,
|
|
|
|
|
|
|
|
|
|
Remainder
of 2009
|
|
$
|
100,219
|
|
|
2010
|
|
|
114,743
|
|
|
2011
|
|
|
-
|
|
|
2012
|
|
|
-
|
|
|
2013
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
|
214,962
|
|
During
the three months ended March 31, 2009 and 2008, rental expenses included in
general and administrative expenses were $35,479 and $8,214,
respectively.
As of
March 31, 2009, the company did not have any contingent
liabilities.
The
Company is obligated to provide uninterrupted piped gas to connected users and
to ensure the safety in the process of piped gas operations. 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.
Deposits
in banks in the PRC are not insured by any government entity or agency, and are
consequently exposed to risk of loss. Management believes the probability of a
bank failure, causing loss to the Company, is remote.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
13.
|
Environmental
Matters
|
The
Company does not anticipate any material future cash requirements to
environmental issues. If circumstances change, the Company will record the
estimated charges to return the sites to their original condition.
|
14.
|
Business
and geographical segments
|
The
Company’s operations are classified into two principal reportable segments which
are provision of gas pipe connection services and provision of natural
gas. Separate management of each segment is required because each business
unit is subject to different production and technology strategies.
Reportable
Segments
|
|
|
Provision of
gas pipe
connection
services
|
|
|
Provision of
natural gas
|
|
|
Corporate
|
|
|
Provision of
connection
services
|
|
|
Provision of
natural gas
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
For the three months ended March 31, 2009
|
|
|
For the three months ended March 31, 2008
|
|
|
For the three months ended
March 31
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
External
revenue
|
|
$
|
146,752
|
|
|
$
|
178,265
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
101,755
|
|
|
$
|
-
|
|
|
$
|
325,017
|
|
|
$
|
101,755
|
|
|
Interest
income
|
|
|
8,357
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,357
|
|
|
|
-
|
|
|
Interest
expense
|
|
|
(211
|
)
|
|
|
-
|
|
|
|
(460
|
)
|
|
|
-
|
|
|
|
(124
|
)
|
|
|
-
|
|
|
|
(671
|
)
|
|
|
(124
|
)
|
|
Depreciation
and amortization
|
|
|
-
|
|
|
|
94,029
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42,334
|
|
|
|
-
|
|
|
|
94,029
|
|
|
|
42,334
|
|
|
Net
profit/(loss) after tax
|
|
|
118,204
|
|
|
|
(436,149
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(219,559
|
)
|
|
|
-
|
|
|
|
(317,945
|
)
|
|
|
(219,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for long-lived assets
|
|
|
-
|
|
|
|
128,133
|
|
|
|
-
|
|
|
|
-
|
|
|
|
228,412
|
|
|
|
-
|
|
|
|
128,133
|
|
|
|
228,412
|
|
|
|
|
As at March 31, 2009
|
|
|
At December 31, 2008
|
|
|
As at March
31, 2009
|
|
|
At December
31, 2008
|
|
|
Assets
|
|
|
14,312,852
|
|
|
|
7,523,909
|
|
|
|
2,544,766
|
|
|
|
13,930,906
|
|
|
|
7,395,087
|
|
|
|
5,094,134
|
|
|
|
24,381,527
|
|
|
|
26,420,127
|
|
The
Company’s operations are located in the PRC. All revenue is from customers in
the PRC. All of the company’s assets are located in the PRC.
Accordingly, no analysis of the Company’s sales and assets by geographical
market is presented.
15.
Discontinued Operations
Effective
September 26, 2008, the Company entered into an asset swap in which it disposed
of the subsidiary Hunchun SingOcean, including substantially (99%) of the net
assets, for a 49% ownership in Qinhuangdao Chensheng Gas Co. Ltd. The results of
operations are recorded under the discontinued operations amounting to $0 and a
loss of $17,838 for the three months ended March 31, 2009 and March 31, 2008,
respectively.
17.
Registration rights
In
connection with the closing of the August 14, 2008 private placement, the
Company entered into a Registration Rights Agreement (the “Registration Rights
Agreement”) with China Hand Fund I. L. P. pursuant to which, among other things,
the Company agreed to register all of the shares of common stock underlying the
securities issued to China Hand (collectively, the “Shares”) within a
pre-defined period. Under the terms of the Registration Rights Agreement,
the Company is obligated to file a registration statement (the “Registration
Statement”) under the Securities Act of 1933 covering the resale of the
Shares. If the Company is unable to file the Registration Statement, cause
it to become effective or maintain its effectiveness as required by the
Registration Rights Agreement, the Company is subject to registration delay
payments in amounts of cash, as partial liquidated damages and not as a penalty,
equal to 1.0% of the aggregate Investment Amount paid by such Holder for Shares
pursuant to the Purchase Agreement. The parties agree that in no event
will the Company be liable for liquidated damages under this Agreement in excess
of 1.0% of the aggregate Purchase Price in any 30-day period and the maximum
aggregate liquidated damages payable to a holder under this agreement shall be
fifteen percent (15%) of the aggregate purchase price paid by purchaser pursuant
to the purchase agreement.
Certain
registration rights from the August 20, 2008 private placement were amended and
restated in connection with the April 30, 2009 Private Placement as discussed in
Note 18 below.
18.
Subsequent Events
Issuance
of Series B Convertible Preferred Stock Securities Purchase
Agreement
On April
30, 2009, China New Energy Group Company (the “Company”) entered into a Series B
Convertible Preferred Stock Securities Purchase Agreement (the “SPA”) with China
Hand Fund I L.P. (“China Hand”).
Pursuant
to the SPA, on May 1, 2009, the Company issued and sold to China Hand, and China
Hand purchased from the Company, 1,116,388 shares of the Company’s Series B
Convertible Preferred Stock (“Series B Preferred Stock”) and warrants (the
“Warrants”) to purchase 7,814,719 shares of its Common Stock at an initial
exercise price of $0.187 per share (subject to adjustments) for a period of five
(5) years following the date of issuance for an aggregate purchase price of
$5,400,000 (the “Private Placement”).
Kuhns
Brothers Securities Corporation (“Kuhns Brothers”) acted as placement agent in
connection with the Private Placement. As compensation for its services, Kuhns
Brothers received a cash fee equal to $540,000, representing 10% of the gross
proceeds received from the Private Placement, as well as warrants to purchase
3,907,358 shares of the Company’s Common Stock (the “Agent Warrants”),
representing 10% of the aggregate number of shares of common stock issuable to
China Hand in the Private Placement upon conversion of the Preferred
Stock.
In
connection with the signing of the SPA, on April 30, 2009, the Company also
entered into a Closing Escrow Agreement by and among the Company, China Hand and
Escrow LLC (the “Escrow Agent”), pursuant to which China Hand agreed to deposit
all funds due to the Company under the SPA in escrow until such time as all
closing conditions of the SPA have been satisfied and the Escrow Agent shall
have received notice, executed by both the Company and China Hand, instructing
the Escrow Agent to release such funds to the Company. The Closing Escrow
Agreement terminates upon the release of all funds from escrow as described
above, or upon the 90
th
day
following the date of the Closing Escrow Agreement if no such instructions to
disburse funds are received by the Escrow Agent, on which date all such
funds will be returned to China Hand.
Make
Good Provision
Additionally,
the Company agreed to make good provisions that will require the Company to
issue to China Hand up to 334,916 additional shares (the “Make Good Shares”) of
its Series B Preferred Stock if it does not achieve an audited after-tax net
income of $5.0 million for the year ending December 31, 2009 (the “2009 Income
Target”); if the Company is successful in achieving the 2009 Income Target,
China Hand will transfer 22,327 shares of its Series B Preferred Stock to
certain members of the Company’s management, which shares have been deposited
into an escrow account. The Company also agreed to issue to China
Hand 27,910 shares of Series B Preferred Stock if the Company’s Common Stock is
not listed for trading on a national securities exchange on or before January
31, 2010 (the “Listing Shares”).
Amendment
and Restatement of Certain Registration Rights
In
connection with the closing of the Private Placement, the Company and China Hand
amended and restated that certain registration rights agreement
between the Company and China Hand dated August 20, 2008. Pursuant to
the Amended and Restated Registration Rights Agreement (the “Amended and
Restated Registration Rights Agreement”), among other things, the
Company agreed to register all of the shares of common stock underlying the
securities issued to China Hand in the Private Placement, as well as the private
placement that was consummated on August 20, 2008 (collectively, the “Shares”)
within a pre-defined period. Under the terms of the Amended and Restated
Registration Rights Agreement, the Company is obligated to file a registration
statement (the “Registration Statement”) under the Securities Act of 1933
covering the resale of the Shares by May 30, 2009. The Company is subject to
registration delay payments in amounts prescribed by the Amended and Restated
Registration Rights Agreement if it is unable to file the Registration
Statement, cause it to become effective or maintain its effectiveness as
required by the Amended and Restated Registration Rights
Agreement. Registration delay payments will accrue at a rate of
$54,000 per month or one percent (1%) of the gross proceeds of the Private
Placement; provided that the maximum aggregate amount of the registration delay
payments pursuant to the Amended and Restated Registration Rights Agreement is
$810,000, or fifteen percent (15%) of the gross proceeds of the Private
Placement.
Waiver
of Certain Post-Closing Obligation in the August Securities Purchase
Agreement
As
partial consideration for the Company’s issuance of the Series B Preferred
Stock, and in connection with the closing of the Private Placement, the Company
and China Hand executed a Waiver (the “Waiver”) of certain post-closing
obligations relating to the private placement consummated between the parties on
August 20, 2008. Specifically, China Hand waived its rights (i)
to 557,212 shares of the Company’s Series A Preferred Stock held in escrow and
due to China Hand as of the date of the closing pursuant to a Securities
Purchase Agreement dated August 8, 2008 (the “August SPA”); provided that the
Company agreed to deliver to China Hand 241,545 shares of Series A Preferred
Stock and to place an additional 241,545 shares of Series A Preferred Stock into
escrow, to be delivered to China Hand if the Company’s after-tax net income for
the year ending December 31, 2009 is not at or above $5,000,000 (the “Amended
Series A Make Good”); (ii) under Section 6.18 of the August SPA in favor of the
Amended Series A Make Good; (iii) to liquidated damages under Section 6.31 of
the August SPA arising from the Company’ s failure to effect a
reverse split of its Common Stock prior to March 31, 2009; and (iv)
its rights to liquidated damages under a Registration Rights Agreement dated
August 20, 2008, provided that the parties enter into the Amended and Restated
Registration Rights Agreement.
Board
of Directors Nomination
In
connection with the Private Placement, China Hand, together with the holders of
the Company’s Series A Convertible Preferred Stock (the “Series A Preferred
Stock”), will have the right to nominate an aggregate of four (4) members to the
Company’s Board of Directors following the closing of the Private
Placement. In connection with the closing of the private placement
consummated between the parties on August 20, 2008 as noted above, China Hand
nominated John D. Kuhns and James Tie Li to the Company’s Board of Directors,
and accordingly, may nominate up to two additional members to the Board of
Directors. John D. Kuhns is the president, chief executive officer,
director and principal shareholder of Kuhns Brothers, and is a principal of
China Hand. James Tie Li is a consultant for Kuhns
Brothers.
Material Modification to the Rights
of Security Holders
In
connection with the Private Placement, the Company filed a Certificate of
Designations of Preferences, Rights and Limitations of Series B Convertible
Preferred Stock with the Secretary of State of the State of Delaware (the
“Certificate”). Pursuant to the Certificate, there are 2,000,000 shares of
Series B Preferred Stock authorized. The holders of the Series B 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.
Additionally,
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. For so long as the number of outstanding
shares of Series B Preferred Stock is at least thirty percent (30%) of the total
number of shares of Series B Preferred Stock issued under the SPA, the holders
of Series B Preferred Stock shall vote together as a single class with the
holders of the Company’s Common Stock, and the holders of any other class or
series of shares entitled to vote with the Common Stock, with the holders of
Series B Preferred Stock issued under the SPA being entitled to seventy percent
(70%) of the total votes on all such matters regardless of the actual number of
shares of Series B Preferred Stock then outstanding, and the holders of Series A
Preferred Stock and Common Stock being entitled to their proportional share of
the remaining 30% of the total votes based on their respective voting power as
calculated under the Certificate of Designations of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock and the Company’s
Certificate of Incorporation.
Each share of Series B 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 Series B 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.
|
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, 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 Annual Report on Form 10-K filed
with the Securities and Exchange Commission on April 15, 2009, 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,” are references to the
combined business of China New Energy Group Company and its wholly-owned
subsidiaries, Willsky Development, SingOcean, Chensheng Gas, Acheng
SingOcean, Yingkou Zhongneng (Dashiqiao SingOcean) and Tianjin CNE, but do
not include the stockholders of China New Energy;
|
|
|
·
|
“Willsky
Development” are references to Willsky Development, Ltd.;
|
|
|
·
|
“SingOcean”
are references to Tianjin SingOcean Public Utility Development Co.,
Ltd.;
|
|
|
·
|
“Chensheng
Gas” are references to Qinhuangdao Chensheng Gas Co. Ltd.;
|
|
|
·
|
“Acheng
SingOcean” are references to Tianjin SingOcean Public Utility Development
Co., Ltd. - Acheng Division;
|
|
|
·
|
“Dashiqiao
SingOcean” are references to Tianjin SingOcean Public Utility Development
Co., Ltd. - Dashiqiao Division;
|
|
|
·
|
“Yingkou
Zhongneng” are references to Yingkou Zhongneng Gas Development Co.,
Ltd
|
|
|
·
|
“Tianjin
CNE” are references to China New Energy (Tianjin) Investment and
Consulting Co., Ltd
|
|
|
·
|
“China,”
“Chinese” and “PRC,” are references to the People’s Republic of
China;
|
|
|
·
|
“BVI”
are references to the British Virgin Islands;
|
|
|
·
|
“RMB”
refer to Renminbi, the legal currency of China;
|
|
|
·
|
“U.S.
dollar,” “$” and “US$” are to the legal currency of the United
States;
|
|
|
·
|
“SEC”
means the Securities and Exchange Commission; and
|
|
|
·
|
“Securities
Act” mean the Securities Act of 1933, as amended, and “Exchange Act” mean
the Securities Exchange Act of 1934, as
amended.
|
Overview
of Our Business
We are a
vertically integrated natural gas company engaged in the development of natural
gas distribution networks, and the distribution of natural gas to residential,
industrial and commercial customers in small and medium sized cities in
China.
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 61,000 consumers in these cities,
and we anticipate that we will be able to extend these distribution networks to
connect in excess of 115,000 consumers in these cities by 2010.
We
procure our natural gas by purchasing natural gas from third-party suppliers.
Once natural gas is extracted by the supplier, 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.
Acquisition
of SingOcean
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.
Private
Placements
On August
20, 2008, we completed a private placement in which we sold to China Hand Fund
I, LLC, or 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.
Subsequently,
on May 1, 2009, the Company issued and sold to China Hand, and China Hand
purchased from the Company, 1,116,388 shares of the Company’s Series B
Convertible Preferred Stock and warrants to purchase 7,814,719 shares of its
Common Stock at an initial exercise price of $0.187 per share (subject to
adjustments) for a period of five (5) years following the date of issuance for
an aggregate purchase price of $5,400,000.
Additionally,
the Company agreed to make good provisions that will require the Company to
issue to China Hand up to 334,916 additional shares of its Series B Preferred
Stock if it does not achieve an audited after-tax net income of $5.0 million for
the year ending December 31, 2009; if the Company is successful in achieving the
2009 Income Target, China Hand will transfer 22,327 shares of its Series B
Preferred Stock to certain members of the Company’s management. The
Company also agreed to issue to China Hand 27,910 shares of Series B Preferred
Stock if the Company’s Common Stock is not listed for trading on a national
securities exchange on or before January 31, 2010.
Kuhns
Brothers Securities Corporation, or Kuhns Brothers, acted as placement agent in
connection with the August 20, 2008 and May, 1, 2009 private placements. In each
case, as compensation for its services, Kuhns Brothers received a cash fee equal
to 10% of the gross proceeds received from each private placement, as well as
warrants to purchase 10% of the aggregate number of shares of common stock
issuable to China Hand in each private placement upon conversion of the Series A
and Series B Preferred Stock. Accordingly, Kuhns Brothers received
cash fees of $900,000 and $540,000, and warrants to purchase
6,500,804 and 3,907,358 shares of the Company’s common stock, in
connection with the August 20, 2008 and May 1, 2009 private placements,
respectively.
Equity
Swap
On
September 16, 2008, we, through our 99%-owned subsidiary Tianjin
SingOcean Public Utility Development Co., Ltd., entered into an Equity Swap
Agreement with Mr. Xiuhai Tian, whereby we acquired from Mr. Tian
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.
On
December 10, 2008, we entered into an Agreement for Equity Transfer with the
holders of the remaining 51% outstanding equity in Chensheng
Gas. Pursuant to the Agreement for Equity Transfer, the Company
agreed to purchase the remaining 51% of the outstanding equity of Chensheng Gas
from 17 individuals for an aggregate purchase price of RMB 12.56 million
(approximately $1.84 million). The transaction was consummated on
December 30, 2008, following which the Company now owns 51% of the equity of
Chensheng Gas, and Tianjin SingOcean now owns 49% of the equity of Chensheng
Gas.
Our
Current Organizational Structure
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 Huanlong Commercial and Trading
Company.
On
January 23, 2009, Dashiqiao SingOcean was converted from a division of SingOcean
to a majority-owned subsidiary, and was renamed as Yingkou Zhongneng Gas
Development Co., Ltd. SingOcean currently owns 70% of the equity of
Yingkou Zhongneng, with the remaining 30% owned by Mr. Zhao Jian.
SingOcean
continues to hold 49% of the equity of Chensheng Gas, with the
remaining 51% owned by China New Energy, and Acheng SingOcean continues to
be a wholly-controlled division of SingOcean.
Acheng
SingOcean and Yingkou Zhongneng are principally responsible for the construction
and operation of the natural gas distribution networks in the cities of Acheng
and Dashiqiao in Northeast China. Chensheng Gas is a natural gas distribution
company operating in the Nandaihe area in Northern China, which could
potentially provide natural gas to an aggregate of 23,000 individuals in the
Nandaihe area by 2012, and we anticipate that it will connect to an excess of
5,000 customers every year over the next three to five years.
We have
established the wholly-owned subsidiary – China New Energy (Tianjin) Investment
and Consulting Co., Ltd on January 12, 2009, in Tianjin, China, for investment
holding purposes.
The
following chart reflects our organizational structure as of the date of this
report.
We have
moved our principal executive office in China to the new address in January,
2009. The new address is 20/F, Center Plaza, No.188 Jiefang Road, He Ping
District,Tianjin, China, and our telephone number is +(86 22) 5829
9778.
Insurance
The
Company has purchased Property Insurance, employee Accident Insurance and Public
Liability Insurance for Chensheng Gas and Yingkou Zhongneng.
First Quarter
Financial Performance Highlights
We
continued to experience strong demand for our products and services during the
first fiscal quarter of 2009 and growth in our revenues and net
income.
The
following are some financial highlights for the first quarter of
2009:
|
|
·
|
Revenues:
Our revenues were $325,017 for the first quarter of 2009, an increase of
142% from the same period of 2008.
|
|
|
·
|
Gross
Margin: Gross margin was 62,517 for the first quarter of 2009, an
increase of 74% from the same period of
2008.
|
|
|
·
|
Operating
Loss: Operating Expense was $345,682 for the first quarter of 2009, an
increase of 57% from the same period of
2008.
|
|
|
·
|
Net
Loss: Net Loss was $317,945 for the first quarter of 2009, an increase of
34% from the same period of 2008.
|
|
|
·
|
Fully
diluted loss per share was $0.00 for the first quarter of
2009.
|
Results
of Operations
Three
months ended March 31, 2009 Compared to Three months ended March 31,
2008
The
following table summarizes the results of our operations during the three-month
periods ended March 31, 2009 and 2008, and provides information regarding the
dollar and percentage increase or (decrease) from the three-month period ended
March 31, 2008 to the three-month period ended March 31, 2009.
All
amounts in thousands of U.S. dollars, except percentages
|
|
|
Three Months
Ended
March 31, 2009
|
|
|
Three Months
Ended
March 31, 2008
|
|
|
Percentage
Change
(Decrease)
|
|
|
Revenues
|
|
$
|
325,017
|
|
|
$
|
101,755
|
|
|
|
219
|
%
|
|
Cost
of sales
|
|
$
|
262,500
|
|
|
$
|
75,937
|
|
|
|
246
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$
|
62,517
|
|
|
$
|
25,818
|
|
|
|
142
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
408,199
|
|
|
$
|
246,
419
|
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Expenses)
|
|
$
|
(345,682
|
)
|
|
$
|
(220,601
|
)
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(expense)
|
|
$
|
(671
|
)
|
|
$
|
(124
|
)
|
|
|
441
|
%
|
|
Other
income (expense)
|
|
$
|
8,450
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
$
|
(337,903
|
)
|
|
$
|
(220,725
|
)
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
997
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(317,
945
|
)
|
|
$
|
(237,397
|
)
|
|
|
34
|
%
|
Revenues
. Revenues
are derived primarily from connection fees and sales of natural gas. Revenues
increased $223,262, or 219% to $325,017 for the three months ended March 31,
2009 from $101,755 for the same period in 2008. This increase was mainly
attributable to an increase in number of connection households and increase in
natural gas consumption.
Cost of Sales.
Cost of sales
consists primarily of the purchase of natural gas from our suppliers. Our cost
of sales increased $186,563, or 246%, to $262,500 for the three months ended
March 31, 2009 from $75,937 during the same period in 2008. Such increase was
mainly attributable to a corresponding increase in the number of households
connected to our distribution network and increase in natural gas consumption by
our customers.
As a
percentage of revenues, the cost of sales decreased to 81% during the three
months ended March 31, 2009, from 75% in the same period in 2008, which was
mainly attributable to an additional revenue stream from a project not affected
by seasonality, which allows the company to collect connection
fees.
Gross Profit.
Our gross
profit increased $36,699, or 142%, to $62,517 for the three months ended March
31, 2009 from $25,818 during the same period in 2008. Gross profit as a
percentage of revenues was 19% for the three months ended March 31, 2009, a
decrease of 24% from 25% during the same period in 2008. Such percentage
increase was mainly due to an additional revenue stream from a project not
affected by seasonality, which allows the company to collect connection
fees.
General and Administrative
Expenses.
General and administrative expenses, including sales
representative commissions, promotion fees, salesperson salaries and expenses,
depreciation charges and other fees, increased $161,780, or 66%, to $408,199 for
the three months ended March 31, 2009 from $246,419 during the same period in
2008. As a percentage of revenues, general and administrative expenses
deceased to 126% for the three months ended March 31, 2009 from 242% for the
same period in 2008. Such increase in general and administrative expenses
resulted from an increase in sales and administrative personnel, while the
decrease in selling, general and administrative expenses as a percentage of
revenues resulted from the greater increase in revenues for the reasons
identified above.
Net Income.
Net loss
increased $80,548, or 34% to a net loss of $317,945 for the three months ended
March 31, 2009 from net loss of $237,397 for the same period of 2008, as a
result of the factors described above.
Liquidity and
Capital Resources
General
As of
March 31, 2009, we had cash and cash equivalents (excluding restricted cash) of
approximately $3,854,769. 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)
|
|
|
Three months ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
(2,362,196
|
)
|
|
$
|
(209,626
|
)
|
|
Net
cash provided by (used in) investing activities
|
|
$
|
(50,618
|
)
|
|
$
|
(228,412
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
$
|
438,852
|
|
|
$
|
59,656
|
|
|
Effect
of exchange rate changes in cash
|
|
$
|
4,777
|
|
|
$
|
60,043
|
|
|
Net
cash flow
|
|
$
|
(50,618
|
)
|
|
$
|
(318,339
|
)
|
Operating
Activities
Net cash
used in operating activities was $2,362,196 for the three months ended March 31,
2009, compared to $209,626 net cash used in operating activities
during the same period of 2008. This decrease in funds provided by our operating
activities was primarily due to decrease in accruals and third party payables,
and the decrease in our business tax and government surcharge
payments
Investing
Activities
Net cash used in investing
activities for the three months ended March 31, 2009 was approximately
$
50,618
, which is a
decrease of $
177,794
from net cash used in investing
activities of $
228,412
for the same period of 2008
. Such decrease is
primarily
due to a
decrease
in our
pipeline network investment
.
Financing
Activities
Our
debt to equity ratio (total debt /total
assets) was
9
% as of March
31, 2009. Net cash provided by financing activities for the three
months ended March 31, 2009 was $
438,852
, which is an
increase
of $
379,196
from net cash provided by financing
activities of $
59,656
during the same period of 2008. Such
increase is mainly due to contributions
from a non–controlling interest of
Yingkou Zhongneng.
We
believe that our currently available working capital should be adequate to
sustain our operations at our current levels through at least the next twelve
months.
Inflation
Our
business, revenues and operating results have not been affected in any material
way by inflation.
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 this time.
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.
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Not
Applicable.
|
ITEM
4T.
|
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.
Yangkan Chong, our Chief Executive Officer and Mr. Peng Mun Foo, our Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of March 31, 2009. Based on that
evaluation, Mr. Chong and Mr. Foo concluded that as of March 31, 2009, 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.
Changes in
Internal Control Over Financial Reporting.
During
the fiscal quarter ended March 31, 2009, 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.
|
Departure
of Chief Executive Officer
On May
18, 2009, Jiaji Shang resigned as the President and Chief Executive Officer of
China New Energy Group Company (the “Company”) and from all officer positions
that he held with any of our subsidiaries, effective immediately. Mr.
Shang’s resignation was not in connection with any disagreement with the
Company. Mr. Shang will remain as the Chairman of the Board of
Directors of the Company.
Appointment
of Chief Executive Officer
On May
15, 2009, Mr. Yangkan Chong, age 54, was appointed as the Company’s President
and Chief Executive Officer effective May 18, 2009. Mr. Chong has served as a
director of the Company since April 27, 2008, and has served as the Vice
Chairman of our subsidiary, Tianjin SingOcean Public Utility Development Co.,
Ltd., since October 2006. From March 2008 to May 2009, Mr. Chong served as the
Deputy Chief Executive Officer of China EnerSave Limited, a renewable energy
provider that is listed on the Singapore Stock Exchange, and Mr. Chong started
his career with the company as a Senior General Manager in March 2007. Mr. Chong
has more than 20 years of experience in the energy industry, and has held senior
level positions with energy-related companies including China Light & Power
(CLP) Hong Kong, Enron International, Edison Mission Energy, Singapore Power and
Exxon Oil and other Singapore Government-linked companies. Mr. Chong holds a
Master of Science (Mechanical Engineering) from the National University of
Singapore and a Bachelor of Engineering (Mechanical & Production) from the
University of Singapore.
In
connection with his appointment as Chief Executive Officer, Mr. Chong entered
into an employment agreement, wherein Mr. Chong has agreed to serve
as Chief Executive Officer for an initial one year period commencing on May
18, 2009 at an annual salary of $144,000. The initial one year term will
be automatically extended for successive one year periods unless either party
gives prior written notice to the other party at least 30 days prior to the end
of the employment period. The salary is subject to annual review. Mr.
Chong will be eligible for bonus or other incentive plans and programs as may be
adopted by the Company’s Board of Directors from time to time. The Company
may terminate Mr. Chong's employment at any time for cause and without cause
upon 30 days prior written notice or in the event of Mr. Chong's death or
disability. Mr. Chong may terminate his employment with 30 days notice, or
immediate notice in the event of constructive termination. Mr. Chong’s
agreement also contains customary non-competition provisions regarding actions
within the People’s Republic of China for a period of two years following the
date of termination of his employment.
Appointment
of Directors
On April
30, 2009, the Company entered into a Series B Convertible Preferred Stock
Securities Purchase Agreement (the “
SPA
”) with China Hand
Fund I L.P. (“
China
Hand
”). Under the SPA, which closed on May 1, 2009, the
Company issued and sold to Vicis Capital Master Fund (“
Vicis
”), a designee
of China Hand, for an aggregate purchase price of $5,400,000, 1,116,388 shares
of the Company’s Series B Convertible Preferred Stock, par value $0.001 per
share (the “
Series B
Preferred Stock
”) and warrants to purchase 7,814,719 shares
of Common Stock at an initial exercise price of $0.187 per share
(subject to adjustments) for a period of five (5) years following the date of
issuance.
Pursuant
to the SPA, the Company is required to increase the size of the Board from five
(5) to seven (7), and the holders of the Series B Preferred Stock have the right
to nominate two (2) members to the Board of Directors. Accordingly,
on May 15, 2009 the Board of Directors of the Company increased the
size of the board to seven (7) and elected Ms. Mary E. Fellows and Mr. Shadron
L. Stastney, the nominees of the holders of the Series B Preferred Stock, to
fill the two vacancies created thereby, effective of the tenth day following the
mailing of an Information Statement on Schedule 14f-1 to be filed with the
Securities and Exchange Commission as soon as practicable. At
present, no written agreements have been executed regarding the compensation to
the new directors for their service on the Company’s Board of
Directors. Pursuant to verbal agreements, Mr. Stastney and Ms.
Fellows will each receive US$20,000 annually for service on the Company’s Board
of Directors.
Mary E.
Fellows
Ms.
Fellows, age 47, has been the executive vice president and corporate secretary
of China Hydroelectic Corporation since 2006. Ms. Fellows has been a
partner and executive vice president of Kuhns Brothers, Inc., an investment
boutique, since 1997. She is a co-chairman of the Distributed Power
Company, a company with investments in solar information publications. From 2003
to 2006, she was a director of GenSelf Corporation. From 1997 to 2002, she
was a corporate secretary of the Solar Electric Light Company. From 1996 to
1999, she was a director of Corporate Administration and corporate secretary of
the New World Power Corporation. Ms. Fellows is also a member of the board of
directors of China Natural Energy Corporation, China Silicon Corporation, China
Electrode Corporation, China Board Mill Corporation, Paragon Semitech USA and
Lime Rock, LLC. Ms. Fellows received her Bachelor's degree in
Science (Alpha Chi) from Teikyo Post University.
Ms.
Fellows is a partner and executive vice president of Kuhns Brothers, Inc., which
acted as placement agent in connection with our private placements completed in
August 2008 and April 2009.
Shadron L.
Stastney
Mr. Stastney,
age 39,
has been a partner at
Vicis Capital, LLC, Since June 2004, which is an investment management firm and
the managing partner of our controlling shareholder, Vicis Capital Master
Fund. From July 2001 to May 2004, Mr. Stastney was a managing director of
Victus Capital, LP, an investment management firm. Mr. Stastney received
his Bachelor's degree in Arts from the University of North Dakota and a Juris
Doctor degree from the Yale Law School.
The
following exhibits are filed as part of this report or incorporated by
reference:
|
Exhibit No.
|
|
Description
|
|
10.1
|
|
Employment
Agreement between the Company and Mr. Yangkan Chong, dated May 11,
2009.
|
|
|
|
|
|
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:
May 20, 2009
|
CHINA NEW ENERGY GROUP
COMPANY
|
|
|
|
|
By:
|
/s/ Yangkan Chong
|
|
|
Yangkan
Chong
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
By:
|
/s/ Peng
Mun Foo
|
|
|
Peng
Mun Foo
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Accounting
Officer)
|
EXHIBIT
INDEX
|
Exhibit No.
|
|
Description
|
|
10.1
|
|
Employment
Agreement between the Company and Mr. Yangkan Chong, dated May 11,
2009.
|
|
|
|
|
|
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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