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: June 30, 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, 300042
People's
Republic of China
(Address
of principal executive offices, Zip Code)
(86 22) 5829
9778
(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 Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
¨
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 stock, as of
August 17, 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 and Six
Months Ended June 30, 2009
TABLE
OF CONTENTS
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
2
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
20
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
28
|
ITEM
4T.
|
CONTROLS
AND PROCEDURES
|
28
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
28
|
ITEM 1A.
|
RISK
FACTORS
|
28
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
29
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
29
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
29
|
ITEM
5.
|
OTHER
INFORMATION
|
29
|
ITEM
6.
|
EXHIBITS
|
29
|
PART
I
FINANCIAL
INFORMATION
ITEM
1.
|
FINANCIAL
STATEMENTS.
|
China
New Energy Group Company
Condensed
Consolidated Financial Statements
For the
three and six months ended
June 30,
2009
(Stated
in US dollars)
|
Page
|
Condensed
Consolidated Balance Sheets (Unaudited)
|
3
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
5
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
6
|
China
New Energy Group Company
Condensed
Consolidated Balance Sheets
(Stated
in US Dollars)
|
|
June
30
|
|
|
December
31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
6,128,037
|
|
|
$
|
5,833,508
|
|
Accounts
receivable
|
|
|
2,887,687
|
|
|
|
2,183,087
|
|
Other
receivables
|
|
|
2,013,839
|
|
|
|
2,254,997
|
|
Inventories,
net
|
|
|
245,724
|
|
|
|
254,585
|
|
Prepayment
|
|
|
-
|
|
|
|
1,558,361
|
|
Other
current assets
|
|
|
77,728
|
|
|
|
3,340
|
|
Total
current assets
|
|
|
11,353,015
|
|
|
|
12,087,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
6,819,008
|
|
|
|
6,844,262
|
|
Construction
in progress
|
|
|
9,777,981
|
|
|
|
5,589,551
|
|
Related
party receivable
|
|
|
-
|
|
|
|
84,120
|
|
Intangible
assets
|
|
|
1,834,265
|
|
|
|
1,814,316
|
|
TOTAL
ASSETS
|
|
$
|
29,784,269
|
|
|
$
|
26,420,127
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
44,558
|
|
|
$
|
111,660
|
|
Accrued
expenses
|
|
|
331,008
|
|
|
|
256,071
|
|
Accruals
and other payable-Third Party
|
|
|
544,120
|
|
|
|
3,144,043
|
|
Tax
payable
|
|
|
688,629
|
|
|
|
693,116
|
|
Related
party payable
|
|
|
97,969
|
|
|
|
-
|
|
Dividend
payable
|
|
|
518,000
|
|
|
|
194,000
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,224,284
|
|
|
|
4,398,890
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
New Energy's Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred
shares: 10,000,000 shares authorized, $0.001 par value, 2,973,761 and
1,857,373 shares issued and outstanding as of June 30,2009 and December
31, 2008, respectively
|
|
|
2,973
|
|
|
|
1,857
|
|
Common
Stock: 500,000,000 shares authorized, $0.001 par value, 100,000,041 shares
issued and outstanding as of June 30,2009 and December 31, 2008,
respectively
|
|
|
100,000
|
|
|
|
100,000
|
|
Additional
paid in capital
|
|
|
27,269,162
|
|
|
|
19,725,482
|
|
Retained
deficit
|
|
|
(2,646,872
|
)
|
|
|
(619,357
|
)
|
Statutory
surplus reserve fund
|
|
|
1,903,034
|
|
|
|
1,903,034
|
|
Accumulated
other comprehensive income
|
|
|
735,847
|
|
|
|
730,168
|
|
Total
China New Energy's Stockholders' equity
|
|
|
27,364,144
|
|
|
|
21,841,184
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
|
195,841
|
|
|
|
180,053
|
|
TOTAL
EQUITY
|
|
|
27,559,985
|
|
|
|
22,021,237
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
29,784,269
|
|
|
$
|
26,420,127
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements
China
New Energy Group Company
Condensed
Consolidated Statement of Operations and Comprehensive Income (Loss) -
(Unaudited)
(Stated
in US Dollars)
|
|
For
the Three months ended
|
|
|
For
the Six months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Connection
services
|
|
$
|
2,627,230
|
|
|
$
|
1,780,417
|
|
|
$
|
2,773,982
|
|
|
$
|
1,780,417
|
|
Natural
gas
|
|
|
183,361
|
|
|
|
125,662
|
|
|
|
361,625
|
|
|
|
227,417
|
|
|
|
|
2,810,591
|
|
|
|
1,906,079
|
|
|
|
3,135,608
|
|
|
|
2,007,834
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connection
services
|
|
|
656,874
|
|
|
|
387,237
|
|
|
|
693,562
|
|
|
|
387,237
|
|
Natural
gas
|
|
|
56,398
|
|
|
|
96,698
|
|
|
|
282,210
|
|
|
|
172,635
|
|
|
|
|
713,272
|
|
|
|
483,935
|
|
|
|
975,773
|
|
|
|
559,872
|
|
Gross
Profit
|
|
|
2,097,319
|
|
|
|
1,422,145
|
|
|
|
2,159,835
|
|
|
|
1,447,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
752,489
|
|
|
|
224,714
|
|
|
|
1,160,687
|
|
|
|
471,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
752,489
|
|
|
|
224,714
|
|
|
|
1,160,687
|
|
|
|
471,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,344,830
|
|
|
|
1,197,430
|
|
|
|
999,148
|
|
|
|
976,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in derivative liability
|
|
|
-
|
|
|
|
- 910,000
|
|
|
|
-
|
|
|
|
- 910,000
|
|
Interest
Income
|
|
|
1,270
|
|
|
|
6,539
|
|
|
|
9,627
|
|
|
|
6,415
|
|
Interest
(expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
- 671
|
|
|
|
-
|
|
Other
Income (expenses)
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
Total
other income (expenses)
|
|
|
1,270
|
|
|
|
(903,461
|
)
|
|
|
9,049
|
|
|
|
(903,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations, before tax
|
|
|
1,346,100
|
|
|
|
293,970
|
|
|
|
1,008,198
|
|
|
|
73,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
366,790
|
|
|
|
318,047
|
|
|
|
367,787
|
|
|
|
318,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from continuing operations, net of tax
|
|
|
979,310
|
|
|
|
(24,077
|
)
|
|
|
640,411
|
|
|
|
(244,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net of tax
|
|
|
-
|
|
|
|
235,329
|
|
|
|
-
|
|
|
|
217,491
|
|
Net
Income (Loss)
|
|
|
979,310
|
|
|
|
211,252
|
|
|
|
640,411
|
|
|
|
(27,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Income) Loss attributable to non controlling interest
|
|
|
(14,051
|
)
|
|
|
(8,237
|
)
|
|
|
6,903
|
|
|
|
(7,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) attributable to China New Energy Group
|
|
|
965,259
|
|
|
|
203,015
|
|
|
|
647,314
|
|
|
|
(34,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Incom (Loss)
|
|
|
979,310
|
|
|
|
211,252
|
|
|
|
640,411
|
|
|
|
(27,311
|
)
|
Foreign
currency translation
|
|
|
11,094
|
|
|
|
(127,843
|
)
|
|
|
305
|
|
|
|
-
|
|
Comprehensive
income attributable to the Non-controlling interest
|
|
|
(8,678
|
)
|
|
|
(1,291
|
)
|
|
|
(12,277
|
)
|
|
|
-
|
|
Comprehensive
income (loss) attributable to China New Energy Group
|
|
$
|
981,726
|
|
|
$
|
82,118
|
|
|
$
|
628,439
|
|
|
$
|
(27,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) per share - Basic & Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations attributable to the Company's common
stockholders
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
Discontinued
operations attributable to the Company's common
stockholders
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Net
(Loss) income attributable to the Company's common
stockholders
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
& Diluted
|
|
|
100,000,041
|
|
|
|
100,000,041
|
|
|
|
100,000,041
|
|
|
|
97,566,244
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements
China
New Energy Group Company
Condensed
Consolidated Statements of Cash Flows - (Unaudited)
(Stated
in US Dollars)
|
|
For
The Six Months Ended
|
|
|
|
June
30
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income attributable to China New Energy Group Company
|
|
$
|
647,314
|
|
|
$
|
(34,382
|
)
|
(Loss)
Income attributable to non-controlling interest
|
|
|
(6,903
|
)
|
|
|
15,957
|
|
Change
in derivative liability
|
|
|
|
|
|
|
910,000
|
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
180,187
|
|
|
|
83,066
|
|
Amortization
|
|
|
6,392
|
|
|
|
4,257
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(703,104
|
)
|
|
|
(393,348
|
)
|
Other
receivables
|
|
|
353,535
|
|
|
|
3,141
|
|
Inventories
|
|
|
9,024
|
|
|
|
186,918
|
|
Prepayment
|
|
|
1,559,165
|
|
|
|
-
|
|
Other
current assets
|
|
|
(74,377
|
)
|
|
|
-
|
|
Accounts
payable
|
|
|
(67,166
|
)
|
|
|
349,426
|
|
Accrued
expenses
|
|
|
74,772
|
|
|
|
-
|
|
Accruals
and other payable-Third Party
|
|
|
(693,240
|
)
|
|
|
(801,863
|
)
|
Taxes
payable
|
|
|
(4,933
|
)
|
|
|
(781,975
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
1,280,666
|
|
|
|
(458,803
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Addition
of construction in progress
|
|
|
(4,184,295
|
)
|
|
|
(1,467,327
|
)
|
Addition
of fixed assets
|
|
|
(150,529
|
)
|
|
|
-
|
|
Increase
in short-term loan
|
|
|
|
|
|
|
660,000
|
|
Payments
made to acquire Chensheng
|
|
|
(1,838,946
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(6,173,770
|
)
|
|
|
(807,327
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Issued
preferred stock
|
|
|
4,752,140
|
|
|
|
-
|
|
Contribution
from former non-controlling interest
|
|
|
439,060
|
|
|
|
-
|
|
Loan
from related parties
|
|
|
-
|
|
|
|
252,064
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows provided by financing activities
|
|
|
5,191,201
|
|
|
|
252,064
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes in cash
|
|
|
(3,567
|
)
|
|
|
(11,869
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
294,529
|
|
|
|
(1,025,935
|
)
|
|
|
|
|
|
|
|
|
|
Cash-
beginning of year
|
|
|
5,833,508
|
|
|
|
2,311,028
|
|
|
|
|
|
|
|
|
|
|
Cash-
end of year
|
|
$
|
6,128,037
|
|
|
$
|
1,285,093
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid in cash
|
|
|
671
|
|
|
|
-
|
|
Income
taxes paid in cash
|
|
|
372,605
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
dividend of preferred stock
|
|
|
324,000
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements
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.
Reclassifications
Certain
prior year amounts on the financial statements have been reclassified to conform
to current classifications. Such reclassifications had no effect on net income
(loss).
Results
of operations for the interim periods are not indicative of annual
results.
2.
|
Discontinued
Operations
|
Effective
September 26, 2008, the Company entered into an asset swap in which it disposed
of the 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 are segregated and reported
as discontinued operations in the accompanying consolidated statement of
operations in 2009 and 2008.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3.
|
New
Accounting Pronouncements
|
In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The
FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted
Accounting Principles a replacement of FASB Statement No. 162. This Statement
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. SFAS 168 shall be effective
for financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of this pronouncement did not have a material
impact on the company’s financial statements
On June
12, 2009 the FASB issue two statements that amended the guidance for off-balance
sheet accounting of financial instruments: SFAS No. 177,
Accounting for transfers of
Financial assets,
and SFAS No. 167,
Amendments to FASB Interpretation
No. 46 (R).
SFAS No.
166 revises SFAS No. 140
,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities,
and will require entities to provide more information
about sale of securitized financial assts and similar transactions, particularly
if the seller retains some risk to the assets, the FASB said. The
statement eliminates the concept of a qualifying special-purpose entity, changes
the requirements for the derecognition of financial assets and call upon sellers
of the assets to make additional disclosures about them.
SFAS no.
167 amends FASB Interpretation (FIN) No 46(R),
Consolidation of Variable Interest
Entities,
by altering how a company determines when an entity that is
sufficiently capitalized or not controlled through voting should be
consolidated, the FASB said. A company has to determine whether it
should provide consolidated reporting of an entity based upon the entity’s
purpose and design and the parent company’s ability to direct the entity’s
actions.
The
standards will be effective at the start of the first fiscal year beginning
after November 15, 2009, which will mean January 2010 for companies that are on
calendar years. The Company is currently evaluating the impact that
SFAS No. 166 and No. 167 will have on its financial statements.
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.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.
|
Net
(Loss) Income Per Share
|
Earnings
(loss) per share are computed pursuant to Statement of Financial Accounting
Standards No. 128 “Earnings Per Share” (“SFAS No. 128). Basic net (loss) income
per share is computed by dividing net (loss) income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted net loss per common share is computed by dividing net (loss)
income by the weighted average number of shares of common stock and potentially
outstanding shares of common stock during each period to reflect potential
dilution that could occur from common shares issuable through common stock
equivalents.
Warrants
and contingently issuable shares are included in the diluted EPS denominator
through the treasury stock method. In applying the treasury stock method, all
dilutive potential common shares, regardless of whether they are exercisable,
are treated as if they had been exercised. The treasury stock method assumes
that the proceeds upon exercise are used to repurchase the entity’s common stock
at the average market price during the period. If the exercise price is lower
than the market price of the stock then the proceeds are not sufficient to buy
back all the shares. The incremental shares remaining are added to the weighted
average number of shares outstanding for the period.
Components
of basic and diluted earnings per share were as follows:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
(Loss)
income per share – Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to China New Energy Group
|
|
$
|
965,259
|
|
|
$
|
203,015
|
|
|
$
|
647,314
|
|
|
$
|
(34,382
|
)
|
Dividend
accrued on Preferred Stock
|
|
|
(130,000
|
)
|
|
|
-
|
|
|
|
(324,000
|
)
|
|
|
-
|
|
Deemed
dividend due to Beneficial Conversion Feature
|
|
|
(2,350,829
|
)
|
|
|
-
|
|
|
|
(2,350,829
|
)
|
|
|
-
|
|
(Loss)
income attributable to common stockholders
|
|
|
(1,515,570
|
)
|
|
|
203,015
|
|
|
|
(2,027,515
|
)
|
|
|
(34,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding
|
|
|
100,000,041
|
|
|
|
100,000,041
|
|
|
|
100,000,041
|
|
|
|
97,566,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income per share – Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
-
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
The
following table shows the weighted average number of potentially dilutive shares
excluded from the diluted net (loss) income per share calculation for the three
months and six months ended June 30, 2009 and 2008,
respectively.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Potentially
Dilutive Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock
|
|
|
91,200,235
|
|
|
|
-
|
|
|
|
78,176,499
|
|
|
|
-
|
|
Warrants,
and contingently issuable shares
|
|
|
20,980,665
|
|
|
|
-
|
|
|
|
18,811,693
|
|
|
|
-
|
|
Total
|
|
|
112,180,900
|
|
|
|
-
|
|
|
|
96,988,192
|
|
|
|
-
|
|
These
potentially dilutive securities were excluded because the effect would have been
anti-dilutive.
Inventories
consist of the following:
|
|
June
30
|
|
|
December
31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
245,724
|
|
|
$
|
254,585
|
|
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6.
|
Plant
and Equipment, net
|
|
|
June 30
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
At
cost
|
|
|
|
|
|
|
Office
equipment
|
|
$
|
91,540
|
|
|
$
|
33,893
|
|
Motor
vehicles
|
|
|
280,181
|
|
|
|
187,137
|
|
Gas
transportation vehicles
|
|
|
425,211
|
|
|
|
424,937
|
|
Gas
station
|
|
|
2,103,966
|
|
|
|
2,102,612
|
|
Underground
gas pipelines
|
|
|
4,726,562
|
|
|
|
4,723,520
|
|
|
|
|
7,627,460
|
|
|
|
7,472,099
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(808,452
|
)
|
|
|
(627,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,819,008
|
|
|
$
|
6,844,262
|
|
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.
Depreciation
expense for the six months ended June 30, 2009 and 2008 was $180,187 and $83,066
respectively.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.
|
Intangible
Assets, net
|
|
|
June 30
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
At
cost
|
|
|
|
|
|
|
Land
use rights
|
|
$
|
587,808
|
|
|
$
|
587,430
|
|
Goodwill
|
|
|
1,289,478
|
|
|
|
1,263,492
|
|
|
|
|
1,877,286
|
|
|
|
1,850,922
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
(43,021
|
)
|
|
|
(36,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,834,265
|
|
|
$
|
1,814,316
|
|
Amortization
expense for the six months ended June 30, 2009 and 2008 was $ 6,392 and $ 4,257,
respectively.
Estimated
amortization for the next five years and thereafter is as follows:
Remainder
of 2009
|
|
$
|
6,703
|
|
2010
|
|
|
12,768
|
|
2011
|
|
|
12,768
|
|
2012
|
|
|
12,768
|
|
2013
|
|
|
12,768
|
|
Thereafter
|
|
|
487,012
|
|
|
|
|
|
|
Total
|
|
$
|
544,787
|
|
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2009 other than minimum tax
liability. 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 Tianjin Sing Ocean, Yingkou Zhongneng Gas, and China New Energy
(Tianjin), and Tianjin Binhai ZhongNeng Gas whereas QinHuangDao 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
expenses was $367,787 and $318,047 for the six months ended June 30, 2009 and
2008, respectively. The Company has recorded no deferred tax assets
or liabilities as of June 30, 2009 and 2008, since nearly all differences in tax
basis and financial statement carrying values are permanent
differences.
|
|
For The Three Months Ended
|
|
|
For The Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
tax
|
|
$
|
366,790
|
|
|
$
|
318,047
|
|
|
$
|
367,787
|
|
|
$
|
318,047
|
|
Deferred
tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
366,790
|
|
|
$
|
318,047
|
|
|
$
|
367,787
|
|
|
$
|
318,047
|
|
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 six months and three
months ended June 30, 2009 and 2008 for the following reasons:
|
|
For The three Months Ended
|
|
|
For The six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Profit
before income taxes
|
|
|
1,346,100
|
|
|
|
293,970
|
|
|
|
1,008,198
|
|
|
|
73,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed
“expected” income tax expense at 25%
|
|
$
|
336,525
|
|
|
$
|
73,492
|
|
|
$
|
252,049
|
|
|
$
|
18,311
|
|
Tax
effect on net taxable temporary differences
|
|
|
76,751
|
|
|
|
-
|
|
|
|
20,810
|
|
|
|
-
|
|
Effect
of cumulative tax losses
|
|
|
(46,486
|
)
|
|
|
244,555
|
|
|
|
94,928
|
|
|
|
299,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
366,790
|
|
|
$
|
318,047
|
|
|
$
|
367,787
|
|
|
$
|
318,047
|
|
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9.
|
Related
Party Transactions
|
As of
June 30, 2009 and December 31, 2008, the Company has the following receivable
(payable) balances with related parties:-
|
(a)
|
Huan
Long is a shareholder of the Company's subsidiary Tianjin Sing Ocean since
January 14, 2009
|
|
|
June 30,
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Huan
Long
|
|
$
|
(97,969
|
)
|
|
$
|
-
|
|
Qu
Qiangxi
|
|
|
-
|
|
|
|
84,120
|
|
|
|
$
|
(97,969
|
)
|
|
$
|
84,120
|
|
The
balances have no stated terms for repayment and are not interest bearing and
therefore are presented as long-term assets and liabilities.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10.
|
Concentrations
and Credit Risk
|
The Company
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 Company 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
six months ended June 30 2009, revenue attributed to connection fees was 88% of
total revenue whereas gas revenue contributed to the remaining 12%. For the six
months ended June 30 2008, revenue attributed to connection fees was 91% of
total revenue whereas gas revenue contributed to the remaining 9 %.
For the
six months ended June 30 2009, costs of connection fee contributed to 71% of
costs of good sold whereas cost of gas to remaining 29%. For the six months
ended June 30 2008, costs of connection fee contributed to 69% of costs of good
sold whereas cost of gas contributed to remaining 31%.
At June
30, 2009, one major customer accounted for 49%, of net accounts receivable. 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.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11.
|
Commitments
and Contingencies
|
Operating
Leases - In the normal course of business, the Company leases the land for
office under operating lease agreements. 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 June 30, 2009
|
|
|
|
|
|
|
|
Remainder
of 2009
|
|
$
|
64,624
|
|
2010
|
|
|
114,743
|
|
2011
|
|
|
-
|
|
2012
|
|
|
-
|
|
2013
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
minimum lease payments
|
|
|
179,367
|
|
During
the six months ended June 30, 2009 and 2008, rental expenses included in general
and administrative expenses were $62,593 and $8,748 respectively.
As of
June 30, 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
12.
|
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.
13.
|
Business
and Geographical Segments
|
Reportable
Segments
|
|
For the six months ended June 30, 2009
|
|
|
For the six months ended June 30, 2008
|
|
|
For the six months ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connection
services
|
|
|
Natural gas
|
|
|
Corporate
|
|
|
Connection
services
|
|
|
Natural gas
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
External
revenue
|
|
$
|
2,773,982
|
|
|
$
|
361,625
|
|
|
$
|
|
|
|
$
|
1,780,417
|
|
|
$
|
227,417
|
|
|
$
|
-
|
|
|
$
|
3,135,608
|
|
|
$
|
2,007,834
|
|
Interest
income
|
|
|
9,627
|
|
|
|
|
|
|
|
|
|
|
|
6,415
|
|
|
|
|
|
|
|
|
|
|
|
9,627
|
|
|
|
6,415
|
|
Interest
expense
|
|
(
671)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(671
|
)
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
186,579
|
|
|
|
|
|
|
|
|
|
|
|
87,323
|
|
|
|
|
|
|
|
186,579
|
|
|
|
87,323
|
|
Net
profit/(loss) after tax
|
|
|
1,920,122
|
|
|
|
(194,104
|
)
|
|
|
(1,085,607
|
)
|
|
|
1,134,931
|
|
|
|
79,753
|
|
|
|
(1,241,995
|
)
|
|
|
640,411
|
|
|
|
(27,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for long-lived assets
|
|
|
4,334,824
|
|
|
|
|
|
|
|
|
|
|
|
1,467,327
|
|
|
|
|
|
|
|
|
|
|
|
4,334,824
|
|
|
|
1,467,327
|
|
|
|
As
at June 30, 2009
|
|
|
As
at June 30, 2008
|
|
|
As at June 30, 2009
|
|
|
As at June 30, 2008
|
|
Assets
|
|
|
15,002,960
|
|
|
|
7,363,794
|
|
|
|
7,417,515
|
|
|
|
5,942,797
|
|
|
|
9,538,468
|
|
|
|
3,071,611
|
|
|
|
29,784,269
|
|
|
|
18,552,876
|
|
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.
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14.
|
Issuance
of Series B Convertible Preferred Stock Securities Purchase
Agreement
|
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”). 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 the 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”).
CHINA
NEW ENERGY GROUP COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14.
|
Issuance
of Series B Convertible Preferred Stock Securities Purchase
Agreement (continued)
|
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 Agreements $810,000, or
fifteen percent (15%) of the gross proceeds of the Private
Placement.
The
company has evaluated subsequent events from the balance sheet date through
August 19, 2009 with the date being the date that the financial statements are
issued or are available to be issued. There are no subsequent
events.
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.
Use
of Terms
Except as
otherwise indicated by the context, all references in this Quarterly Report to
(i) “China New Energy,” the “Company,” “we,” “us” or “our” are references to
China New Energy Group Company and its wholly-owned subsidiaries, Willsky
Development, Ltd., or Willsky Development, Tianjin SingOcean Public Utility
Development Co., Ltd., or SingOcean, Qinhuangdao Chensheng Gas Co. Ltd., or
Chensheng Gas, Tianjin SingOcean Public Utility Development Co., Ltd. - Acheng
Division, or Acheng SingOcean, Yingkou Zhongneng Gas Development Co., Ltd., or
Yingkou Zhongneng (formerly Tianjin SingOcean Public Utility Development Co.,
Ltd. - Dashiqiao Division, or Dashiqiao SingOcean), and China New Energy
(Tianjin) Investment and Consulting Co., Ltd, or Tianjin CNE, and Tianjin Binhai
Zhongneng Gas Company, or Binhai Zhongneng, but do not include the stockholders
of China New Energy; (ii) “SEC” are to the Securities and Exchange Commission;
(iii) “Securities Act” are to the Securities Act of 1933, as amended; (iv)
“Exchange Act” are to the Securities Exchange Act of 1934, as amended; (v) “RMB”
are to Renminbi, the legal currency of China; (vi) “U.S. dollar,” “$” and “US$”
are to the legal currency of the United States; (vii) “BVI” are to the British
Virgin Islands; and (viii) “China” and “PRC” are to the People’s Republic of
China.
Overview
of Our Business
We are a
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 residential 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.
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.
SingOcean
continues to hold 49% of the equity of Chensheng Gas, with the
remaining 51% owned by China New Energy Group Company, 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 our wholly-owned subsidiary Tianjin CNE on January 12, 2009, in
Tianjin, China, for investment holding purposes.
On June
26, 2009, our subsidiary, Qinhuangdao Chensheng Gas Co., Ltd., established a
wholly-owned subsidiary, Tianjin Binhai Zhongneng Gas Co., Ltd., in Da Gang
District, Tianjin, China, for constructing and developing the gas projects
of Private Economic Park and Taiping County in Dagang District,
Tianjin.
The
following chart reflects our organizational structure as of the date of this
report.
Our
principal executive office in China is located at 20/F, Center Plaza, No.188
Jiefang Road, He Ping District, Tianjin, China, and our telephone number is +(86
22) 5829 9778.
Second Quarter Financial Performance
Highlights
In spite
of the current global economic downturn, we continued to experience strong
demand for our products and services during the second quarter of 2009 and
growth in our revenues and net income.
The
following are some financial highlights for the second quarter of
2009:
|
·
|
Revenues
:
Our revenues were approximately $2,810,591 for the second quarter of 2009,
an increase of 47% from the same quarter of last
year.
|
|
·
|
Gross
Margin
: Gross margin was 75% for the second quarter of 2009,
equivalent to 75% for the same period in
2008.
|
|
·
|
Operating
Expense
: Operating Expense (Selling, General & Administrative
expense) was $752,489 for the second quarter of 2009, an increase of 234%
from the same period of 2008.
|
|
·
|
Net
Income
: Net income was approximately $965,259 for the second
quarter of 2009, an increase of 375% from the same period of last
year.
|
|
·
|
Fully
diluted net loss per share
: Fully diluted net loss per share was
$0.02 for the three months ended June 30, 2009, as compared to $0.00 for
the same period last year.
|
Principal Factors Affecting our
Financial Performance
We
believe that the following factors will continue to affect our financial
performance:
|
·
|
Growth of
China’s natural gas industry
.
Currently,
natural gas consumption in the PRC accounts for less than 3% of its total
energy consumption. However, driven by environmental pressure
from the demand side and improvements in social infrastructure with
economic growth, in the west in particular, and stable energy supply, it
is anticipated that the use of natural gas will grow very rapidly in the
PRC. According to the statistics of the China National
Development and Reform Commission, the consumption of natural gas has
increased from 24.5 billion cubic meters in 2000 to 55.6 billion cubic
meters in 2006, which represented an average growth of 32.42% per year.
From the 4th Annual Asia Natural Gas Congress 2008, experts anticipated
that the demand for natural gas in China would grow rapidly to 150 billion
cubic meters in 2010 and to 240 billion cubic meters in
2015.
|
|
·
|
PRC
regulations promoting the use of clean energy
. The PRC’s
heavy reliance on coal exceeds world-wide consumption rates (Source:
Energy Information Administration, U.S. Department of
Energy). The use of coal, however, causes air pollution and
other negative consequences to the environment. In the PRC, the
heavy use of unwashed coal has led to large emissions of sulfur dioxide
and particulate matter. An air pollution study conducted by the
World Health Organization in 1998 showed that seven of the 10 most
polluted cities in the world were located in the PRC. As such,
there have been serious environmental concerns in many countries around
the world, resulting in a global trend to reduce coal usage. In
consideration of such trends, in 1996, the PRC presented a plan to raise
the share of natural gas in the country’s energy mix (Source: Ninth
Five-Year Plan (1996-2000)). In many locations where natural
gas supply is available, local governments often require all new
residential buildings to install piped gas connections as a condition to
the issuance of the construction or occupancy permits. Before
2000, local municipal governments controlled gas
distribution. Since then, the industry has been opened to
private companies, whose investments have fostered an increase in the use
of natural gas in the PRC. The PRC government has deemed the
natural gas industry a suitable industry for public and private
investments.
|
|
·
|
Expans
ion of our
production and distribution networks
. We plan to expand
our operations to acquire exclusive rights for the development of natural
gas distribution networks in cities and regions beyond those that we
currently possess. We anticipate that we will own
six natural gas pipeline
networks.
|
Taxation
United
States and British Virgin Islands
We are
subject to United States tax at a tax rate of 34%. No provision for income
taxes in the United States has been made as we have no income taxable in the
United States. Our subsidiary Willsky Development was incorporated in
the BVI and under the current laws of the BVI, is not subject to income
taxes.
China
Before
the implementation of the New EIT Law described below, Foreign Invested
Enterprises, or FIEs, established in the PRC were generally subject to an
enterprise income tax, or EIT, rate of 33.0%, which includes a 30.0% state
income tax and a 3.0% local income tax.
On March
16, 2007, the National People’s Congress of China passed a new Enterprise Income
Tax Law, or the New EIT Law, and on December 6, 2007, the State Council of China
passed the Implementing Rules for the New EIT Law, or the Implementing Rules,
which took effect on January 1, 2008. The New EIT Law and Implementing Rules
impose a unified EIT rate of 25.0% on all domestic-invested enterprises and
FIEs, unless they qualify under certain limited
exceptions. Therefore, nearly all FIEs are subject to the new tax
rate alongside other domestic businesses rather than benefiting from the old FIE
tax laws, and its associated preferential tax treatments, beginning January 1,
2008.
Despite
these pending changes, the New EIT Law gives the FIEs established before March
16, 2007, or Old FIEs, a five-year grandfather period during which they can
continue to enjoy their existing preferential tax treatment. During
this five-year grandfather period, the Old FIEs which enjoyed tax rates lower
than 25% under the original EIT law shall gradually increase their EIT rate by
2% per year until the tax rate reaches 25%. In addition, the Old FIEs that
are eligible for the “two-year exemption and three-year half reduction” or
“five-year exemption and five-year half-reduction” under the original EIT law,
are allowed to remain to enjoy their preference until these holidays expire. The
discontinuation of any such special or preferential tax treatment or other
incentives would have an adverse effect on any organization’s business, fiscal
condition and current operations in China.
In
addition to the changes to the current tax structure, under the New EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25.0% on its global income. The Implementing Rules define the term “de
facto management bodies” as “substantial and overall management and control over
the production and operations, personnel, accounting, and properties” of the
enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation with respect to
non-Chinese enterprise or group controlled offshore entities. Pursuant to the
Notice, an enterprise incorporated in an offshore jurisdiction and controlled by
a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of
daily operation reside or perform their duties mainly in China; (ii) its
financial or personnel decisions are made or approved by bodies or persons in
China; (iii) its substantial properties, accounting books, corporate chops,
board and shareholder minutes are kept in China; and (iv) ½ of directors with
voting rights or senior management often reside in China. Such resident
enterprise would be subject to an EIT rate of 25% on its worldwide income and
must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
However,
as our case substantially meets the foregoing criteria, there is a likelihood
that we are deemed to be a resident enterprise by Chinese tax authorities. If
the PRC tax authorities determine that we are a “resident enterprise” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we may be subject to the enterprise income tax at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest
on financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the New EIT Law
and its Implementing Rules dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax purposes. Finally,
it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC stockholders and
with respect to gains derived by our non-PRC stockholders from transferring our
shares. We are actively monitoring the possibility of “resident enterprise”
treatment and are evaluating appropriate organizational changes to avoid this
treatment, to the extent possible.
Under the
current PRC tax laws and the related implementing rules, the prevailing
statutory rate of enterprise income tax is 25% for SingOcean, Acheng SingOcean,
and Dashiqiao SingOcean, whereas Chensheng Gas is being taxed on 0.8% of its
annual sales. Sales tax is at a rate of 3% on connection revenue and a sales tax
is also levied on gas sales revenue at a rate of 4%.
Results
of Operations
Comparison of Three Months
Ended June 30, 2009 and June 30, 2008
The
following table summarizes the results of our operations during the three-month
periods ended June 30, 2009 and 2008, and provides information regarding the
dollar and percentage increase or (decrease) from the three-month period ended
June 30, 2008 to the three-month period ended June 30, 2009.
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
Three
Months
Ended
June
30,
2009
|
|
|
Three
Months
End
ed
June
30,
2008
|
|
|
Percentage
Change
Increase
(Decrease)
|
|
Revenues
|
|
$
|
2,811
|
|
|
$
|
1,906
|
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
714
|
|
|
|
484
|
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
2,097
|
|
|
|
1,422
|
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General &Administrative Expense
|
|
|
752
|
|
|
|
225
|
|
|
|
234
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
1,345
|
|
|
|
1,197
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income (Expense)
|
|
|
1
|
|
|
|
7
|
|
|
|
(86
|
)
|
Other
Income (Expense)
|
|
|
|
|
|
|
(910
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations Before Income Taxes
|
|
|
1,346
|
|
|
|
294
|
|
|
|
358
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(367
|
)
|
|
|
(318
|
)
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
From Discontinued Operations
|
|
|
-
|
|
|
|
235
|
|
|
|
(100
|
)%
|
Non
controlling interest
|
|
|
(14
|
)
|
|
|
(8
|
)
|
|
|
75
|
%
|
Net
Income (Loss)
|
|
$
|
965
|
|
|
$
|
203
|
|
|
|
375
|
%
|
Revenues
. Revenues
are derived primarily from connection fees and sales of natural gas. Revenues
increased $904,512, or 47% to $2,810,591 for the three months ended June 30,
2009 from $1,906 079 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 connection costs and purchase
of natural gas from our suppliers. Our cost of sales increased
$229,337, or 47%, to $713,272 for the three months ended June 30, 2009 from
$483,935 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.
Gross
Profit
.
Our
gross profit increased $675,174, or 47%, to $2,097,319 for the three months
ended June 30, 2009 from $1,422,145 during the same period in 2008. Gross profit
as a percentage of revenues was 74.6% for the three months ended June 30,
2009, The gross profit margin during the same period in 2008 was also
74.6%.
Selling, General & Administrative
Expenses
(
S
&
G&A)
Expenses
. SG&A
expenses, including sales representative commissions, promotion fees,
salesperson salaries and expenses, depreciation charges and other fees,
increased $527,775, or 235%, to $752,489 for the three months ended June 30,
2009 from $224,714 during the same period in 2008. As a percentage of revenues,
SG&A expenses increased to 27% for the three months ended June 30, 2009 from
11.8% for the same period in 2008. Such increase in S,G&A
expenses resulted from an increase in sales and administrative personnel, while
the increase in SG&A expenses as a percentage of revenues
resulted from the reasons identified above.
Net
Income
. Net income increased $762,244, or 375% to a net income of
$965,259 for the three months ended June 30, 2009 from net income of $203,015
for the same period of 2008, due to the absence of a derivative
expense charged in the second quarter of 2008.
Comparison of Six Months
Ended June 30, 2009 and June 30, 2008
The
following table summarizes the results of our operations during the six-month
periods ended June 30, 2009 and ended June 30, 2008, and provides information
regarding the dollar and percentage increase or (decrease) from the six-month
period ended June 30, 2008 to the six-month period ended June 30,
2009.
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
Six
Months
Ended
June
30,
2009
|
|
|
Six
Months
Ended
June
30,
2008
|
|
|
Percentage
Change
Increase
(Decrease)
|
|
Revenues
|
|
$
|
3,136
|
|
|
$
|
2,008
|
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
976
|
|
|
|
560
|
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
2,160
|
|
|
|
1,448
|
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and Administrative Expenses
|
|
|
1,161
|
|
|
|
471
|
|
|
|
146
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Expenses)
|
|
|
999
|
|
|
|
977
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income and (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income (Expense)
|
|
|
9
|
|
|
|
6
|
|
|
|
50
|
%
|
Other
Income (Expense)
|
|
|
|
|
|
|
(910
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations Before Income Taxes
|
|
|
1,008
|
|
|
|
73
|
|
|
|
1,281
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(368
|
)
|
|
|
(318
|
)
|
|
|
16
|
%
|
Income
From Discontinued Operation
|
|
|
|
|
|
|
218
|
|
|
|
(100
|
)%
|
Non
controlling interest
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
200
|
%
|
Net
Income (Loss)
|
|
$
|
647
|
|
|
$
|
(34
|
)
|
|
|
2,003
|
%
|
Revenues
. Revenues
are derived primarily from connection fees and sales of natural gas. Revenues
increased $1,127,774 or 56% to $3,135,608 for the six months ended June 30, 2009
from $2,007,834 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 $415,901, or 74%, to $975,773
for the six months ended June 30, 2009 from $559,872 during the same period in
2008. Such increase was mainly attributable to a corresponding increase in the
number of households connected to our network and increase in natural gas
consumption by our customers. As a percentage of revenues, the cost of sales
increased to 31% during the six months ended June 30, 2009, from 28% in the same
period in 2008, which was mainly attributable to an increase in our connection
households.
Gross
Profit
.
Our
gross profit increased $711,872, or 49%, to $2,159,835 for the six months ended
June 30, 2009 from $1,447,963 during the same period in 2008. Gross profit as a
percentage of revenues was 69% for the six months ended June 30, 2009, a
decrease of 3% from 72% during the same period in 2008. Such percentage decrease
was mainly due to an increase in our connection costs.
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 $689,554, or 146%, to $1,160,687 for the six months ended June 30,
2009 from $471,133 during the same period in 2008. As a percentage of
revenues, general and administrative expenses increased to 37% for the six
months ended June 30, 2009 from 23% for the same period in 2008. Such increase
in selling, general and administrative expenses resulted from an increase in
salaries, rental fees, and depreciation charges.
Net
Income
. Net income increased $681,696, to a net income of $647,314 for
the six months ended June 30, 2009 from a net loss of $34,382 for the
same period of 2008, as a result of the factors described above.
Liquidity
and Capital Resources
As of
June 30, 2009, we had cash and cash equivalents of approximately $6.1 million.
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)
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
1,281
|
|
|
$
|
(459
|
)
|
Net
cash used in investing activities
|
|
|
(6,174
|
)
|
|
|
(807
|
)
|
Net
cash provided by financing activities
|
|
|
5,191
|
|
|
|
252
|
|
Effect
of exchange rate changes in cash
|
|
|
(4
|
)
|
|
|
(12
|
)
|
Net
cash provided (used)
|
|
$
|
294
|
|
|
$
|
(1,026
|
)
|
Operating
Activities
Net cash
provided by operating activities was $1,280,666 for the six months ended June
30, 2009, compared to net cash used in operating activities of $458,803 during
the same period of 2008. This increase in funds used in our operating activities
was primarily due to an increase in net income and a decrease in
prepayments
.
Investing
Activities
Our main
uses of cash for investing activities are mainly for the construction of gas
pipelines.
Net cash
used in investing activities for the six months ended June 30, 2009 was
$6,173,770, which is an increase of $5,366,443
from $807,327 for the same period of 2008. Such increase is
primarily due to a purchase of the Chensheng subsidiary and
pipeline construction.
Financing
Activities
Our debt
to equity ratio (total debt /total assets) was 7% as of June 30,
2009. Net cash provided by financing activities for the six months
ended June 30, 2009 was $5,191,201, which is an increase of $4,939,137 from
$252,064 during the same period of 2008. Such increase is mainly due
to contributions from the private placement consummated on May 01,
2009.
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 five (5) years following the date of issuance, for a purchase price of
$9,000,000.
Subsequently,
on May 1, 2009, we issued and sold to China Hand 1,116,388 shares of our Series
B Convertible Preferred Stock and warrants to purchase 7,814,719 shares of our
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 a
purchase price of $5,400,000.
Additionally,
we agreed to certain make good provisions that will require us to issue to China
Hand up to 334,916 additional shares of our Series B Preferred Stock if we do
not achieve an audited after-tax net income of $5.0 million for the year ending
December 31, 2009. If we are successful in achieving such income
target, China Hand will transfer 22,327 shares of its Series B Preferred Stock
to certain members of our management. We also agreed to issue to China
Hand 27,910 shares of our Series B Preferred Stock if our 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 our 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 our common stock, in connection with the August 20, 2008 and
May 1, 2009 private placements, respectively.
We
believe that our cash on hand and cash flow from operations will meet part of
our present cash needs and we will require additional cash resources, including
loans, to meet our expected capital expenditure and working capital for the next
12 months. In addition, we may, in the future, require additional cash
resources due to changed business conditions, implementation of our strategy to
expand our production capacity or other investments or acquisitions we may
decide to pursue. If our own financial resources are insufficient to
satisfy our capital requirements, we may seek to sell additional equity or debt
securities or obtain additional credit facilities. The sale of additional
equity securities could result in dilution to our stockholders. The
incurrence of indebtedness would result in increased debt service obligations
and could require us to agree to operating and financial covenants that would
restrict our operations. Financing may not be available in amounts or on
terms acceptable to us, if at all. Any failure by us to raise additional
funds on terms favorable to us, or at all, could limit our ability to expand our
business operations and could harm our overall business prospects.
Critical
Accounting Policies
There
were no material changes in the Company’s critical accounting policies from
those described in the Company’s 2008 Form 10-K.
Recent
Accounting Pronouncements
See Note
3 to the June 30, 2009, Unaudited Condensed Consolidated Financial
Statements, under the subheading “New Accounting Pronouncements” regarding the
effect of certain new accounting standards on the Company
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.
Effects
of Inflation
Our
business, revenues and operating results have not been affected in any material
way by inflation.
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 or capital
expenditures or capital resources that is material to an investor in our
securities.
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.
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 June 30, 2009. Based on
that evaluation, Mr. Chong and Mr. Foo concluded that as of June 30, 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 to satisfy the objectives for which they are
intended.
Changes
in Internal Control Over Financial Reporting.
During
the fiscal quarter ended June 30, 2009, there were no changes in our internal
control over financial reporting 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 believe 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.
You
should carefully consider he risk factors discussed in Part I, Item 1A of the
Company’s 2008 Form 10-K which could have a material impact on the Company’s
business, financial condition or results of operations. The risks
described in the Company’s Form 10-K are not the only risks facing the
Company. Additional risks and uncertainties not presently known to
the Company or that the Company currently believes to be immaterial may also
adversely affect the Company’s business, financial condition or results of
operations.
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.
|
Appointment
of Chief Operating Officer
On June
5, 2009, Mr. Dunhong Shi, age 45, was appointed as the Company’s Chief Operating
Officer. Mr. Shi has experience in operations and management in energy-related
companies. He has also held senior level positions in large and middle
state-owned corporations, including Tianjin Soda Plant, Cogeneration Plant of
Nanshan Group. Prior to joining the Company, and for over five years, Mr. Shi
served as the Chief Operating Officer and Executive Director of Wahsang Gas
(China) Investment Co., Ltd (a Hong Kong listed company), and as General Manager
of Wahsang Energy Company.
The
following exhibits are filed as part of this report or incorporated by
reference:
Exhibit
No.
|
|
Description
|
31.1
|
|
Certifications
of Principal Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certifications
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.
Date:
August 19, 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 Officer and Principal
Accounting
Officer)
|
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