China New Energy Group Company (OTC:CNER)

Business Outlook

Mr. Chong concluded, "We believe that we remain on track to complete three significant acquisitions by year end—Dadi Gas, Fuzhou Zhongran and Lean Longran.  These firms can add tremendously to our business prospects, since they are all players in under-penetrated, fast-growing small- and medium-sized cities.  The efforts of the Company's management are very much focused on closing the acquisitions and positioning China New Energy to execute on its business plan once the deals are concluded.  We anticipate that the acquisitions will bring about substantial synergies, including guaranteed and steady supply of gas from upstream suppliers; better pricing for gas, related products and other purchases; lower transportation costs; lower operating expenses; and flexible mobilization and placement of professional and technical staff. In addition, we expect the acquisitions to improve our cash flow and overall financial position, creating great opportunities for revenue, profit growth, and an increase in shareholder value."

Past Information:

Third Quarter Financial Performance Highlights

• Revenues: Our revenues were $0.16 MM for the third quarter of 2010, a decrease of 86% from the same period of 2009.

• Gross Margin: Gross margin was a loss of 20% for the third quarter of 2010 compared to gross margin of 67% for the third quarter of 2009, representing a percentage decrease of 87%.

• Operating Expenses: Operating expenses (including selling, general and administrative expenses) were $1.38 MM for the third quarter of 2010, an increase of 8% from the same period of 2009.

• Net Income / (Loss): A net loss of $10.93 MM resulted for the third quarter of 2010, while the net income for the same period of 2009 was $6.16 MM. The decrease of net income was mainly due to: (1) a decrease in revenues of connection fees by $0.98 MM; (2) an increase of operating expenses by $0.1 MM; (3) a change in fair value of derivative financial instruments which resulted in other expenses of $8.32 MM while it resulted in other income of $6.04 MM for the same period of 2009; and (4) the value of Series Preferred Stock C was $1.03 MM, which was recorded as accrued interest for the third quarter of 2010.

• Fully diluted net income per share: Fully diluted net loss per share was $0.16 for the third quarter of 2010, as compared to net income per share of $0.03 for the same period of 2009.

Business Outlook

Mr. Chong concluded, "We believe that we remain on track to complete three significant acquisitions by year end—Dadi Gas, Fuzhou Zhongran and Lean Longran.  These firms can add tremendously to our business prospects, since they are all players in under-penetrated, fast-growing small- and medium-sized cities.  The efforts of the Company's management are very much focused on closing the acquisitions and positioning China New Energy to execute on its business plan once the deals are concluded.  We anticipate that the acquisitions will bring about substantial synergies, including guaranteed and steady supply of gas from upstream suppliers; better pricing for gas, related products and other purchases; lower transportation costs; lower operating expenses; and flexible mobilization and placement of professional and technical staff. In addition, we expect the acquisitions to improve our cash flow and overall financial position, creating great opportunities for revenue, profit growth, and an increase in shareholder value."

In recording the costs incurred in connection with the installation of the outdoor and indoor pipelines in property developments, the Company had been recognizing the connection fees based on the percentage of completion method while capitalizing the equipment and amortizing it over the useful life of the equipment. After discussions with CVB the Company has determined that the appropriate accounting treatment is to recognize the cost of the equipment concurrently with the associated revenues. The effect of this error in accounting treatment was to significantly overstate the Company’s income in prior periods.

hina New Energy Group Company, through its subsidiary Beijing Century Dadi Gas Engineering Co., Ltd., a company incorporated under the laws of People’s Republic of China, owned 40% of the equity interest in Beijing Fu Hua Dadi Gas Co., Ltd., a company incorporated under the laws of PRC (“Fu Hua”).

On March 28, 2011, Century Dadi entered into an Equity Transfer Agreement with Fudi Gas Investment Co., Ltd. and Beijing Gas Group Company (“Beijing Gas”). Based on the Agreement, Century Dadi agreed to sell and transfer all of its 40% equity interest in Fu Hua to Beijing Gas for the following consideration:
A)     RMB 29.43 million (approximately $4.296 million) for Fu Hua’s net assets; and

B)     RMB 13.21 million (approximately $1.93 million) for settling the loan between Century Dadi and Fu Hua. As of December 31, 2010, Fu Hua borrowed from Century Dadi the sum of RMB 13.21 million (principal and interest). The loan was due on April 30, 2011. In consideration of Century Dadi waiving the interest on the loan from January 1, 2011 to April 30, 2011, Fu Hua agreed to repay the loan within 10 business days after transfer of the Fu Hua equity interest by Century Dadi to Bejing Gas is complete.

As described in a Current Report on Form 8-K filed on December 22, 2009 by China New Energy Group Company, pursuant to an Equity Interest Purchase Agreement entered into on December 16, 2009 our wholly-owned subsidiary, Willsky Development, Ltd., a BVI company (“Willsky”), acquired 100% of the equity of Fuzhou City Lean Zhongran Gas Inc., a PRC company.

The total purchase price was RMB 4,800,000 (approximately $0.7 million) payable in three installments. The first installment of approximately $0.19 million was paid. The second and third installments of approximately $0.36 million and approximately $0.15 million, respectively, were due on April 30, 2010 and August 30, 2010 and neither of these payments has been made. Accordingly, the total amount owed by Willsky to the seller under the Lean Zhongran Purchase Agreement (prior to the execution of the supplementary agreement described below) was approximately $0.51 million.

TIANJIN, China, Jan. 18, 2011 /PRNewswire-Asia/ -- China New Energy Group Company today announced that on January 11, 2011, the Company completed the first installment payment of $17.6 million for the acquisition of Tianjin Dadi Friendship Co. Ltd. which is the parent company of Beijing Century Dadi Gas Engineering Co., Ltd. and Zhuolu Dadi Gas Co. Ltd. (collectively, "Dadi Gas"). The Company also announced that, pursuant to this payment, CNER has assumed management control of Dadi Gas's operations. Through this transaction, China New Energy has acquired a 70% equity interest in Tianjin Dadi Friendship Co. Ltd., which holds 100% of Beijing Century Dadi Gas Engineering Co., Ltd. and Zhuolu Dadi Gas Co. Ltd. Dadi Gas operates 15 gas supply projects located in 5 provincial areas and owns and operates two gas stations. As of the end of 2010, Dadi Gas owned approximately 199 miles of main pipeline and sub pipeline, and 273 miles of household pipelines. The firm also served approximately 115,200 households, 488 commercial customers and sold approximately 92 million cubic meters of gas in 2010.

"We are excited to complete this important milestone as we work towards concluding our acquisition of Dadi Gas," said Mr. Yangkan Chong, Chief Executive Officer. "Dadi Gas is a key component of our growth strategy and complements our existing business. We plan to increase our presence in the fast growing second and third tier cities in China that are located in close proximity to economically developed areas with sufficient natural gas resources. With a well-established brand name, a vertically integrated business model, a seasoned technical and engineering team, and its state-of-the-art technologies, we believe Dadi Gas will significantly enhance our position as a recognized player in China's natural gas industry. We anticipate that the acquisition will create meaningful revenue growth opportunities, yield substantial synergies with our current operations, while significantly improving our cash flow and financial position, and ultimately enhancing shareholder value. We are excited about the growth in overall demand for natural gas from both commercial and residential users in China, and our ability to capitalize on it."

China New Energy Investment Co., Ltd a wholly-owned PRC subsidiary of China New Energy Group Company entered into:

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an Equity Transfer Agreement with Seller  to acquire from the Seller a 70% equity interest in Zhoulu Dadi Gas Co. Ltd., a PRC company.

On September 14, 2009, China New Energy Group Company entered into and consummated the sale of securities pursuant to a Series C and Series D Convertible Preferred Stock Securities Purchase Agreement with China Hand Fund I, LLC.

China New Energy primarily operates in the northeastern cities of China, around Bohai Bay, which is one of the seven key areas in the PRC government's general plan for natural gas development. The Company plans to continue to capitalize on the rise in natural gas consumption in China as the country shifts away from oil and coal to cleaner fuels like natural gas, and as the natural gas pipeline infrastructure in China continues to improve. Improved living standards and real estate development are driving demand for natural gas consumption in China and local governments now often require new residential buildings to incorporate natural gas connections in their designs.

The Company's growth strategy is to focus on under-penetrated, growing small- and medium-sized cities and enter into favorable franchise agreements with local governments for long-term exclusive rights to develop the local natural gas distribution network and supply natural gas in their area. China New Energy looks at the following criteria when identifying attractive areas for geographic expansion: size and density of population, concentration of industrial/commercial activities, environmental policies of the regional government, potential for further development, exclusivity of distribution, and required methods of delivery. The Company is also focused on diversifying its revenue stream towards a greater focus on industrial customers and natural gas sales. The Company's recently completed and announced acquisitions are in line with these selection criteria.

Mr. Chong concluded, "We have announced three acquisitions -- Dadi Gas, Fuzhou Zhongran, and Lean Zhongran -- that we expect to close later this year. We expect these acquisitions, combined with the continued growth in the existing markets we serve, to help further drive our ability to capitalize on the growing market for natural gas in China. We are excited about our business going forward and look forward to executing on our strategy through the balance of 2010 and beyond."

see release

Thanks to a GeoContributor The GeoTeam® has added China New Energy Group to its data base.  After reading the SEC filings we are guessing that, in the near future, the CNER is preparing to execute a reverse split in order to qualify for an exchange uplisting.

Excerpt from second quarter 10Q page, 18- Make Good Provision:

"The Company 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."

China Hand took part in a financing arrangement with China New Energy.

"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."

Source: SEC Form 10Q (For the quarterly period ended: June 30, 2009)

On April 30, 2009, the Company entered into a Series B Convertible Preferred Stock Securities Purchase Agreement with China Hand Fund I. 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 and warrants  to purchase 7,814,719 shares of its Common Stock at an initial exercise price of $0.187 per share 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:

• Require sthe 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, 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”).

Source: SEC form 10Q (second quarter 10Q page, 18- Make Good Provision)