CHINA NEW ENERGY GROUP CO. 
By TIANJIN, China, Nov. 26, 2010 /PRNewswire-Asia-FirstCall/ -- China New Energy Group Company (OTC Bulletin Board: CNER) ("China New Energy" or the "Company"), a natural gas network developer and distributor of natural gas to residential, industrial, and commercial users in small and medium sized cities in China, today announced its third quarter financial results ended September 30, 2010.
Third Quarter 2010 Results
For the third quarter ended September 30, 2010, revenues were $162,066 compared to $1.1 million in the same quarter last year. The decrease was due to a decline in number of connection households. Revenues from connection fees were $124,803 compared to $1.1 million in the same period last year. Revenues from natural gas sales were $37,263 compared to $42,427 for the third quarter of last year.
Gross loss was $33,339 compared to a gross profit of $0.8 million from the third quarter of 2009. Operating expenses were $1.4 million compared to $1.3 million for the third quarter of last year. This increase was primarily due to the fact that the Company is expanding by adding more resources in areas like business development, outside consultants, and the hiring of additional staff to help strengthen the Company's internal controls. Operating loss was $1.4 million, compared to an operating loss of $513,842 for the same period last year.
The Company's third quarter 2010 and third quarter 2009 financial statements include the non-cash impact from the change in fair value of derivative financial instruments of ($8.3) million and $6.0 million, respectively.
Net loss from continuing operations was $10.9 million compared to net income from continuing operations of $5.4 million, or $0.06 per diluted share, in the same period last year. Excluding the non-cash impact from the change in fair value of derivative financial instruments, the Company's adjusted net loss from continuing operations was $2.6 million, compared to an adjusted net loss from continuing operations of $0.7 million for the third quarter of last year. (*)
In March 2010, the Company sold its subsidiary, Yingkou Zhongneng Gas Development Co., Ltd., for RMB 21.9 million (approximately $3.2 million). In December 2009, the Company sold its Acheng Division for RMB 40 million (approximately $6 million). The results of Yingkou Zhongneng and Acheng Division are classified as discontinued operations on the Company's financial statements.
Net loss attributable to common shareholders was $17.3 million compared to net income attributable to common shareholders of $5.9 million, or $0.03 per diluted share, in the same period last year. Adjusted net loss attributable to common shareholders, which excludes the non-cash impact of the change in fair value of derivative financial instruments, was $9.0 million, compared to an adjusted net loss of $130,557 for the third quarter of last year (*)
(*) See table at the end of this press release for a reconciliation of income from continuing operations to exclude the non-cash impact from the change in fair value of derivative financial instruments and for a reconciliation of net income attributable to common shareholders to exclude the non-cash impact from the change in fair value of derivative financial instruments.
First Nine Months of FY2010 Results
For the nine months ended September 30, 2010, revenues were $2.6 million compared to $1.8 million in the same period last year, an increase of 39.9%. Revenues from connection services fees were $2.5 million compared to $1.7 million in the same period last year, an increase of 41.9%. Sales of natural gas were relatively flat at $84,165. Gross profit was $1.7 million compared to $1.2 million in the same period last year, an increase of 46.7%. Gross margin was 67.2% compared to 64.1% last year. Operating loss was $2.3 million compared to $1.4 million in the prior year period, an increase of 62.7%.
Net loss from continuing operations was $11.9 million compared to net income from continuing operations of $6.4 million for the nine months ended September 30, 2009. Adjusted net loss from continuing operations, which excludes the non-cash impact of the change in fair value of derivative financial instruments, was $3.9 million compared with an adjusted net loss from continuing operations of $1.6 million, for the first nine months of 2009.
Net loss attributable to common shareholders was $18.8 million compared to net income attributable to common shareholders of $8.9 million, or $0.05 per diluted share, in the first nine months of 2009. Adjusted net loss attributable to common shareholders, which excludes the non-cash impact of the change in fair value of derivative financial instruments, was $10.8 million, compared to an adjusted net income of $837,686 for the first nine months of 2009.
Financial Condition
As of September 30, 2010, the Company had cash and cash equivalents of $0.6 million. The Company has no long term debt. Shareholders' equity was negative $27.9 million as of September30, 2010. During the first nine months of 2010, operating cash flow was negative $0.5 million versus negative cash from operations of $0.9 million in the prior year period. Capital expenditures for the nine months ended September 30, 2010 were approximately $38.4 million, which was primarily for the construction of gas pipelines and stations.
Recent Developments
In September 2010, the Company's wholly-owned PRC subsidiary, China New Energy Investment Co., Ltd, entered into certain equity transfer agreements with Beijing Fengyin Xianghe Scientific Technology Co., Ltd. a PRC company controlled by Mr. Tang Zhixiang, to acquire 70% equity interests in Beijing Century Dadi Gas Engineering Co., Ltd. and Zhoulu Dadi Gas Co. Ltd. (collectively, "Dadi Gas") for a total purchase price of RMB 270 million (approximately $40 million).
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."
Use of Non-GAAP Financial Information
GAAP results for three and nine month periods ended September 30, 2010 and 2009 include the significant non-cash charges which do not relate to the operation of the business including non-cash expenses related to the change in fair value of derivative financial instruments. These are non-cash events which do not affect the Company's operations. To supplement the Company's consolidated financial statements presented on a GAAP basis, the Company has provided non-GAAP financial information excluding the impact of these items in this release, which are adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations, adjusted net income attributable to common shareholders and adjusted earnings per share attributable to common shareholders. The Company's management believes that these non-GAAP measures provide investors with a better understanding of how the results relate to the Company's historical performance. The additional adjusted information is not meant to be considered in isolation or as a substitute for GAAP financials. The adjusted financial information that the Company provides also may differ from the adjusted information provided by other companies. Management believes that these adjusted financial measures are useful to investors because they exclude non-cash expenses that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions as these measures provide a consistent method of comparison to historical periods. As a result, the provision of these adjusted measures allows investors to evaluate the Company's performance using the same methodology and information as that used by the Company's management. Moreover, management believes that these adjusted measures reflect the essential operating activities of the Company. Adjusted measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the adjusted financial measure. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded. A reconciliation of each adjusted measure to the nearest GAAP measure appears in the table at the end of this release.
About China New Energy Group Company
China New Energy Group Company ("China New Energy" or the "Company") is 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 users in small and medium sized cities in China. The Company generates revenues primarily from the connection fees it charges its customers for interconnecting to pipelines in its natural gas distribution networks, and fees for natural gas usage. For more information, please visit http://www.cnegc.com.
Safe Harbor Statement
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Any statements set forth above that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to, the Company's ability to access natural gas for distribution, and ability to identify and develop operational locations under favorable terms, changes in natural gas pricing mechanism imposed by the Chinese government, changes in the regulatory environment and future national or regional economic and competitive conditions, and other factors detailed from time to time in the Company's filings with the United States Securities and Exchange Commission and other regulatory authorities. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
-FINANCIAL TABLES FOLLOW-
CHINA NEW ENERGY GROUP COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
- (UNAUDITED)
For the three months ended For the nine months ended
September 30, September 30,
2010 2009 2010 2009
Revenues:
Connection
services $124,803 $1,095,454 $2,479,344 $1,747,312
Natural gas 37,263 42,427 84,165 84,670
162,066 1,137,881 2,563,509 1,831,982
Cost of
Sales:
Connection
services 145,435 329,665 717,113 551,248
Natural gas 49,970 48,202 123,555 106,619
195,405 377,867 840,668 657,867
Gross (Loss)
Profit (33,339) 760,014 1,722,841 1,174,115
Operating
Expenses:
General and
administrative
expenses 1,312,808 853,577 3,797,133 1,625,875
Selling
expenses 65,509 42,279 217,145 128,881
Registration
right
liabilities - 378,000 - 828,000
Total
operating
expenses 1,378,317 1,273,856 4,014,278 2,582,756
Operating
loss (1,411,656) (513,842) (2,291,437) (1,408,641)
Other Income
(Expenses):
Change in
fair value
of
derivative
financial
instruments
-warrants 1,654,806 6,041,231 1,946,842 8,017,275
Change in
fair value
of
derivative
financial
instruments
-put
options of
backstop
agreements
and
obligation
to
issuance of
common stock
relating to
Series D
preferred
stock (9,975,502) - (9,975,502) -
Interest
income 11,916 5,520 14,466 7,754
Interest
expense (1,035,478) (1,113) (1,039,843) (4,123)
Other income 14,476 3,307 27,566 3,400
Other
expenses (190,016) - (190,016) -
Total other
income
(expenses) (9,519,798) 6,048,945 (9,216,487) 8,024,306
(Loss) Income
From
continuing
operations,
Before
Income Tax (10,931,454) 5,535,103 (11,507,924) 6,615,665
Income Tax 2,238 181,885 384,835 187,993
(Loss) Income
From
continuing
operations,
net of
Income Tax (10,933,692) 5,353,218 (11,892,759) 6,427,672
Discontinued
Operations:
(Loss) Income
from
discontinued
operations,
net of
income tax (231) 809,506 (85,877) 1,894,543
(Loss) Income
from
discontinued
operations,
net of
Income Tax (231) 809,506 (85,877) 1,894,543
Net (Loss)
Income (10,933,923) 6,162,724 (11,978,636) 8,322,215
Net Loss
(Income)
attributable
to
Non-
controlling
Interest 4,597 (25,104) 1,876 (18,200)
Net (Loss)
Income
attributable
to China
New Energy
Group (10,929,326) 6,137,620 (11,976,760) 8,304,015
Dividend and
Deemed
Dividend on
Preferred
Stock (6,378,098) (226,946) (6,851,248) 550,946
Net (Loss)
Income
attributable
to China
New Energy
Group Common
Stockholders (17,307,424) 5,910,674 (18,829,008) 8,854,961
Other
Comprehensive
Income:
Net (Loss)
Income (10,933,923) 6,162,724 (11,978,636) 8,322,215
Foreign
currency
translation
loss (557,564) (13,763) (710,103) (24,442)
Comprehensive
Income
attributable
to
Non-
controlling
interest - (17,052) - (12,026)
Comprehensive
(loss) income $(11,491,487) $6,131,909 $(12,688,739) $8,285,747
(Loss) Income
per share -
Basic
(Loss) Income
from
continuing
operations $(0.16) $0.06 $(0.18) $0.05
(Loss) Income
from
discontinued
operations $(0.00) $0.01 $(0.00) $0.02
Total (loss)
income per
share $(0.16) $0.07 $(0.18) $0.07
(Loss) Income
per share -
Diluted
(Loss) Income
from
continuing
operations $(0.16) 0.03 (0.18) 0.04
(Loss) Income
from
discontinued
operations $(0.00) $- $(0.00) $0.01
Total (loss)
income per
share $(0.16) $0.03 $(0.18) $0.05
Weighted
average
common
shares
outstanding
Basic 106,687,887 100,000,041 102,488,123 100,000,041
Diluted 252,046,676 217,949,744 234,554,522 199,844,225
CHINA NEW ENERGY GROUP COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2010 2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents $580,731 $2,672,884
Restricted cash 39,691 180,352
Accounts receivable, net of
allowance for doubtful
accounts
of $219,842 and $- 3,306,894 4,619,232
Receivable from sale of a
subsidiary 3,368,119 5,119,055
Inventories, net 338,008 271,104
Prepaid expenses 197,389 179,011
Deemed receivable from former
shareholders of subsidiaries
acquired for settlement of
certain liabilities 1,250,976 1,983,782
Current assets held for sale 1,430,758 1,768,278
NET CURRENT ASSETS 10,512,566 16,793,698
Property, plant and equipment,
net 10,472,634 8,000,069
Other receivables 1,546,130 2,091,092
Deposits for acquisitions of
subsidiaries 18,822,946 197,696
Intangible assets, net 1,195,612 1,186,272
Deposits paid for acquisition
of long term assets 2,245,362 1,972,162
Goodwill 229,150 224,488
Non-current assets held for
sale 10,135,011 9,760,345
Derivative assets - put options 1,598,093 -
TOTAL ASSETS $56,757,504 $40,225,822
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable $422,944 $614,642
Deposits receipt for disposal 1,045,072 -
Accruals and other payable 539,449 187,904
Acquisition consideration
payable 1,353,474 1,651,888
Short term bank loan 223,944 -
Tax payable 174,358 1,323,815
Registration rights penalties
payable 2,160,000 2,160,000
Related party payables 99,926 97,893
Dividends payable on preferred
stock 249,411 509,381
Derivative financial
instruments -warrants 4,821,264 6,768,106
Derivative financial
instruments -call options
related to
Series D Convertible Preferred
Stock 43,665,345 -
Liabilities to be settled by
former shareholders of
subsidiaries acquired 1,250,976 1,983,782
Convertible notes 4,034,315 -
Current liabilities held for
sale 437,761 548,832
TOTAL CURRENT LIABILITIES 60,478,239 15,846,243
Preferred Stock : 10,000,000
shares authorized, $0.001 par
value Series A Convertible
Preferred Stock : 2,098,918
and 2,098,918 shares issued
and outstanding, liquidation
preference of $10,137,774 and
$10,137,774 as of September
30, 2010 and December 31, 2009 7,031,818 7,031,818
Series B Convertible Preferred
Stock: 1,116,388 and 1,116,388
shares issued and outstanding,
liquidation preference of
$5,399,969 and $5,399,969 as
of September 30, 2010 and
December 31, 2009 2,153,307 2,153,307
Series C Convertible Preferred
Stock : 18.73 and 0 shares
issued and outstanding,
liquidation preference of
$15,000,000 and $0 as of
September 30, 2010 and
December 31, 2009 15,000,000 -
CHINA NEW ENERGY'S
STOCKHOLDERS' EQUITY
Series D Convertible Preferred
Stock (see Derivative
financial instruments -call
options): 4 and 0 shares
issued and outstanding,
liquidation preference of $ 0
as of both September 30, 2010
and December 31, 2009 - -
Common Stock: 500,000,000
shares authorized, $0.001 par
value, 107,070,281 and
101,788,199 shares issued and
outstanding, respectively 107,070 101,788
Additional paid in capital (14,831,844) 10,152,971
(Accumulated deficit)/Retained
earnings (17,405,485) 1,423,523
Statutory surplus reserve fund 1,746,890 1,746,890
Accumulated other comprehensive
income 2,311,044 1,600,941
TOTAL CHINA NEW ENERGY'S
STOCKHOLDERS' EQUITY (DEFICIT) (28,072,325) 15,026,113
Non-controlling interest 166,465 168,341
TOTAL EQUITY (DEFICIT) (27,905,860) 15,194,454
TOTAL LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK
AND EQUITY (DEFICIT) $56,757,504 $40,225,822
CHINA NEW ENERGY GROUP COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
For The Nine Months Ended
September 30,
2010 2009
Cash flows from operating
activities:
Net (loss) income $(11,978,636) $8,322,215
Net loss (income) from
discontinued operations 85,877 (1,894,543)
Net (loss) income from
continuing operations $(11,892,759) $6,427,672
Adjustments to reconcile net
(loss) income to net cash
used in operating activities
:
Change in fair value of
derivative financial
instruments -
(1,946,842) (8,017,275)
Change in fair value of
derivative financial
instruments -
put options of backstop
agreements and obligation to
issuance of common stock
relating to Series D
preferred stock 9,975,502 -
Registration rights penalties - 828,000
Depreciation and amortization 269,782 140,275
Non cash interest 1,034,314 -
Changes in operating assets
and liabilities:
Accounts receivable 1,383,826 (3,063,448)
Other receivables 578,176 183,628
Inventories (60,210) (37,228)
Prepayment (14,544) 18,010
Other current assets - (87,610)
Accounts payable (200,914) (461,528)
Accruals and other payables 1,370,634 (541,671)
Tax payable (1,156,523) (765,519)
Cash used in operating
activities -continuing
operations (659,558) (5,376,694)
Cash provided by (used in)
operating activities -
discontinued operations 172,504 4,461,586
Net cash used in operating
activities (487,054) (915,108)
Cash flows from investing
activities
Deposit paid for property,
plant and equipment (2,749,365) (1,108,880)
Deposits paid for
acquisitions of subsidiaries (18,625,250) -
Payment made to acquire
subsidiary -Chensheng - (1,838,946)
Proceeds from sale of
subsidiary 1,825,010 -
Acquisition consideration
payable (313,949) -
Cash provided by (used in)
investing activities-
continuing operations (19,863,554) (2,947,826)
Cash used in investing
activities-discontinued
operations (179,733) (2,083,662)
Net cash provided by (used
in) investing activities (20,043,287) (5,031,488)
Cash flows from financing
activities
Proceeds from convertible
loan 3,000,000 -
Proceeds from short term bank
loan 220,058 -
Change from restricted cash 140,661 24,279
Proceeds from issuance of
preferred stock 15,000,000 4,752,140
Cash provided by financing
activities-continuing
operations 18,360,719 4,776,419
Cash provided by financing
activities-discontinued
operations - 439,060
Net cash flows provided by
financing activities 18,360,719 5,215,479
Effect of exchange rate
changes in cash and cash
equivalents 77,469 (2,488)
Net increase (decrease) in
cash and cash equivalents (2,092,153) (733,605)
Cash and cash equivalents -
beginning of period 2,672,884 5,612,356
Cash and cash equivalents -
end of period $580,731 $4,878,751
Supplemental disclosure of
cash flow information:
Cash paid for interest $- $-
Cash paid for income tax $1,420,494 $448,252
Supplemental disclosure of
non-cash investing and
financing activities:
Preferred stock dividends
payable $260,872 $135,000
Preferred stock dividends
paid in common stock $948,884 $-
Registration rights payable $2,160,000 $900,000
Acquisition consideration
payable related to the
acquisition of Wuyuan $636,850 $-
Acquisition consideration
payable related to the
acquisition of Zhanhua
Jiutai $716,624 $-
Receivable for disposal of
discontinued operations $3,368,119 $-
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
Three Months Ended Nine Months Ended
September 30, September 30,
Adjusted Net
Income (Loss)
and Diluted
EPS From
Continuing
Operations 2010 2009 2010 2009
-------------- ---- ---- ---- ----
GAAP Net Income
(Loss) from
Continuing
Operations (10,933,692) 5,353,218 (11,892,759) 6,427,672
Less: Change in
fair value of
derivative
financial
instruments -
warrants 1,654,806 6,041,231 1,946,842 8,017,275
Less: Change in
fair value of
derivative
financial
instruments -
Options (9,975,502) - (9,975,502) -
Adjusted Amount
Net Income
from
Continuing
Operations (2,612,996) (688,013) (3,864,099) (1,589,603)
Weighted
average number
of shares -
Diluted 252,046,676 217,949,744 234,554,522 199,844,225
Adjusted
Diluted EPS
from
Continuing
Operations (0.01) (0.00) (0.02) (0.01)
Three Months Ended Nine Months Ended
September 30, September 30,
Adjusted Net
Income (Loss)
and Diluted
EPS
Attributable
to Common
Shareholders 2010 2009 2010 2009
-------------- ---- ---- ---- ----
GAAP Net Income
(Loss) and
Attributable
to Common
Shareholders (17,307,424) 5,910,674 (18,829,008) 8,854,961
Less: Change in
fair value of
derivative
financial
instruments -
warrants 1,654,806 6,041,231 1,946,842 8,017,275
Less: Change in
fair value of
derivative
financial
instruments -
Options (9,975,502) - (9,975,502) -
Adjusted Amount ($8,986,728) ($130,557) ($10,800,348) $837,686
Weighted
average number
of shares -
Diluted 252,046,676 217,949,744 234,554,522 199,844,225
Adjusted
Diluted EPS
Attributable
to Common
Shareholders ($0.04) ($0.00) ($0.05) $0.00
Company Contact:
Eric Yu, Chief Financial Officer
Email: ericyu@cnegc.com
Website: www.cnegc.com
----------------------
Investor Relations Contact:
CCG Investor Relations
Mr. Athan Dounis, Account Manager
Phone: +1-646-213-1916
Email: athan.dounis@ccgir.com
Mr. Crocker Coulson, President
Phone: +1-646-213-1915
Email: crocker.coulson@ccgir.com
Website: www.ccgirasia.com
SOURCE China New Energy Group Company
