UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10−Q/A
 (Mark
One)
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
quarterly period ended: March 31, 2009
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period from ____________ to _____________
  Commission
File Number: 333-83375
 
 CHINA NEW ENERGY GROUP
COMPANY
 (Exact
Name of Registrant as Specified in Its Charter)
 
 Delaware
                    
                    65-0972647(State
      or other jurisdiction of
                      incorporation
      or organization)
                    
                    (I.R.S.
      Employer Identification
No.)
 
 20/F,
Center Plaza, No.188 Jie Fang Road
 He
Ping District, Tianjin, China     300042
 (Address
of principal executive offices, Zip Code)
  (86
22) 5829 9778
 (Registrant’s
telephone number, including area code)
  No.
1703 and 1704, A Building, No. 1, Hongji Apartment, Jin Wei Road
 He Bei District, Tianjin,
China
 
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes  x  No   ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes    ̈  No     ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      Accelerated Filer  ̈
                Accelerated
      Filer   ̈Non-Accelerated Filer  ̈(Do not check if a smaller reporting company)
                Smaller
      reporting company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes   ̈  No  x
 
 The
number of shares outstanding of each of the issuer’s classes of common equity,
as of May 10, 2010 is as follows:
  Class
      of Securities
                    
                    Shares
      OutstandingCommon
      Stock, $0.001 par value
                    
                    101,788,199
  
  
 
 Quarterly
Report on FORM 10-Q/A
  Three
Months Ended March 31, 2009
 
 Table
of Contents
 
 PART
      IFINANCIAL
      INFORMATIONITEM
      1.
                  FINANCIAL
      STATEMENTS.
                  
                  
                  1ITEM
      2.
                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
                  
                  
                  39ITEM
      3.
                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                  
                  
                  47ITEM
      4.
                  CONTROLS
      AND PROCEDURES.
                  
                  
                  47PART
      IIOTHER
      INFORMATIONITEM
      1.
                  LEGAL
      PROCEEDINGS.
                  
                  
                  48ITEM
      2.
                  UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
                  
                  
                  48ITEM
      3.
                  DEFAULTS
      UPON SENIOR SECURITIES.
                  
                  
                  48ITEM
      5.
                  OTHER
      INFORMATION.
                  
                  
                  48ITEM
      6.
                  EXHIBITS.
                  
                  
                  48
  
  EXPLANATORY
NOTE REGARDING RESTATEMENT
 
 This
Amendment No. 1 ("Form 10-Q/A") to our Quarterly Report on Form 10-Q for the
three month period ended March 31, 2009 ("Form 10-Q"), which was filed with the
SEC on May 15, 2009, amends the Form 10-Q to reflect restated amounts and
revised disclosures of the Company's consolidated financial statements for the
three month period ended March 31 2009 and for the year ended December 31,
2008.
 
 The
company has restated its property, plant and equipment, intangible assets,
registration rights penalties payable and certain expenses for the three months
ended March 31, 2009 and expanded the related footnote disclosures. These
adjustments resulted in an increase in the Group’s net loss for the three months
ended March 31, 2009 by $12,152,643, from the net loss of $338,900 to the net
loss of $12,491,543, with a corresponding increase in accumulated deficit and
equity at March 31, 2009. A detailed discussion of the restatement of the
consolidated financial statements for the three months ended March 31, 2009
originally filed May 20, 2009 is included in note 18
  
  PART
I
 FINANCIAL
INFORMATION
  ITEM
      1.
              FINANCIAL
      STATEMENTS.
 
 CHINA
NEW ENERGY GROUP COMPANY
 
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 Index to
condensed consolidated financial statements – unaudited
 
 PageCondensed Consolidated
      Balance Sheets (Restated)
                  2Condensed Consolidated
      Statements of Operations and Comprehensive
      Loss (Restated)
                  4Condensed Consolidated
      Statements of Cash Flows (Restated)
                  5Notes
      to CondensedConsolidated Financial Statements
                  6
  1
  CHINA
NEW ENERGY GROUP COMPANY
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 March
      31
                          
                          
                          December
      312009
                          
                          
                          2008RestatedASSETSCURRENT
      ASSETSCash
      and cash equivalents
                          
                          $
                          3,634,032
                          
                          
                          $
                          5,612,356Restricted
      cash
                          
                          
                          220,737
                          
                          
                          
                          221,152Accounts
      receivable, net of allowance for doubtful accounts of $- and
      $-
                          
                          
                          1,685,239
                          
                          
                          
                          2,183,087Inventories,
      net
                          
                          
                          287,450
                          
                          
                          
                          257,597Prepaid
      expenses
                          
                          
                          376,738
                          
                          
                          
                          133,614Other
      current assets
                          
                          
                          2,338
                          
                          
                          
                          3,340TOTAL
      CURRENT ASSETS
                          
                          
                          6,206,534
                          
                          
                          
                          8,411,146Property,
      plant and equipment, net
                          
                          
                          13,495,652
                          
                          
                          
                          13,470,468Intangible
      assets, net
                          
                          
                          1,301,326
                          
                          
                          
                          1,308,375Other
      receivables
                          
                          
                          2,286,943
                          
                          
                          
                          2,254,997Deposits
      paid for acquisition of long term assets
                          
                          
                          1,497,837
                          
                          
                          
                          1,424,747Goodwill
                          
                          
                          63,017
                          
                          
                          
                          63,014TOTAL
      ASSETS
                          
                          $
                          24,851,309
                          
                          
                          $
                          26,932,747
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  2
  CHINA
NEW ENERGY GROUP COMPANY
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 March
      31
                          
                          
                          December
      312009
                          
                          
                          2008RestatedLIABILITIES
      AND EQUITYCURRENT
      LIABILITIESAccounts
      payable
                          
                          $
                          997,417
                          
                          
                          $
                          874,542Accruals
      and other payables
                          
                          
                          244,600
                          
                          
                          
                          242,309Acquisition
      consideration payable
                          
                          
                          -
                          
                          
                          
                          1,838,946Registration
      rights penalties payable
                          
                          
                          1,350,000
                          
                          
                          
                          900,000Tax
      payable
                          
                          
                          221,209
                          
                          
                          
                          693,116Related
      party payables
                          
                          
                          498,638
                          
                          
                          
                          498,703Dividends
      payable on preferred stock
                          
                          
                          329,000
                          
                          
                          
                          194,000Derivative
      financial instruments – warrants
                          
                          
                          17,218,657
                          
                          
                          
                          5,506,143TOTAL
      CURRENT LIABILITIES
                          
                          
                          20,859,521
                          
                          
                          
                          10,747,759Commitment
      and contingencies (Note 16)Preferred
      Stock : 10,000,000 shares authorized, $0.001 par value Series A
      Convertible Preferred Stock: 1,857,373 shares issued and outstanding,
      liquidation preference of $8,971,112 as of March 31, 2009 and December 31,
      2008
                          
                          
                          7,031,818
                          
                          
                          
                          7,031,818CHINA
      NEW ENERGY'S STOCKHOLDERS' DEFICIENCYCommon
      stock: 500,000,000 shares authorized, $0.001 par value, 100,000,041 shares
      issued and outstanding as of March 31, 2009 and December 31, 2008,
      respectively
                          
                          
                          100,000
                          
                          
                          
                          100,000Additional
      paid in capital
                          
                          
                          9,396,046
                          
                          
                          
                          9,396,046Accumulated
      deficit
                          
                          
                          (16,414,737
                          )
                          
                          
                          (3,809,149
                          )Statutory
      surplus reserve fund
                          
                          
                          1,746,890
                          
                          
                          
                          1,746,890Accumulated
      other comprehensive income
                          
                          
                          1,606,297
                          
                          
                          
                          1,616,977TOTAL
      CHINA NEW ENERGY'S STOCKHOLDERS’ (DEFICIT) EQUITY
                          
                          
                          (3,565,504
                          )
                          
                          
                          9,050,764Non-controlling
      interest
                          
                          
                          525,474
                          
                          
                          
                          102,406TOTAL
      STOCKHOLDERS’ (DEFICIT) EQUITY
                          
                          
                          (3,040,030
                          )
                          
                          
                          9,153,170TOTAL
      LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
      STOCKHOLDERS’ (DEFICIT) EQUITY
                          
                          $
                          24,851,309
                          
                          
                          $
                          26,932,747
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3
  CHINA
NEW ENERGY GROUP COMPANY
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
 (Unaudited)For
      the three months endedMarch
      31,2009
                        
                        
                        2008RestatedRevenue:Connection
      services
                        
                        $
                        146,752
                        
                        
                        $
                        -Natural
      gas
                        
                        
                        178,265
                        
                        
                        
                        101,755325,017
                        
                        
                        
                        101,755Cost
      of Sales:Connection
      services
                        
                        
                        93,955
                        
                        
                        
                        -Natural
      gas
                        
                        
                        181,735
                        
                        
                        
                        75,937275,690
                        
                        
                        
                        75,937Gross
      Profit
                        
                        
                        49,327
                        
                        
                        
                        25,818Operating
      Expenses:General
      and administrative expenses
                        
                        
                        334,638
                        
                        
                        
                        202,975Selling
      expenses
                        
                        
                        50,500
                        
                        
                        
                        43,444Registration
      rights penalties
                        
                        
                        450,000
                        
                        
                        
                        -Total
      operating expenses
                        
                        
                        835,138
                        
                        
                        
                        246,419Operating
      Loss
                        
                        
                        (785,811
                        )
                        
                        
                        (220,601
                        )Other
      Income (Expenses):Change
      in fair value of derivative financial instruments –
    warrants
                        
                        
                        (11,712,514
                        )
                        
                        
                        -Interest
      income
                        
                        
                        8,357
                        
                        
                        
                        -Interest
      expense
                        
                        
                        (671
                        )
                        
                        
                        (124
                        )Other
      Income
                        
                        
                        93
                        
                        
                        
                        -Total
      other expenses
                        
                        
                        (11,704,735
                        )
                        
                        
                        (124
                        )Loss
      From Continuing Operations, Before Income Tax
                        
                        
                        (12,490,546
                        )
                        
                        
                        (220,725
                        )Income
      Tax
                        
                        
                        (997
                        )
                        
                        
                        -Loss
      From Continuing Operations, net of Income Tax
                        
                        
                        (12,491,543
                        )
                        
                        
                        (220,725
                        )Loss
      From Discontinued Operations, net of Income Tax
                        
                        
                        -
                        
                        
                        
                        (17,838
                        )Net
      Loss
                        
                        
                        (12,491,543
                        )
                        
                        
                        (238,563
                        )Add:
      Net loss Attributable to Non-controlling Interest
                        
                        
                        20,955
                        
                        
                        
                        1,166Net
      Loss Attributable to China New Energy Group
                        
                        
                        (12,470,588
                        )
                        
                        
                        (237,397
                        )Dividends
      and Deemed Dividend on Preferred Stock
                        
                        
                        (135,000
                        )
                        
                        
                        -Net
      Loss Attributable to Common Stockholders
                        
                        
                        (12,605,588
                        )
                        
                        
                        (237,397
                        )Other
      Comprehensive LossNet
      Loss
                        
                        
                        (12,491,543
                        )
                        
                        
                        (238,563
                        )Foreign
      currency translation
                        
                        
                        (10,679
                        )
                        
                        
                        127,843Comprehensive
      Loss Attributable to Non-controlling Interest
                        
                        
                        5,026
                        
                        
                        
                        1,291Comprehensive
      Loss
                        
                        $
                        (12,497,196
                        )
                        
                        $
                        (109,429
                        )(Loss)
      per share – Basic(Loss)
      from continuing operations
                        
                        
                        (0.13
                        )
                        
                        
                        (0.00
                        )(Loss)
      from discontinued operations
                        
                        
                        0.00
                        
                        
                        
                        (0.00
                        )Total
      (loss) per share
                        
                        $
                        (0.13
                        )
                        
                        $
                        (0.00
                        )(Loss)
      per share – Diluted(Loss)
      from continuing operations
                        
                        
                        (0.13
                        )
                        
                        
                        (0.00
                        )(Loss)
      from discontinued operations
                        
                        
                        0.00
                        
                        
                        
                        (0.00
                        )Total
      (loss) per share
                        
                        $
                        (0.13
                        )
                        
                        $
                        (0.00
                        )Weighted
      average common shares outstandingBasic
                        
                        
                        100,000,041
                        
                        
                        
                        95,134,934Diluted
                        
                        
                        176,709,543
                        
                        
                        
                        95,134,934
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  4
  CHINA
NEW ENERGY GROUP COMPANY
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 For
      The Three Months EndedMarch
      31,2009
                      
                      
                      2008RestatedCash
      flows from operating activitiesNet
      loss
                      
                      $
                      (12,491,543
                      )
                      
                      $
                      (220,725
                      )Net
      loss from discontinued operations
                      
                      
                      -
                      
                      
                      
                      (17,838
                      )Net
      loss from continuing operations
                      
                      
                      (12,491,543
                      )
                      
                      
                      (238,563
                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                      
                      
                      110,863
                      
                      
                      
                      41,897Change
      in fair value of derivative financial instruments –
    warrants
                      
                      
                      11,712,514
                      
                      
                      
                      -Registration
      rights penalties
                      
                      
                      450,000
                      
                      
                      
                      -Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      497,969
                      
                      
                      
                      312,302Other
      receivables
                      
                      
                      (18,465
                      )
                      
                      
                      -Inventories
                      
                      
                      (29,838
                      )
                      
                      
                      179,024Prepaid
      expenses
                      
                      
                      (243,112
                      )
                      
                      
                      12,201Other
      current assets
                      
                      
                      1,002
                      
                      
                      
                      -Accounts
      payable
                      
                      
                      114,362
                      
                      
                      
                      (181,084
                      )Accrued
      expense
                      
                      
                      -
                      
                      
                      
                      (332,724
                      )Other
      payables
                      
                      
                      (4,541
                      )
                      
                      
                      (4,252
                      )Tax
      payable
                      
                      
                      (471,940
                      )
                      
                      
                      1,620Cash
      provided by operating activities-continuing operations
                      
                      
                      (372,729
                      )
                      
                      
                      (209,579
                      )Cash
      provided by operating activities-discontinued operations
                      
                      
                      -
                      
                      
                      
                      239Net
      cash used in operating activities
                      
                      
                      (372,729
                      )
                      
                      
                      (209,340
                      )Cash
      flows from investing activitiesDeposits
      paid and acquisition of property, plant and equipment
                      
                      
                      (201,139
                      )
                      
                      
                      (184,660
                      )Payment
      made to acquire subsidiary – Chensheng
                      
                      
                      (1,838,946
                      )
                      
                      
                      -Cash
      used in investing activities-continuing operations
                      
                      
                      (2,040,085
                      )
                      
                      
                      (184,660
                      )Cash
      used in investing activities-discontinued operations
                      
                      
                      -
                      
                      
                      
                      (44,039
                      )Net
      cash used in investing activities
                      
                      
                      (2,040,085
                      )
                      
                      
                      (228,699
                      )Cash
      flows from financing activitiesFund
      deposit as restricted cash
                      
                      
                      415
                      
                      
                      
                      -Contribution
      from Non-controlling interest
                      
                      
                      438,852
                      
                      
                      
                      59,656Cash
      provided by financing activities-continuing operations
                      
                      
                      439,267
                      
                      
                      
                      59,656Cash
      provided by financing activities-discontinued operations
                      
                      
                      -
                      
                      
                      
                      -Net
      cash flows provided by financing activities:
                      
                      
                      439,267
                      
                      
                      
                      59,656Effect
      of exchange rate changes in cash and cash equivalents
                      
                      
                      (4,777
                      )
                      
                      
                      60,043Net
      decrease in cash and cash equivalents
                      
                      
                      (1,978,324
                      )
                      
                      
                      (318,340
                      )Cash
      and cash equivalents - beginning of period
                      
                      
                      5,612,356
                      
                      
                      
                      2,311,028Cash
      and cash equivalents - end of period
                      
                      $
                      3,634,032
                      
                      
                      $
                      1,992,688Supplemental
      disclosure of non cash investing and financing activities:Interest
      paid in cash
                      
                      $
                      -
                      
                      
                      $
                      -Income
      taxed paid in cash
                      
                      $
                      371,384
                      
                      
                      $
                      -
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  5
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 Restatement
of previously issued March 31, 2009 Consolidated Financial
Statements
 
 The Group
has restated its property, plant and equipment, intangible assets, registration
rights penalties payable and certain expenses for the three months ended March
31, 2009 and expanded the related footnote disclosures. These adjustments
resulted in an increase in the Group’s net loss for the three months ended March
31, 2009 by $12,152,643, from the net loss of $338,900 to the net loss of
$12,491,543, with a corresponding increase in accumulated deficit and equity at
March 31, 2009. A detailed discussion of the restatement of the consolidated
financial statements for the three months ended March 31, 2009 originally filed
May 20, 2009 is included in note 18.
 
 1.
              Basis
      of Presentation
 
 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 Group, 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 Group
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 Group for the year ended December 31, 2008
and notes thereto included in the Form 10KA of China New Energy Group Company
filed on April 15, 2010. The Group follows the same accounting policies in the
preparation of interim reports.
 
 Results
of operations for the interim periods are not indicative of annual
results.
 
 2.
              Organization
      and Nature of Business
 
 China New
Energy Group Company (“CNER” and the “Group”) was incorporated on March 28, 2008
in the state of Delaware USA, under the name of Travel Hunt Holdings, Inc.. On
May 27, 2008, Travel Hunt changed its name to China New Energy Group Company in
connection with a share exchange transaction as described below.
 
 Reverse
Acquisition
 On March
28, 2008, the Company executed a share exchange agreement with Willsky
Development Ltd. (“Willsky”) whereby the Company issued to the stockholders of
Willsky 94,908,650 shares of the Company’s Common Stock in exchange for all of
the issued and outstanding capital stock of Willsky (the “Share Exchange”).
Prior to the Share Exchange, 7,091,391 shares of Common Stock were issued and
outstanding. Willsky thereby became our wholly-owned subsidiary and the former
shareholders of Willsky became our controlling stockholders.
 
 Concurrently
with the Share Exchange, the two existing shareholders of Travel Hunt
surrendered to the Company a total of 2,000,000 shares of the Common Stock of
the Company for cancellation in exchange for $660,000 payable through the
delivery of a six month Convertible Promissory Note. After surrender, the
existing shareholders retained 5,091,391 shares of our Common
Stock.
 
 Simultaneous
with the consummation of the Share Exchange, the shareholder of Willsky, Eternal
International Holding Group Ltd, a Hong Kong corporation, distributed 85,417,785
shares of the Company’s Common Stock to its shareholders as a dividend.
Accordingly, following this distribution and the surrender of 2,000,000 shares
held by the existing shareholders, Eternal International beneficially owned
approximately 9.49% of the Company’s outstanding capital stock of 100,000,041
common shares.
  6
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 2.
              Organization
      and Nature of Business  -
continued
 
 This
transaction has been accounted for as a reverse acquisition and recapitalization
of the Company whereby Willsky is deemed to be the accounting acquirer (legal
acquiree) and the Company the accounting acquiree (legal acquirer). The
historical financial statements for periods prior to March 28, 2008, are those
of Willsky except that the equity section and earnings per share have been
retroactively restated to reflect the reverse acquisition.
 
 Principal
activity
 The
principal activity of the Group is the operation of natural gas distribution
network through its Chinese subsidiary companies. The Group’s operating
subsidiaries and branches (which together with the Company are collectively
referred to as the “Group”) and their principal activities as of March 31, 2009
are as follows:
 
 
 
 Willsky Development Ltd.
(“Willsky”)
 Willsky
Development Ltd. (“Willsky”) was incorporated on May 31, 2005 under the laws of
the British Virgin Islands.
 
 Tianjin Sing Ocean Public
Utility Development Co., Ltd. (“Singocean”)
 In 2005,
Willsky acquired a 99% shareholding in Singocean, which was formed in the PRC as
an equity joint venture to be operated for a period of 50 years until January
18, 2054, with registered capital of $4,500,000 (RMB31,897,000). Singocean set
up a branch division in Acheng, Tianjin, called Tianjin Sing Ocean Public
Utility Development Co., Ltd. – Acheng Division (“Singocean – Acheng Division”)
which is to be operated for a period of five years until December 28,
2010.
  7
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 2.    Organization
and Nature of Business-continued
 
 Qinhuangdao Chensheng Gas
Company Limited (“Chensheng”)
 On
September 16, 2008, our Singocean subsidiary entered into an Equity Swap
Agreement with Mr. Xiu Hai Tian, whereby we acquired from Mr. Xiu
a 49% ownership interest in Chensheng, in exchange for our 99%
ownership in Hunchun Sing Ocean.  The parties to the Equity Swap
Agreement determined that the value of the 49% interest in Chensheng and the 99%
interest in Hunchun Sing Ocean were approximately equal and therefore there was
no cash or other consideration exchanged.
 
 On
December 10, 2008, we entered into an Agreement for Equity Transfer with the
holders of the remaining 51% ownership interest in Chensheng. The Agreement was
consummated on December 30, 2008 and the Company purchased the remaining 51% of
Chensheng from 17 individuals, for an aggregate purchase price of approximately
$1,840,000 (RMB 12,560,000). As a result, the Company owns 51% of Chensheng and
our 99%-owned subsidiary Singocean owns 49% of Chensheng and thus the Group
ultimately owns 99.5% of Chensheng.
 
 China New Energy (Tianjin)
Investment & Consulting Co., Ltd. (“Tianjin Investment”)
 On
January 12, 2009, Tianjin Investment was established in the PRC and is engaged
in the business of investment holding.
 
 Yingkou Zhongneng Gas
Development Co., Ltd. (“Yingkou Zhongneng”)
 On
January 23, 2009, Yingkou Zhongneng was established in the PRC and operates a
natural gas distribution network in the city of Dashiqiao.
 
 Operational Rights and Right
to Supply and Operate Gas Pipeline
 The
Group, through Singocean, has signed an “Investment Agreement of Piped Gas
Project Construction in Dashiqiao City” which states that the Group is in charge
of operations and management of the piped gas project in Dashiqiao. On June 16,
2005, the Dashiqiao City Construction Bureau gave the Group a certificate which
confirmed that the Group has exclusive operational rights for thirty years in
Dashiqiao City. The Group receives a connection fee of $380 (RMB2,600) per
user.
 
 On June
10, 2005, the Group, through Singocean, signed an “Investment Agreement of Piped
Gas Project Construction in Acheng City” which states that the Group has the
exclusive right to invest in and operate the gas pipeline system in Acheng City
for thirty years. The Group receives a connection fee of $293 (RMB2,000) per
user.
 
 On
October 8, 2005, the Group, through Chensheng, signed an “Investment Agreement
of Piped Gas Project Construction in Qinhuangdao” which states that the Group
has the exclusive right to invest in and operate the gas pipeline system in
Qinhuangdao for twenty-five years. The Group receives a connection fee of $351
(RMB2,400) per user.
  8
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 3.
Summary of Significant Accounting Policies
 
 (a)
Basis of Presentation
 
 The
financial statements are prepared in accordance with 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.
 
 (b)
Use of Estimates
 In
preparing consolidated financial statements in conformity with US GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reported periods. Actual results could differ from those
estimates.
 
 Significant
Estimates
 
 These
consolidated financial statements include some amounts that are based on
management's best estimates and judgments. The most significant estimates relate
to revenue recognition of gas connection contracts, depreciation of property,
plant and equipment, the valuation allowance for deferred taxes, impairment
testing of intangible assets, the fair value of derivative instrument
liabilities and various contingent liabilities. It is reasonably possible that
the above-mentioned estimates and others may be adjusted as more current
information becomes available, and any adjustment could be significant in future
reporting periods.
 
 (c)
Principles of Consolidation
 
 The
consolidated financial statements include the accounts of the Group and all of
its subsidiaries. All significant intercompany transactions and accounts have
been eliminated in consolidation.
 
 (d)
Cash and Cash Equivalents
 The Group
considers all highly liquid investments with original maturities of three months
or less at the time of purchase to be cash equivalents. As of March 31, 2009 and
December 31, 2008, the Group did not have any cash equivalents.
 
 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 Group, is remote.
 
 (e)
Property, Plant and Equipment
 
 Property,
plant and equipment are stated at cost. Expenditures for maintenance and
repairs, which do not improve or extend the expected useful life of the assets,
are expensed to operations but major repairs are capitalized. Depreciation is
provided principally by use of the straight-line method over the useful lives of
the related assets, as follows:
 
 Computer
      equipment
                
                3
      yearsFurniture
      & fixtures
                
                5
      yearsOffice
      equipment
                
                5
      yearsMotor
      vehicles
                
                5
      yearsGas
      transportation vehicles
                
                5
      -20 yearsGas
      station
                
                20-25
      yearsUnderground
      gas pipelines
                
                20-30
      years
 
 The gain
or loss on disposal of property, plant and equipment is the difference between
the net sales proceeds and the carrying amount of the relevant assets, and, if
any, is recognized in the statement of operations.
  9
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 3.
Summary of Significant Accounting Policies-continued
 
 (f)
Intangible Assets
 
 Intangible
assets are generally amortized on a straight line basis over their respective
estimated useful lives. The Group has no intangible assets with indefinite
useful lives. Intangible assets represent land use rights in the PRC. According
to Chinese regulations, land belongs to the nation. Land use rights refer to the
purchase of the legal right to use land from the government. The term of the
land use rights is 50 years. The land use rights are amortized using the
straight-line method over their estimated useful life of 50 years.
 
 (g)
Inventories
 
 Inventories,
including construction materials, integrated circuit cards, gas meters,
polyethylene valves and natural gas are stated at the lower of cost and net
realizable value. Cost is calculated using the weighted average method. Net
realizable value is based on estimated selling prices in the ordinary course of
business less estimated costs to completion and the estimated costs necessary to
make the sale.
 
 (h)
Goodwill
 
 Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired in a business combination,
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill” and Other Intangible Assets”, goodwill is no longer subject to
amortization. Rather, goodwill is subject to at least an annual assessment for
impairment, applying a fair-value based test. Fair value is generally determined
using a discounted cash flow analysis.
 
 (i)
Impairment of Assets
 
 In
accordance with SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets", the Group evaluates its long-lived assets to determine
whether later events and circumstances warrant revised estimates of useful lives
or a reduction in carrying value due to impairment. If indicators of impairment
exist and if the value of the assets is impaired, an impairment loss would be
recognized. As of March 31, 2009 and December 31, 2008, no impairment loss has
been recognized.
 
 (j)
Income Taxes
 
 The Group
accounts for income taxes under SFAS No. 109, “Accounting for Income
Taxes”.  Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.  Also, the Group did not have any
liabilities for unrecognized income tax benefits according to the provisions of
FIN 48.
 
 (k)
Revenue Recognition
 Among the
accounting policies adopted by the Group, the most critical one is the policy
regarding revenue recognition of the Group’s major sources of income, namely,
gas connection services and sales of gases. In accordance with the SEC's Staff
Accounting Bulletin ("SAB") No. 104, under this policy, all of the following
criteria must be met in order for us to recognize revenue:
 
 1.
              Persuasive
      evidence of an arrangement exists;
 2.
              Delivery
      has occurred or services have been
rendered;
 3.
              The
      seller's price to the buyer is fixed or determinable;
  and
 4.
              Collectibility
      is reasonably assured.
  10
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 3.
Summary of Significant Accounting Policies-continued
 
 Gas
connection revenue
 
 Gas
connection revenue is recognized when the outcome of a contract can be estimated
reliably and the stage of completion at the balance sheet date can be measured
reliably.
 
 Revenue
from gas connection contracts is recognized on the percentage of completion
method, measured by reference to the value of work carried out during the year.
When the outcome of a gas connection contract cannot be estimated reliably,
revenue is recognized only to the extent of contract costs incurred that it is
probable will be recoverable.
 
 When the
outcome of a gas connection contract can be estimated reliably and the stage of
contract completion at the balance sheet date can be measured reliably, contract
costs are charged to the income statement by reference to the stage of
completion of the contract activity at the balance sheet date on the same basis
as revenue from the gas connection contract is recognized.
 
 When the
outcome of a gas connection contract cannot be estimated reliably, contract
costs are recognized as expenses in the period in which they are incurred. When
it is probable that total contract costs will exceed contract revenue, the
expected loss is recognized as an expense immediately.
 
 Where
contract costs incurred to date plus recognized profits less recognized losses
exceed progress billings, the surplus is shown as an amount due from customers
for contract work. For contracts where progress billings exceed contract costs
incurred to date plus recognized profits less recognized losses, the surplus is
shown as an amount due to customers for contract work. Amounts received before
the related work is performed are included in the consolidated balance sheet, as
a liability, as advances received. Amounts billed for work performed but not yet
paid by the customer are included in the consolidated balance sheet under trade
and other receivables.
 
 During
the three months ended March 31, 2009 and 2008, all the contracts for connection
services were started and completed in the same period.
 
 Revenue
from sale of gas
 
 Sales
revenue from sale of gas represents the invoiced value of goods sold, net of
value-added tax (“VAT”). Revenue from sale of gas is recognized when the goods
are delivered and title has passed.
 
 All of
the Group’s products that are sold in the PRC are subject to Chinese value-added
tax of 3% of the gross sales price. This VAT may be offset by VAT paid by the
Group on raw materials and other materials included in the cost of producing
their finished product. The Group recorded VAT payable and VAT receivable net of
payments in the financial statements.
  11
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 3. Summary of Significant Accounting
Policies-continued
 
 (l)
Foreign Currency Translation and Transactions
 
 The
Group’s functional currency is the Renminbi (“RMB”) and its reporting currency
is U.S. dollars. The Group’s consolidated balance sheet accounts are translated
into U.S. dollars at the year-end exchange rates and all revenue and expenses
are translated into U.S. dollars at the average exchange rates prevailing during
the periods in which these items arise. Translation gains and losses are
deferred and accumulated as a component of other comprehensive income in
stockholders’ equity. Transaction gains and losses that arise from exchange rate
fluctuations from transactions denominated in a currency other than the
functional currency are included in the statement of operations as incurred. The
translation and transaction gains and losses were immaterial for the periods
ended March 31, 2009 and 2008.
 
 The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Group because it has not engaged in any significant
transactions that are subject to the restrictions.
 
 (m)
Fair Value of Financial Instruments
 
 The Group
records and discloses certain financial and non-financial assets and liabilities
at their fair value. The fair value of an asset is the price at which the asset
could be sold in an orderly transaction between unrelated, knowledgeable and
willing parties able to engage in the transaction. A liability’s fair value is
defined as the amount that would be paid to transfer the liability to a new
obligor in a transaction between such parties, not the amount that would be paid
to settle the liability with the creditor.
 
 Assets
and liabilities recorded at fair value are measured using a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value.
These tiers include:
 
 Ÿ
              Level
      1, defined as observable inputs such as quoted prices in active
      markets;
 Ÿ
              Level
      2, defined as inputs other than quoted prices in active markets that are
      either directly or indirectly observable;
and
 Ÿ
              Level
      3, defined as unobservable inputs in which little or no market data
      exists, therefore requiring the Group to develop our own
      assumptions.
 
 Our
derivative instrument liabilities are recorded at fair value. Our financial
instruments that are recorded at cost include cash and cash equivalents,
restricted cash, accounts receivable, receivables related to subsidiaries sold,
deposits for acquisitions, accounts payable, accrued expenses, dividends
payable, other current liabilities, and our convertible preferred stock. We
believe the carrying values of these financial instruments approximate their
fair values due to their short-term nature.
 
 (n)
Derivative Financial Instruments
 
 We do not
use derivative financial instruments to hedge exposures to cash-flow,
exchange-rate or market-risks that may affect the fair values of our financial
instruments. However, certain financial instruments, such as warrants, which are
indexed to our Common Stock, are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or physical or net-share
settlement is not within our control or (b) the instrument is not solely indexed
to our Common Stock. Derivative financial instruments are initially recorded,
and continuously carried, at fair value.
 
 Determining
the fair value of these complex derivative financial instruments involves
judgment and the use of certain relevant assumptions including, but not limited
to, interest rates and stock price volatility.  The use of different
assumptions could have a material effect on the estimated fair value
amounts.
  12
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 3.
Summary of Significant Accounting Policies-continued
 
 (o)
Basic and Diluted Earnings Per Share
 
 The Group
reports basic earnings per share in accordance with SFAS No. 128, “Earnings Per
Share”. Basic earnings per share is computed using the weighted average number
of shares outstanding during the periods presented. The weighted average number
of shares of the Group represents the common stock outstanding during the
reporting periods.
 
 Diluted
earnings per share is based on the assumption that all dilutive options were
converted or exercised as of the beginning of the period or when issued, if
later. Dilution is computed by applying the treasury stock method. Under this
method, options are assumed to be exercised at the beginning of the period or
the time of issuance, if later, and as if the funds obtained thereby were used
to re-purchase common stock at the average market price during the
period.
 
 (p)
Accumulated Other Comprehensive Income
 
 Accumulated
other comprehensive income represents the change in equity of the Group during
the periods presented from foreign currency translation
adjustments.
  (q)
Profit Appropriation
 
 In
accordance with PRC regulations, the Group is required to make appropriations to
the statutory surplus reserve, based on after-tax net income determined in
accordance with PRC GAAP. Appropriation to the statutory surplus reserve should
be at 10% of the after-tax net income determined in accordance with the PRC GAAP
until the reserve is equal to 50% of the entity’s registered capital. Statutory
surplus reserve is non-distributable other than in
liquidation.
 
 (r)
Accounts Receivable
 
 Gas
connection fees are recognized on the percentage of completion method, measured
by reference to the value of work carried out during the year. The portion that
is not received in cash is recorded as accounts
receivable.
 
 Trade
accounts receivable are stated at the amount management expects to collect from
balances outstanding at the period end. Outstanding account balances are
reviewed individually for collectability.  Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote.  Over the last two years, we
have not experienced any bad debts from customers and, accordingly, did not have
a provision for uncollectible accounts at March 31, 2009 and December 31,
2008.
 
 Allowances
for doubtful accounts receivable balances are recorded when circumstances
indicate that collection is doubtful for particular accounts receivable or as a
general reserve for all accounts receivable.  Management estimates
such allowances based on historical evidence such as amounts that are subject to
risk.  Accounts receivable are written off if reasonable collection
efforts are not successful.
 
 Based on
management’s evaluation of historical experience, the following policy for
allowance of doubtful accounts is established:
 
 Trade and other receivables
      due:
                    
                    % of BalanceBetween
      91 and 180 days:
                    
                    
                    5
                    %Between
      181 and 360 days:
                    
                    
                    20
                    %Between
      361 and 720 days:
                    
                    
                    50
                    %Over
      721 days:
                    
                    
                    100
                    %
  13
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 3.
Summary of Significant Accounting Policies-continued
 
 (s)
Non-controlling interests
 
 As of
March 31, 2009 , Tianjin Huan Long Trading directly held a 1% non-controlling
interest in Tianjin Singocean and held a 0.5% non-controlling interest interest
in Qinhuangdao Chengsheng Gas Co., Ltd.
 
 (t)
Discontinued Operations
 
 Effective
September 26, 2008, the Group entered into an asset swap in which it disposed of
our former subsidiary Hunchun.
 
 In
accordance with SFAS No. 144, “Accounting for the Impairment of
Long-Lived Assets”, Hunchun 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 for the three months ended March 31, 2008.
 
 (u)   Advertising
and Promotion Costs
 
 Costs
incurred in direct-response advertising are capitalized and amortized on a
straight-line basis over the duration of the advertising campaign. As of March
31, 2009 and 2008, there was no capitalized direct-response advertising. All
other advertising costs are expensed as incurred. Advertising and promotion
costs were nil for the three months ended March 31, 2009 and 2008.
 
 (v)   Post-Retirement
and Post-Employment Benefits
 
 The
Group’s subsidiaries contribute to a state pension plan in respect of its PRC
employees. Other than the above, neither the Group nor its subsidiary provides
any other post-retirement or post-employment benefits.
 
 (w)  Shipping
and Handling Costs
 
 Shipping
and handling costs related to delivery of finished goods are included in other
selling, general and administrative expenses. During the three months ended
March 31, 2009 and 2008, shipping and handling costs were nil.
 
 (x)   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 new primary gas pipelines.  However, if a
primary pipeline is already in place, we are able to connect new customers to
our distribution network during the winter months. Additionally, gas consumption
by residential customers is higher in the winter months for heating purposes,
and we see a corresponding increase in usage during that time.
 
 (y)
New Accounting Pronouncements
 
 Effective
July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (“GAAP”)
in the United States. The historical GAAP hierarchy was eliminated and the ASC
became the only level of authoritative GAAP, other than guidance issued by the
Securities and Exchange Commission. Our accounting policies were not affected by
the conversion to ASC.
  14
 
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 3.
Summary of Significant Accounting Policies-continued
 
 In
December 2007, the FASB amended its guidance on accounting for business
combinations. The new accounting guidance resulted in a change in our accounting
policy effective January 1, 2009, and is being applied prospectively to all
business combinations subsequent to the effective date. Among other things, the
new guidance amends the principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest in the acquiree
and the goodwill acquired. It also establishes new disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. The adoption of this new accounting policy affects our acquisitions
made during 2009.
 
 In
December 2007, the FASB issued new accounting and disclosure guidance related to
non-controlling interests in subsidiaries (previously referred to as minority
interests), which resulted in a change in our accounting policy effective
January 1, 2009. Among other things, the new guidance requires that a
non-controlling interest in a subsidiary be accounted for as a component of
equity separate from the parent's equity, rather than as a liability. The new
guidance is being applied prospectively, except for the presentation and
disclosure requirements, which have been applied retrospectively. The adoption
of this new accounting policy affects the presentation and disclosure of
non-controlling interests on our consolidated financial statements.
 
 In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of the valuation techniques, as defined. This ASU is effective for
the first reporting period, including interim periods, beginning after the
issuance of this ASU. The adoption of this ASU did not have a material impact on
the Group’s consolidated financial statements.
 
 In
January 2010, the FASB issued an accounting standard update to address the
accounting for distributions to shareholders with components of stock and cash
(A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic
505 clarifies the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a limit on the amount of cash that
will be distributed is not a stock dividend for purposes of applying Topics 505
and 260 for interim and annual periods ending on or after December 15, 2009, and
should be applied on a retrospective basis. The Group does not expect the
provisions of this ASU to have a material effect on the financial position,
results of operations, or cash flows of the Group.
  15
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 4.
Restricted Cash
 
 At March
31, 2009 and December 31, 2008, restricted cash of $220,737 and $221,152
represented the cash held by an escrow agent for expenses relating to investor
and public relations.
 
 5.
Other Receivables
 
 Other
receivables consist of the following:
 
 March
      31
                          2009
                        
                        
                        December
      31
                          2008UnauditedDue
      from Tianjin East Ocean Gas Company Limited
                        
                        $
                        1,416,790
                        
                        
                        $
                        1,416,707Other
      receivables
                        
                        
                        870,153
                        
                        
                        
                        838,290Total
                        
                        $
                        2,286,943
                        
                        
                        $
                        2,254,997
 
 The
balance due from Tianjin East Ocean Gas Company Limited (“East Ocean”)
represents the amount due from Hunchun to the Group which was assigned to East
Ocean when East Ocean obtained 99% ownership of Hunchun by the exchange of a 49%
ownership interest in Chensheng during September 2008.
 
 Other
receivables are mainly comprised of an amount due from the Dashiqiao City
Construction Bureau relating to various construction projects.  These
deposits will be refunded to us once certain construction milestones are
completed.
 
 6.
Inventories
 
 Inventories
at March 31, 2009 and December 31, 2008 of $287,450 and $257,597, respectively,
consist of raw materials and do not include any work in progress or finished
goods.
  16
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 7.
Property, Plant and Equipment, net
 
 Property,
plant and equipment consist of the following:
 March
      31
                        2009
                      
                      
                      December
      31
                        2008Unaudited(Restated)At
      CostOffice
      Equipment
                      
                      $
                      77,772
                      
                      
                      $
                      33,660Motor
      Vehicles
                      
                      
                      171,184
                      
                      
                      
                      171,175Gas
      Transportation Vehicles
                      
                      
                      652,948
                      
                      
                      
                      652,910Gas
      Station
                      
                      
                      891,343
                      
                      
                      
                      891,291Machinery
                      
                      
                      141,733
                      
                      
                      
                      141,725Underground
      Gas Pipelines
                      
                      
                      6,631,285
                      
                      
                      
                      6,630,8978,566,265
                      
                      
                      
                      8,521,658Less:
      Accumulated depreciation
                      
                      
                      (744,517
                      )
                      
                      
                      (640,741
                      )$
                      7,821,748
                      
                      
                      $
                      7,880,917Construction-in-progress
                      
                      
                      5,673,904
                      
                      
                      
                      5,589,55113,495,652
                      
                      
                      
                      13,470,468
 
 The gas
pipelines, gas station, and other constructed assets belong to the Group, not to
the municipalities or other units that contract with the Group to provide the
hookups and the gas distribution to the households. Depreciation is provided for
these assets as they are used in operations.
 
 During
the three months ended March 31, 2009, depreciation expenses amounted to
$103,738, of which $94,471 and $9,267 were recorded as cost of sales and general
and administrative expenses, respectively.
 
 During
the three months ended March 31, 2008, depreciation expenses amounted to
$39,853, of which $37,602 and $2,251 were recorded as cost of sales and general
and administrative expenses, respectively.
  17
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 8.
Intangible Assets, net
 
 Intangible
asset consist of the following:
 March
      31
                      2009
                    
                    
                    December
      31
                      2008Unaudited(Restated)Land
      use rights
                    
                    $
                    1,348,995
                    
                    
                    $
                    1,348,915Less:
      accumulated amortization
                    
                    
                    (47,669
                    )
                    
                    
                    (40,540
                    )$
                    1,301,326
                    
                    
                    $
                    1,308,375
 
 Amortization
expense for the three months ended March 31, 2009 and 2008 was $7,125 and
$2,044, respectively.
 
 Estimated
amortization for the next five years and thereafter is as follows:
 
 Remainder
      of 2009
                      
                      $
                      21,3752010
                      
                      
                      28,5002011
                      
                      
                      28,5002012
                      
                      
                      28,5002013
                      
                      
                      28,500Thereafter
                      
                      
                      1,165,951Total
                      
                      $
                      1,301,326
  18
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 9.
Acquisition Consideration Payable
  March
      31
                      2009
                    
                    
                    December
      31
                      2008RestatedAcquisition
      consideration payable relating to the purchase of
Chensheng
                    
                    
                    -
                    
                    
                    
                    1,838,946Total
                    
                    $
                    -
                    
                    
                    $
                    1,838,946
 
 The
acquisition consideration payable as of December 31, 2008 represents the amount
due for acquiring the remaining 51% interest in Chensheng in December, 2008 (see
Note 2).  This amount was paid on January 20, 2009.
 
 10.
Related Party Payable
 
 As of
March 31, 2009 and December 31, 2008, the Group has the following balances
payable to related parties:
 
 March
      31
                      2009
                    
                    
                    December
      31
                      2008RestatedEternal
      International Holding Group Ltd, shareholder of the
Company
                    
                    
                    400,726
                    
                    
                    
                    400,797Tianjin
      Huanlong Commercial and Trading Company, non-controlling shareholder of
      the a subsidiary
                    
                    $
                    97,912
                    
                    
                    $
                    97,906$
                    498,638
                    
                    
                    $
                    498,703
 The
balances have no stated terms for repayment and are not interest
bearing.
 
 19
 
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 11.
Capital Stock Transactions
 
 August
20, 2008 Private Placement - Series A Redeemable Convertible Preferred
Stock
 
 In
connection with the August 20, 2008 private placement, the Company filed a
Certificate of Designations of Preferences, Rights and Limitations of Series A
Convertible Preferred Stock with the Secretary of State of the State of Delaware
(the "Certificate").  The Company’s Certificate of Incorporation authorizes
it to issue 10,000,000 shares of Preferred Stock and by the filing, 5,500,000
shares were designated as Series A Convertible Preferred Stock ("Series A
Preferred Stock").  On August 20, 2008, the Company issued 1,857,373 shares
of Series A Preferred Stock to China Hand Fund I, LLC (“China
Hand”).
 
 At March
31, 2009 and December 31, 2008, 1,857,373 shares of Series A Preferred
Stock were issued and outstanding.
 
 Dividends
 The
holders of the Series A Preferred Stock are entitled to cumulative
dividends at a rate of 6% per annum of the stated price paid per share of $4.83,
compounded daily and payable semi-annually on June 1 and December
1. Dividends are payable in shares of Common Stock or, at the option of the
Company, in cash. If paid in shares of Common Stock, the number of shares to be
issued is determined by dividing the dividend payable by 90% of the
volume-weighted average price for the 20 days preceding the dividend payment
date of June 1 or December 1. As long as any shares of Series A Preferred Stock
are outstanding, the Company may not declare or pay dividends with respect to
the Common Stock.
 
 Voting
Rights
 In
addition to the right to vote as a separate class of securities, the holders of
the Preferred Stock are entitled to vote together with the holders of the
Company’s Common Stock, with each such holder of Series A Preferred Stock
entitled to the number of votes equal to the number of shares of the Company’s
Common Stock in to which such Series A Preferred Stock would be converted if
converted on the record date for the taking of a vote. However, for so long as
the number of outstanding shares of Series B Preferred Stock is at least 30% of
the total number of shares of Series B Preferred Stock originally issued, the
holders of Series B Preferred Stock vote together as a single class with the
holders of the Company’s Common Stock and the holders of any other class or
series of shares entitled to vote with the Common Stock, including the Series A
Preferred Stock, with the holders of Series B Preferred Stock being entitled to
70% of the total votes on all such matters regardless of the actual number of
shares of Series B Preferred Stock then outstanding, and the holders of Series A
Preferred Stock and Common Stock being entitled to their proportional share of
the remaining 30% of the total votes based on their respective voting
power.
  Liquidation
 Upon any
liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary (each, a “Liquidation Event”), the holders of the Series A
Preferred Stock are entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Series A Preferred
Stock an amount equal to $4.83, plus any accumulated but unpaid dividends
thereon (the “Liquidation Value”), before any distribution or payment is made to
the holders of any securities which are junior to the Series A Preferred Stock
upon the occurrence of a Liquidation Event and after any distributions or
payments made to holders of any class or series of securities which are senior
to the Series A Preferred Stock upon the occurrence of a Liquidation Event. If
the assets of the Company are insufficient to pay in full such amounts, then the
entire assets to be distributed to the Series A Holders will be distributed
among the Series A Holders ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. In the event the assets of the Company available for distribution to the
holders of shares of Series A Preferred Stock upon the occurrence of a
Liquidation Event are insufficient to pay in full all amounts to which such
holders are entitled, no such distribution shall be made on account of any
shares of any other class or series of capital stock of the Company ranking on a
parity with the shares of Series A Preferred Stock upon the occurrence of such
Liquidation Event unless proportionate distributive amounts are paid on account
of the shares of Series A Preferred Stock, ratably, in proportion to the full
distributable amounts for which holders of all such parity shares are
respectively entitled upon the occurrence of such Liquidation
Event.
  20
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 11.
Capital Stock Transactions -continued
 
 August
20, 2008 Private Placement - Series A Redeemable Convertible Preferred
Stock
 
 Conversion
 Each
share of Series A Preferred Stock is initially convertible, at any time at the
option of the holder, into 35 shares of the Company’s Common Stock, subject to
future adjustments as provided for in the Certificate. The Series A Preferred
Stock will automatically convert into shares of the Company’s Common Stock
immediately prior to any transaction resulting in a Change in Control of the
Company. Further, provided there is an effective registration statement covering
the shares to be received on conversion, the Company may require conversion of
the Series A Preferred Stock if the volume-weighted average price for at least
20 trading days in any consecutive 30 day period equals or exceeds twice the
conversion price and the trading volume on each day in the 30 day period has
equaled or exceeded 100,000 shares.
 
 The
conversion price of the Series A Preferred Stock will be adjusted for standard
anti-dilution events, including stock dividends or stock splits or
reclassification of shares of the Common Stock. For as long as any shares of
Series A Preferred Stock remain outstanding, the Company may not enter into any
Variable Rate Transactions or Most Favored Nation transactions. If the Company
does enter into a Variable Rate Transaction, in which it issues debt or equity
securities that are convertible into shares of Common Stock at a conversion or
exercise price that is based upon or varies with the trading price for shares of
the Common Stock or enters into a Most Favored Nation transaction in which the
Company issues any securities in a capital raising transaction or series of
transactions on terms more favorable than those granted to the holders of the
Series A Preferred Stock, the holders of the Series A Preferred Stock are
entitled to adjustment of the conversion price and to receive additional shares
or other rights. Furthermore, if the Company issues (except in an underwritten
public offering approved by holders of the Series A Preferred Stock in which the
gross proceeds to the Company are not less than $20 million) any shares of
Common Stock or securities convertible into shares of Common Stock at a price
which is less than the conversion price then in effect, the conversion price
will be reduced to that lower price.
 
 As long
as 20% of the shares of Series A Preferred Stock remain outstanding,, the
Company may not issue any other preferred stock (except for the issuance of
Series A Preferred Stock and Series B Preferred Stock issued pursuant to the
agreements under which those Series were originally issued) or any convertible
debt convertible into Common Stock, without the consent of the holders of
outstanding shares of Series A Preferred Stock.
  21
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 11.
Capital Stock Transactions -continued
 
 August
20, 2008 Private Placement - Series A Redeemable Convertible Preferred
Stock
 
 Warrants
 On August
20, 2008, the Company consummated a private placement transaction in which it
issued and sold to China Hand, 1,857,373 shares of the Company's Series A
Preferred Stock and warrants to purchase 13,001,608 shares of the Company's
common stock at an initial exercise price of $0.187 per share (subject to
adjustments) for a period of 5 years following the date of issuance, for a
purchase price of $9 million in gross proceeds.  The proceeds left the
Company with $7,076,302 in net proceeds after the deduction of offering expenses
in the amount of $1,923,698 and which includes a cash fee equal to $900,000,
representing 10% of the gross proceeds received from the Private Placement to
Kuhns Brothers and other offering costs of $1,023,698. Currently, none of the
warrants have been exercised.
  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
$900,000, representing 10% of the gross proceeds received from the Private
Placement, as well as warrants to purchase 6,500,804 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 upon conversion of the Preferred
Stock sold in the Private Placement.
 
 The fair
value of the 13,001,608 warrants issued with the Series A Redeemable Convertible
Preferred Stock was $1,968,182 to investors and the fair value of the 6,500,804
warrants issued to the placement agent was $984,091 at the issuance date and the
total amount was $2,952,273. The fair value was computed using the
Cox-Ross-Rubinstein (“CRR”) Binomial Model under the following assumptions: (1)
expected life of 5 years, (2) volatility of 66%, (3) risk free interest rate of
3% and dividend rate of 0%.
 
 As at
March 31, 2009 and December 31, 2008, the fair value of the warrants was
$17,218,657 and $5,506,143, respectively. Therefore, the Company recognized a
loss of $11,712,514 and $2,553,870 loss from the change in fair value for the
quarter ended March 31, 2009 and for the year ended December 31,
2008.
 
 As at
March 31, 2009 and December 31, 2008, the fair value of the warrants was
$17,218,657 and $5,506,143, respectively, based on the following
assumptions:
 
 March
      31, 2009
                  
                  
                  December
      31, 2008Warrants
      outstanding
                  
                  
                  19,502,412
                  
                  
                  
                  19,502,412Exercise
      price
                  
                  $
                  0.187
                  
                  
                  $
                  0.187Annual
      dividend yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %Expected
      life (years)
                  
                  
                  4.42
                  
                  
                  
                  4.64Risk-free
      interest rate
                  
                  
                  1.51
                  %
                  
                  
                  1.45
                  %Expected
      volatility
                  
                  
                  90
                  %
                  
                  
                  66
                  %
  22
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 11.
Capital Stock Transactions -continued
 
 August
20, 2008 Private Placement - Series A Redeemable Convertible Preferred
Stock
 
 Make Good
Provision
 The
Company agreed to make good provisions that will require the Company to issue to
China Hand up to an aggregate of 1,114,442 (557,221 shares for each of 2008 and
2009) additional shares of its Preferred Stock if it does not achieve the
targeted after-tax net income and earnings per share targets for 2008 and 2009.
The 2008 after tax net income target is $4,300,000, and the 2008 earnings per
share target is $0.0261 on a fully-diluted basis. The 2009 after tax net income
target is $6,000,000 and the 2009 earnings per share target is $0.0294 on a
fully diluted basis; provided that if the Subsequent Closing does not occur
within 30 days of the filing of the Company’s 2008 annual report on Form 10-K.
As of December 31, 2008, the Company has not met the 2008 Income Target of
$4,300,000.
 
 The
Company agreed to issue to China Hand 241,545 shares of Series A Preferred Stock
because the Company did not meet the 2008 earnings target.
 
 Management
Incentive
 China
Hand agreed to place in escrow 46,434 shares of Series A Preferred Stock, to be
issued to certain members of the Company’s management as a performance incentive
if the 2008 and 2009 earnings targets were met. The 2008 earnings target was not
met and the shares were returned to China Hand. In connection with the May 1,
2009 private placement with China Hand, the number of shares to be provided as
an incentive for 2009 was revised to 22,328 shares of Series B Preferred
Stock.
  23
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 11.
Capital Stock Transactions -continued
 
 August
20, 2008 Private Placement - Series A Redeemable Convertible Preferred
Stock
 
 Registration Right
Liabilities
 In
connection with the private placement, the Group and China Hand entered into
a Registration Rights Agreement dated August 20, 2008, in which the Group
agreed to register all of the shares of Common Stock underlying the securities
issued to China Hand. The Agreement requires the Group to file the required
Registration Statement within 45 days of August 20, 2008 and
achieve  effectiveness within 150 days, i.e., file by October 4, 2008
and achieve effectiveness by January 17, 2009.
 
 The Group
is subject to registration delay payments if it is unable to file the
Registration Statement, cause it to become effective or maintain its
effectiveness as required by the Registration Rights
Agreement.  Registration delay payments accrue at a rate of 1% per
month of the aggregate investment amount paid by the holder or $90,000 per
month, provided that the maximum aggregate amount of the registration delay
payments will be $1,350,000, or 15% of the gross proceeds of the private
placement.
 
 As of
December 31, 2008, the Group has not filed the required Registration Statement.
Management currently expects to file the required Registration Statement and use
it best efforts to have it effective by December, 2009. In accordance with the
guidance in EITF 00-19-2, the Group has accrued the $90,000 per month
registration delay payments for the 15 month period from October, 2008 to
December, 2009 and as of March 31, 2009 and December 31, 2008, has accrued an
amount of $1,350,000 and $900,000 for these registration delay payments
respectively.
 
 August
20, 2008 Private Placement - Series A Redeemable Convertible Preferred
Stock
 
 Accounting
 In
accordance with the guidance in FAS 133 Derivatives and Hedging –
Recognition, the Series A Preferred Stock is considered to be an equity
instrument and, accordingly, the embedded conversion option has not been
separated and accounted for as a derivative financial instrument. After
allocating $1,968,182 to the initial fair value of the warrants issued to China
Hand, the remaining proceeds received from China Hand of $7,031,818 were
allocated to the carrying value of the Series A Preferred Stock. As required by
EITF 00-27 Beneficial
Conversion Features, the Company recognized a beneficial conversion
feature as of the date of issuance of the Series A Preferred Stock. The amount
of the beneficial conversion feature exceeded the proceeds allocated to the
carrying value of the Series A Preferred Stock and, accordingly, the beneficial
conversion feature recorded was limited to the allocated proceeds. Because the
holders of the Series A Preferred Stock may convert their shares at any time,
the beneficial conversion feature recorded of $7,031,818 was immediately
recognized as a deemed dividend to those holders.
 
 As
discussed above, the Company was obligated to issue additional shares of Series
A Preferred Stock to China Hand if the Company did not meet prescribed earnings
targets for 2008 and 2009.  This obligation represents a contingent
beneficial conversion feature, which would be accounted for at the date the
contingency is resolved. Because all of the proceeds allocated to the Series A
Preferred Stock were recognized at inception as a beneficial conversion feature,
no further recognition of any beneficial conversion feature is permitted and the
241,545 additional shares issued to China Hand because the 2008 earnings target
was not met have been recorded at their par value.
 
 Because
the Series A Preferred Stock has conditions for its redemption that may be
outside our control, including the right of the holders to request redemption at
the liquidation value in the event of a Fundamental Transaction or a Change in
Control, in accordance with EITF D-098 Distinguishing Liabilities from
Equity, the Series A Preferred Stock has been classified outside of
Stockholders’ Equity in our consolidated balance sheet. Because the Company
believes that it is not probable that the Series A Preferred Stock will become
redeemable, the carrying value of the Series A Preferred Stock is not being
adjusted to its redemption value.
  24
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 12.
Income Taxes
  USA
 The Group
and 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
operate. As the Group had no income generated in the United States, there was no
tax expense or tax liability due to the Internal Revenue Service of the United
States as of March 31, 2009.
 
 BVI
 Willsky
incorporated under the international Business Companies Act of the British
Virgin Islands and, accordingly is exempted from payment of British Virgin
Islands income taxes.
 
 PRC
 Pursuant
to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income
tax is 25% for Singocean, Acheng, and Daishiquiao, whereas Chensheng is being
taxed on 0.8% of its annual sales.
  The Group
had no material adjustments to its liabilities for unrecognized income tax
benefits according to the provisions of FIN 48.  The income tax
expense was $997 and $0 for the three months ended March 31, 2009 and 2008,
respectively.  The Group has recorded no deferred tax assets or
liabilities as of March 31, 2009 and 2008, since nearly all differences in tax
basis and financial statement carrying values are permanent
differences.
 
 Our
policy for recording interest and penalties associated with audits is to record
such items as a component of income tax expenses. There were no interest and
penalties recorded for the three months ended March 31, 2009.
 
 For
      The Three Months EndedMarch
      31,2009
                      
                      
                      2008Unaudited
                      
                      
                      Unaudited(Restated)Income
      Tax ExpenseCurrent
      tax
                      
                      $
                      997
                      
                      
                      $
                      -Change
      in deferred tax assets – NOL
                      
                      
                      3,124,970
                      
                      
                      
                      35,240Change
      in valuation allowance
                      
                      
                      (3,124,970
                      )
                      
                      
                      (35,240
                      )Total
                      
                      $
                      997
                      
                      
                      $
                      -
 
 All of
the Group’s income (loss) before income taxes is from PRC sources. Actual income
tax expenses reported in the consolidated statements of income and comprehensive
income differ from the amounts computed by applying the PRC statutory income tax
rate of 25% for the fiscal year of 2009 and 2008 respectively to income (loss)
before income taxes for the three months ended March 31, 2009 and 2008 for the
following reasons:
  25
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 12.
Income Taxes-continued
  For
      The Three Months EndedMarch
      31,2009
                        
                        
                        2008Unaudited
                        
                        
                        Unaudited(Restated)Loss
      from continuing operations before income taxes
                        
                        $
                        (12,490,546
                        )
                        
                        $
                        (220,725
                        )Computed
      “expected” income tax expense at 25% in 2009 and 2008, except on the net
      income of Chensheng of $2,931 in 2009 and $- in 2008
                        
                        $
                        (3,125,567
                        )
                        
                        
                        (55,181
                        )Income
      tax expense of “Chensheng” - charged at 0.8% of gross sales of $ 199,250
      and $- in 2008
                        
                        
                        1,594
                        
                        
                        
                        -Tax
      effect of net taxable permanent differences
                        
                        
                        -
                        
                        
                        
                        19,941Effect
      of cumulative tax losses
                        
                        
                        3,124,970
                        
                        
                        
                        35,240$
                        997
                        
                        
                        $
                        -
 
 Our
policy for recording interest and penalties associated with audits is to record
such items as a component of income tax expense. There were no interest and
penalties recorded for the years ended December 31, 2009 and 2008.
 
 13.
Earnings Per Share
 
 Basic
earnings per share (EPS) is computed by dividing the earnings for the periods by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities by including
other potential common stock, including stock options and warrants, in the
weighted average number of common shares outstanding for a period, if
dilutive.  The numerators and denominators used in the computations of
basic and dilutive EPS are presented in the following table:
 Three
      months ended March 31,2009
                    
                    
                    2008unaudited
                    
                    
                    unaudited(restated)Numerator
      for basic earnings (loss) per share from continuing
    operationsNet
      (loss) income from continuing operations
                    
                    $
                    (12,470,588
                    )
                    
                    $
                    (237,397
                    )Dividend
      on preferred stocks
                    
                    
                    (135,000
                    )
                    
                    
                    -Income
      (loss) from continuing operations used in computing basic earnings per
      share
                    
                    $
                    (12,605,588
                    )
                    
                    $
                    (237,397
                    )Basic
      earnings (loss) per share from continuing operations
                    
                    $
                    (0.13
                    )
                    
                    $
                    (0.00
                    )Numerator
      for basic earnings (loss) per share from discontinued
      operationsNet
      income (loss) from discontinued operations
                    
                    $
                    -
                    
                    
                    $
                    (17,838
                    )Dividend
      on preferred stocks
                    
                    
                    -
                    
                    
                    
                    -Income
      (loss) from discontinued operations used in computing basic earnings per
      share
                    
                    $
                    -
                    
                    
                    $
                    (17,838
                    )Basic
      earnings (loss) per share from discontinued operations
                    
                    $
                    -
                    
                    
                    $
                    0.00
  26
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 13.
Earnings Per Share - continued
 
 Numerator
      for diluted earnings per share from continuing operationsNet
      income (loss) from continuing operations
                    
                    $
                    (12,605,588
                    )
                    
                    $
                    (237,397
                    )Dividend
      on preferred stocks
                    
                    
                    135,000
                    
                    
                    
                    -Income
      (Loss) from continuing operations used in computing diluted earnings per
      share
                    
                    $
                    (12,470,588
                    )
                    
                    $
                    (237,397
                    )Diluted
      earnings (loss) per share from continuing operations
                    
                    $
                    (0.13
                    )
                    
                    $
                    0.00Numerator
      for diluted earnings per share from discontinued
operationsNet
      income (loss) from discontinued operations
                    
                    $
                    -
                    
                    
                    $
                    (17,838
                    )Dividend
      on preferred stocks
                    
                    
                    -
                    
                    
                    
                    -Income
      (loss) from discontinued operations used in computing diluted earnings per
      share
                    
                    $
                    -
                    
                    
                    $
                    (17,838
                    )Diluted
      earnings (loss) per share from discontinued operations
                    
                    $
                    -
                    
                    
                    $
                    0.00Denominator
      for basic and diluted earnings per shareWeighted
      average shares of common stock outstanding
                    
                    
                    100,000,041
                    
                    
                    
                    95,134,934Weighted
      average shares of common stock issuable on assumed conversion of preferred
      stock outstanding
                    
                    
                    65,008,055
                    
                    
                    
                    -Dilutive
      effect of options, warrants, and contingently issuable
    shares
                    
                    
                    11,701,447
                    
                    
                    
                    -Shares
      used in computing diluted net income (loss) per share
                    
                    
                    176,709,543
                    
                    
                    
                    95,134,934Total
      earnings (loss) per share:Basic
                    
                    $
                    (0.13
                    )
                    
                    $
                    0.00Diluted
                    
                    $
                    (0.13
                    )
                    
                    $
                    0.00
  27
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 14.
Business and geographical segments
 
 The
Group’s operations are classified into two principal reportable segments which
are provision of gas pipe connection services and provision of natural
gas. Separate management of each segment is required because each business
unit is subject to different production and technology strategies.
 
 Reportable
Segments
 Provision
      of
                      gas
      pipe
                      connection
                      services
                    
                    
                    Provision
      of
                      natural
      gas
                    
                    
                    Corporate
                    
                    
                    Provision
      of
                      connection
                      services
                    
                    
                    Provision
      of
                      natural
      gas
                    
                    
                    Corporate
                    
                    
                    TotalFor
      the three months ended March 31, 2009
                    
                    
                    For
      the three months ended March 31, 2008
                    
                    
                    For
      the three months ended
                      March
      312009
                    
                    
                    2008External
      revenue
                    
                    $
                    146,752
                    
                    
                    $
                    178,265
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    101,755
                    
                    
                    $
                    -
                    
                    
                    $
                    325,017
                    
                    
                    $
                    101,755Interest
      income
                    
                    
                    8,357
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,357
                    
                    
                    
                    -Interest
      expense
                    
                    
                    (211
                    )
                    
                    
                    -
                    
                    
                    
                    (460
                    )
                    
                    
                    -
                    
                    
                    
                    (124
                    )
                    
                    
                    -
                    
                    
                    
                    (671
                    )
                    
                    
                    (124
                    )Depreciation
      and amortization
                    
                    
                    53,566
                    
                    
                    
                    40,905
                    
                    
                    
                    16,392
                    
                    
                    
                    26,172
                    
                    
                    
                    11,430
                    
                    
                    
                    4,295
                    
                    
                    
                    110,863
                    
                    
                    
                    41,897Income
      Tax
                    
                    
                    997
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    997
                    
                    
                    
                    -Net
      income (loss) after income tax
                    
                    
                    60,484
                    
                    
                    
                    (3,470
                    )
                    
                    
                    (12,548,557
                    )
                    
                    
                    -
                    
                    
                    
                    (238,563
                    )
                    
                    
                    
                    
                    
                    
                    (12,491,543
                    )
                    
                    
                    (238,563
                    )Expenditures
      for long-lived assets
                    
                    
                    137,166
                    
                    
                    
                    19,865
                    
                    
                    
                    44,108
                    
                    
                    
                    -
                    
                    
                    
                    184,373
                    
                    
                    
                    -
                    
                    
                    
                    201,139
                    
                    
                    
                    184,373
 
 As
      at March 31, 2009
                  
                  
                  At
      December 31, 2008
                  
                  
                  As
      at March
                    31,
      2009
                  
                  
                  At
      December
                    31,
      2008Assets
                  
                  
                  15,336,666
                  
                  
                  
                  8,277,575
                  
                  
                  
                  1,237,068
                  
                  
                  
                  16,542,520
                  
                  
                  
                  2,520,108
                  
                  
                  
                  7,870,119
                  
                  
                  
                  24,851,309
                  
                  
                  
                  26,932,747
  28
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 15.
Concentrations and Credit Risk
 
 Cash -
Cash includes cash on hand and demand deposits in accounts maintained with state
owned banks within the PRC. The Group considers all highly liquid instruments
purchased with original maturities of three months or less, and money market
accounts, to be cash equivalents. Total cash in these banks at March 31, 2009
and 2008 amounted to $3,634,032 and $5,612,356, respectively, of which no
deposits were covered by insurance. Also, as of March 31, 2009 and 2008, the
Group held $220,737 and $221,152 in restricted cash in a corporate legal
counsel’s trust account respectively, in accordance with an agreement with
investors for the restricted use of preferred stock dividend and investor
relation related expenses. Nonperformance by these institutions could expose the
Group to losses not covered by insurance. Management reviews the financial
condition of these institutions on a periodic basis.  The Group has
not incurred any losses on these accounts from nonperformance by the
aforementioned institutions.
 
 Major
customers –For the three months ended March 31, 2009, one customer accounted for
approximately 45% of the Company’s sales and four customers accounted for
approximately 58% of the Company’s accounts receivable as of March 31, 2009. For
the three months ended March 31, 2008, no customers accounted for more than 10%
of the Company’s sales and two customers accounted for approximately 90% of the
Company’s account receivable as of March 31, 2008.
 
 Major
suppliers –For the three months ended March 31, 2009, one supplier accounted for
approximately 13% of the Company’s purchases and three suppliers accounted for
approximately 67% of the Company’s accounts payable as of March 31, 2009. For
the three months ended March 31, 2008, no suppliers accounted for more than 10%
of the Company’s purchases and three suppliers accounted for approximately 79%
of the Company’s accounts payable as of March 31, 2008.
 
 Political
and economic risks - The Group's operations are carried out in the PRC.
Accordingly, the Group's business, financial condition, and results of
operations may be influenced by the political, economic, and legal environments
in the PRC, and by the general state of the PRC's economy. The Group's
operations in the PRC are subject to specific considerations and significant
risks not typically associated with companies in North America and Western
Europe. These include risks associated with, among others, the political,
economic, and legal environments, and foreign currency exchange. The Group's
results may be adversely affected by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among
others.
 
 The Group
does not require collateral to support financial instruments that are subject to
credit risk.
 
 Environmental
Matters - The Group does not anticipate any material future cash requirements
related to environmental issues. If circumstances change, the Group will record
the estimated charges necessary to return sites to their original
condition.
  29
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 16.
Commitments and Contingencies
 
 Operating
Leases - In the normal course of business, the Group leases the land for hen
house under operating lease agreements. The Group rents land, primarily for the
office rental. The operating lease agreements generally contain renewal options
that may be exercised at the Group’s discretion after the completion of the base
rental terms. The Group was obligated under operating leases requiring minimum
rentals as follows:
 
 As
      of December 31,Remainder
      of 2009
                    
                    $
                    100,2192010
                    
                    
                    114,7432011
                    
                    
                    -2012
                    
                    
                    -2013
                    
                    
                    -Thereafter
                    
                    
                    -Total
      minimum lease payments
                    
                    $
                    214,962
 
 During
the three months ended March 31, 2009 and 2008, rental expenses included in
general and administrative expenses were $35,479 and $0,
respectively.
 
 As of
March 31, 2009, and December 31, 2008, the Group did not have any contingent
liabilities.
 
 The Group
is obligated to provide uninterrupted piped gas to connected users and to ensure
safety in the process of piped gas operations. The volume of gas to be supplied
by the Group will grow with the increase of gas users. The Group has selected
three qualified gas resource suppliers to ensure stable operations in meeting
its obligations.
 
 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 Group, is remote.
  30
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 17.
Subsequent Events
 
 Issuance
of Series B Convertible Preferred Stock Securities Purchase
Agreement
 
 On April
30, 2009, China New Energy Group Company (the “Group”) 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 Group issued and sold to China Hand, and China
Hand purchased from the Group, 1,116,388 shares of the Group’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 Group’s Common Stock (the “Agent Warrants”),
representing 10% 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 Group also
entered into a Closing Escrow Agreement by and among the Group, China Hand and
Escrow LLC (the “Escrow Agent”), pursuant to which China Hand agreed to deposit
all funds due to the Group 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 Group and China Hand, instructing the
Escrow Agent to release such funds to the Group. The Closing Escrow Agreement
terminates upon the release of all funds from escrow as described above, or upon
the 90th day
following the date of the Closing Escrow Agreement if no such instructions to
disburse funds is received by the Escrow Agent, on which date all such funds
will be returned to China Hand.
  31
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 17. Subsequent
Events - continued
 
 Make
Good Provision
 
 Additionally,
the Group agreed to make good provisions that will require the Group 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 Group 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 Group’s management, which shares have been deposited into an
escrow account.  The Group also agreed to issue to China Hand 27,910
shares of Series B Preferred Stock if the Group’s Common Stock is not listed for
trading on a national securities exchange on or before January 31, 2010 (the
“Listing Shares”).
 
 Amendment
and Restatement of Certain Registration Rights
  In
connection with the closing of the Private Placement, the Group and China Hand
amended and restated that certain  registration rights agreement
between the Group 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
Group 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 Group 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 Group is subject to
registration delay payments in amounts prescribed by the Amended and Restated
Registration Rights Agreement if it is unable to file the Registration
Statement, cause it to become effective or maintain its effectiveness as
required by the Amended and Restated Registration Rights Agreement. 
Registration delay payments will accrue at a rate of $54,000 per month or one
percent (1%) of the gross proceeds of the Private Placement; provided that the
maximum aggregate amount of the registration delay payments pursuant to the
Amended and Restated Registration Rights Agreement is $810,000, or fifteen
percent (15%) of the gross proceeds of the Private Placement.
 
 Waiver
of Certain Post-Closing Obligations in the August Securities Purchase
Agreement
 
 As
partial consideration for the Group’s issuance of the Series B Preferred Stock,
and in connection with the closing of the Private Placement, the Group and China
Hand executed a Waiver (the “Waiver”) of certain post-closing obligations
relating to the private placement consummated between the parties on August 20,
2008.   Specifically, China Hand waived its rights (i) to 557,212
shares of the Group’s Series A Preferred Stock held in escrow and due to China
Hand as of the date of the closing pursuant to a Securities Purchase Agreement
dated August 8, 2008 (the “August SPA”); provided that the Group agreed to
deliver to China Hand 241,545 shares of Series A Preferred Stock and to place an
additional 241,545 shares of Series A Preferred Stock into escrow, to be
delivered to China Hand if the Group’s after-tax net income for the year ending
December 31, 2009 is not at or above $5,000,000 (the “Amended Series A Make
Good”); (ii) under Section 6.18 of the August SPA in favor of the Amended Series
A Make Good; (iii) to liquidated damages under Section 6.31 of the
August  SPA arising from the Group’ s failure to effect a reverse
split of its Common Stock prior to March  31, 2009; and (iv) its
rights to liquidated damages under a Registration Rights Agreement dated August
20, 2008, provided that the parties enter into the Amended and Restated
Registration Rights Agreement.
  32
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 17. Subsequent
Events - continued
 
 Board
of Directors Nomination
 
 In
connection with the Private Placement, China Hand, together with the holders of
the Group’s Series A Convertible Preferred Stock (the “Series A Preferred
Stock”), will have the right to nominate an aggregate of four (4) members to the
Group’s Board of Directors following the closing of the Private
Placement.  In connection with the closing of the private placement
consummated between the parties on August 20, 2008 as noted above, China Hand
nominated John D. Kuhns and James Tie Li to the Group’s Board of Directors, and
accordingly, may nominate up to two additional members to the Board of
Directors.  John D. Kuhns is the president, chief executive officer,
director and principle shareholder of Kuhns Brothers, and is a principal of
China Hand.  James Tie Li is a consultant for Kuhns
Brothers.
 
 Material Modification to the Rights
of Security Holders
 
 In
connection with the Private Placement, the Group filed a Certificate of
Designations of Preferences, Rights and Limitations of Series B Convertible
Preferred Stock with the Secretary of State of the State of Delaware (the
“Certificate”). Pursuant to the Certificate, there are 2,000,000 shares of
Series B Preferred Stock authorized. The holders of the Series B Preferred Stock
will be entitled to cumulative dividends at a rate of 6% of the price paid per
share, as may be adjusted in accordance with the Certificate, per annum
compounded daily and payable semi-annually.
 
 Additionally,
in addition to the right to vote as a separate class of securities, the holders
of the Preferred Stock are entitled to vote together with the holders of the
Group’s common stock, with each such holder of Preferred Stock entitled to the
number of votes equal to the number of shares of the Group’s common stock in to
which such Preferred Stock would be converted if converted on the record date
for the taking of a vote.  For so long as the number of outstanding
shares of Series B Preferred Stock is at least thirty percent (30%) of the total
number of shares of Series B Preferred Stock issued under the SPA, the holders
of Series B Preferred Stock shall vote together as a single class with the
holders of the Group’s Common Stock, and the holders of any other class or
series of shares entitled to vote with the Common Stock, with the holders of
Series B Preferred Stock issued under the SPA being entitled to seventy percent
(70%) of the total votes on all such matters regardless of the actual number of
shares of Series B Preferred Stock then outstanding, and the holders of Series A
Preferred Stock and Common Stock being entitled to their proportional share
of
 the
remaining 30% of the total votes based on their respective voting power as
calculated under the Certificate of Designations of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock and the Group’s Certificate
of  Incorporation.
 
 Each
share of Series B Preferred Stock is initially convertible, at any time at the
sole option of the holder of such Preferred Stock, into 35 shares of the Group’s
Common Stock, subject to future adjustments as provided for in the Certificate.
The Series B Preferred Stock shall automatically convert into shares of the
Group’s common stock immediately prior to any transaction resulting in a change
in control of the Group.
  33
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 18.
Restatement and reclassification of financial statements
 
 The
Restatement results from our management’s determination subsequent to the
issuance of our financial statements for the three months ended March 31, 2009
that originally filed on May 20, 2009. The Group has also reflected the
corrections of the following errors and reclassifications in its consolidated
financial statements as of and for the three months ended March 31, 2009. For
Note 1 to Note 3, the errors are reflected in the restated financial statements
for the year ended December 31, 2008 which brings the same effects to the
financial statements for the period ended March 31, 2009.
 
 No. 1 to
No. 3 are the same restatements adjustments included in the Form 10KA of China
New Energy Group Company filed on April 15, 2010, which brought forward to these
financial statements for the three months ended March 31, 2009.
 
 1)
              There
      were errors in the recording of the fair value of the assets acquired
      during the acquisition of Chensheng. Therefore, the Group has recorded the
      increase to the fair value from the book value of several assets,
      including $1,036,655 of Property, plant and equipment, $757,550 of
      Intangible assets (ie Land use right) and $3,012 of Inventories, and the
      decrease in $1,200,477 of Goodwill. Consequently, we recalculated the
      $96,489 of the depreciation for such increment of those assets and
      minority interest in Chensheng, which caused a decrease to the minority
      interest by $77,647 in the consolidated balance sheet and a decrease to
      the minority interest’s share of net income by $414,763 in the
      consolidated statement of operations and comprehensive
    income.
 
 2)
              There
      was an error in the elimination of its intercompany accounts. Therefore,
      the Group has recorded a decrease in the Related party receivable balances
      by $84,120 and an increase in the General and administrative expenses by
      $54,196 and the comprehensive income of
$29,924.
 
 3)
              The
      Group reassessed the nature of the Preferred stock together with warrants
      and the Group reclassified $1,857 and $7,029,961 (total amounting to
      $7,031,818) from Preferred stock and Additional paid in capital of
      Stockholders’ Equity to the mezzanine section as of December 31, 2008.
      Also, the Group reclassified warrant liabilities of $2,952,273 from
      additional paid in capital and recognized a $2,553,870 loss from the
      change in fair value of the warrant liabilities in the income statement
      and the total amount of the warrant liabilities was $5,506,143 as of
      December 31, 2008. Besides, the Group has accrued $900,000 registration
      right liabilities as of December 31,
2008.
 
 4)
              The
      adjustments further made for this quarter owing to the effect on the above
      3 brought forward restatement adjustments from 2008K/A
  are:
 
 Ÿ
              The
      Group further provided the depreciation and amortization of $16,835 in the
      income statement and brought a decrease of $110 exchange effects to
      accumulated other comprehensive income for the increment of the fair value
      of the assets which decreased $12,841 and $3,884 of the property, plant
      and equipment and intangible assets respectively. The Group increased the
      goodwill of $26,011 by the exchange rate
  effects.
 Ÿ
              The
      Group corrected the Related party receivable by $84,120 and decreased the
      General and administrative expenses by $26,706 and the comprehensive
      income of $57,414.
 Ÿ
              The
      Group has further accrued $450,000 registration right liabilities for the
      three months ended March 31, 2009 that resulted in a balance of $1,350,000
      as of March 31, 2009.
 Ÿ
              The
      Group has recorded an increase in the derivative financial instruments –
      warrants and the expense for change in fair value of warrant liabilities
      by $11,712,514 for the three months ended March 31,
  2009.
  34
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 18.
Restatement and reclassification of financial statements- continued
 
 5)
              The
      Group has reflected the following
  reclassifications.
 
 Ÿ
              The
      Group reclassified $220,737 from cash and cash equivalents to restricted
      cash for cash placed in escrow.
 Ÿ
              The
      Group reclassified $2,286,943 of other receivable from current assets to
      long term assets.
 Ÿ
              The
      Group reclassified $1,497,837 from prepayment to deposits paid for
      acquisition of long term assets.
 Ÿ
              The
      Group reclassified accrued expenses and accruals and other payable-Third
      Party amounting to $253,084 and $1,003,250, respectively, to accounts
      payable of $771,386, other receivables of $84,222 and related party
      payable of $400,726.
 Ÿ
              The
      Group reclassified $347,202 from additional paid-in capital and $156,144
      from statutory surplus reserve fund to accumulated other comprehensive
      income of $503,346.
 Ÿ
              The
      Group reclassified $25,870 from non-controlling interest to accumulated
      other comprehensive income.
 Ÿ
              The
      Group reclassified $178,265 from connection services revenue to natural
      gas revenues for the three months ended March 31, 2009 and also the Group
      reclassified ($50,500), $168,545 and $63,690 from selling expenses, cost
      of sales from connection services and general and administrative expenses
      to cost of sales of natural gas.
 Ÿ
              The
      Group has the above reclassifications which brought the same
      reclassification effect into the cashflow statements for the period ended
      March 31, 2009.
 
 The net
effect of the correction of errors was to:
 
 Ÿ
              Increase
      the Group’s reported total assets as of March 31, 2009 by $469,782 from
      $24,381,527 to $24,851,309.
 Ÿ
              Decrease
      the Group’s reported minority interest as of March 31, 2009 by $103,517
      from $628,991 to $525,474.
 Ÿ
              Decrease
      the Group’s reported accumulated deficit as of March 31, 2009 by
      $15,342,435 from $1,072,302 to
$16,414,737.
 Ÿ
              Increase
      the Group’s reported accumulated other comprehensive income as of March
      31, 2009 by $886,918 from $719,379 to
  $1,606,297.
 Ÿ
              Decrease
      the Group’s reported net loss by $12,152,643 for the three months ended
      March 31, 2009 from $338,900 to
$12,491,543.
 Ÿ
              Increase
      the Group’s reported net loss attributable to China New Energy Group by
      $12,152,643 for the three months ended March 31, 2009 from $317,945 to
      $12,470,588.
 Ÿ
              Decrease
      the Group’s reported comprehensive loss attributable to China New Energy
      Group by $12,152,533 for the three months ended March 31, 2009, from
      $344,663 to $12,497,196.
 Ÿ
              Decrease
      the basic net loss per share from continuing operations by $0.13 from
      $0.00 to $0.13.
 Ÿ
              Decrease
      the dilutive net loss per share from continuing operations by $0.13 from
      $0.00 to $0.13.
  35
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 18.
Restatement and reclassification of financial
statements (Continued)
 
 March
      31
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  March
      312009
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  2009(Reported)
                                                  
                                                  
                                                  Note
    1
                                                  
                                                  
                                                  Note
    2
                                                  
                                                  
                                                  Note
    3
                                                  
                                                  
                                                  Note
    4
                                                  
                                                  
                                                  Note
    5
                                                  
                                                  
                                                  (Restated)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                                  
                                                  $
                                                  3,854,769
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (220,737
                                                  )
                                                  
                                                  $
                                                  3,634,032Restricted
      cash
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  220,737
                                                  
                                                  
                                                  
                                                  220,737Accounts
      receivable
                                                  
                                                  
                                                  1,685,239
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1,685,239(2,286,943
                                                  )Other
      receivables
                                                  
                                                  
                                                  2,371,165
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (84,222
                                                  )
                                                  
                                                  
                                                  -Related
      party receivable
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (84,120
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  84,120
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  -Inventories,
      net
                                                  
                                                  
                                                  284,438
                                                  
                                                  
                                                  
                                                  3,012
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  287,450Prepaid
      expenses
                                                  
                                                  
                                                  1,874,575
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (1,497,837
                                                  )
                                                  
                                                  
                                                  376,738Other
      current assets
                                                  
                                                  
                                                  2,338
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  2,338TOTAL
      CURRENT ASSETS
                                                  
                                                  
                                                  10,072,524
                                                  
                                                  
                                                  
                                                  3,012
                                                  
                                                  
                                                  
                                                  (84,120
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  84,120
                                                  
                                                  
                                                  
                                                  (3,869,002
                                                  )
                                                  
                                                  
                                                  6,206,534Property,
      plant and equipment, net
                                                  
                                                  
                                                  12,471,838
                                                  
                                                  
                                                  
                                                  1,036,655
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (12,841
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  13,495,652Intangible
      assets, net
                                                  
                                                  
                                                  547,660
                                                  
                                                  
                                                  
                                                  757,550
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (3,884
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1,301,326Other
      receivables
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  2,286,943
                                                  
                                                  
                                                  
                                                  2,286,943Deposits
      paid for acquisition of long term assets
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,497,837
                                                  
                                                  
                                                  
                                                  1,497,837Goodwill
                                                  
                                                  
                                                  1,289,505
                                                  
                                                  
                                                  
                                                  (1,200,477
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (26,011
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  63,017TOTAL
      ASSETS
                                                  
                                                  $
                                                  24,381,527
                                                  
                                                  
                                                  
                                                  596,740
                                                  
                                                  
                                                  
                                                  (84,120
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  41,384
                                                  
                                                  
                                                  
                                                  (84,222
                                                  )
                                                  
                                                  $
                                                  24,851,309LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                                  
                                                  $
                                                  226,031
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  771,386
                                                  
                                                  
                                                  $
                                                  997,417Accrued
      expenses
                                                  
                                                  
                                                  253,084
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (253,084
                                                  )
                                                  
                                                  
                                                  -Other
      payables
                                                  
                                                  
                                                  1,247,850
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (1,003,250
                                                  )
                                                  
                                                  
                                                  244,600Registration
      right payable
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  900,000
                                                  
                                                  
                                                  
                                                  450,000
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1,350,000Tax
      payable
                                                  
                                                  
                                                  221,209
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  221,209Related
      party payable
                                                  
                                                  
                                                  97,912
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  400,726
                                                  
                                                  
                                                  
                                                  498,638Dividend
      payable
                                                  
                                                  
                                                  329,000
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  329,000Warrant
      liabilities
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  5,506,143
                                                  
                                                  
                                                  
                                                  11,712,514
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  17,218,657TOTAL
      CURRENT LIABILITIES
                                                  
                                                  
                                                  2,375,086
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  6,406,143
                                                  
                                                  
                                                  
                                                  12,162,514
                                                  
                                                  
                                                  
                                                  (84,222
                                                  )
                                                  
                                                  
                                                  20,859,521Commitment
      and contingencies (Note 16)Preferred
      Stock : 10,000,000 shares authorized, $0.001 par value Series A
      Convertible Preferred Stock: 1,857,373 shares issued and outstanding,
      liquidation preference of $8,971,112 as of March 31, 2009
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  7,031,818
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  7,031,818CHINA
      NEW ENERGY’S STOCKHOLDERS’ EQUITY
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Common
      stock: (500,000,000 shares authorized, $0.001 par value, 100,000,041
      shares issued and outstanding) as of March 31, 2009
                                                  
                                                  
                                                  100,000
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  100,000Preferred
      shares: (10,000,000 shares authorized, 1,857,373 shares issued and
      outstanding)
                                                  
                                                  
                                                  1,857
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (1,857
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  -(7,029,961
                                                  )Additional
      paid in capital
                                                  
                                                  
                                                  19,725,482
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (2,952,273
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (347,202
                                                  )
                                                  
                                                  
                                                  9,396,046(11,712,514
                                                  )(450,000
                                                  )414,763
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (900,000
                                                  )
                                                  
                                                  
                                                  (16,835
                                                  )Accumulated
      deficit
                                                  
                                                  
                                                  (1,072,302
                                                  )
                                                  
                                                  
                                                  (96,489
                                                  )
                                                  
                                                  
                                                  (54,196
                                                  )
                                                  
                                                  
                                                  (2,553,870
                                                  )
                                                  
                                                  
                                                  26,706
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (16,414,737
                                                  )Statutory
      surplus reserve fund
                                                  
                                                  
                                                  1,903,034
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (156,144
                                                  )
                                                  
                                                  
                                                  1,746,890110(26,011
                                                  )
                                                  
                                                  
                                                  25,870Accumulated
      other comprehensive income
                                                  
                                                  
                                                  719,379
                                                  
                                                  
                                                  
                                                  356,113
                                                  
                                                  
                                                  
                                                  (29,924
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  57,414
                                                  
                                                  
                                                  
                                                  503,346
                                                  
                                                  
                                                  
                                                  1,606,297TOTAL
      CHINA NEW ENERGY’S STOCKHOLDERS EQUITY (DEFICIT)
                                                  
                                                  
                                                  21,377,450
                                                  
                                                  
                                                  
                                                  674,387
                                                  
                                                  
                                                  
                                                  (84,120
                                                  )
                                                  
                                                  
                                                  (13,437,961
                                                  )
                                                  
                                                  
                                                  (12,121,130
                                                  )
                                                  
                                                  
                                                  25,870
                                                  
                                                  
                                                  
                                                  (3,565,504
                                                  )Non-controlling
      interest
                                                  
                                                  
                                                  628,991
                                                  
                                                  
                                                  
                                                  (77,647
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (25,870)
                                                  
                                                  
                                                  
                                                  525,474TOTAL
      EQUITY (DEFICIT)
                                                  
                                                  
                                                  22,006,441
                                                  
                                                  
                                                  
                                                  596,740
                                                  
                                                  
                                                  
                                                  (84,120
                                                  )
                                                  
                                                  
                                                  (13,437,961
                                                  )
                                                  
                                                  
                                                  (12,121,130
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (3,040,030
                                                  )TOTAL
      LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
      STOCKHOLDERS’ EQUITY (DEFICIT)
                                                  
                                                  $
                                                  24,381,527
                                                  
                                                  
                                                  
                                                  596,740
                                                  
                                                  
                                                  
                                                  (84,120
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  41,384
                                                  
                                                  
                                                  
                                                  (84,222
                                                  )
                                                  
                                                  $
                                                  24,851,309
  36
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 18.
Restatement and reclassification of financial
statements (Continued)
  2009
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                2009As
      reported
                                                                                
                                                                                
                                                                                Note
      1
                                                                                
                                                                                
                                                                                Note
      2
                                                                                
                                                                                
                                                                                Note
      3
                                                                                
                                                                                
                                                                                Note
      4
                                                                                
                                                                                
                                                                                Note
      5
                                                                                
                                                                                
                                                                                (Restated)Revenue:Connection
      services
                                                                                
                                                                                $
                                                                                325,017
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (178,265
                                                                                )
                                                                                
                                                                                $
                                                                                146,752Natural
      gas
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                178,265
                                                                                
                                                                                
                                                                                
                                                                                178,265325,017
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                325,017Cost
      of Sales:Connection
      services
                                                                                
                                                                                
                                                                                262,500
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (168,545
                                                                                )
                                                                                
                                                                                
                                                                                93,955Natural
      gas
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                181,735
                                                                                
                                                                                
                                                                                
                                                                                181,735262,500
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                13,190
                                                                                
                                                                                
                                                                                
                                                                                275,690Gross
      Profit
                                                                                
                                                                                
                                                                                62,517
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (13,190
                                                                                )
                                                                                
                                                                                
                                                                                49,327Operating
      Expenses:16,835General
      and administrative expenses
                                                                                
                                                                                
                                                                                408,199
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (26,706
                                                                                )
                                                                                
                                                                                
                                                                                (63,690
                                                                                )
                                                                                
                                                                                
                                                                                334,638Selling
      expenses
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                50,500
                                                                                
                                                                                
                                                                                
                                                                                50,500Registration
      rights penalties
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                450,000
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                450,000Total
      operating expenses
                                                                                
                                                                                
                                                                                408,199
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (440,129
                                                                                )
                                                                                
                                                                                
                                                                                (13,190
                                                                                )
                                                                                
                                                                                
                                                                                835,138Loss
      from Operations
                                                                                
                                                                                
                                                                                (345,682
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (440,129
                                                                                )
                                                                                
                                                                                
                                                                                (13,190
                                                                                )
                                                                                
                                                                                
                                                                                (785,811
                                                                                )Other
      Income (Expenses):Change
      in fair value of warrant liabilities
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (11,712,514
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (11,712,514
                                                                                )Interest
      income
                                                                                
                                                                                
                                                                                8,357
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                8,357Interest
      expense
                                                                                
                                                                                
                                                                                (671
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (671
                                                                                )Other
      Income
                                                                                
                                                                                
                                                                                93
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                93Total
      other income (expense)
                                                                                
                                                                                
                                                                                7,779
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (11,712,514
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (11,704,735
                                                                                )Loss
      From Continuing Operations, Before Income Tax
                                                                                
                                                                                
                                                                                (337,903
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,152,643
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,490,546
                                                                                )Income
      Tax
                                                                                
                                                                                
                                                                                (997
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (997
                                                                                )Loss
      From Continuing Operations, net of Income Tax
                                                                                
                                                                                
                                                                                (338,900
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,152,643
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,491,543
                                                                                )Income
      From Discontinued Operations, net of Income Tax
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                -Net
      Loss
                                                                                
                                                                                
                                                                                (338,900
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,152,643
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,491,543
                                                                                )Less:
      Net Loss Attributable to Non-controlling Interest
                                                                                
                                                                                
                                                                                20,955
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                20,955Add:
      Net Loss Attributable to China New Energy Group
                                                                                
                                                                                
                                                                                (317,945
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,152,643
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,470,588
                                                                                )Dividend
      and Deemed Dividend on Preferred Stock
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (135,000
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (135,000
                                                                                )Net
      Loss Attributable to Common Stockholders
                                                                                
                                                                                $
                                                                                (317,945
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,287,643
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                (12,605,588
                                                                                )Other
      Comprehensive LossNet
      Loss
                                                                                
                                                                                
                                                                                (338,900
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (12,152,643
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (12,491,543
                                                                                )Foreign
      currency translation
                                                                                
                                                                                
                                                                                (10,789
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                110
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (10,679
                                                                                )Comprehensive
      Income Attributable to Non-controlling Interest
                                                                                
                                                                                
                                                                                5,026
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                5,026Comprehensive
      loss attributable to the Company
                                                                                
                                                                                $
                                                                                (344,663
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (12,152,533
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                (12,497,196
                                                                                )Income
      (Loss) per share - BasicLoss
      from continuing operations
                                                                                
                                                                                $
                                                                                (0.00
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (0.13
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                $
                                                                                (0.13
                                                                                )Income
      (Loss) from discontinued operations
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                -Total
      loss per share
                                                                                
                                                                                $
                                                                                (0.00
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (0.13
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                (0.13
                                                                                )Income
      (Loss) per share - DilutedLoss
      from continuing operations
                                                                                
                                                                                $
                                                                                (0.00
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                (0.13
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                $
                                                                                (0.13
                                                                                )Income
      (Loss) from discontinued operations
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                -Total
      loss per share
                                                                                
                                                                                $
                                                                                (0.00
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (0.13
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                (0.13
                                                                                )Weighted
      average common shares outstandingBasic
                                                                                
                                                                                
                                                                                100,000,041
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                100,000,041Diluted
                                                                                
                                                                                
                                                                                176,709,543
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                176,709,543
  37
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 18.
Restatement and reclassification of financial
statements (Continued)
  For
      The Three Months Ended March 31As
      reported
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            As
      restated2009
                                            
                                            
                                            Note
      1
                                            
                                            
                                            Note
      2
                                            
                                            
                                            Note
      3
                                            
                                            
                                            Note
      4
                                            
                                            
                                            Note
      5
                                            
                                            
                                            2009Cash
      flows from operating activitiesNet
      loss attributable to China New Energy Group
                                            
                                            $
                                            (317,945
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (12,152,643
                                            )
                                            
                                            
                                            (20,955
                                            )
                                            
                                            $
                                            (12,491,543
                                            )Loss
      attributable to non-controlling interest
                                            
                                            
                                            (20,955
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            20,955
                                            
                                            
                                            
                                            -Adjustments
      to reconcile net (loss) to net cash used in operating
      activities:Depreciation
      and amortization
                                            
                                            
                                            94,029
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            16,834
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            110,863Change
      in fair value of warrant liabilities
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            11,712,514
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            11,712,514Registration
      right payable
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            450,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            450,000Changes
      in operating assets and liabilities:
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            -Accounts
      receivable
                                            
                                            
                                            497,969
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            497,969Other
      receivables
                                            
                                            
                                            (111,480
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            93,015
                                            
                                            
                                            
                                            (18,465
                                            )Inventories
                                            
                                            
                                            (29,838
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (29,838
                                            )Prepayment
                                            
                                            
                                            (316,117
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            73,005
                                            
                                            
                                            
                                            (243,112
                                            )Other
      current assets
                                            
                                            
                                            1,002
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,002Accounts
      payable
                                            
                                            
                                            114,362
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            114,362Accrued
      expense
                                            
                                            
                                            (3,002
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,002
                                            
                                            
                                            
                                            -Other
      payables
                                            
                                            
                                            (1,798,281
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,793,740
                                            
                                            
                                            
                                            (4,541
                                            )Tax
      payable
                                            
                                            
                                            (471,940
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (471,940
                                            )Net
      cash used in operating activities
                                            
                                            
                                            (2,362,196
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            26,705
                                            
                                            
                                            
                                            1,962,762
                                            
                                            
                                            
                                            (372,729
                                            )Cash
      flows from investing activitiesAddition
      to property, plant and equipment
                                            
                                            
                                            (128,133
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (73,006
                                            )
                                            
                                            
                                            (201,139
                                            )Payment
      made to acquire subsidiary -Chensheng
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (1,838,946
                                            )
                                            
                                            
                                            (1,838,946
                                            )Repayment
      from related parties
                                            
                                            
                                            77,515
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (77,515
                                            )
                                            
                                            
                                            -Net
      cash used in investing activities
                                            
                                            
                                            (50,618
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,989,467
                                            )
                                            
                                            
                                            (2,040,085
                                            )Cash
      flows from financing activitiesChange
      from restricted cash
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            415
                                            
                                            
                                            
                                            415Contribution
      from non-controlling interest
                                            
                                            
                                            438,852
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            438,852Net
      cash flows provided by financing activities:
                                            
                                            
                                            438,852
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            415
                                            
                                            
                                            
                                            439,267Effect
      of exchange rate changes in cash and cash equivalents
                                            
                                            
                                            (4,777
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (4,777
                                            )Net
      (decrease) in cash and cash equivalents
                                            
                                            
                                            (1,978,739
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            26,705
                                            
                                            
                                            
                                            (26,290
                                            )
                                            
                                            
                                            (1,978,324
                                            )Cash
      and cash equivalents - beginning of period
                                            
                                            
                                            5,833,508
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (221,152
                                            )
                                            
                                            
                                            5,612,356Cash
      and cash equivalents - end of period
                                            
                                            $
                                            3,854,769
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (220,737
                                            )
                                            
                                            $
                                            3,634,032
  38
 
 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/Aincluding 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, 2010 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.
 
 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, Nandaihe and Zhanhua. Currently, these distribution networks provide
natural gas to an aggregate of approximately 64,000 consumers in these
cities.
 
 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
Organizational Structure
 
 China New
Energy Group Company was incorporated on March 28, 2008 in the state of Delaware
USA, under the name of Travel Hunt Holdings, Inc. On May 27, 2008, Travel Hunt
changed its name to China New Energy Group Company in connection with a share
exchange transaction as described below.
  39
  Willsky
Development was incorporated on May 31, 2005 in the British Virgin Islands. On
March 28, 2008, Travel Hunt Holdings, Inc. completed a reverse acquisition
transaction with Willsky whereby Travel Hunt Holdings, Inc. issued to the
shareholder of Willsky 94,908,650 shares of Travel Hunt Holdings, Inc. common
stock in exchange for all of the issued and outstanding capital stock of
Willsky Development. Simultaneous with the consummation of the share exchange
agreement, the shareholder of Willsky, Eternal International Holding Group Ltd,
a Hong Kong corporation, or Eternal International, distributed 85,417,785 shares
of Travel Hunt Holdings, Inc. common stock as a dividend. Accordingly, following
this distribution, Eternal International beneficially owns approximately 9.49%
of Travel Hunt Holdings, Inc. outstanding capital stock. Willsky thereby became
Travel Hunt Holdings, Inc.’s wholly-owned subsidiary and the former shareholders
of Willsky became Travel Hunt Holdings, Inc. controlling
stockholders.
 
 For
accounting purposes, the acquisition was accounted for as a recapitalization
effected by a share exchange, and the transaction treated as a reverse
acquisition with Willsky as the acquirer and Travel Hunt Holdings, Inc. as the
acquired party. The assets and liabilities of the acquired entity (Willsky) were
brought forward at their book value and no goodwill was recognized.
 
 In 2005,
Willsky acquired a 99% shareholding of Tianjin Sing Ocean Public Utility
Development Co., Ltd. (“Singocean”) which was formed in the PRC as an equity
joint venture to be operated for a period of 50 years until January 18, 2054
with registered capital of $4.5 million (RMB31,897,000). Singocean has two
branch divisions, namely Acheng SingOcean and Dashiqiao SingOcean, and
established in the PRC to be operated for a period of 5 years until December 28,
2010 and 50 years until January 18, 2054, respectively.
 
 ChenSheng
- On September 16, 2008, we, through our 99%-owned subsidiary
SingOcean entered into an Equity Swap Agreement with Mr. Xiu Hai Tian,
whereby we acquired from Mr. Tian a 49% ownership interest in
Chensheng, in exchange for our 99% ownership in Hunchun Sing
Ocean.  The parties to the Equity Swap Agreement determined that the
value of the 49% interest in Chensheng Gas and the 99% interest in Hunchun Sing
Ocean were approximately equal and therefore there was no cash or other
consideration involved in the transaction from either party.
 
 On
December 10, 2008, the Company entered into an Agreement for Equity Transfer
with the holders of the remaining 51% outstanding equity in
Chensheng.  Pursuant to the Agreement for Equity Transfer, the Company
agreed to purchase the remaining 51% of the outstanding equity of Chensheng Gas
from 17 individuals for an aggregate purchase price of RMB 12.56 million
(approximately $1.84 million).  The transaction was consummated on
December 30, 2008, following which the Company now owns 51% of the equity of
Chensheng, and Tianjin Sing Ocean now owns 49% of the equity of
Chensheng.
 
 On
January 12, 2009, Tianjin Investment was established in the PRC and engaged in
the business of investment holding.
 
 On
January 23, 2009, Yingkou Zhongneng was established in the PRC and engaged in
the business of natural gas distribution network in the city of
Dashiqiao.
 
 Critical Accounting
Policies
 
 Accounting
policies discussed in this section are those that we consider to be most
critical to an understanding of our financial statements because they inherently
involve significant judgment and uncertainties.  For all of these
estimates, we caution that future events rarely develop exactly as forecast, and
the best estimates routinely require adjustment.
 
 Revenue
Recognition
 
 Among the
accounting policies adopted by the Group, the most critical one is the policy
regarding revenue recognition of the Group’s major sources of income, namely,
gas connection services and sales of gases. In accordance with the SEC's Staff
Accounting Bulletin ("SAB") No. 104, under this policy, all of the following
criteria must be met in order for us to recognize revenue:
 
 1.       Persuasive evidence of an arrangement
exists;
 2.       Delivery has occurred or services have
been rendered;
  40
  3.       The seller's price to the buyer is fixed
or determinable; and
 4.       Collectibility is reasonably
assured.
 
 Gas
connection revenue
 
 Gas
connection revenue is recognized when the outcome of a contract can be estimated
reliably and the stage of completion at the balance sheet date can be measured
reliably.
 
 Revenue
from gas connection contracts is recognized on the percentage of completion
method, measured by reference to the value of work carried out during the year.
When the outcome of a gas connection contract cannot be estimated reliably,
revenue is recognized only to the extent of contract costs incurred that it is
probable will be recoverable.
 
 When the
outcome of a gas connection contract can be estimated reliably and the stage of
contract completion at the balance sheet date can be measured reliably, contract
costs are charged to the income statement by reference to the stage of
completion of the contract activity at the balance sheet date on the same basis
as revenue from the gas connection contract is recognized.
 
 When the
outcome of a gas connection contract cannot be estimated reliably, contract
costs are recognized as expenses in the period in which they are incurred. When
it is probable that total contract costs will exceed contract revenue, the
expected loss is recognized as an expense immediately.
 
 Where
contract costs incurred to date plus recognized profits less recognized losses
exceed progress billings, the surplus is shown as an amount due from customers
for contract work. For contracts where progress billings exceed contract costs
incurred to date plus recognized profits less recognized losses, the surplus is
shown as an amount due to customers for contract work. Amounts received before
the related work is performed are included in the consolidated balance sheet, as
a liability, as advances received. Amounts billed for work performed but not yet
paid by the customer are included in the consolidated balance sheet under trade
and other receivables.
 
 During
the three months ended March 31, 2009 and 2008, all the contracts for connection
services were started and completed.
 
 Revenue
from sale of gas
 
 Sales
revenue from sale of gas represents the invoiced value of goods sold, net of
value-added tax (“VAT”). Revenue from sale of gas is recognized when the goods
are delivered and title has passed.
 
 All of
the Company’s products that are sold in the PRC are subject to Chinese
value-added tax of 3% of the gross sales price. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product. The Company recorded VAT payable and VAT
receivable net of payments in the financial statements.
 
 Use
of Estimates
 
 In
preparing consolidated financial statements in conformity with US GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reported periods. Actual results could differ from those
estimates
 
 Significant
Estimates
 
 These
consolidated financial statements include some amounts that are based on
management's best estimates and judgments. The most significant estimates relate
to revenue recognition of gas connection contracts, depreciation of property,
plant and equipment, the valuation allowance for deferred taxes, impairment
testing of intangible assets and various contingent liabilities. It is
reasonably possible that the above-mentioned estimates and others may be
adjusted as more current information becomes available, and any adjustment could
be significant in future reporting periods.
  41
  Reportable
Operating Segments
 
 For the
three months ended March 31, 2009, we had sales revenue of $0.33
million of which $0.15 million was from connection services while
$0.18 million, or 55%, was from gas sales.
 
 Our
revenue for the three months ended March 31, 2009 was contributed by the
connection services and providing natural gas to commercial and residential
customers. Connection services is provided by Chensheng,
 
 First
Quarter Financial Performance Highlights
 
 The
following are some financial highlights for the three months ended March 31,
2009:
 
 Revenues:
Our revenues were $0.33 million for the three months ended March 31, 2009,
an increase of 219% from the same period of 2008.
 
 Gross
Margin: Gross margin was 15% for the three months ended March 31, 2009
compared to gross margin of 25% for the same period of 2008, representing a
percentage decrease of 10%.
 
 Operating
Expenses: Operating expenses (including selling, general
and administrative expenses) were $0.84 million for the three months
ended March 31, 2009, an increase of 239% from the same period of
2008.
 
 Net Income /
(Loss): A net loss of $12.47 million resulted for the three months
ended March 31, 2009. The net loss was due to some major expenses incurred
during the period which included: (1) change in fair value of warrant
liabilities, $11.71 million and (2) registration rights penalties of
$0.45 million.
 
 Fully diluted net
income per share: Fully diluted net loss per share was $0.13 for the
three months ended March 31, 2009, as compared to net income per share of
$0.00 for the same period of 2008.
 
 Taxation
 
 As a
Delaware company, the Company is subject to United States taxation, but no
provision for income taxes was made for the three months ended March 31, 2009
and 2008 as the Company did not have reportable taxable income for the
period.
 
 Willsky,
a wholly-owned subsidiary of the Company, is subject to BVI taxation, but no
provision for income taxes was made for the three months ended March 31, 2009
and 2008 as Willsky did not have reportable taxable income for the
period.
 
 SingOcean
is subject to the tax laws of the PRC at  the prevailing
statutory rate of enterprise income tax of 25%. SingOcean did not have
reportable taxable income for the period.
 
 Yingkou
Zhongneng was funded as an independent legal entity in January 2009 from a
division of SingOcean which is subject to the tax laws of the PRC
at  the prevailing statutory rate of enterprise income tax of 25%.
Yingkou Zhongneng did not have reportable taxable income for the
period.
 
 Chensheng
is subject to the tax laws of the PRC being taxed on 0.8% of annual
sales. Starting from January 1, 2009, the tax rate was changed to 1% on
sales.  On July 1, 2009, the tax rate was changed to 25% on net income. For
the three months ended March 31, 2009, the amount of income tax was
$997.
  42
  Results
of Operations
 
 Comparison
of Three Months Ended March 31, 2009 and 2008
 
 The
following table summarizes the results of our operations during the three months
ended March 31, 2009 and 2008:
 (All
amounts, other than percentages, in thousands of U.S. dollars)
 
 (Unaudited)For
      the three months endedMarch
      31,2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    Change%RestatedRevenue:
                    
                    $
                    325
                    
                    
                    $
                    102
                    
                    
                    $
                    223
                    
                    
                    
                    219
                    %Cost
      of Sales:
                    
                    
                    276
                    
                    
                    
                    76
                    
                    
                    
                    200
                    
                    
                    
                    263
                    %Gross
      Profit
                    
                    
                    49
                    
                    
                    
                    26
                    
                    
                    
                    24
                    
                    
                    
                    91
                    %Total
      operating expenses
                    
                    
                    835
                    
                    
                    
                    246
                    
                    
                    
                    589
                    
                    
                    
                    239
                    %Loss
      from Operations
                    
                    
                    (786
                    )
                    
                    
                    (221
                    )
                    
                    
                    (565
                    )
                    
                    
                    256
                    %Other
      Expenses:Change
      in fair value of warrants liabilities
                    
                    
                    (11,713
                    )
                    
                    
                    -
                    
                    
                    
                    (11,713
                    )Interest
      income (expense)
                    
                    
                    8
                    
                    
                    
                    -
                    
                    
                    
                    8
                    
                    
                    
                    100
                    %Loss
      From Continuing Operations, Before Income Tax
                    
                    
                    (12,491
                    )
                    
                    
                    (221
                    )
                    
                    
                    (12,270
                    )
                    
                    
                    5552
                    %Income
      Tax
                    
                    
                    (1
                    )
                    
                    
                    -
                    
                    
                    
                    (1
                    )Income
      (loss) From Discontinued Operations, net of Income Tax
                    
                    
                    -
                    
                    
                    
                    (18
                    )
                    
                    
                    
                    
                    
                    
                    100
                    %Non
      controlling Interest
                    
                    
                    21
                    
                    
                    
                    1
                    
                    
                    
                    20
                    
                    
                    2000%Net
      Loss
                    
                    
                    (12,471
                    )
                    
                    
                    (237
                    )
                    
                    
                    (12,234
                    )
                    
                    
                    5612
                    %
 
 Revenues.  Revenues
are derived primarily from connection fees and sales of natural
gas.  Revenues increased $0.23 million, or 219%, to
$0.33 million for the three months ended March 31, 2009 from
$0.10 million for the same period in 2008. This increase was mainly
attributable to an increase in number of connection households.
 
 Cost of
Sales.   Cost of sales consists primarily of connection
costs and purchase of natural gas from our suppliers and
depreciation.
  43
  Our cost
of sales increased by $0.20 million, or 263%, to $0.28 million for the
three months ended March 31, 2009 from $0.08 million during the same period
in 2008. Such increase was mainly attributable to a increase in the number of
households connected to our distribution network.
 
 Gross
Profit.Our
gross profit increased by $0.02 million, or 91%, to $0.05 million for
the three months ended March 31, 2009 from $0.03 million during the same
period in 2008.  Gross profit as a percentage of revenues, or gross
profit margin, was 15% for the three months ended March 31, 2009.  The
gross profit margin during the same period in 2008 was 25%. Such decrease in
gross profit margin was mainly due to the increase of operating assets and thus
the increase in the cost allocation of depreciation.
 
 Total OperatingExpenses.The total operating
expenses consist of two components, the first one is registration right
penalties and the other is general and administrative expenses (“SG&A”). For
the three months ended March 31, 2009, the total operating expenses were
$0.84 million while the amount was $0.25 milloion for the same period
of 2008, or increased by 239%.  This increase was mainly due to the
fact that we are expanding our company.    Management
believes that the relatively high SG&A expenses will continue as we
endeavor to expand our business.
 
 Loss from Operations.Our loss from
operations increased by $0.57 million, or 256%, to $0.79 million
for the three months ended March 31, 2009 from $0.22 million during the
same period in 2008.  This increase in loss from operations was mainly
due to increase in SG&A expense and registration right
penalties.
 
 Other
Income (Expenses)
 
 Change In Fair Value of Warrant
Liability:For the three months ended March 31, 2009, the change in fair
value of warrant liability was recorded as other income of $11.71 million
while the one incurred in the same period of Year 2008 was nil.
 
 The
Company adopted a FASB accounting standard, which defines determining whether an
instrument (or embedded feature) is indexed to an entity’s own
stock.  This accounting standard specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the
Company’s own stock and (b) classified in stockholders’ equity in the statement
of financial position would not be considered a derivative financial
instrument.  This FASB accounting standard provides a new two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
scope exception.
 
 As a
result of adopting this FASB accounting standard, warrants previously treated as
equity pursuant to the derivative treatment exemption are no longer afforded
equity treatment because the warrants have a downward ratchet provision on the
exercise price. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.
 
 On August
20, 2008, the fair value of the 13,001,608 warrants issued with the Series A
Convertible Preferred Stock to China Hand was $1.97 million and the fair value
of 6,500,804 warrants issued to Kuhns Brothers was $0.98 million. The fair value
was computed using the Cox-Ross-Rubinstein (“CRR”) Binomial Model under the
following assumptions: (1) expected life of 5 years, (2) volatility of 66%, (3)
risk free interest rate of 3% and dividend rate of 0%.
 
 In year
2009, the Company changed the assumption of volatility of 66% to 90%. As at
March 31, 2009 and December 31, 2008, the fair value of the warrants was $17.22
million and $5.51 million, respectively. Therefore, the Company recognized a
loss of $11.71 million loss from the change in fair value for the quarter ended
March 31, 2009.
  44
  LossFrom Continuing Operations, Before Income
Tax.Our loss from continuing operations before income tax
increased by $12.27 million, to $12.49 million, for the three months
ended March 31, 2009 from $0.22 million during the same period in
2008.  Such increase was mainly due to the fact that the company
recorded a $11.71 million loss from the change in fair value of the
warrants which put through according to EITF 07-05.
 
 Income
(Loss) From Discontinued Operation
 
 The
income (loss) from the discontinued operation was due to the fact that, on
September 26, 2008, the Company entered into an asset swap in which it disposed
of the subsidiary Hunchun, including substantially (99%) of the net assets, for
a 49% ownership in Qinhuangdao Chensheng Gas Co. Ltd.
 
 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 2008. There were no assets or liabilities of Hunchun
in the consolidated balance sheet as of March 31, 2008.
 
 Disposal
of Hunchun in 2008
 
 The
following table displays summarized activity in the Company's consolidated
statements of operations for discontinued operations of Hunchun during the three
months ended March 31, 2008.
 
 2009
      (million)
                    
                    
                    2008
      (million)Revenue
                    
                    $
                    
                    
                    
                    $
                    -Operating
      income
                    
                    $
                    
                    
                    
                    $
                    (0.02
                    )Income
      before income taxes
                    
                    $
                    
                    
                    
                    $
                    (0.02
                    )Income
      tax expense
                    
                    $
                    
                    
                    
                    $Income
      from discontinued operations, net of tax
                    
                    $
                    
                    
                    
                    $
                    (0.02
                    )
 
 NetLoss. Net
loss increased by $12.23 million to a net loss of $12.47 million
for the three months ended March 31, 2009, from a net loss of $0.24 million
for the same period of 2008, which is mainly due to: (1) increase in total
operating expenses by $0.59 million; and (2) loss from the change in fair
value of the warrants, $11.71 million.
 
 Liquidity
and Capital Resources
 
 As of
March 31, 2009, we had cash and cash equivalents of approximately $3.63 million.
 The following table provides detailed information about our net cash flow
for all financial statement periods presented in this report.
  45
  Cash
Flow
 (All
amounts in thousands of U.S. dollars)
  For the three months endedMarch 312009
                    
                    2008Net
      cash provided by (used in) operating activities
                    
                    $
                    (373
                    )
                    
                    $
                    (210
                    )Net
      cash used in investing activities
                    
                    
                    (2,040
                    )
                    
                    
                    (228
                    )Net
      cash provided by financing activities
                    
                    
                    439
                    
                    
                    
                    60Effect
      of exchange rate changes in cash
                    
                    
                    (5
                    )
                    
                    
                    60Net
      cash provided (used)
                    
                    $
                    (1,978
                    )
                    
                    $
                    (318
                    )
 
 Operating
Activities
 
 Net cash
used in operating activities was $0.37 million for the three months ended
March 31, 2009, compared to net cash used in operating activities of
$0.21 million during the same period of 2008. This increase in funds used
in our operating activities was primarily due to the increase in prepayment
which was paid to the construction team and tax payables.
 
 Investing
Activities
 
 Our main
use of cash in investing activities was mainly for the construction of gas
pipelines and acquisition of assets.
 
 Net cash
used in investing activities for the three months ended March 31, 2009 was $2.04
million, which was an increase of $1.81 million
from $0.23 million for the same period of 2008.  This
increase was due to payments made for the increased construction in
progress and fixed assets.
 
 Financing
Activities
 
 Our debt
to equity ratio was 523 % as of March 31, 2009.  Net cash
provided by financing activities for the three months ended March 31, 2009 was
$0.44 MM. The financing was mainly attributable to contribution from
Non-controlling interest.
 
 Capital
Expenditures, Contractual Obligations, Commitments and Contingences
 
 For the
three months ended March 31, 2009, the company spent about $2.04 million in
capital expenditures which was mainly for the construction of gas pipelines, gas
station and acquisition. The company settled the payments according to the terms
of the contract and fulfilled of its contractual obligations.  Other
than the operating leases stated in Note 16 to Unaudited Condensed Consolidated
Financial Statements, we have no other commitments and contingencies. As
disclosed in Note 16, the Company is obligated under operating leases to pay
minimum lease payments of approximately $0.21 million.
  Seasonality
 
 Our
pipeline distribution networks are primarily located in northeastern China,
which is extremely cold during the winter months. Additionally, gas consumption
by residential customers is higher in the winter months for heating purposes,
and there is a corresponding increase in usage during winter. However, due to
the cold weather we are unable to construct primary gas pipelines.  If
a primary pipeline is already in place, we are able to connect new customers to
our distribution network during this time.
 
 Effects
of Inflation
 
 Our
business, revenues and operating results have not been affected in any material
way by inflation.
  46
  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
      4.
              CONTROLS
      AND PROCEDURES.
 
 Evaluation of
Disclosure Controls and Procedures.
 
 We
maintain “disclosure controls and procedures” (as defined in Rule 13a-15(e)
under the Exchange Act) that are designed to ensure that information that would
be required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
 
 As
required by Rule 13a-15 under the Exchange Act, our management, including Mr.
Yangkan Chong, our Chief Executive Officer and Mr. Eric Yu, our Chief Financial
Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2009.  Based on
that evaluation, Mr. Chong and Mr. Yu concluded that as of March 31, 2009, and
as of the date that the evaluation of the effectiveness of our disclosure
controls and procedures was completed, our disclosure controls and procedures
were not effective in that certain of the “significant deficiencies” first
identified in the process of preparing our financial statements for the fiscal
year ended December 31, 2008 continue to exit despite the implementation of the
remedial measures described below.
 
 Changes in
Internal Control over Financial Reporting.
 
 Under the
supervision and with the participation of our management, including our Chief
Executive officer and Chief Financial Officer, identified a number of
“significant deficiencies” in the process of preparing our financial statements
for the fiscal year ended December 31, 2008 related to (i) the U.S. GAAP
expertise of our internal accounting staff, and (ii) our internal audit
functions.Based on
that evaluation, management concluded that our internal control over financial
reporting were not effective, as of December 31, 2008.
 
 During
the quarter ended March 31, 2009, we continued to take the remedial measures
described below that have materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
 
 Because
our current accounting department is relatively new to U.S. GAAP and the related
internal control procedures required of U.S. public companies, our management
has determined that they require additional training and assistance in U.S. GAAP
matters. Management has determined that our internal audit function is also
significantly deficient due to insufficient qualified resources to perform
internal audit functions.
  In order
to correct the foregoing significant deficiencies, we continue to take the
following remediation measures:
  ·
              We continue to arrange
      necessary training for our accounting department
    staff;
  47
  ·
              We continue to engage external
      professional accounting or consultancy firms to assist us in the
      preparation of the US GAAP
accounts;
 
 ·
              We remain committed to the
      establishment of effective internal audit functions; however, due to the
      scarcity of qualified candidates with extensive experience in U.S. GAAP
      reporting and accounting in the region, we were not able to hire
      sufficient internal audit resources before the end of our reporting
      period.  However, we will increase our search for qualified
      candidates with assistance from recruiters and through
      referrals;
 
 ·
              In addition, we have allocated
      significant financial and human resources to strengthen the internal
      control structure and we have been actively working with external
      consultants to assess our data collection, financial reporting, and
      control procedures and to strengthen our internal controls over financial
      reporting.
  We
believe that the foregoing steps will remediate the significant deficiencies
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate.
 
 PART
II
 
 OTHER
INFORMATION
 
 ITEM
      1.
              LEGAL
      PROCEEDINGS.
 
 From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business.  We are currently not aware
of any such legal proceedings or claims that we expect will have a material
adverse affect on our business, financial condition or operating
results.  However, litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that
may harm our business.
 
 ITEM
      2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
 
 None.
 
 ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIES.
 
 None.
 
 ITEM
      5.
              OTHER
      INFORMATION.
 
 None.
 
 ITEM
      6.
              EXHIBITS.
 
 Exhibit No.
                    
                    Description31.1
                    
                    Certification
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                    
                    Certification
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32
                    
                    Certification
      of Principal Executive Officer and 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.
  48
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Dated:
May 24, 2010
 
 CHINA NEW ENERGY GROUP
      COMPANYBy:
                    /s/
      Yangkan ChongYangkan
      ChongChief
      Executive Officer(Principal
      Executive Officer)By:
                    /s/
      Eric YuEric
      YuChief
      Financial Officer(Principal
      Financial and Accounting
Officer)
  49
  EXHIBIT
INDEX
 
 Exhibit No.
                    
                    Description31.1
                    
                    Certification
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                    
                    Certification
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32
                    
                    Certification
      of Principal Executive Officer and 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.
  50