UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10−Q


(Mark
One)




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended: September 30, 2009




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from ____________ to _____________




Commission
File Number: 333-83375





CHINA NEW ENERGY GROUP
COMPANY


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
            
            65-0972647(State
      or other jurisdiction of incorporation
              or
      organization)
            
            (I.R.S.
      Employer Identification No.)




20/F,
Center Plaza, No.188 Jie Fang Road


He
Ping District, Tianjin, 300042


People's
Republic of China


(Address
of principal executive offices, Zip Code)




(86 22) 5829
9778


(Registrant’s
telephone number, including area code)




_____________________________________________________


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes xNo   ̈





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  o
            (Do not check if a
      smaller reporting company)
            Smaller reporting
      company  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes   ̈  No x





The
number of shares outstanding of each of the issuer’s classes of stock, as
of  November 13, 2009 , 2009 is as follows:




Class
      of Securities
            
            Shares
      OutstandingCommon
      Stock, $0.001 par value
            
            100,000,041Series
      A Convertible Preferred Stock, $0.001 par value
            
            1,857,373Series
      B Convertible Preferred Stock, $0.001 par value
            
            1,116,388















Quarterly
Report on FORM 10-Q


Three and Nine
Months Ended September 30, 2009








TABLE
OF CONTENTS








PART I


FINANCIAL
INFORMATION





ITEM 1.
            
            FINANCIAL STATEMENTS
            
            2ITEM 2.
            
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            
            21ITEM 3.
            
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            29ITEM 4.
            
            CONTROLS
      AND PROCEDURES
            
            30PART IIOTHER INFORMATIONITEM 1.
            
            LEGAL
      PROCEEDINGS
            
            31ITEM 6.
            
            EXHIBITS
            
            31









PART
I


FINANCIAL
INFORMATION




ITEM
      1.
            FINANCIAL
      STATEMENTS.




China
New Energy Group Company


Condensed
Consolidated Financial Statements


For the
three and nine months ended


September
30, 2009


(Stated
in US dollars)





PageCondensed
      Consolidated Balance Sheets (Unaudited)
            
            
            3Condensed
      Consolidated Statements of Operations and Comprehensive Income
      (Unaudited)
            
            
            4Condensed
      Consolidated Statements of Cash Flows (Unaudited)
            
            
            5Notes
      to Consolidated Financial Statements (Unaudited)
            
            
            6




2




CHINA
NEW ENERGY GROUP COMPANY
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Stated
in US Dollars)
 
 September
      30,
              
              
              December
      31,2009
              
              
              2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              4,878,751
              
              
              $
              5,612,356Restricted
      cash
              
              
              196,873
              
              
              
              221,152Accounts
      receivable
              
              
              3,925,491
              
              
              
              2,183,087Other
      receivables
              
              
              2,159,614
              
              
              
              2,254,997Inventories,
      net
              
              
              285,787
              
              
              
              254,585Prepayment
              
              
              784,953
              
              
              
              1,558,361Other
      current assets
              
              
              94,017
              
              
              
              3,340Total
      current assets
              
              
              12,325,486
              
              
              
              12,087,878Property,
      plant and equipment, net
              
              
              7,676,229
              
              
              
              6,844,262Construction
      in progress
              
              
              8,447,645
              
              
              
              5,589,551Related
      party receivable
              
              
              -
              
              
              
              84,120Intangible
      assets
              
              
              1,804,658
              
              
              
              1,814,316TOTAL
      ASSETS
              
              $
              30,254,018
              
              
              $
              26,420,127LIABILITIES
      AND EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              276,117
              
              
              $
              111,660Accrued
      expenses
              
              
              277,271
              
              
              
              256,071Accruals
      and other payable-Third Party
              
              
              526,837
              
              
              
              3,144,043Tax
      payable
              
              
              523,770
              
              
              
              693,116Related
      party payable
              
              
              97,888
              
              
              
              -Dividend
      payable on preferred stock
              
              
              744,946
              
              
              
              194,000TOTAL
      CURRENT LIABILITIES
              
              
              2,446,829
              
              
              
              4,398,890China
      New Energy's Stockholders' equity:Preferred
      Stock: 10,000,000 shares authorized, $0.001 par value, 2,973,761 and
      1,857,373 shares issued and outstanding as of September 30, 2009 and
      December 31, 2008, respectively
              
              
              2,973
              
              
              
              1,857Common
      Stock: 500,000,000 shares authorized, $0.001 par value, 100,000,041 shares
      issued and outstanding as of September 30,2009 and December 31, 2008,
      respectively
              
              
              100,000
              
              
              
              100,000Additional
      paid in capital
              
              
              27,269,163
              
              
              
              19,725,482Accumulated
      (deficit)
              
              
              (2,382,613
              )
              
              
              (619,357
              )Statutory
      surplus reserve fund
              
              
              1,903,034
              
              
              
              1,903,034Accumulated
      other comprehensive income
              
              
              693,939
              
              
              
              730,168Total
      China New Energy's Stockholders' equity
              
              
              27,586,496
              
              
              
              21,841,184Non-controlling
      interest
              
              
              220,693
              
              
              
              180,053TOTAL
      EQUITY
              
              
              27,807,189
              
              
              
              22,021,237TOTAL
      LIABILITIES AND EQUITY
              
              
              30,254,018
              
              
              $
              26,420,127
 
 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 INCOME –
(UNAUDITED)
 (Stated
in US Dollars)
  For
      the Three months ended
              
              
              For
      the nine months endedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Revenues:Connection
      services
              
              $
              2,659,930
              
              
              $
              2,092,445
              
              
              $
              5,433,912
              
              
              $
              3,846,773Natural
      gas
              
              
              157,344
              
              
              
              161,413
              
              
              
              518,970
              
              
              
              390,2142,817,274
              
              
              
              2,253,858
              
              
              
              5,952,882
              
              
              
              4,236,987Cost
      of Sales:Connection
      services
              
              
              683,068
              
              
              
              454,061
              
              
              
              1,376,630
              
              
              
              833,644Natural
      gas
              
              
              367,411
              
              
              
              121,565
              
              
              
              649,622
              
              
              
              295,2571,050,479
              
              
              
              575,626
              
              
              
              2,026,252
              
              
              
              1,128,901Gross
      Profit
              
              
              1,766,795
              
              
              
              1,678,232
              
              
              
              3,926,630
              
              
              
              3,108,086Operating
      Expenses:Selling,
      general and administrative expenses
              
              
              802,011
              
              
              
              346,094
              
              
              
              1,962,698
              
              
              
              813,975Total
      operating expenses
              
              
              802,011
              
              
              
              346,094
              
              
              
              1,962,698
              
              
              
              813,975Operating
      income
              
              
              964,784
              
              
              
              1,332,138
              
              
              
              1,963,932
              
              
              
              2,294,111Other
      Income (Expenses):Interest
      Income
              
              
              10,680
              
              
              
              -
              
              
              
              20,307
              
              
              
              -Interest
      (expense)
              
              
              (3,699
              )
              
              
              -
              
              
              
              (4,370
              )
              
              
              -Other
      Income
              
              
              5,558
              
              
              
              3,702
              
              
              
              5,651
              
              
              
              9,974Total
      other income
              
              
              12,539
              
              
              
              3,702
              
              
              
              21,588
              
              
              
              9,974Income
      from continuing operations, before tax
              
              
              977,323
              
              
              
              1,335,840
              
              
              
              1,985,520
              
              
              
              2,304,085Income
      Taxes
              
              
              461,013
              
              
              
              391,358
              
              
              
              828,800
              
              
              
              705,244Income
      from continuing operations, net of tax
              
              
              516,310
              
              
              
              944,482
              
              
              
              1,156,720
              
              
              
              1,598,841Income
      (loss) from discontinued operations, net of tax
              
              
              -
              
              
              
              (7,116
              )
              
              
              -
              
              
              
              223,410Net
      Income
              
              
              516,310
              
              
              
              937,366
              
              
              
              1,156,720
              
              
              
              1,822,251Net
      (Income) attributable to non controlling interest
              
              
              (25,104
              )
              
              
              (37,009
              )
              
              
              (18,200
              )
              
              
              (46,277
              )Net
      Income attributable to China New Energy Group
              
              $
              491,206
              
              
              $
              900,357
              
              
              $
              1,138,520
              
              
              $
              1,775,974Other
      Comprehensive income:Net
      Income
              
              
              516,310
              
              
              
              937,366
              
              
              
              1,156,720
              
              
              
              1,822,251Foreign
      currency translation
              
              
              (42,159
              )
              
              
              37,114
              
              
              
              (41,854
              )
              
              
              377,403Comprehensive
      income attributable to the Non-controlling interest
              
              
              251
              
              
              
              -
              
              
              
              (12,026
              )
              
              
              -Comprehensive
      income attributable to China New Energy Group
              
              $
              474,402
              
              
              $
              974,480
              
              
              $
              1,102,840
              
              
              $
              2,199,654Income
      (Loss) per share – Basic & diluted:Income
      (Loss) from continuing operations attributable to the Company's common
      stockholders
              
              $
              0.00
              
              
              $
              (0.06
              )
              
              $
              (0.02
              )
              
              $
              (0.05
              )Discontinued
      operations attributable to the Company's common
    stockholders
              
              $
              0.00
              
              
              $
              0.00
              
              
              $
              0.00
              
              
              $
              0.00Net
      income (loss) attributable to the Company's common
      stockholders
              
              $
              0.00
              
              
              $
              (0.06
              )
              
              $
              (0.02
              )
              
              $
              (0.05
              )Weighted
      average common shares outstanding:Basic
              
              
              100,000,041
              
              
              
              100,000,041
              
              
              
              100,000,041
              
              
              
              98,321,560Diluted
              
              
              209,495,669
              
              
              
              132,839,829
              
              
              
              200,655,139
              
              
              
              110,255,834
  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 – (UNAUDITED)
 (Stated
in US Dollars)
 
 For
      The Nine Months EndedSeptember
      30,2009
              
              
              2008Cash
      flows from operating activities:Net
      income attributable to China New Energy Group Company
              
              $
              1,138,520
              
              
              $
              1,775,974Income
      attributable to non-controlling interest
              
              
              18,200
              
              
              
              27,371Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
              
              
              277,476
              
              
              
              125,592Amortization
              
              
              9,572
              
              
              
              6,429Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (1,741,568
              )
              
              
              (374,181
              )Other
      receivables
              
              
              205,909
              
              
              
              (650,954
              )Inventories
              
              
              (31,228
              )
              
              
              174,757Prepayment
              
              
              772,557
              
              
              
              -Other
      current assets
              
              
              (90,613
              )
              
              
              -Accounts
      payable
              
              
              164,360
              
              
              
              (398,948
              )Accrued
      expenses
              
              
              21,251
              
              
              
              -Accruals
      and other payable-Third Party
              
              
              (710,835
              )
              
              
              (790,089
              )Taxes
      payable
              
              
              (169,093
              )
              
              
              (397,601
              )Net
      cash used in operating activities
              
              
              (135,492
              )
              
              
              (501,650
              )Cash
      flows from investing activitiesAddition
      of construction in progress
              
              
              (2,857,106
              )
              
              
              (960,375
              )Addition
      of fixed assets
              
              
              (1,110,147
              )
              
              
              (97,692
              )Payments
      made to acquire subsidiary
              
              
              (1,838,946
              )
              
              
              -Acquisition
      of an associated company
              
              
              -
              
              
              
              483,512Net
      cash used in investing activities
              
              
              (5,806,199
              )
              
              
              (574,555
              )Cash
      flows from financing activitiesRepayment
      of cash advanced from director
              
              
              -
              
              
              
              (210,711
              )Issued
      preferred stock
              
              
              4,752,140
              
              
              
              9,000,000Payment
      of offering costs associated with preferred stock
              
              
              -
              
              
              
              (1,507,144
              )Contribution
      from former non-controlling interest
              
              
              439,060
              
              
              
              -Loan
      from related parties
              
              
              24,279
              
              
              
              -Net
      cash flows provided by financing activities
              
              
              5,215,479
              
              
              
              7,282,145Effect
      of exchange rate changes in cash
              
              
              (7,393
              )
              
              
              (1,308,366
              )Net
      (decrease) increase in cash
              
              
              (733,605
              )
              
              
              4,897,574Cash-
      beginning of year
              
              
              5,612,356
              
              
              
              2,311,028Cash-
      end of year
              
              $
              4,878,751
              
              
              $
              7,208,602Supplemental
      disclosure of cash flow information:Interest
      paid in cash
              
              $
              4,370
              
              
              
              -Income
      taxes paid in cash
              
              $
              522,594
              
              
              
              -Supplemental
      disclosure of non-cash investing and financing activities:Accrued
      dividend of preferred stock
              
              $
              550,946
              
              
              
              -
  The
accompanying notes are an integral part of these condensed consolidated
financial statements
  
 5




CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  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 Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These statements reflect all adjustments, consisting
of normal recurring adjustments, which, in the opinion of management, are
necessary for fair presentation of the information contained therein. It is
suggested that these interim condensed consolidated financial statements be read
in conjunction with the financial statements of the Company for the year ended
December 31, 2008 and notes thereto included in the Form 10-K of China New
Energy Group Company filed on April 15, 2009. The Company follows the same
accounting policies in the preparation of interim reports.
 
 Results
of operations for the interim periods are not indicative of annual
results.
 
 Going
Concern
 
 As shown
in accompanying condensed consolidated financial statements, the Company had an
accumulated deficit incurred through September 30, 2009, which raise substantial
doubt about the Company’s ability to continue as a going concern. The condensed
consolidated financial statements do not include any adjustments relating to
recoverability and classification of recorded assets, or the amounts and
classification of liability that might be necessary in the event the Company
cannot continue in existence.
 
 The
timing and amount of capital requirements will depend on a number of factors,
including demand for products and services and the availability of opportunities
for expansion through affiliations and other business relationships. Management
intends to seek new capital from new equity securities issuances to provide
funds needed to increase liquidity, fund internal growth, and fully implement
its business plan.
 
 2. Discontinued
operations
 
 Effective
September 26, 2008, the Company entered into an asset swap in which it disposed
of the subsidiary Hunchun Sing Ocean including substantially all of its assets.
In accordance with FASB ASC No. 360, “Accounting for the Impairment of
Long-Lived Assets”, Hunchun Sing Ocean operation is being accounted for as
discountinued operations and, accordingly, its operating results are segregated
and reported as discountinued operations in the accompanying consolidated
statement of operations in 2009 and 2008.
 
 6
 
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  3. Organization
and Nature of Business
 
 China New
Energy Group Company (the “Company”) was incorporated on March 28, 2008 in the
state of Delaware USA. The principal activity of the Company is investment
holding. Details of the Company’s subsidiaries and its subsidiary’s branch
companies and subsidiary (which together with the company are collectively
referred to as the “Group”) and their principal activities as of September 30,
2009 were as follows:
  %
      of shareholding
                attributable
      to the CompanyName
              
              Place
      of Registration
              
              Direct
              
              Indirect
              
              EffectiveWillsky
      Development Ltd.
              
              BVI
              
              100%
              
              -
              
              100%China
      New Energy (Tianjin) Investment & Consulting Co., Ltd
      (“CNETICCL”)
              
              The
      PRC
              
              100%
              
              -
              
              100%Tianjin
      Sing Ocean Public Utility
                Development
      Co. Ltd. (“TSOPUDCD”)
              
              The
      PRC
              
              -
              
              99%
              
              99%QinHuangDao
      ChenSheng
                Gas
      Co., Ltd. (“QHDCSGCL”)
              
              The
      PRC
              
              51%
              
              48.5%
              
              99.5%Yingkou
      Zhongneng Gas Development Co., Ltd (“YZGDCL”)
              
              The
      PRC
              
              -
              
              99%
              
              99%Tianjin
      Binhai Zhongneng Gas Co., Ltd. (“TBZGCL”)
              
              The
      PRC
              
              -
              
              99.3%
              
              99.3%
 
 Willsky
Development LTD. was incorporated on May 31, 2005 in the British Virgin Islands.
On March 28, 2008, Travel Hunt Holdings, Inc. completed a reverse acquisition
transaction with Willsky Development whereby Travel Hunt Holdings, Inc. issued
to the shareholder of Willsky Development 94,908,650 shares of Travel Hunt
Holdings, Inc. common stock in exchange for all of the issued and outstanding
capital stock of Willsky Development. Simultaneous with the consummation of the
share exchange agreement, the shareholder of Willsky, Eternal International
Holding Group Ltd, a Hong Kong corporation, or Eternal International,
distributed 85,417,785 shares of Travel Hunt Holdings, Inc. common stock as a
dividend. Accordingly, following this distribution, Eternal International
beneficially owns approximately 9.49% of Travel Hunt Holdings, Inc. outstanding
capital stock. Willsky Development thereby became Travel Hunt Holdings, Inc.’s
wholly-owned subsidiary and the former shareholders of Willsky Development
became Travel Hunt Holdings, Inc. controlling stockholders.
 
 For
accounting purposes, the acquisition was accounted for as a recapitalization
effected by a share exchange, and the transaction treated as a reverse
acquisition with Willsky Development as the acquirer and Travel Hunt Holdings,
Inc. as the acquired party. The assets and liabilities of the acquired entity
(Willsky) were brought forward at their book value and no goodwill was
recognized.
 
 On May
27, 2008, we changed our name from Travel Hunt Holdings, Inc. to China New
Energy Group Company.
 
 Tianjin
Sing Ocean Public Utility Development Co. Ltd. (“TSOPUDCD”) is an equity joint
venture established in the PRC to be operated for a period of 50 years until
January 18, 2054. It is a subsidiary of the Company and it’s consolidated into
the Company’s financial statements.  It has a branch division in
Acheng, Tianjin Sing Ocean Public Utility Development Co., Ltd (“TSOPUDCL-AD”)
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.
 
 7
 
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 3. Organization
and Nature of Business - continued
 
 QinHuangDao
ChenSheng Gas Co, Ltd. (QHDCSGCL) - On September 16, 2008, we,
through our 99%-owned subsidiary Tianjin Sing Ocean Public Utility
Development Co., Ltd., entered into an Equity Swap Agreement with Mr. Xiu Hai
Tian, whereby we acquired from Mr. Xiu a 49% ownership interest
in Chensheng Gas, in exchange for our 99% ownership in Hunchun 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
Gas.  Pursuant to the Agreement for Equity Transfer, the Company
agreed to purchase the remaining 51% of the outstanding equity of Chensheng Gas
from 17 individuals for an aggregate purchase price of RMB 12.56 million
(approximately $1.84 million).  The transaction was consummated on
December 30, 2008, following which the Company now owns 51% of the equity of
Chensheng Gas, and our 99%-owned subsidiary Tianjin Sing Ocean now owns 49% of
the equity of Chensheng Gas and therefore, the  Group ultimately hold
Chensheng 99.5%.
 
 Yingkou
Zhongneng Gas Development Co., Ltd (YZGDCL) is a 100% owned subsidiary of our
99%-owned subsidiary Tianjin Sing Ocean Public Utility Development and
therefore, the Group ultimately owned 99% of YZGDCL. YZGDCL established in the
PRC to operate a natural gas distribution network in the city of
Dashiqiao.
 
 China New
Energy (Tianjin) Investment & Consulting Co., Ltd (CNETICCL) is a 100% owned
subsidiary of the Company and established in the PRC for investment holding
purposes.
 
 On June
26, 2009, our 99.5%-owned subsidiary Qinhuangdao Chensheng Gas Co., Ltd.
contributed $1,462,501 (RMB10,000,000) in cash in which 60.6% of the
shareholding and our 99%-owned subsidiary Sing Ocean contributed $950,626
(RMB6,500,000) in assets in which 39.4% of the shareholding to establish a
subsidiary, Tianjin Binhai Zhongneng Gas Co., Ltd. (TBZGCL), in Da Gang
District, Tianjin, China, for constructing and developing the gas projects of
Private Economic Park and Taiping County in Dagang District, Tianjin. As a
result, the group hold 99.3% of the TBZGCL.
 
 8
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 4. Summary
of Significant Accounting Policies
 
 (a) Basis
of Consolidation
 
 The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
 
 (b) Revenue Recognition
 
 We
recognize revenue upon meeting the recognition requirements of Staff Accounting
Bulletin (“SAB”) No. 104, Revenue Recognition.  Natural gas revenues
are recorded based on the amount of product delivered to customers through
pipelines and checked by gas meters.
 
 Connection
fees, which relate to the hookup from the street pipeline to the customer, are
charged to both residential and commercial customers. This revenue segment
accounts for a majority of the Company’s revenue. The connection fees are
recognized as revenue upon the completion of the jobs by the contractor, the
installation being checked and accepted by the Company’s technical staff, and
acceptance by the customer.
 
 (c) Foreign Currency Transactions
 
 The
accompanying financial statements are presented in United States dollars. The
functional currency of the Company is US$, the functional currency of Willsky
Development Ltd is HK$, and the functional currency of all the PRC subsidiaries
is Renminbi (RMB). The Company’s consolidated balance sheet accounts are
translated into U.S. dollars at the year-end exchange rates and all revenue and
expenses are translated into U.S. dollars at the average exchange rates
prevailing during the periods in which these items arise. Translation gains and
losses are deferred and accumulated as a component of other comprehensive income
in stockholders’ equity. Transaction gains and losses that arise from exchange
rate fluctuations from transactions denominated in a currency other than the
functional currency are included in the statement of operations as incurred. The
translation and transaction gains and losses were immaterial for the nine months
ended September 30, 2009 and 2008.
 
 The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Company because it has not engaged in any
significant transactions that are subject to the restrictions.
 
 (d) 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.
 
 (e)
Reclassifications
 
 Certain
prior year amounts on the financial statements have been reclassified to conform
to current classifications. Such reclassifications had no effect on net income
(loss).
 
 9
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 4. Summary
of Significant Accounting Policies - continued
  (f)
Recently Issued Accounting Guidance
  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.
 
 In June
2009, the Financial Accounting Standards Board ("FASB") amended its guidance on
accounting for variable interest entities ("VIE"). The new accounting guidance
will result in a change in our accounting policy effective January 1, 2010.
Among other things, the new guidance requires a qualitative rather than a
quantitative analysis to determine the primary beneficiary of a VIE; requires
continuous assessments of whether an enterprise is the primary beneficiary of a
VIE; enhances disclosures about an enterprise's involvement with a VIE; and
amends certain guidance for determining whether an entity is a VIE. Under the
new guidance, a VIE must be consolidated if the enterprise has both (a) the
power to direct the activities of the VIE that most significantly impact the
entity's economic performance, and (b) the obligation to absorb losses or
the right to receive benefits from the VIE that could potentially be significant
to the VIE. The Company is evaluating the impact that this change in accounting
policy will have on our consolidated financial statements. Based on our initial
assessment, we anticipate that certain entities that are consolidated under our
current accounting policy may not be consolidated subsequent to the effective
date of the new guidance. The Company does not expect this change in accounting
policy to have a material impact on our consolidated financial
statements.
 
 In June
2009, the FASB issued an amendment to the accounting and disclosure requirements
for transfers of financial assets. The guidance requires additional disclosures
for transfers of financial assets and changes the requirements for derecognizing
financial assets. The guidance is effective for fiscal years beginning after
November 15, 2009. The Company is currently assessing the impact of the guidance
on its consolidated financial position and results of operations.
 
 In
October 2009, the FASB issued amendments to the accounting and disclosure for
revenue recognition. These amendments, effective for fiscal years beginning on
or after June 15, 2010 (early adoption is permitted), modify the criteria for
recognizing revenue in multiple element arrangements and the scope of what
constitutes a non-software deliverable. The Company is currently assessing the
impact on its consolidated financial position and results of
operations.
 
 No other
new accounting pronouncements, applicable to the Company, have been
issued.
  10
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 5. Earnings
Per Share
 
 Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock, or resulted in the issuance of common
stock that shared in the earnings of the entity.
 
 Components
of basic and diluted earnings per share were as follows:
 
 For
      the three months ended
              
              
              For
      the nine months endedSeptember
      30
              
              
              September
      30
              
              
              September
      30
              
              
              September
      302009
              
              
              2008
              
              
              2009
              
              
              2008Numerator
      for basic and diluted EPS:Net
      Income attributable to China New Energy Group
              
              $
              491,206
              
              
              $
              900,357
              
              
              $
              1,138,520
              
              
              $
              1,775,974Deemed
      dividend on Preferred stock issued
              
              
              -
              
              
              
              (7,031,818
              )
              
              
              (2,350,829
              )
              
              
              (7,031,818
              )Dividend
      on Preferred stock
              
              
              (226,946
              )
              
              
              (59,000
              )
              
              
              (550,946
              )
              
              
              (59,000
              )Net
      income (loss) attributed to common stockholders
              
              
              264,260
              
              
              
              (6,190,461
              )
              
              
              (1,763,255
              )
              
              
              (5,314,844
              )Denominator
      for basic and diluted EPS:Weighted
      average shares of common stock outstanding
              
              
              100,000,041
              
              
              
              100,000,041
              
              
              
              100,000,041
              
              
              
              98,321,560Weighted
      average shares of preferred stock outstanding
              
              
              104,081,635
              
              
              
              29,677,590
              
              
              
              86,906,435
              
              
              
              9,964,738Dilutive
      effect of options, warrants, and contingently issuable
    shares
              
              
              5,413,993
              
              
              
              3,162,198
              
              
              
              13,748,663
              
              
              
              1,969,535Common
      stock and common stock equivalents
              
              
              209,495,669
              
              
              
              132,839,829
              
              
              
              200,655,139
              
              
              
              110,255,833Earnings
      per share:Basic
              
              $
              0.00
              
              
              $
              (0.06
              )
              
              $
              (0.02
              )
              
              $
              (0.05
              )Diluted
              
              $
              0.00
              
              
              $
              (0.06
              )
              
              $
              (0.02
              )
              
              $
              (0.05
              )
 
 For the
three months and nine months ended September 30, 2009 and 2008, no potential
common shares are included in the computation of any diluted per-share amount
because it results in an anti-dilutive effect.
  11
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 6. Inventories
 
 Inventories
consist of the following:
 
 September
      30
              
              
              December
      312009
              
              
              2008Raw
      materials
              
              $
              285,787
              
              
              $
              254,585Work
      in progress
              
              
              -
              
              
              
              -Finished
      goods
              
              
              -
              
              
              
              -$
              285,787
              
              
              $
              254,585
 
 7. Plant
and Equipment, net
 
 September
      30,
              
              
              December
      31,2009
              
              
              2008At
      costOffice
      equipment
              
              $
              101,359
              
              
              $
              33,893Motor
      vehicles
              
              
              279,948
              
              
              
              187,137Gas
      transportation vehicles
              
              
              424,856
              
              
              
              424,937Gas
      station
              
              
              2,263,850
              
              
              
              2,102,612Underground
      gas pipelines
              
              
              5,511,610
              
              
              
              4,723,5208,581,623
              
              
              
              7,472,099Less:
      accumulated depreciation
              
              
              (905,394
              )
              
              
              (627,837
              )$
              7,676,229
              
              
              $
              6,844,262
 
 The gas
pipelines, gas station, and other constructed assets belong to the Company, not
to the municipalities or other units that contract with the Company to provide
the hookups and the gas distribution to the households. Depreciation is provided
for these assets as they are used in operations.
 
 The
Company recorded the depreciation of office equipment and motor vehicles under
general and administrative expenses, and the depreciation of gas transportation
vehicles, gas station and underground gas pipelines under the cost of
sales.
 
 Depreciation
expense for the nine months ended September 30, 2009 and 2008 was $277,476 and
$125,592 respectively.
 
 Depreciation
expenses for the three months ended September 30, 2009 and 2008 was $97,289 and
$42,526 respectively.
  12
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 8. Intangible
Assets, net
 
 September
      30,
              
              
              December
      31,2009
              
              
              2008At
      costLand
      use rights
              
              $
              587,316
              
              
              $
              587,429Goodwill
              
              
              1,263,518
              
              
              
              1,263,4911,850,834
              
              
              
              1,850,920Less:
      accumulated amortization
              
              
              (46,176
              )
              
              
              (36,604
              )$
              1,804,658
              
              
              $
              1,814,316
 
 Amortization
expense for the nine months ended September 30, 2009 and 2008 was $9,572 and
$6,429, respectively.
 
 Amortization
expense for the three months ended September 30, 2009 and 2008 was $3,180 and
$2,172, respectively
 
 Estimated
amortization for the next five years and thereafter is as follows:
 
 Remainder
      of 2009
              
              $
              3,1912010
              
              
              12,7652011
              
              
              12,7652012
              
              
              12,7652013
              
              
              12,765Thereafter
              
              
              486,889Total
              
              $
              541,140
 
 9. Restricted
cash
 
 At
September 30, 2009 and December 31, 2008, restricted cash of $196,873 and
$221,152 respectively represented the cash held by Escrow agent for the expenses
relating to investor and public relations.
 
 13
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 10. Income
Taxes
 
 The
Company, its subsidiary and branch divisions are subject to income taxes on an
entity basis on income arising in, or derived, from the tax jurisdiction in
which they operated. As the Company had no income generated in the United
States, there was no tax expense or tax liability due to the Internal Revenue
Service of the United States as of September 30, 2009.  A subsidiary
of the Company was incorporated under the international Business Companies Act
of the British Virgin Islands and, accordingly is exempted from payment of
British Virgin Islands income taxes. Pursuant to the PRC Income Tax Laws, the
prevailing statutory rate of enterprise income tax is 25% for TSOPUDCD, YZGDCL,
and CNETICCL, whereas QHDCSGCL is being taxed on 1% of its gross sales for the
first half of year 2009 and 25% on net income started from July, 2009 and 0.8%
of it gross sales for the year of 2008.
 
 The
Company had no material adjustments to its liabilities for unrecognized income
tax benefits according to the provisions of FASB ASC No. 740.10.  The
income tax expense was $828,800 and $705,244 for the nine months ended September
30, 2009 and 2008, respectively.  The Company has recorded no deferred
tax assets or liabilities as of September 30, 2009 and 2008, since the
management intends to maintain a full valuation allowance.
 
 For
      The Three Months Ended
              
              
              For
      The Nine Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Current
      tax
              
              $
              461,013
              
              
              $
              391,358
              
              
              $
              828,800
              
              
              $
              705,244Change
      in deferred tax assets-NOL
              
              
              205,514
              
              
              
              57,398
              
              
              
              397,124
              
              
              
              129,223Change
      in deferred tax assets
              
              
              11,168
              
              
              
              -
              
              
              
              8,237
              
              
              
              -Change
      in valuation allowance
              
              
              (216,682
              )
              
              
              (57,398
              )
              
              
              (405,361
              )
              
              
              (129,223
              )Total
              
              $
              461,013
              
              
              $
              391,358
              
              
              $
              828,800
              
              
              $
              705,244
 
 All of
the Company’s income 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 before
income taxes for the three and nine months ended September 30, 2009 and 2008 for
the following reasons:
 
 For
      The Three Months Ended
              
              
              For
      The Nine Months EndedSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Profit
      before income taxes
              
              $
              977,323
              
              
              $
              1,335,840
              
              
              $
              1,985,520
              
              
              $
              2,304,085Computed
      “expected” income tax expense at 25%
              
              
              244,331
              
              
              
              333,960
              
              
              
              496,380
              
              
              
              576,021Income
      tax expense taxed on QHDCSGCL at 1% of gross sales
              
              
              -
              
              
              
              -
              
              
              
              (72,941
              )
              
              
              -Tax
      effect on net taxable temporary differences
              
              
              11,168
              
              
              
              -
              
              
              
              8,237
              
              
              
              -Effect
      of cumulative tax losses
              
              
              205,514
              
              
              
              57,398
              
              
              
              397,124
              
              
              
              129,223$
              461,013
              
              
              $
              391,358
              
              
              $
              828,800
              
              
              $
              705,244
 
 14
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 11. Related
Party Transactions
 
 As of
September 30, 2009 and December 31, 2008, the Group has the following balances
with related parties:
 
 September
      30,
              
              
              December
      31,2009
              
              
              2008Tianjin
      Huanlong Commercial and Trading Company, shareholder of the
      subsidiary
              
              $
              (97,888
              )
              
              $
              -Qu
      Qiangxi, ex-shareholder of the subsidiary
              
              
              -
              
              
              
              84,120$
              (97,888
              )
              
              $
              84,120
 
 The
balances have no stated terms for repayment and are not interest
bearing.
 
 12. Concentrations
and Credit Risk
 
 The Group
operates principally in the PRC and grants credit to its customers in this
geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company's operations.  Financial instruments that potentially subject
the Group to a concentration of credit risk consist of cash and accounts
receivable.
 
 For the
nine months period ended September 30, 2009 and 2008, one customer accounted for
approximately 12% and four customers accounted for approximately 57% of the
Company’s sales respectively.
 
 For the
three months period ended September 30, 2009 and 2008, three customers accounted
for approximately 46% and five customers accounted for approximately 76% of the
Company’s sales respectively.
 
 At
September 30, 2009, two major customers accounted for 14% and 13% of net
accounts receivable respectively. At December 31, 2008, two major customers
accounted for 19% and 11% of net accounts receivable respectively.
 
 At
September 30, 2009, three major suppliers accounted for 53%, 12% and 11% of net
accounts payable respectively. At December 31, 2008, two major suppliers
accounted for 49% and 12% of net accounts payable respectively.
 
 The
Company does not require collateral to support financial instruments that are
subject to credit risk.
 
 15
 
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 13. Commitments
and Contingencies
 
 Operating
Leases - In the normal course of business, the Company leases the property under
operating lease agreements. The Company rents property for offices space. The
operating lease agreements generally contain renewal options that may be
exercised at the Company’s discretion after the completion of the base rental
terms. The Company was obligated under operating leases requiring minimum
rentals as follows:
 
 As
      of September 30,Remainder
      of 2009
              
              $
              43,3292010
              
              
              141,6782011
              
              
              -2012
              
              
              -2013
              
              
              -Thereafter
              
              
              -Total
      minimum lease payments
              
              $
              185,007
 
 During
the nine months ended September 30, 2009 and 2008, rental expenses included in
general and administrative expenses were $102,409 and $8,214,
respectively.
 
 During
the three months ended September 30, 2009 and 2008, rental expenses included in
general and administrative expenses were $39,816 and $0,
respectively.
 
 As of
September 30, 2009, the Company did not have any contingent
liabilities.
 
 The
Company is obligated to provide uninterrupted piped gas to connected users and
to ensure the safety in the process of piped gas operations. The volume of gas
to be supplied by the Company will grow with the increase of gas users. The
Company has selected three qualified gas resource suppliers to ensure the stable
operation to meet its obligation.
 
 Deposits
in banks in the PRC are not insured by any government entity or agency, and are
consequently exposed to risk of loss. Management believes the probability of a
bank failure, causing loss to the Company, is remote.
 
 14. Environmental Matters
 
 The
Company does not anticipate any material future cash requirements to
environmental issues. If circumstances change, the Company will record the
estimated charges to return the sites to their original condition.
  16
 
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 15. Business
and geographical segments
 
 The
Company’s operations are classified into two principal reportable segments which
are provision of gas pipe connection services and provision of natural
gas. Separate management of each segment is required because each business
unit is subject to different production and technology strategies .
 
 Reportable
Segments
 
 For
      the nine months ended
                September
      30, 2009
              
              
              For
      the nine months ended
                September
      30, 2008
              
              
              For
      the nine months ended September 30Connection
              
              
              Natural
              
              
              
              
              
              Connection
              
              
              Natural
              
              
              
              
              
              2009
              
              
              2008services
              
              
              gas
              
              
              Corporate
              
              
              services
              
              
              gas
              
              
              Corporate
              
              
              Total
              
              
              TotalExternal
      revenue
              
              $
              5,433,912
              
              
              
              518,970
              
              
              
              -
              
              
              
              3,846,773
              
              
              
              390,214
              
              
              
              -
              
              
              
              5,952,882
              
              
              
              4,236,987Interest
      income
              
              
              20,307
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              20,307
              
              
              
              -Interest
      expense
              
              
              (4,370
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,370
              )
              
              
              -Depreciation
      and amortization
              
              
              31,318
              
              
              
              255,730
              
              
              
              -
              
              
              
              125,592
              
              
              
              6,429
              
              
              
              -
              
              
              
              287,048
              
              
              
              132,021Net
      profit/(loss) after tax
              
              
              4,073,220
              
              
              
              (201,135
              )
              
              
              (2,715,365
              )
              
              
              3,059,406
              
              
              
              (37,064
              )
              
              
              (1,200,091
              )
              
              
              1,156,720
              
              
              
              1,822,251Expenditures
      for long-lived assets
              
              
              3,967,253
              
              
              
              -
              
              
              
              -
              
              
              
              1,058,067
              
              
              
              -
              
              
              
              -
              
              
              
              3,967,253
              
              
              
              1,058,067
 
 17
  CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  15. Business
and geographical segments - continued
 
 Reportable
Segments
 
 For
      the three months ended
                September
      30, 2009
              
              
              For
      the three months ended
                September
      30, 2008
              
              
              For
      the three months ended September 30Connection
              
              
              Natural
              
              
              
              
              
              Connection
              
              
              Natural
              
              
              
              
              
              2009
              
              
              2008services
              
              
              gas
              
              
              Corporate
              
              
              services
              
              
              gas
              
              
              Corporate
              
              
              Total
              
              
              TotalExternal
      revenue
              
              $
              2,659,930
              
              
              
              157,344
              
              
              
              -
              
              
              
              2,092,445
              
              
              
              161,413
              
              
              
              -
              
              
              
              2,817,274
              
              
              
              2,253,858Interest
      income
              
              
              10,680
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,680
              
              
              
              -Interest
      expense
              
              
              (3,699
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,699
              )
              
              
              -Depreciation
      and amortization
              
              
              31,318
              
              
              
              69,151
              
              
              
              -
              
              
              
              125,592
              
              
              
              (80,894
              )
              
              
              -
              
              
              
              100,469
              
              
              
              44,698Net
      profit/(loss) after tax
              
              
              2,153,098
              
              
              
              (7,031
              )
              
              
              (1,629,757
              )
              
              
              1,878,198
              
              
              
              (116,817
              )
              
              
              (824,015
              )
              
              
              516,310
              
              
              
              937,366Expenditures
      for long-lived assets
              
              
              367,571
              
              
              
              -
              
              
              
              -
              
              
              
              409,260
              
              
              
              -
              
              
              
              -
              
              
              
              367,571
              
              
              
              409,260
  As
      at September 30, 2009
              
              
              As
      at December 31, 2008
              
              
              As
      at
                September
      30,
              
              
              As
      at
                December
      31,Connection
              
              
              Natural
              
              
              
              
              
              Connection
              
              
              Natural
              
              
              
              
              
              2009
              
              
              2008services
              
              
              gas
              
              
              Corporate
              
              
              services
              
              
              gas
              
              
              Corporate
              
              
              Total
              
              
              TotalAssets
              
              
              15,724,243
              
              
              
              8,229,739
              
              
              
              6,300,036
              
              
              
              13,930,906
              
              
              
              7,395,087
              
              
              
              5,094,134
              
              
              
              30,254,018
              
              
              
              26,420,127
  The
Company’s operations are located in the PRC. All revenue is from customers in
the PRC. All of the company’s assets are located in the PRC. Accordingly, no
analysis of the Company’s sales and assets by geographical market is
presented.
  18
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 16. Issuance
of Series B Convertible Preferred Stock Securities Purchase
Agreement
 
 On April
30, 2009, China New Energy Group Company (the “Company”) entered into a Series B
Convertible Preferred Stock Securities Purchase Agreement (the “SPA”) with China
Hand Fund I L.P. (“China Hand”).
  Pursuant
to the SPA, on May 1, 2009, the Company issued and sold to China Hand, and China
Hand purchased from the Company, 1,116,388 shares of the Company’s Series B
Convertible Preferred Stock (“Series B Preferred Stock”) and warrants (the
“Warrants”) to purchase 7,814,719 shares of its Common Stock at an initial
exercise price of $0.187 per share (subject to adjustments) for a period of five
(5) years following the date of issuance for an aggregate purchase price of
$5,400,000 (the “Private Placement”).
 
 Kuhns
Brothers Securities Corporation (“Kuhns Brothers”) acted as placement agent in
connection with the Private Placement. As compensation for its services, Kuhns
Brothers received a cash fee equal to $540,000, representing 10% of the gross
proceeds received from the Private Placement, as well as warrants to purchase
3,907,358 shares of the Company’s Common Stock (the “Agent Warrants”),
representing 10% the aggregate number of shares of common stock issuable to
China Hand in the Private Placement upon conversion of the Preferred
Stock.
 
 In
connection with the signing of the SPA, on April 30, 2009, the Company also
entered into a Closing Escrow Agreement by and among the Company, China Hand and
Escrow LLC (the “Escrow Agent”), pursuant to which China Hand agreed to deposit
all funds due to the Company under the SPA in escrow until such time as all
closing conditions of the SPA have been satisfied and the Escrow Agent shall
have received notice, executed by both the Company and China Hand, instructing
the Escrow Agent to release such funds to the Company. The Closing Escrow
Agreement terminates upon the release of all funds from escrow as described
above, or upon the 90th day
following the date of the Closing Escrow Agreement if no such instruction to
disburse funds is received by the Escrow Agent, on which date all such funds
will be returned to China Hand. In May, the Company received all the
funds  amounting to $5,400,000 from the Escrow Agent.
 
 Make
Good Provision
 
 Additionally,
the Company agreed to make good provisions that will require the Company to
issue to China Hand up to 334,916 additional shares (the “Make Good Shares”) of
its Series B Preferred Stock if it does not achieve an audited after-tax net
income of $5.0 million for the year ending December 31, 2009 (the “2009 Income
Target”); if the Company is successful in achieving the 2009 Income Target,
China Hand will transfer 22,327 shares of its Series B Preferred Stock to
certain members of the Company’s management, which shares have been deposited
into an escrow account.  The Company also agreed to issue to China
Hand 27,910 shares of Series B Preferred Stock if the Company’s Common Stock is
not listed for trading on a national securities exchange on or before January
31, 2010 (the “Listing Shares”).
 
 Amendment
and Restatement of Certain Registration Rights
  In
connection with the closing of the Private Placement, the Company and China Hand
amended and restated that certain  registration rights agreement
between the Company and China Hand dated August 20, 2008.  Pursuant to
the Amended and Restated Registration Rights Agreement (the “Amended and
Restated Registration Rights Agreement”),  among other things, the
Company agreed to register all of the shares of common stock underlying the
securities issued to China Hand in the Private Placement, as well as the private
placement that was consummated on August 20, 2008 (collectively, the “Shares”)
within a pre-defined period. Under the terms of the Amended and Restated
Registration Rights Agreement, the Company is obligated to file a registration
statement (the “Registration Statement”) under the Securities Act of 1933
covering the resale of the Shares by May 30, 2009. The Company is subject to
registration delay payments in amounts prescribed by the Amended and Restated
Registration Rights Agreement if it is unable to file the Registration
Statement, cause it to become effective or maintain its effectiveness as
required by the Amended and Restated Registration Rights
Agreement.  Registration delay payments will accrue at a rate of
$54,000 per month or one percent (1%) of the gross proceeds of the Private
Placement; provided that the maximum aggregate amount of the registration delay
payments pursuant to the Amended and Restated Registration Rights Agreement is
$810,000, or fifteen percent (15%) of the gross proceeds of the Private
Placement. Subsequently, the Company signed a wavier agreement with China Hand
on April 30, 2009 which waived the above terms and conditions.
 
 19
 
 CHINA
NEW ENERGY GROUP COMPANY
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 17. Subsequent
Events
 
 The
Company evaluated subsequent events through the time of filing this Quarterly
Report on Form 10-Q on November 16,. 2009. No significant events occurred
subsequent to the balance sheet date but prior to the filing of this report that
would have a material impact on our Condensed Consolidated Financial
Statements.
 
 20




ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





Special
Note Regarding Forward Looking Statements





This
Quarterly Report on Form 10-Q, including the following “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements that are based on the beliefs of our management, and
involve risks and uncertainties, as well as assumptions, that, if they ever
materialize or prove incorrect, could cause actual results to differ materially
from those expressed or implied by such forward-looking statements. The words
“believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,”
“aim,” “will” or similar expressions are intended to identify forward-looking
statements. All statements, other than statements of historical fact, are
statements that could be deemed forward-looking statements, including statements
regarding new and existing products, technologies and opportunities; statements
regarding market and industry segment growth and demand and acceptance of new
and existing products; any projections of sales, earnings, revenue, margins or
other financial items; any statements of the plans, strategies and objectives of
management for future operations; any statements regarding future economic
conditions or performance; uncertainties related to conducting business in
China; any statements of belief or intention; any of the factors and risks
mentioned in the “Risk Factors” sections of our Annual Report on Form 10-K filed
with the Securities and Exchange Commission on April 15, 2009, and any
statements of assumptions underlying any of the foregoing. All forward-looking
statements included in this report are based on information available to us on
the date of this report. We assume no obligation and do not intend to update
these forward-looking statements, except as required by law.





Use
of Terms





Except as
otherwise indicated by the context, all references in this Quarterly Report to
(i) “China New Energy,” the “Company,” “we,” “us” or “our” are references to
China New Energy Group Company and its wholly-owned subsidiaries, Willsky
Development, Ltd., or Willsky Development, Tianjin SingOcean Public Utility
Development Co., Ltd., or SingOcean, Qinhuangdao Chensheng Gas Co. Ltd., or
Chensheng Gas, Tianjin SingOcean Public Utility Development Co., Ltd. - Acheng
Division, or Acheng SingOcean, Yingkou Zhongneng Gas Development Co., Ltd., or
Yingkou Zhongneng (formerly Tianjin SingOcean Public Utility Development Co.,
Ltd. - Dashiqiao Division, or Dashiqiao SingOcean), and China New Energy
(Tianjin) Investment and Consulting Co., Ltd, or Tianjin CNE, and Tianjin Binhai
Zhongneng Gas Company, or Binhai Zhongneng, but do not include the stockholders
of China New Energy; (ii) “SEC” are to the Securities and Exchange Commission;
(iii) “Securities Act” are to the Securities Act of 1933, as amended; (iv)
“Exchange Act” are to the Securities Exchange Act of 1934, as amended; (v) “RMB”
are to Renminbi, the legal currency of China; (vi) “U.S. dollar,” “$” and “US$”
are to the legal currency of the United States; (vii) “BVI” are to the British
Virgin Islands; and (viii) “China” and “PRC” are to the People’s Republic of
China.





Overview
of Our Business





We are a
natural gas company engaged in the development of natural gas distribution
networks, and the distribution of natural gas to residential, industrial and
commercial customers in small and medium sized cities in China.





We
currently own the exclusive rights to develop distribution networks to provide
natural gas to industrial, commercial and residential consumers in the cities of
Dashiqiao, Acheng and Nandaihe. Currently, these distribution networks provide
natural gas to an aggregate of approximately 61,000 consumers in these
cities.





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.





21





Our
Current Organizational Structure




Willsky
Development LTD. was incorporated on May 31, 2005 in the British Virgin Islands.
On March 28, 2008, Travel Hunt Holdings, Inc. completed a reverse acquisition
transaction with Willsky Development whereby Travel Hunt Holdings, Inc. issued
to the shareholder of Willsky Development 94,908,650 shares of Travel Hunt
Holdings, Inc. common stock in exchange for all of the issued and outstanding
capital stock of Willsky Development. Simultaneous with the consummation of the
share exchange agreement, the shareholder of Willsky, Eternal International
Holding Group Ltd, a Hong Kong corporation, or Eternal International,
distributed 85,417,785 shares of Travel Hunt Holdings, Inc. common stock as a
dividend. Accordingly, following this distribution, Eternal International
beneficially owns approximately 9.49% of Travel Hunt Holdings, Inc. outstanding
capital stock. Willsky Development thereby became Travel Hunt Holdings, Inc.’s
wholly-owned subsidiary and the former shareholders of Willsky Development
became Travel Hunt Holdings, Inc. controlling stockholders.





For
accounting purposes, the acquisition was accounted for as a recapitalization
effected by a share exchange, and the transaction treated as a reverse
acquisition with Willsky Development as the acquirer and Travel Hunt Holdings,
Inc. as the acquired party. The assets and liabilities of the acquired entity
(Willsky) were brought forward at their book value and no goodwill was
recognized.





On May
27, 2008, we changed our name from Travel Hunt Holdings, Inc. to China New
Energy Group Company.





Tianjin
Sing Ocean Public Utility Development Co. Ltd. (“TSOPUDCD”) is an equity joint
venture established in the PRC to be operated for a period of 50 years until
January 18, 2054. It is a subsidiary of the Company and it’s consolidated into
the Company’s financial statements.  It has a branch division in
Acheng, Tianjin Sing Ocean Public Utility Development Co., Ltd (“TSOPUDCL-AD”)
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.





QinHuangDao
ChenSheng Gas Co, Ltd. (QHDCSGCL) - On September 16, 2008, we,
through our 99%-owned subsidiary Tianjin Sing Ocean Public Utility
Development Co., Ltd., entered into an Equity Swap Agreement with Mr. Xiu Hai
Tian, whereby we acquired from Mr. Xiu a 49% ownership interest
in Chensheng Gas, in exchange for our 99% ownership in Hunchun 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
Gas.  Pursuant to the Agreement for Equity Transfer, the Company
agreed to purchase the remaining 51% of the outstanding equity of Chensheng Gas
from 17 individuals for an aggregate purchase price of RMB 12.56 million
(approximately $1.84 million).  The transaction was consummated on
December 30, 2008, following which the Company now owns 51% of the equity of
Chensheng Gas, and Tianjin Sing Ocean now owns 49% of the equity of Chensheng
Gas.





Yingkou
Zhongneng Gas Development Co., Ltd (YZGDCL) is a subsidiary of the Company and
established in the PRC to operate a natural gas distribution network in the city
of Dashiqiao.





China New
Energy (Tianjin) Investment & Consulting Co., Ltd (CNETICCL) is a subsidiary
of the Company and established in the PRC for investment holding
purposes.





On June
26, 2009, our subsidiary, Qinhuangdao Chensheng Gas Co., Ltd. and Sing Ocean
contributed $1,462,501 (RMB10,000,000) in cash and $950,626 (RMB6,500,000) in
assets respectively to establish a wholly-owned subsidiary, Tianjin Binhai
Zhongneng Gas Co., Ltd., in Da Gang District, Tianjin, China, for constructing
and developing the gas projects of Private Economic Park and Taiping County in
Dagang District, Tianjin.





22





The
following chart reflects our organizational structure as of the date of this
report.











Reportable
Operating Segments





For the
nine months ended September 30, 2009,  we had sales revenue of $5.95
million  of which $5.43 MM or 91% was from connection services while
$0.52 million or 9% was from gas sales.





Our
revenue for the nine months ended September 30, 2009, is mainly contributed by
the connection services segment as the company concentrates our efforts to
provide our services to property developers.  Thus, the gas
consumption will begin when the properties are sold in the
market.  Currently, the volume of gas sales to connected households is
not high. This phenomenon does affect our revenue structure.




Third Quarter Financial Performance
Highlights





The
following are some financial highlights for the three months ended September 30,
2009:





·
            Revenues:
      Our revenues were approximately $2.82 MM for the three months ended
      September 30, 2009, an increase of 25% from the same period of
      2008.





·
            Gross
      Margin: Gross margin was 63% for the three months ended September
      30, 2009, compared to gross margin of 74 % for the three months ended
      Septembetr 30, 2008 representing  a straight decrease of 11% or
      a percentage increase of 5% for the same period in
  2008.




23




·
            Operating
      Expense: Operating expense (including selling, general
      and  administrative expense) was $0.80 MM for the three months
      ended September 30, 2009, an increase of 132% from the same period of
      2008.





·
            Net
      Income: Net income was approximately $0.492 MM for the three months
      ended September 30, 2009, a decrease of 45% from the same period of
      2008.





·
            Fully
      diluted net income per share: Fully diluted net income per share
      was $0.01 for the three months ended September 30, 2009, as compared to
      net loss per share $0.06 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 nine months ended September 30, 2009
and 2008 as the Company did not have reportable taxable income for the
period.





Willsky
Development Company, a wholly-owned subsidiary of the Company, is subject to BVI
taxation, but no provision for income taxes was made for the nine months ended
September 30, 2009 and 2008 as Willsky Development Company did not have
reportable taxable income for the period.





China New
Energy (Tianjin) Investment & Consulting Co.,Ltd is subject to the tax laws
of the PRC at the prevailing statutory rate of enterprise income tax
of  25%.





Tianjin
Sing Ocean Public Utility Development Company is subject to the tax laws
of  the PRC at  the prevailing statutory rate of enterprise
income tax of 25%.





Acheng is
a division of Tianjin Sing Ocean Public Utility Development Company: thus, it is
not subject to separate statutory income tax.





Yingkou
Zhongneng Gas Development Company is subject to the tax laws of the PRC, the
prevailing statutory rate of enterprise income tax is 25%.





Qinhuangdao
Chensheng Gas Company 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 annual sales.  It was further amended and effective on
July 1, 2009, the tax rate was changed to 25% on net income.





Tianjin
Binhai Zhongneng Gas Company is subject to the tax laws of the PRC at the
prevailing statutory rate of enterprise income tax of 25%.





On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation with respect to
non-Chinese enterprises or group controlled offshore entities. Pursuant to the
Notice, an enterprise incorporated in an offshore jurisdiction and controlled by
a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of
daily operations reside or perform their duties mainly in China; (ii) its
financial or personnel decisions are made or approved by bodies or persons in
China; (iii) its main properties, accounting books, corporate seal, board and
shareholder minutes are kept in China; and (iv) directors with voting rights or
senior management often reside in China.  Such resident enterprise
would be subject to an EIT rate of 25% on its worldwide income and must pay a
withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural
person.  Nor are detailed measures available on the imposition of tax
on non-domestically incorporated resident enterprises. Therefore, it is unclear
how tax authorities will determine tax residency based on the facts of each
case.





However,
as our case substantially meets the foregoing criteria, there is a likelihood
that we are deemed to be a resident enterprise by Chinese tax authorities. If
the PRC tax authorities determine that we are a “resident enterprise” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide
taxable income as well as subject to PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the
New EIT Law and its Implementing Rules dividends paid to us from our PRC
subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such
dividends will not be subject to a 10% withholding tax, as the PRC foreign
exchange control authorities, which enforce the withholding tax, have not yet
issued guidance with respect to the processing of outbound remittances to
entities that are treated as resident enterprises for PRC enterprise income tax
purposes. Finally, it is possible that future guidance issued with respect to
the new “resident enterprise” classification could result in a situation in
which a 10% withholding tax is imposed on dividends we pay to our non-PRC
stockholders and with respect to gains derived by our non-PRC stockholders from
transferring our shares. We are actively monitoring the possibility of “resident
enterprise” treatment and are evaluating appropriate organizational changes to
avoid this treatment, to the extent possible.




24




Results
of Operations





Comparison of Three Months
Ended September 30, 2009 and September 30, 2008





The
following table summarizes the results of our operations during the three-month
periods ended September 30, 2009 and 2008, and provides information regarding
the dollar and percentage increase or (decrease) from the three-month period
ended September 30, 2008 to the three-month period ended September 30,
2009.





(All
amounts, other than percentages, in thousands of U.S. dollars)





Three
      Months Ended
              September
      30, 2009
            
            
            Three
      Months Ended
              September
      30, 2008
            
            
            Percentage
      Change
              Increase
              (Decrease)Revenues
            
            $
            2,817
            
            
            
            2,254
            
            
            
            25
            %Cost
      of Sales
            
            
            1,050
            
            
            
            576
            
            
            
            82
            %Gross
      Profit
            
            
            1,767
            
            
            
            1,678
            
            
            
            5
            %Selling,
      General &Administrative  Expenses
            
            
            802
            
            
            
            346
            
            
            
            132
            %Operating
      Income
            
            
            965
            
            
            
            1,332
            
            
            
            (28
            )%Other
      Income and (Expenses)Interest
      income
            
            
            11
            
            
            
            -
            
            
            
            -Interest
      (Expense)
            
            
            (4
            )
            
            
            -
            
            
            
            -Other
      Income (Expense)
            
            
            6
            
            
            
            4
            
            
            
            50
            %Income
      from Continuing Operations  Before Income Taxes
            
            
            977
            
            
            
            1,336
            
            
            
            (27
            )%Income
      Taxes
            
            
            461
            
            
            
            391
            
            
            
            18
            %(Loss)
      From Discontinued Operations
            
            
            -
            
            
            
            (7
            )
            
            
            -Non
      controlling interest
            
            
            (25
            )
            
            
            (37
            )
            
            
            (32
            )%Net
      Income
            
            $
            491
            
            
            
            900
            
            
            
            (45
            )%








Revenues.  Revenues
are derived primarily from connection fees and sales of natural
gas.  Revenues increased $0.56 MM, or 25% to $2.82 MM for the three
months ended September 30, 2009 from $2.25 MM 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.





25




Our cost
of sales increased by $0.47 MM, or 82%, to $1.05 MM for the three months ended
September 30, 2009 from $0.58 MM during the same period in 2008. Such increase
was mainly attributable to a corresponding increase in the number of households
connected to our distribution network and we recorded the depreciation of the
operation under cost of sales for the three months ended September 30,
2009.





Gross
Profit.Our
gross profit increased by $0.09 MM, or 5%, to $1.77 MM for the three months
ended September 30, 2009 from $1.68 MM during the same period in 2008. Gross
profit as a percentage of revenues. or gross profit margin, was 63% for the
three months ended September 30, 2009.  The gross profit margin during
the same period in 2008 was 74%. Such decrease in gross profit margin was mainly
due to cost reallocation of the depreciation.





Selling, General & Administrative
Expenses (S&G&A
Expenses). SG&A expenses, include office expenses, entertainment and
travelling, salaries and other expenses. SG&A expenses increased by $0.46
MM, or 132%, to $0.80 MM for the three months ended September 30, 2009 from
$0.35 MM during the same period in 2008. As a percentage of revenues, SG&A
expenses increased to 28% for the three months ended September 30, 2009 from 15%
for the same period in 2008.  This increase was mainly due to the fact
that we are preparing to expand our company.    Management
believes that the relatively high SG&A expenses will continue as we
endeavor  to expand our business.





Net
Income. Net income decreased $0.41 MM, or 45% to a net income of $0.49 MM
for the three months ended September 30, 2009 from net income of $0.90 MM for
the same period of 2008, mainly due to the increase in SG&A
expenses.





Comparison of Nine Months
Ended September 30, 2009 and September 30, 2008





The
following table summarizes the results of our operations during the nine-month
periods ended September 30, 2009 and ended September 30, 2008, and provides
information regarding the dollar and percentage increase or (decrease) from the
nine-month period ended September 30, 2008 to the nine-month period ended
September 30, 2009.





(All
amounts, other than percentages, in thousands of U.S. dollars)





Nine
      Months Ended
              September
      30, 2009
            
            
            Nine
      Months Ended
              September
      30, 2008
            
            
            Percentage
      Change
              Increase
              (Decrease)Revenues
            
            $
            5,953
            
            
            
            4,237
            
            
            
            40
            %Cost
      of Sales
            
            
            2,026
            
            
            
            1,129
            
            
            
            79
            %Gross
      Profit
            
            
            3,927
            
            
            
            3,108
            
            
            
            26
            %Selling,
      general and Administrative Expenses
            
            
            1,963
            
            
            
            814
            
            
            
            141
            %Operating
      Income (Expenses)
            
            
            1,964
            
            
            
            2,294
            
            
            
            (14
            %)Other
      Income and (Expenses)Interest
      income
            
            
            20
            
            
            
            -
            
            
            
            -Interest
      (Expense)
            
            
            (4
            )
            
            
            -
            
            
            
            -Other
      Income (Expense)
            
            
            6
            
            
            
            10
            
            
            
            (43
            %)Income
      (Loss) from Continuing Operations Before Income Taxes
            
            
            1,986
            
            
            
            2,304
            
            
            
            (14
            %)Income
      Taxes
            
            
            829
            
            
            
            705
            
            
            
            18
            %Income
      From Discontinued Operations
            
            
            -
            
            
            
            223
            
            
            
            -Non
      controlling interest
            
            
            (18
            )
            
            
            (46
            )
            
            
            (61
            %)Net
      Income
            
            $
            1,139
            
            
            
            1,776
            
            
            
            (36
            %)




26





Revenues.  Revenues
are derived primarily from connection fees and sales of natural gas. Revenues
increased $1.72 MM or 40% to $5.95 MM for the nine months ended September 30,
2009 from $4.24 MM for the same period in 2008. This increase was mainly
attributable to an increase in number of connected households and an increase in
natural gas consumption.





Cost of
Sales.  Cost of sales consists primarily of the purchase of
natural gas from our suppliers and connection costs. Our cost of sales increased
$0.90 MM, or 79%, to $2.03 MM for the nine months ended September 30, 2009 from
$1.13 MM during the same period in 2008. Such increase was mainly attributable
to a corresponding increase in the number of households connected to our network
and increase in natural gas consumption by our customers. As a percentage of
revenues, the cost of sales increased to 34% during the nine months ended
September 30, 2009, from 27% in the same period in 2008, which was mainly
attributable to an increase in the number of connected households.





Gross
Profit.Our
gross profit increased $0.82 MM, or 26%, to $3.93 MM for the nine months ended
September 30, 2009 from $3.11 MM during the same period in 2008. Gross profit as
a percentage of revenues was 66% for the nine months ended September 30, 2009, a
decrease of 7% from 73% during the same period in 2008. This percentage decrease
was mainly due to an increase in our connection costs.





Selling, General
and Administrative Expenses. Selling, general and administrative
expenses, which include sales representative commissions, promotion fees,
salesperson salaries and expenses, depreciation charges and other fees,
increased $1.15 MM, or 141%, to $1.96 MM for the nine months ended September 30,
2009 from $0.81 MM during the same period in 2008.  As a percentage of
revenues, general and administrative expenses increased to 33% for the nine
months ended September 30, 2009 from 19% for the same period in 2008. This
increase was mainly due to the fact that we are endeavoring to expand our
business.  Management believes that the relatively high SG&A
expenses will continue as we endeavor to expand our business.





Net
Income. Net income decreased $0.64 MM, to $1.14 MM for the nine months
ended September 30, 2009 from $1.78 MM for the same period of 2008, as a result
of the factors described above.





Liquidity
and Capital Resources





As of
September 30, 2009, we had cash and cash equivalents of approximately $4.9
million.  The following table provides detailed information about our net
cash flow for all financial statement periods presented in this
report.





Cash
Flow


(All
amounts in thousands of U.S. dollars)





Nine
      Months Ended September 30,2009
            
            
            2008Net
      cash provided by (used in) operating activities
            
            $
            (135
            )
            
            $
            (502
            )Net
      cash used in investing activities
            
            
            (5,806
            )
            
            
            (575
            )Net
      cash provided by financing activities
            
            
            5,215
            
            
            
            7,282Effect
      of exchange rate changes in cash
            
            
            (7
            )
            
            
            (1,308
            )Net
      increase (decrease) in cash
            
            $
            (734
            )
            
            $
            4,898





Operating
Activities





Net cash
used in operating activities was $0.14 MM for the nine months ended September
30, 2009, compared to net cash used in operating activities of $0.50 MM during
the same period of 2008. This decrease in funds used in our operating activities
was primarily due to an increase of accounts receivable, as well as a decrease
in prepayment and other payables.





27




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 nine months ended September 30, 2009 was
$5.81 MM which is an increase of $5.23 MM from $0.57 MM for the
same period of 2008.  This increase was due to a purchase
of  the Chensheng subsidiary,  and increased
 construction in progress and fixed assets.





Financing
Activities





Our debt
to equity ratio  was 9% as of September 30, 2009.  Net cash
provided by financing activities for the nine months ended September 30, 2009
was $5.22 MM, which is a decrease of $2.07 MM from $7.28 MM during the same
period of 2008.  The decrease was mainly attributable to the fund
falling in 2009. It was a decrease of 28%.





On August
20, 2008, we completed a private placement in which we sold to China Hand Fund
I, LLC, or China Hand, and its designees 1,857,373 shares of our Series A
Preferred Stock and warrants to purchase 13,001,608 shares of our common stock
at an initial exercise price of $0.187 per share (subject to adjustments)
exercisable for a period of five (5) years following the date of issuance, for a
purchase price of $9,000,000.





Subsequently,
on May 1, 2009, we issued and sold to China Hand 1,116,388 shares of our Series
B Convertible Preferred Stock and warrants to purchase 7,814,719 shares of our
common stock at an initial exercise price of $0.187 per share (subject to
adjustments) exercisable for a period of five (5) years following the date of
issuance for a purchase price of $5,400,000.





Additionally,
we agreed to certain make good provisions that will require us to issue to China
Hand up to 334,916 additional shares of our Series B Preferred Stock if we do
not achieve audited after-tax net income of $5.0 million for the year ending
December 31, 2009.  If we are successful in achieving this income
target, China Hand will transfer 22,327 shares of its Series B Preferred Stock
to certain members of our management.  We also agreed to issue to China
Hand 27,910 shares of our Series B Preferred Stock if our common stock is not
listed for trading on a national securities exchange on or before January 31,
2010.





Kuhns
Brothers Securities Corporation, or Kuhns Brothers, acted as placement agent in
connection with the August 20, 2008 and May, 1, 2009 private placements. In each
case, as compensation for its services, Kuhns Brothers received a cash fee equal
to 10% of the gross proceeds received from each private placement, as well as
warrants to purchase 10% of the aggregate number of shares of our common stock
issuable to China Hand in each private placement upon conversion of the Series A
and Series B Preferred Stock.  Accordingly, Kuhns Brothers received
cash fees of $900,000 and $540,000, and warrants to purchase 6,500,804 and
3,907,358 shares of our common stock, in connection with the August 20, 2008 and
May 1, 2009 private placements, respectively.





Going
Concern





As shown
in accompanying condensed consolidated financial statements, the Company had an
accumulated deficit incurred through September 30, 2009, which raise substantial
doubt about the Company’s ability to continue as a going concern. The condensed
consolidated financial statements do not include any adjustments relating to
recoverability and classification of recorded assets, or the amounts and
classification of liability that might be necessary in the event the Company
cannot continue in existence.





The
timing and amount of capital requirements will depend on a number of factors,
including demand for products and services and the availability of opportunities
for expansion through affiliations and other business relationships. Management
intends to seek new capital from new equity securities issuances to provide
funds needed to increase liquidity, fund internal growth, and fully implement
its business plan.





In
addition, we may, in the future, require additional cash resources due to
changed business conditions, implementation of our strategy to expand our
production capacity or other investments or acquisitions we may decide to
pursue.  If our own financial resources are insufficient to satisfy our
capital requirements, we may seek to sell additional equity or debt securities
or obtain additional credit facilities.  The sale of additional equity
securities could result in dilution to our stockholders.  The incurrence of
indebtedness would result in increased debt service obligations and could
require us to agree to operating and financial covenants that would restrict our
operations.  Financing may not be available in amounts or on terms
acceptable to us, if at all.  Any failure by us to raise additional funds
on terms favorable to us, or at all, could limit our ability to expand our
business operations and could harm our overall business prospects.





28




Capital
Expenditures, Contractual Obligations, Commitments and Contingences





For nine
months ended September 30, 2009, the company spent about $5.8 MM 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 12 to Unaudited Condensed Consolidated Financial
Statements, we have no other commitments and contingencies. As disclosed in Note
12, the Company is obligated under operating leases to pay minimum lease
payments of approximately $0.18 MM .





Critical
Accounting Policies





There
were no material changes in the Company’s critical accounting policies from
those described in the Company’s 2008 Form 10-K.




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.





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.




Price
Risk





We are
principally 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.  In the
PRC   the price of connection fees and gas sales to residential
customers is subject to the approval of the corresponding local PRC Price
Bureau.  The corresponding local PRC Price Bureau will examine our
cost of connection and gas supply, compare it with the local living standard,
then finalize and approve our price of connection fees and gas
sales.  There is no assurance that we will be able to obtain the
necessary approvals to increase our prices if our costs
increase.   As  we only have to obtain the approval of
the local PRC Price Bureau for connection fees and gas sales to residential
customers the price to commercial customers is subject to contractual
negotiation between both parties.




None.





Foreign
Exchange Risk





The PRC
government imposes control over the conversion of Renminbi into foreign
currencies.  Under the current unified floating exchange rate system,
the People's Bank of China publishes an exchange rate, which we refer to as the
PBOC exchange rate, based on the previous day's dealings in the inter-bank
foreign exchange market. Financial institutions authorized to deal in foreign
currency may enter into foreign exchange transactions at exchange rates within
an authorized range above or below the PBOC exchange rate according to market
conditions.




29




Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control, conversion
of Renminbi into foreign exchange by Foreign Investment Enterprises, or FIEs,
for use on current account items, including the distribution of dividends and
profits to foreign investors, is permissible. FIEs are permitted to convert
their after-tax dividends and profits to foreign exchange and remit such foreign
exchange to their foreign exchange bank accounts in the
PRC.  Conversion of Renminbi into foreign currencies for capital
account items, including direct investment, loans, and security investment, is
still under certain restrictions. On January 14, 1997, the State Council amended
the Foreign Exchange Control Regulations and added, among other things, an
important provision, which provides that the PRC government shall not impose
restrictions on recurring international payments and transfers under current
account items.





Enterprises
in the PRC (including FIEs) which require foreign exchange for transactions
relating to current account items, may, without approval of the State
Administration of Foreign Exchange, or SAFE, effect payment from their foreign
exchange account or convert and pay at the designated foreign exchange banks by
providing valid receipts and proofs.





Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be
sought.





Since
1994, the exchange rate for Renminbi against the United States dollar has
remained relatively stable, most of the time in the region of approximately
RMB8.28 to $1.00. However, in 2005, the Chinese government announced that it
would begin pegging the exchange rate of the Chinese Renminbi against a number
of currencies, rather than just the U.S. dollar and, the exchange rate for the
Renminbi against the U.S. dollar became RMB8.02 to $1.00. As our operations are
primarily in PRC, any significant revaluation or devaluation of the Chinese
Renminbi may materially and adversely affect our cash flows, revenues and
financial condition. We may not be able to hedge effectively against in any such
case. For example, to the extent that we need to convert United States dollars
into Chinese Renminbi for our operations, appreciation of this currency against
the United States dollar could have a material adverse effect on our business,
financial condition and results of operations. Conversely, if we decide to
convert Chinese Renminbi into United States dollars for other business purposes
and the United States dollar appreciates against this currency, the United
States dollar equivalent of the Chinese Renminbi we convert would be reduced.
There can be no assurance that future movements in the exchange rate of Renminbi
and other currencies will not have an adverse effect on our financial condition.
CNER’s operating companies are FIEs to which the Foreign Exchange Control
Regulations are applicable. There can be no assurance that we will be able to
obtain sufficient foreign exchange to pay dividends or satisfy other foreign
exchange requirements in the future.





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 is 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 Tak Shing, our Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of September 30,
2009.  Based on that evaluation, Mr. Chong and Mr. Yu concluded that
as of September 30, 2009 our disclosure controls and procedures were effective
to satisfy the objectives for which they are intended.





Changes
in Internal Control Over Financial Reporting.





During
the fiscal quarter ended September 30, 2009, there were no changes in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





30




PART
II


OTHER
INFORMATION





ITEM
      1.
            LEGAL
      PROCEEDINGS.





From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise, in the ordinary course of business. We are currently not aware of any
such legal proceedings or claims that we believe will have a material adverse
affect on our business, financial condition or operating results. However,
litigation is subject to inherent uncertainties, and an adverse result in these,
or other matters, may arise from time to time that may harm our
business.








ITEM
      6.
            EXHIBITS.





The
following exhibits are filed as part of this report or incorporated by
reference:





Exhibit
      No.
            
            Description31.1
            
            Certification
      of Principal Executive Officer filed pursuant to Rule 13a-14(a)/15d-14(a),
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
            
            Certification
      of Principal Financial Officer filed pursuant to Rule 13a-14(a)/15d-14(a),
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
            
            Certification
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
            
            Certification
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




31




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.




CHINA
      NEW ENERGY GROUP COMPANYDate:
      November 14, 2009
              By:
              /s/ Yangkan
      ChongYangkan
      Chong, Chief Executive Officer(Principal
      Executive Officer)




By:
              /s/ Eric
      Yu Tak ShingEric
      Yu Tak Shing, Chief Financial Officer(Principal
      Financial Officer and Principal
                Accounting
      Officer)




32