UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K/A
 
 x
                  ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
fiscal year ended December 31, 2007
 
 o
                TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
transition period from ________ to _________
 
 Commission
File Number: 000-31539
 
 CHINA NATURAL GAS,
INC.
 (Exact
Name of Registrant as specified in its charter)
 
 Delaware
                
                98-0231607(State
      or other jurisdiction of
                  Incorporation
      or organization)
                
                (I.R.S.
      Employer
                  Identification
      Number)
 
 19th
Floor, Building B, Van Metropolis
 Tang Yan
Road, Hi-Tech Zone
 Xi’an,
710065, Shaanxi Province, China
 (Address
of principal executive office)
 
 Registrant’s
telephone number, including area code: 86-29-8832-7391
 
 Securities
registered under Section 12(b) of the Exchange Act: None
 
 Securities
registered under Section 12(g) of the Exchange Act:
 Common Stock, $.0001 par
value per share
 (Title of
Class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes oNo x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes oNo x
 
 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 o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
 
 Large
      accelerated filer  o
                Accelerated
      filer  oNon-accelerated
      filer   o
                Smaller
      reporting company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No x
 
 The
aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant, as of March 18, 2008, was approximately $119,833,846. All
executive officers and directors of the registrant have been deemed, solely for
the purpose of the foregoing calculation, to be "affiliates" of the registrant.
 
 As of
March 13, 2008, there were 29,200,304 shares of the issuer's common stock,
$0.0001 par value per share, issued and outstanding.
  FORM 10-K
  FOR THE FISCAL YEAR ENDED DECEMBER
31, 2007
  INDEX
  PagePART
      I
                
                
                2ITEM
      1.
                DESCRIPTION
      OF BUSINESS
                
                2ITEM
      1A
                RISK
      FACTORS
                
                8ITEM
      2.
                DESCRIPTION
      OF PROPERTY
                
                16ITEM
      3.
                LEGAL
      PROCEEDINGS
                
                16ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITYHOLDERS
                
                16PART
      II
                
                
                17ITEM
      5.
                MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
      BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
                
                17ITEM
      6.
                SELECTED
      FINANCIAL DATA
                
                18ITEM
      7.
                MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                
                18ITEM
      7A.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                
                23ITEM
      8.
                FINANCIAL
      STATEMENTS
                
                24ITEM
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                
                25ITEM
      9A(T).
                CONTROLS
      AND PROCEDURES
                
                25ITEM
      9B.
                OTHER
      INFORMATION
                
                26PART
      III
                
                
                27ITEM
      10.
                DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(a) OF THE EXCHANGE ACT
                
                27ITEM
      11.
                EXECUTIVE
      COMPENSATION
                
                29ITEM
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                
                30ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS
                
                31ITEM
      14.
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                
                31ITEM
      15.
                EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                
                32
 
  STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
  In this
annual report, references to "China Natural Gas," "CHNG," "the Company," "we,"
"us," and "our" refer to China Natural Gas, Inc.
  Except
for the historical information contained herein, some of the statements in this
Report contain forward-looking statements that involve risks and uncertainties.
These statements are found in the sections entitled "Business," "Management's
Discussion and Analysis or Plan of Operation," and "Risk Factors." They include
statements concerning: our business strategy; expectations of market and
customer response; liquidity and capital expenditures; future sources of
revenues; expansion of our proposed product line; and trends in industry
activity generally. In some cases, you can identify forward-looking statements
by words such as "may," "will," "should," "expect," "plan," "could,"
"anticipate," "intend," "believe," "estimate," "predict," "potential," "goal,"
or "continue" or similar terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including, but
not limited to, the risks outlined under "Risk Factors," that may cause our or
our industry's actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. For example, assumptions that could cause actual results to vary
materially from future results include, but are not limited to: our ability to
successfully develop and market our products to customers; our ability to
generate customer demand for our products in our target markets; the development
of our target markets and market opportunities; our ability to manufacture
suitable products at competitive cost; market pricing for our products and for
competing products; the extent of increasing competition; technological
developments in our target markets and the development of alternate, competing
technologies in them; and sales of shares by existing shareholders. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Unless we are required to do so under US federal securities
laws or other applicable laws, we do not intend to update or revise any
forward-looking statements.
  1
  PART I
  ITEM 1. DESCRIPTION OF
BUSINESS
  Organizational
History
 
 We were
incorporated in the state of Delaware on March 31, 1999, as Bullet Environmental
Systems, Inc. On May 25, 2000 we changed our name to Liquidpure Corp. and on
February 14, 2002 we changed our name to Coventure International, Inc.
 
 On
December 6, 2005, we issued an aggregate of 4 million shares to all of the
registered shareholders of Xi’an Xilan Natural Gas Co., Ltd., and entered into
exclusive arrangements with Xi’an Xilan Natural Gas Co., Ltd. and these
shareholders that give us the ability to substantially influence Xi’an Xilan
Natural Gas’ daily operations and financial affairs, appoint its senior
executives and approve all matters requiring shareholder approval. On December
19, 2005, we changed our name to China Natural Gas, Inc.
 
 On
February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., ("Xilan
Equipment") as a wholly owned foreign enterprise (WOFE). We then, through Xilan
Equipment, entered into exclusive arrangements with Xi’an Xilan Natural Gas Co.,
Ltd. and these shareholders that give us the ability to substantially influence
Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its
senior executives and approve all matters requiring shareholder approval. We
memorialized these arrangements on August 17, 2007. As a result, the Company
consolidates the financial results of Xi’an Xilan Natural Gas as variable
interest entity pursuant to FASB Interpretation No. 46R, "Consolidation of
Variable Interest Entities."
 
 We
distribute and sell natural gas to commercial, industrial and residential
customers in the Xi’an area, including Lantian County and the Lintong and Baqiao
Districts, of Shaanxi province of The Peoples' Republic of China ("China" or the
"PRC") through a network of approximately 120 km of high pressure
pipelines.  We also distribute and sell CNG as vehicular fuel through a
network of CNG filling stations in Shaanxi and Henan Provinces.  As of
December 31, 2007, we owned and operated 16 CNG filling stations in Shaanxi
Province and 8 CNG filling stations in Henan Province.
 
 We
operate three primary business lines:
  ·
                    Distribution
      and sale of compressed natural gas (CNG) through Company-owned CNG filling
      stations for hybrid (natural gas/gasoline) powered vehicles (24 stations
      as of December 31,
2007);
   ·
                    Distribution
      and sale of piped natural gas to residential, commercial and industrial
      customers through Company-owned pipelines. The Company distributes and
      sells natural gas to approximately 84,500 homes and businesses;
      and
  ·
                    Conversion
      of gasoline-fueled vehicles to hybrid (natural gas/gasoline) powered
      vehicles at our Auto Conversion
Division.
 We also
generate additional revenues from the installation of connections to our
piped natural gas distribution system for end users.
 
 We buy
all of the natural gas that we sell and distribute to our customers from
government owned enterprises. We do not mine or produce any of our own natural
gas and have no plans to do so during the next 12 months. The natural gas that
we buy is available in two forms: (i) piped natural gas; and (ii)
CNG.
 
 2
  Our Products, Services and
Customers
 
 Our Pipeline Distribution
System
 
 We own
and operate a network of approximately 120 km of high pressure pipeline in the
Xi’an area. The network connects to a high pressure pipeline network of the
government operated Shaanxi Natural Gas Company, which supplies natural gas
directly from a gas field in the northern region of the province. Our high
pressure pipeline then feed into city-gate "let-down" stations at Hongqing and
Lantian County, where the pressure is reduced and natural gas is transported
through a network of low-pressure distribution pipes to supply our residential,
commercial and industrial customers in Lantian County and the Lintong and Baqiao
Districts. The spur also feeds our compressor station at Hongqing where CNG is
collected by tankers to supply CNG filling stations.
 
 Each of
our pipeline customers is physically connected to our pipeline network through
Company installed and maintained connection equipment and natural gas usage
monitoring systems, from which we generate additional revenues.
 
 We
believe that we are currently the sole authorized provider of natural gas to
residential customers in our service area and the only privately owned company
in the Shaanxi province to own and operate this type of high pressure
pipeline.
 
 CNG Filling
Stations
 
 As of
December 31, 2007, we own and operate 16 CNG natural gas filling stations in the
Xi’an metropolitan area and 8 natural gas filling stations in Henan province.
Through these company-owned filling stations, CNG is sold to taxis, buses and
private cars that operate on CNG technology. Currently, we purchase natural gas
for 1.22 RMB/cubic meter and sell each cubic meter for 2.35 RMB net of value
added taxes.
 
 We
continue expanding our CNG filling station base by constructing new stations as
well as acquiring existing stations. We can construct a CNG filling station in
approximately 60 days for a cost of approximately US$900,000. We are evaluating
additional sites for CNG filling stations in Xi’an and in other regions such as
Henan province.
 
 In July
2005, we purchased a Compressor Station located in Hongqing, near our pipeline.
A compressor station compresses natural gas and allows trucks to transport CNG
to filling stations. In January 2008, we purchase an additional Compressor
Station in Xianyang, approximately 15 miles from Xi’an.
 
 Our Liquefied Natural Gas (LNG)
Project
 
 During
2007, we made significant progress to move into the processing, distribution and
sale of LNG. We believe that adding LNG to our product offerings will expand our
geographic sales footprint and improve revenues and profitability.
 
 Both CNG
and LNG are natural gas compressed into canisters for convenient transportation,
usually by tank trucks, to locations of distribution or consumption. Typically
CNG is compressed at 200 times atmospheric pressure and can be transported at
normal temperatures to distances of up to 300 kilometers. LNG is compressed at
up to 625 times atmospheric pressure and must be transported at sub-zero degree
temperatures. The cost of compressing and processing LNG is higher than those of
CNG, but LNG can be transported over longer distance and per unit transportation
costs are therefore lower.
 
 In
September 2007 we have started the construction of an LNG processing and
distribution plant in Jingbian, Shaanxi province (the "LNG Project"). We
estimate that the LNG Project will cost approximately $40 million (RMB 309
million). As of March 10, 2008, we have secured such financing and we believe
that the plant can be completed by 2009. We have obtained the required permits
and approvals to build the LNG plant from local government authorities; we are
still required to have approval from the Shaanxi Development and Reform
Commission to begin LNG production at the plant.
 3
  The
approval process for LNG plant construction of this type is lengthy and
arduous—a factor which we believe is a significant barrier to entry to potential
competitors and which better positions our company for long-term growth. This
project also allows us to diversify our business and focus on two
high-growth areas: CNG filling station business and LNG production,
distribution, and sale. We believe that the PRC's clean energy policies will
bolster demand for natural gas in China and we have government support to be a
leader in this area.
 
 Our CNG Market
 
 We
estimate that currently there are  approximately
50,000 vehicles using CNG in the Xi’an area. Currently it is estimated that
there are 5,000 buses and 20,000 taxis using CNG in Xi’an. Each bus uses an
average of 70 cubic meters of CNG per day and taxis use an average of 30 cubic
meters of CNG per day (Source: Xi’an Clean Fuel Vehicles Commission 2005) The
PRC government estimates in its Eleventh Five Year Plan (2006-2010) that current
total demand for CNG as a vehicular fuel in the Xi’an area is approximately
1,070,000 cubic meters per day. Compared to gasoline and diesel, natural gas as
vehicular fuel is cheaper, cleaner and safer. The PRC government’s Clean Energy
Policy encourages the use of CNG as a vehicular fuel.
 
 We
estimate that the average CNG station in Xi’an pumps approximately 15,000 cubic
meters of CNG per day. In the end of 2007, there were 64 CNG filling stations in
Xi’an. We estimate that approximately 877,500 cubic meters of CNG is pumped per
day during the year, a figure well below estimated total demand. As a result, we
believe that there is significant unmet demand for CNG as vehicular fuel in the
Xi’an area that provides us great opportunities for profit and
growth.
 
 We
believe that our vertically integrated operations, proprietary pipeline and
secured supply contracts give us greater access to CNG supplies and customers
and a unique competitive position as a major supplier of CNG vehicular fuel in
the Xi’an area.
 
 Our Pipeline Network
Customers
 
 As of
December 31, 2007, we had approximately 84,500 customers, including residential,
industrial and commercial customers. We are continuing to expand our customer
base in Xi’an's newly developed business and residential areas including Xihan
and Chanliu. Our industrial customers, including the Xiwei Aluminum Company and
the Hungtian Company, use natural gas as a raw material for their production
process. We are not dependent upon any single customer or group of customers for
a material portion of our natural gas sales or revenues.
  Our
pipeline customers purchase natural gas by prepaid cards that can be inserted
into the connection equipment to initiate gas flow.
 
 We are
currently seeking to expand pipeline distribution to the Shangluo and Ankang
areas of Shaanxi province. In September 2005, we submitted applications to local
government authorities for approval to supply these areas on an exclusive basis.
Approval is still pending and can take up to three years. As a result, we cannot
be certain when we will receive the approval, or if approved when we will get
the permit, or whether we will receive such approval at all. However, we believe
that if we receive the government approval, it would give us the exclusive right
to provide natural gas to residential, commercial and industrial customers in
those areas.
 
 Our Subsidiaries and Variable
Interest Entities
 
 On
October 24, 2006, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary,
Shaanxi Jingbian Liquefied Natural Gas Co., Ltd., a limited liability company
organized under the laws of the PRC to administer the production and sales of
LNG.
  4




In 2006,
Xi’an Xilan Natural Gas, through its wholly-owned subsidiary, Shaanxi Jingbian
Liquefied Natural Gas Co., Ltd, received a letter from PetroChina Company
Limited pursuant to which PetroChina agreed in principle, subject to the
negotiation and execution of a final contract, to supply up to 150,000,000 cubic
meters of natural gas annually upon the completion of our LNG
project.
 
 In 2006,
we formed a wholly-owned subsidiary, Xi’an Xilan Natural Gas Equipment Ltd., a
limited liability company organized under the laws of the PRC (“Xilan
Equipment”), to provide equipment to our own CNG filling stations.
 
 Effective
March 8, 2006, we also established a variable interest entity, Xi’an Xilan
Natural Gas by entering into exclusive arrangement with Xi’an Xilan Natural Gas
through our subsidiary Xilan Equipment. Pursuant to the exclusive arrangement,
the Company, through Xilan Equipment, has the ability to substantially influence
Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its
senior executives and approve all matters requiring shareholder approval. As a
result, based on FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities, the Company is able to treat Xi’an Xilan Natural Gas as a variable
interest entity of the Company and consolidate its financial results.
  In May
2007, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary, Xi’an Xilan Auto
Body Shop.
  Suppliers
 
 The
Company purchases all of the natural gas for resale from three vendors,
PetroChina Changqing Oilfield Company, Shaanxi Natural Gas Co. Ltd., and
Jingcheng City Mingshi Coal Bed Methane Exploitage Ltd. The Company has
long-term supply agreements with PetroChina Changqing Oilfield Company and
Jingcheng City Mingshi Coal Bed Methane Exploitage Ltd. with no minimum purchase
requirements. The price of natural gas is strictly controlled by the government
and has remained stable over the past 3 years.
 
 On
October 19, 2006, we received a letter from PetroChina Company Limited pursuant
to which PetroChina agreed in principle to supply up to 150 million cubic meters
of natural gas annually to our subsidiary subject to the negotiation of a final
agreement once our LNG plant is built.
 
 We do not
expect any difficulty in continuing to renew our supply contracts during the
next 12 months.
 
 PRC Natural Gas Industry
Overview
 
 China's
rapidly expanding economy is stretching the limits of its energy resources. The
country is the world’s second largest energy consumer after the United States,
with an annual energy consumption growth rate as high as 12.8% between 2002 and
2006. During the same period, natural gas consumption grows at 13.3% annually.
Natural gas currently accounts for only 3% of the country’s total energy usage,
compared to the world average 23%. Over the next 5 years, usage of natural gas
in China is expected to grow 5% annually and make up 5.1% of the total energy
consumption. As of January 1, 2007, China's domestic reserve of natural gas was
estimated to be 80 trillion cubic feet. (Source: EIA). The country's largest
reserves are located in western and north central China.
 
 In order
to meet the demand for natural gas, the PRC government has encouraged private
companies to invest in and build the necessary transportation, distribution and
sale infrastructure for natural gas. On December 27, 2002, the Ministry of
Construction issued a memorandum stating that regulation of the public utility
industry (including natural gas distribution) should be liberalized. It also
stated that foreign and private investment participation should be encouraged
and welcomed. The memorandum provided a legal framework for private urban
natural gas distribution.
 
 Sources of Energy
 
 Traditionally,
the PRC has relied heavily on coal and crude oil as its primary energy sources.
According to China Statistical Yearbook, in 2005, coal, crude oil,
hydro-electricity and natural gas accounted for 67.7%, 22.7%, 7% and 3%,
respectively, of the PRC's total energy consumption. During the PRC government’s
Eleventh Five Year Plan (2006-2010), the percentage of coal, crude oil and
hydro-electricity would go down to 66.1%, 20.5% and 6.8% respectively, while
that of natural gas would increase to 5.1%. Traditionally, a large portion of
natural gas is consumed as raw material for production of fertilizer. A little
over 10% of natural gas is consumed as fuel. (Source: The Institute of Energy
Economics of Japan).




5




The PRC's
heavy reliance on coal exceeds world consumption rates for the same period,
which was 22.2% (Source: Energy Information Administration, U.S. Department of
Energy). The use of coal, however, causes air pollution and other negative
consequences to the environment. In the PRC, the heavy use of unwashed coal has
led to large emissions of sulfur dioxide and particulate matter. An air
pollution study conducted by the World Health Organization in 1998 showed that
seven of the 10 most polluted cities in the world were located in the PRC. As
such, there have been serious environmental concerns in many countries around
the world, resulting in a global trend to reduce coal usage. In consideration of
such trends, in 1996, the PRC presented a plan to raise the share of natural gas
in the country's energy mix (Source: Ninth Five-Year Plan (1996-2000)). In many
locations where natural gas supply is available, local governments often require
all new residential buildings to install piped gas connections as a condition to
the issuance of the construction or occupancy permits. Before 2000, local
municipal governments controlled gas distribution. Since then, the industry has
been opened to private companies, whose investments have fostered an increase in
the use of natural gas in the PRC. The PRC government has deemed the natural gas
industry a suitable industry for public and private investments.
 
 China's Natural Gas Reserves and Gas
Pipeline Infrastructure
 
 Recognizing
the serious problems caused by the heavy reliance on coal usage, the PRC
government has aggressively moved to reduce coal usage by substituting coal with
other, more environmentally friendly forms of fuel, such as natural gas. The PRC
abounds in rich natural gas reserves, which are distributed among Xinjiang,
Sichuan, and Shaanxi Provinces, as well as Inner Mongolia. According to the
Second Oil and Gas Reserve Assessment published by the Geological and Mineral
Resources Department of China, natural gas reserves in China are estimated to be
80,000 billion cubic meters with 30,000 billion cubic meters onshore and 8,000
billion cubic meters offshore. These reserves are sufficient for approximately
74 to 120 years of consumption of China based on current consumption
levels.
 
 Because
China's largest reserves of natural gas are located in western and north-central
China, in 2002, the Chinese government initiated the construction of a 4,000
kilometer long high pressure pipeline project in order to transport natural gas
from Xinjiang and Shaanxi in the northwestern parts of China to Beijing,
Shanghai, and other cities in the southern and eastern regions of China which
are economically stronger and thus account for more energy consumption. The
pipeline network, which runs across 9 provinces on Chinese mainland, started
operation in December 2004, and has significantly optimized the energy
infrastructure of China. The natural gas pipeline presented great business
opportunity for natural gas distributors at the major junctures, such as Shaanxi
province.
 
 Demand for Natural
Gas
 
 Currently,
natural gas consumption in the PRC accounts for less than 3% of its total energy
consumption. However, driven by environmental pressures, improvements in social
infrastructure fueled by economic growth, and a stable energy supply, it is
anticipated that the use of natural gas will grow very rapidly in the PRC over
the next 20 years.
 
 Intellectual
Property
 
 We have
applied for a service mark on the “Xilan” name, which is used in connection with
all our products and services.
 
 6
 
 Research and
Development
 
 We have
not had and do not anticipate having any material research and development
expenses. The funding for all research and development expenses is expected to
come from operating cash flows.
 
 Governmental and Environmental
Regulation
 
 To date,
we comply with all registrations and requirements for the issuance and
maintenance of all licenses required by the applicable governing authorities in
China. These licenses include:
  ·
                  Qualified
      Urban Fuel Operator Business License authorized by the Shaanxi
      Construction Bureau, the local office of the Ministry of Construction,
      effective from January 2, 2004 to January 2, 2009.(License number
      SHAANRANZHI 166)
 
 ·
                  License
      to Supply, Install Equipment and Maintain Gas Fuel Lines issued by the
      local Gas Fuels for Heating Bureau, an agency of the Ministry of
      Construction and the Xi’an Natural Gas Management Bureau. License number:
      XIRAN 136)
 
 ·
                  Safety
      and Inspection Regulation for Special Equipment Safety Inspection
      Standards for High Pressure Pipeline and Technical Safety Inspection
      Regulations from the Shaanxi Quality and Technology Inspection Bureau for
      compressor stations and pressure storage tank system. (Approval letter
      reference: 2004SHAANGUOCHUHAN033)
 
 ·
                  Annual
      Safety Inspection of Lightning Conductor Equipment approved by the Shaanxi
      Meteorology Bureau. (Certificate number 0005274) The City-gate and
      Compressor Stations are approved by the local office of the Ministry of
      Construction.
 
 ·
                  Business
      license to operate Xilan Equipment effective from February 22, 2006 to
      February 21, 2021.
 
 ·
                  Business
      license to operate Xilan Liquified Natural Gas effective from October 24,
      2006 to October 23, 2036.
 
 ·
                  Business
      license to operate Xi’an Xilan Auto Bodyshop effective as of May 15,
      2007.
 
 ·
                  Business
      license to operate Xi’an Xilan Natural Gas effective as of January 8,
      2000.
  Fuel
service station standards are subject to regulation by the Ministry of
Construction, the General Administration of Quality Supervision, and the Bureau
of Inspection and Quarantine of the People's Republic of China. Upon
satisfactory inspection of service stations, certificates will be
issued.
 
 Various
standards must be met for filling stations, including the handling and storage
of CNG, tanker handling, and compressor operation. The Local Ministry of
Construction and the Gas Field Operation Department of the Municipal
Administration Committee regulate these standards. The Municipal Development and
Reform Commission, which issues certificates for the handling of dangerous
chemical agents, carries out inspections.
 
 Standards
for the design and construction of filling stations must conform to GB50156-2202
and technology standard BJJ84-2000.
 
 Competition
 
 The three
largest state owned energy companies, CNPC (China National Petroleum
Corporation) Group, SINOPEC (China Petroleum and Chemical Corporation Group),
and CNOOC (China National Offshore Oil Corporation Group) are principally
engaged in the upstream supply of energy and are material competitors in the
exploration and transportation of oil and gas. They build much of the country's
high-pressure pipeline infrastructure. Natural gas is distributed to smaller
regional firms that redistribute the gas to the end user, either through lower
pressure pipeline networks, or via tankers in the form of liquid natural gas
(LNG).
  7
  With
respect to our pipeline services, we compete with privately owned companies:
Xinjiang Guanghui LNG Development Corporation Ltd. and Xin'Ao Gas Field Ltd.
Xinjiang Guanghui LNG Development Corporation Ltd. is primarily involved in the
transportation of LNG via tanker truck from natural gas wells to storage
facilities. Xin'Ao Gas Field Ltd. is a publicly owned company traded on the Hong
Kong Exchange that distributes natural gas via pipeline in 13 provinces and
municipalities that have a combined population of 31 million. Neither Xinjiang
Guanghui nor Xin'Ao is approved to supply natural gas to any area in which Xilan
is currently operating.
 
 With
respect to our CNG filling station market, currently, there are approximately 64
CNG filling stations in Xi’an City. Fifteen of these stations are state owned
enterprises. The other 49 stations are privately owned with the majority of
these being single station operators. We believe that we effectively compete
with the stations based upon our organization, experience and financial
resources.
 
 Employees
 
 Currently,
we have 599 employees, including, 7 in management; 57 in administrative; 13 in
operations; 12 in sales; 5 in research and development; 17 in finance and 457
employees at the retail filling stations. We have not experienced any industrial
actions and we have excellent relationships with our employees. We are not a
party to any collective bargaining agreements.
 
 Legal Proceedings
 
 Neither
our company nor any of our subsidiaries is a party to any legal proceedings
that, individually or in the aggregate, are material to our company as a whole.
  Available
Information
 
 We file
quarterly and annual reports, proxy statements and other information with the
SEC. You may read and copy any document that we file at the public reference
facilities of the SEC in Washington, D.C. You may call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Our SEC filings are also
available to the public from the SEC’s website at
http://www.sec.gov.
 
 ITEM 1A. RISK
FACTORS
 
 RISK FACTORS
 
 An investment in our common stock is
speculative and involves a high degree of risk and uncertainty. You should
carefully consider the risks described below, together with the other
information contained in this prospectus, including the consolidated financial
statements and notes thereto of our Company, before deciding to invest in our
common stock. The risks described below are not the only ones facing our
Company. Additional risks not presently known to us or that we presently
consider immaterial may also adversely affect our Company. If any of the
following risks occur, our business, financial condition and results of
operations and the value of our common stock could be materially and adversely
affected.
 
 Risks Related to Our
Business
 
 Prices of natural gas can be subject
to significant fluctuations, which may affect our ability to provide supplies to
our customers.
 
 We obtain
most of our supplies of natural gas from a government owned entity and our
supply contracts are subject to review every six months. However, our costs for
natural gas are strictly controlled by the government and have remained stable
over the past 3 years. Management does not expect any difficulty in continuing
to renew the supply contracts during the next 12 months. The price of natural
gas can fluctuate in response to changing national or international market
forces. Accordingly, price levels of natural gas may rise or fall significantly
over the short to medium term due to political events, OPEC actions and other
factors, industry economics over the long term.
 
 8
  We are dependent on supplies of
natural gas to deliver to our customers.
 
 With the
exception of certain compressed and liquid natural gas supplies, we obtain our
supplies of natural gas from one supplier, which is a government owned entity.
The ability to deliver our product is dependent on a sufficient supply of
natural gas and if we are unable to obtain a sufficient natural gas supply, it
could prevent us making deliveries to our customers. While we have supply
contracts, we do not control the government owned or other suppliers, nor are we
able to control the amount of time and effort they put forth on our behalf. It
is possible that our suppliers will not perform as expected, and that they may
breach or terminate their agreements with us. It is also possible that, after a
semi-annual review of our primary supply contract, they will choose to provide
services to a competitor. Any failure to obtain supplies of natural gas could
prevent us from delivering such to our customers and could have a material
adverse affect on our business and financial condition.
 
 Our business operations are subject
to a high degree of risk and insurance may not be adequate to cover liabilities
resulting from accidents or injuries that may occur.
 
 Our
operations are subject to potential hazards incident to the gathering,
processing, separation and storage of natural gas, such as explosions, product
spills, leaks, emissions and fires. These hazards can cause personal injury and
loss of life, severe damage to and destruction of property and equipment, and
pollution or other environmental damage, and may result in curtailment or
suspension of our operations.
 
 The
occurrence of a significant event for which we are not fully insured or
indemnified, and/or the failure of a party to meet its indemnification
obligations, could materially and adversely affect our operations and financial
condition. Moreover, no assurance can be given that we will be able to maintain
adequate insurance in the future at rates it considers reasonable. To date,
however, we have maintained adequate coverage at reasonable rates and have
experienced no material uninsured losses.
 
 Changes in the regulatory atmosphere
could adversely affect our business.
 
 The
distribution of natural gas and operations of filling stations are highly
regulated requiring registrations for the issuance of licenses required by
various governing authorities in China. In addition, various standards must be
met for filling stations including handling and storage of natural gas, tanker
handling, and compressor operation which are regulated. The costs of complying
with regulations in the future may harm our business. Furthermore, future
changes in environmental laws and regulations could result in stricter standards
and enforcement, larger fines and liability, and increased capital expenditures
and operating costs, any of which could have a material adverse effect on our
financial condition or results of operations.
  We depend on our senior management's
experience and knowledge of the industry and would be adversely affected by the
loss of any of our senior managers.
 
 We are
dependent on the continued efforts of our senior management team. We do not
currently have employment contracts with our senior executives. If, for any
reason, our senior executives do not continue to be active in management, our
business, or the financial condition of our Company, our results of operations
could be adversely affected. In addition, we do not maintain life insurance on
our senior executives and other key employees.
 
 9
  We may need to raise capital to fund
our operations, and our failure to obtain funding when needed may force us to
delay, reduce or eliminate acquisitions and business development
plans.
 
 If in the
future, we are not capable of generating sufficient revenues from operations and
our capital resources are insufficient to meet future requirements, we may have
to raise funds to continue the development, commercialization and marketing of
our business.
 
 We cannot
be certain that funding will be available. To the extent that we raise
additional funds by issuing equity securities, our stockholders may experience
significant dilution. Any debt financing, if available, may involve restrictive
covenants that impact our ability to conduct our business. If we are unable to
raise additional capital if required or on acceptable terms, we may have to
delay, scale back, discontinue our planned acquisitions or business development
plans or obtain funds by entering into agreements on unattractive
terms.
 
 Risks Related to the People’s
Republic of China
 
 China’s economic policies could
affect our business.
 
 Substantially
all of our assets are located in China and substantially all of our revenue is
derived from our operations in China. Accordingly, our results of operations and
prospects are subject, to a significant extent, to the economic, political and
legal developments in China.
 
 While
China's economy has experienced a significant growth in the past twenty years,
growth has been irregular, both geographically and among various sectors of the
economy. The Chinese government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall economy of China, but may also have a negative effect on us.
For example, our operating results and financial condition may be adversely
affected by the government control over capital investments or changes in tax
regulations.
 
 The
economy of China has been transitioning from a planned economy to a more
market-oriented economy. In recent years the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform and
the reduction of state ownership of productive assets and the establishment of
corporate governance in business enterprises; however, a substantial portion of
productive assets in China are still owned by the Chinese government. In
addition, the Chinese government continues to play a significant role in
regulating industry development by imposing industrial policies. It also
exercises significant control over China's economic growth through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies.
 
 Capital outflow policies in The
People's Republic of China may hamper our ability to remit income to the United
States.
 
 The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency outside of the PRC.
We receive substantially all of our revenues in Renminbi. Under our current
structure, our income is primarily derived from payments from Xi’an Xilan
Natural Gas Co. Shortages in the availability of foreign currency may restrict
the ability of Xi’an Xilan Natural Gas to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy its foreign currency
denominated obligations. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest
payments and expenditures from trade-related transactions, can be made in
foreign currencies without prior approval from the PRC State Administration of
Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required in those cases in
which Renminbi is to be converted into foreign currency and remitted out of the
PRC to pay capital expenses, such as the repayment of bank loans denominated in
foreign currencies. The PRC government also may at its discretion restrict
access in the future to foreign currencies for current account transactions. If
the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to pay
dividends in foreign currencies to our shareholders.
  10
  Although we do not import goods into
or export goods out of The People's Republic of China, fluctuation of the RMB
may indirectly affect our financial condition by affecting the volume of
cross-border money flow.
 
 The value
of the RMB fluctuates and is subject to changes in the People's Republic of
China political and economic conditions. Since July 2005, the conversion of RMB
into foreign currencies, including USD, has been based on rates set by the
People's Bank of China which are set based upon the interbank foreign exchange
market rates and current exchange rates of a basket of currencies on the world
financial markets. As of March 13, 2008, the exchange rate between the RMB and
the United States dollar was 7.095 RMB to every one USD.
 
 We may face obstacles from the
communist system in The People's Republic of China.
 
 Foreign
companies conducting operations in The People's Republic of China face
significant political, economic and legal risks. The Communist regime in The
People's Republic of China, including a stifling bureaucracy may hinder Western
investment.
 
 We may have difficulty establishing
adequate management, legal and financial controls in The People's Republic of
China.
 
 The
People's Republic of China historically has been deficient in Western style
management and financial reporting concepts and practices, as well as in modern
banking, computer and other control systems. We may have difficulty in hiring
and retaining a sufficient number of qualified employees to work in The People's
Republic of China. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.
 
 Because our assets and operations are
located in China, you may have difficulty enforcing any civil liabilities
against us under the securities and other laws of the United States or any
state.
 
 We are a
holding company, and all of our assets are located in the Republic of China. In
addition, our directors and officers are non-residents of the United States, and
all or a substantial portion of the assets of these non-residents are located
outside the United States. As a result, it may be difficult for investors to
effect service of process within the United States upon these non-residents, or
to enforce against them judgments obtained in United States courts, including
judgments based upon the civil liability provisions of the securities laws of
the United States or any state.
 
 There is
uncertainty as to whether courts of the Republic of China would
enforce:
 ·
                  Judgments
      of United States courts obtained against us or these non-residents based
      on the civil liability provisions of the securities laws of the United
      States or any state; or
 
 ·
                  In
      original actions brought in the Republic of China, liabilities against us
      or non-residents predicated upon the securities laws of the United States
      or any state. Enforcement of a foreign judgment in the Republic of China
      also may be limited or otherwise affected by applicable bankruptcy,
      insolvency, liquidation, arrangement, moratorium or similar laws relating
      to or affecting creditors' rights generally and will be subject to a
      statutory limitation of time within which proceedings may be
      brought.
  11
  The PRC legal system embodies
uncertainties, which could limit law enforcement
availability.
 
 The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, decided legal cases have little precedence. In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation over the past 27
years has significantly enhanced the protections afforded to various forms of
foreign investment in China. Each of our PRC operating subsidiaries and
affiliates is subject to PRC laws and regulations. However, these laws and
regulations change frequently and the interpretation and enforcement involve
uncertainties. For instance, we may have to resort to administrative and court
proceedings to enforce the legal protection that we are entitled to by law or
contract. However, since PRC administrative and court authorities have
significant discretion in interpreting statutory and contractual terms, it may
be difficult to evaluate the outcome of administrative court proceedings and the
level of law enforcement that we would receive in more developed legal systems.
Such uncertainties, including the inability to enforce our contracts, could
affect our business and operation. In addition, intellectual property rights and
confidentiality protections in China may not be as effective as in the United
States or other countries. Accordingly, we cannot predict the effect of future
developments in the PRC legal system, particularly with regard to the industries
in which we operate, including the promulgation of new laws. This may include
changes to existing laws or the interpretation or enforcement thereof, or the
preemption of local regulations by national laws. These uncertainties could
limit the availability of law enforcement, including our ability to enforce our
agreements with the government entities and other foreign
investors.
  The admission of China into the World
Trade Organization could lead to increased foreign
competition.
 
 Provincial
and central government authorities regulate the natural gas industry for safety
and ensure that all areas receive natural gas service. However, as a result of
China becoming a member of the World Trade Organization (WTO), restrictions on
foreign investment in the industry may be reduced. With China's need to meet
growth in natural gas demand and the WTO's requirement for a reduction of
restrictions on foreign investment as a condition of membership, such events
could lead to increased competition in the natural gas industry.
 
 PRC laws and regulations governing
our businesses and the validity of certain of our contractual arrangements are
uncertain. If we are found to be in violation, we could be subject to sanctions.
In addition, changes in such PRC laws and regulations may materially and
adversely affect our business.
  There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our variable interest entity, XXNG, and its shareholders. We
are considered a foreign person or foreign invested enterprise under PRC law. As
a result, we are subject to PRC law limitations on foreign ownership of Chinese
companies. These laws and regulations are relatively new and may be subject to
change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively.
  The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
  12
  We may be adversely affected by
complexity, uncertainties and changes in PRC regulation of natural gas business
and companies, including limitations on our ability to own key assets.
  The PRC
government regulates the natural gas industry including foreign ownership of,
and the licensing and permit requirements pertaining to, companies in the
natural gas industry. These laws and regulations are relatively new and
evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be a violation of
applicable laws and regulations. Issues, risks and uncertainties relating to PRC
government regulation of the bio-pharmaceutical industry include the
following:
 ·
                  we
      only have contractual control over XXNG. We do not own it due to the
      restriction of foreign investment in Chinese businesses;
    and
 
 ·
                  uncertainties
      relating to the regulation of the natural gas business in China, including
      evolving licensing practices, means that permits, licenses or operations
      at our company may be subject to challenge. This may disrupt our business,
      or subject us to sanctions, requirements to increase capital or other
      conditions or enforcement, or compromise enforceability of related
      contractual arrangements, or have other harmful effects on
    us.
  The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, natural gas businesses in China,
including our business.
  In order to comply with PRC laws
limiting foreign ownership of Chinese companies, we conduct our natural gas
business through Xi’an Xilan Natural Gas by means of contractual arrangements.
If the government of the People’s Republic of China determines that these
contractual arrangements do not comply with applicable regulations, our business
could be adversely affected.
 
 The
government of the People’s Republic of China restricts foreign investment in
natural gas businesses in China. Accordingly, we operate our business in China
through Xi’an Xilan Natural Gas. Xi’an Xilan Natural Gas holds the licenses and
approvals necessary to operate our natural gas business in China. We have
contractual arrangements with Xi’an Xilan Natural Gas and its shareholders that
allow us to substantially control Xi’an Xilan Natural Gas. We cannot assure you,
however, that we will be able to enforce these contracts.
 
 Although
we believe we comply with current regulations of the People’s Republic of China,
we cannot assure you that the government of the People’s Republic of China would
agree that these operating arrangements comply with the People’s Republic of
China’s licensing, registration or other regulatory requirements, with existing
policies or with requirements or policies that may be adopted in the future. If
the government of the People’s Republic of China determines that we do not
comply with applicable law, it could revoke our business and operating licenses,
require us to discontinue or restrict our operations, restrict our right to
collect revenues, require us to restructure our operations, impose additional
conditions or requirements with which we may not be able to comply, impose
restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us that could be harmful to our
business.
 
 Our contractual arrangements with
Xi’an Xilan Natural Gas and its shareholders may not be as effective in
providing control over these entities as direct ownership.
  Since the
law of the People’s Republic of China limits foreign equity ownership in natural
gas companies in China, we operate our business through Xi’an Xilan Natural Gas.
We have no equity ownership interest in XXNG and rely on contractual
arrangements to control and operate such businesses. These contractual
arrangements may not be effective in providing control over Xi’an Xilan Natural
Gas as direct ownership. For example, Xi’an Xilan Natural Gas could fail to take
actions required for our business despite its contractual obligation to do so.
If Xi’an Xilan Natural Gas fails to perform under its agreements with us, we may
have to incur substantial costs and resources to enforce such arrangements and
may have to rely on legal remedies under the law of the People’s Republic of
China, which may not be effective. In addition, we cannot assure you that Xi’an
Xilan Natural Gas’ shareholders would always act in our best interests.
 
 13
  Risks Related to Corporate and Stock
Matters
 
 Our largest stockholder has
significant influence over our management and affairs and could exercise this
influence against your best interests.
 
 At March
13, 2008, Mr. Qinan Ji, our founder, Chairman of the Board and Chief Executive
Officer and our largest stockholder, beneficially owned approximately 20.3% of
our outstanding shares of common stock. As a result, pursuant to our Bylaws and
applicable laws and regulations, our controlling shareholder and our other
executive officers and directors are able to exercise significant influence over
our Company, including, but not limited to, any stockholder approvals for the
election of our directors and, indirectly, the selection of our senior
management, the amount of dividend payments, if any, our annual budget,
increases or decreases in our share capital, new securities issuance, mergers
and acquisitions and any amendments to our Bylaws. Furthermore, this
concentration of ownership may delay or prevent a change of control or
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us, which could decrease the market price of our
shares. The limited prior public market and trading market may cause volatility
in the market price of our common stock.
 
 The limited trading volume in our
stock may cause volatility in the market price of our common
stock.
 
 Our
common stock is currently traded on a limited basis on the OTCBB under the
symbol, "CHNG.OB" The quotation of our common stock on the OTCBB does not assure
that a meaningful, consistent and liquid trading market currently exists, and in
recent years, such market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of many smaller companies like
us. Our common stock is thus subject to volatility. In the absence of an active
trading market:
  ·
                  investors
      may have difficulty buying and selling or obtaining market
      quotations;
 
 ·
                  market
      visibility for our common stock may be limited;
  and
  ·
                  a
      lack of visibility for our common stock may have a depressive effect on
      the market for our common
stock.
  Trading of our stock may be
restricted by the SEC's penny stock regulations which may limit a stockholder's
ability to buy and sell our stock if our stock trades below $5.00 per
share.
 
 The SEC
has adopted Rule 15g-9 which generally defines "penny stock" to be any equity
security that has a market price (as defined) less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions. Our
securities are covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other than
established customers and "accredited investors". The term "accredited investor"
refers generally to institutions with assets in excess of $5,000,000 or
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
 
 14
  NASD sales practice requirements may
also limit a stockholder's ability to buy and sell our
stock.
 
 Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document
before effecting any transaction in a penny stock for the investor's
account.
 
 Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii)reasonably determine, based
on that information, that transactions in penny stocks are suitable for the
investor and that the investor has sufficient knowledge and experience as to be
reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
 
 Shares eligible for future sale may
adversely affect the market price of our Common stock, as the future sale of a
substantial amount of our restricted stock in the public marketplace could
reduce the price of our common stock.
 
 From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act ("Rule
144"), subject to certain limitations. In general, pursuant to Rule 144, a
stockholder (or stockholders whose shares are aggregated) who has satisfied a
one-year holding period may, under certain circumstances, sell within any
three-month period a number of securities which does not exceed the greater of
1% of the then outstanding shares of common stock or the average weekly trading
volume of the class during the four calendar weeks prior to such sale. Rule 144
also permits, under certain circumstances, the sale of securities, without any
limitations, by a non-affiliate of our company that has satisfied a two-year
holding period. Any substantial sale of common stock pursuant to Rule 144 or
pursuant to any resale prospectus may have an adverse effect on the market price
of our securities.
  If we or
our independent registered public accountants cannot attest our adequacy in the
internal control measures over our financial reporting, as required by Section
404 of the U.S. Sarbanes-Oxley Act, for the fiscal year ending December 31,
2007, we may be adversely affected.
  As a
public company, we are subject to report our internal control structure and
procedures for financial reporting in our annual reports on Form 10-KSB, as a
requirement of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 by the U.S.
Securities and Exchange Commission (the "SEC"). The report must contain an
assessment by management about the effectiveness of our internal controls over
financial reporting. Moreover, the independent registered public accountants of
our Company must attest to and report on management's assessment of the same.
Even if our management attests to our internal control measures to be effective,
our independent registered public accountants may not be satisfied with our
internal control structure and procedures. We cannot guarantee the outcome of
the report and it could result in an adverse impact on us in the financial
marketplace due to the loss of investor confidence in the reliability of our
financial statements, which could negative influence to our stock market
price.
 
 15
  Stockholders should have no
expectation of any dividends.
 
 The
holders of our common stock are entitled to receive dividends when declared by
the Board of Directors out of funds available. To date, we have not declared nor
paid any cash dividends. The Board of Directors does not intend to declare any
dividends in the near future, but instead intends to retain all earnings, if
any, for use in our business operations.
  I TEM 2. DESCRIPTION OF
PROPERTY
  Our
principal executive offices are located at 19th Floor, Building B, Van
Metropolis, No. 35 Tangyan Road, Hi-Tech Zone, Xi’an, 710065, Shaanxi Province,
People's Republic of China. Our property consists of approximately 818 square
meters, which is rented on an annual basis for $88,225.
  We have
additional properties located in Lantian County, the districts of Baqiao,
Lintong and Gaoxin in the city of Xi’an, and the cities of Jiyuan, Kaifung and
Pindingshan, in Henan province. We own a 120km high-pressure underground
pipeline network and two Citygate stations (terminals) with accompanying
buildings and equipment. We lease the main office building where we are
headquartered and all of our CNG filling station sites. As of December 31, 2007,
we own and operate 16 CNG filling stations in Shaanxi Province and 8 CNG filling
stations in Henan Province.
  In
February, 2006 we formed our 100%-owned subsidiary, Xilan Equipment, which
maintains an office in the No. 3 Xianmen St., Lantian County, Xi’an, Shaanxi
Province, China. The office consists of approximately 1001 sq. feet, with annual
rental payment of $1,106.
  On
October 24, 2006, we formed our 100% owned subsidiary, Xilan Liquified Natural
Gas Co., Ltd., which maintains an office in the Tongwang Road, Zhangjiapan Town,
Jingbian County, China. The office consists of approximately 3,921 sq. feet,
with annual rental payment of $5,214.
  As of
December 31, 2007, the Company owned 11 trucks and 23 tankers that the Company
used to transport natural gas.
 
 Insurance
  The
Company carries auto insurance on its vehicles and maintains workers
compensation insurance for its filling station workers. The Company believes
this insurance is adequate for its needs. The Company does not carry any product
liability insurance or property insurance on its office buildings or other
property.
  We
believe that current facilities are adequate for our current and immediately
foreseeable operating needs. We do not have any policies regarding investments
in real estate, securities or other forms of property.
 
 ITEM 3. LEGAL
PROCEEDINGS
  From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. 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. We are currently not aware
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse affect on our business, financial
condition or operating results.
  ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITYHOLDERS
  None .
  16


PART II
  ITEM 5. MARKET FOR REGISTRANT'S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
  On March
17, 2004, our common stock was approved for listing on the Over-the-Counter
Bulletin Board under the symbol "CVNI" and on December 19, 2005 our symbol was
changed to "CHNG" and our fiscal year end was changed to December 31. The
following table contains information about the range of high and low bid prices
for our common stock for each full quarterly period for 2007 and 2006 based upon
reports of transactions on the OTC Bulletin Board. The source of this
information is the OTC Bulletin Board. The quotations represent inter-dealer
prices without retail markup, markdown or commission, and may not necessarily
represent actual transactions.
 
 COMMON
      STOCK
                MARKETPRICEHIGH
              
              LOWFISCAL
      YEAR ENDED DECEMBER 31, 2007:Fourth
      Quarter
              
              $
              14.95
              
              $
              6.50Third
      Quarter
              
              $
              8.34
              
              $
              4.39Second
      Quarter
              
              $
              5.06
              
              $
              1.85First
      Quarter
              
              $
              3.16
              
              $
              1.65FISCAL
      YEAR ENDED DECEMBER 31, 2006:Fourth
      Quarter
              
              $
              3.46
              
              $
              2.51Third
      Quarter
              
              $
              3.24
              
              $
              2.60Second
      Quarter
              
              $
              4.45
              
              $
              2.05First
      Quarter
              
              $
              5.67
              
              $
              3.00
  As of
March13, 2008, there were approximately 43 holders of record of our common
stock.
  Dividends
  There are
no restrictions in our articles of incorporation or bylaws that prevent us from
declaring dividends. The Delaware General Corporation Law, however, does
prohibit us from declaring dividends where, after giving effect to the
distribution of the dividend:
  1. We
would not be able to pay our debts as they become due in the usual course of
business; or
 2. Our
total assets would be less than the sum of our total liabilities plus the amount
that would be needed to satisfy the rights of shareholders who have preferential
rights superior to those receiving the distribution.
  We have
never paid any cash dividends on our common stock. We currently anticipate that
we will retain any future earnings for use in our business. Consequently, we do
not anticipate paying any cash dividends in the foreseeable future.
  The
payment of dividends in the future will depend upon our results of operations,
as well as our short-term and long-term cash availability, working capital,
working capital needs and other factors, as determined by our board of
directors. Currently, except as may be provided by applicable laws, there are no
contractual or other restrictions on our ability to pay dividends if we were to
decide to declare and pay them.
 
 Securities Authorized for Issuance
under Equity Compensation Plan
  There has
been no common stock authorized for issuance with respect to any equity
compensation plan as of the fiscal year ended December 31, 2007.
 
 Recent Sales of Unregistered
Securities.
  The
following securities were issued within fiscal year 2007 and the subsequent
interim period and were not registered under the Securities Act of
1933.
  17




On
January 29, 2008, the Company issued and sold RMB145,000,000 in principal amount
of 5.00% Guaranteed Senior Notes due 2014 and issued seven-year warrants
exercisable for up to 2,900,000 shares of the Company’s common stock at the
initial exercise price of $7.3652 pursuant to a Securities Purchase Agreement
with Abax Lotus Ltd. On March 10, 2008, the Company issued the same investor
additional Senior Notes in aggregate principal amount of RMB145,000,000
(approximately $20,000,000) and granted the Investor an option to purchase up to
RMB 73,000,000 (approximately $10,000,000) in principal amount of its Senior
Notes.
 
 On August
2, 2007, the Company issued 4,615,385 shares of common stock at the purchase
price of $3.25 per share and warrants to purchase up to 692,308 shares of common
stock at the per share exercise price of $7.79 per share to certain investors
pursuant to a Securities Purchase Agreement the Company entered into on the same
date with the investors named therein.
 
 ITEM 6.  SELECTED FINANCIAL
DATA.
 
 Not
required for smaller reporting companies.
 
 ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
  The information in this report
contains forward-looking statements. All statements other than statements of
historical fact made in this report are forward looking. In particular, the
statements herein regarding industry prospects and future results of operations
or financial position are forward-looking statements. These forward-looking
statements can be identified by the use of words such as "believes,"
"estimates," "could," "possibly," "probably," anticipates," "projects,"
"expects," "may," "will," or "should" or other variations or similar words. No
assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. Forward-looking statements reflect
management's current expectations and are inherently uncertain. Our actual
results may differ significantly from management's
expectations.
 
 The
following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of our management.
 
 Overview
 
 We were
incorporated in the state of Delaware on March 31, 1999, as Bullet Environmental
Systems, Inc. On May 25, 2000, we changed our name to Liquidpure Corp. and on
February 14, 2002, we changed our name to Coventure International Inc.
 
 On
December 6, 2005, we issued an aggregate of 4 million shares to all of the
registered shareholders of Xi’an Xilan Natural Gas Co., Ltd., and entered into
exclusive arrangements with Xi’an Xilan Natural Gas Co., Ltd. and these
shareholders that give us the ability to substantially influence Xi’an Xilan
Natural Gas’ daily operations and financial affairs, appoint its senior
executives and approve all matters requiring shareholder approval. On December
19, 2005, we changed our name to China Natural Gas, Inc.
 
 On
February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., (“Xilan
Equipment”) as a wholly owned foreign enterprise (WOFE). We then, through Xilan
Equipment, entered into exclusive arrangements with Xi’an Xilan Natural Gas Co.,
Ltd. and these shareholders that give us the ability to substantially influence
Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its
senior executives and approve all matters requiring shareholder approval. We
memorialized these arrangements on August 17, 2007. As a result, the Company
consolidates the financial results of Xi’an Xilan Natural Gas as variable
interest entity pursuant to FASB Interpretation No. 46R, “Consolidation of
Variable Interest Entities.”
 
 We
transport, distribute and sell natural gas to commercial, industrial and
residential customers in the Xi’an area, including Lantian County and the
districts of Lintong and Baqiao, in the Shaanxi Province of The Peoples'
Republic of China ("China" or the "PRC") through a network of high pressure
pipelines. We also distribute and sell CNG as vehicular fuel through a network
of approximately 120 km of CNG filling stations in Shaanxi and Henan
Provinces.  - During the year of 2007, the pipeline’s average daily
throughput capacity is 20,565 cubic meters, comparing to approximately 18,048
cubic meters in the year of 2006. As of December 31, 2007, we own and operate 16
CNG fueling stations in Shaanxi Province and 8 CNG fueling stations in Henan
Province. During the year of 2007, we had sold compressed natural gas of
84,744,620 cubic meters through our fueling stations, comparing to
39,279,689 cubic meters in the year of 2006.
 
 18
  We
operate three primary business lines:
 ·
                Distribution
      and sale of compressed natural gas (CNG) through Company-owned CNG filling
      stations for hybrid (natural gas/gasoline) powered vehicles (24 stations
      as of December 31, 2007);
 
 ·
                Distribution
      and sale of piped natural gas to residential, commercial and industrial
      customers through Company-owned pipelines. The Company distributes and
      sells natural gas to approximately 84,500 homes and businesses;
      and
 
 ·
                Conversion
      of gasoline-fueled vehicles to hybrid (natural gas/gasoline) powered
      vehicles at our Auto Conversion
Division.
  We buy
all of the natural gas that we sell and distribute to our customers. We do not
mine or produce any of our own natural gas and have no plans to do so during the
next 12 months. The natural gas that we buy is available in two forms: (i) piped
natural gas; and (ii) CNG.
 
 On
October 24, 2006, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary,
Shaanxi Jingbian Liquified Natural Gas Co., Ltd., for the purpose of
constructing a liquefied natural gas facility to be located in Jingbian, Shaanxi
Province. We plan to invest approximately $40 million to construct this
facility, and we have secured such funding for this project through security
purchase agreement with Abax Lotus Ltd. The LNG plant is under construction and
is expected to start operation in 2009. Once completed, the plant has LNG
processing capacity of 500,000 cubic meters per day, or approximately 150
million cubic meters on an annual basis.
  Critical Accounting Policies
 
 Use of
Estimates. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
 
 Accounts and Other
Receivables. Accounts
and other receivables are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as needed. The
Company allowance for uncollectible accounts is not significant.
 
 The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Reserves are recorded primarily on a specific
identification basis. The Company’s management determined that all receivables
are good and there is no need for a bad debt reserve as of December 31,
2007.
 
 As needed
for normal business purpose, the Company advances predetermined amounts based
upon internal Company policy to certain employees and internal units to ensure
certain transactions to be performed in timely manner. The Company has full
oversight and control over the advanced accounts. Therefore, the allowance for
the uncollectible accounts is nil.
 
 Inventory. Inventory is stated at the lower of cost, as determined on a first-in, first-out
basis, or market. Management compares the cost of inventories with the market
value, and allowance is made for writing down the inventories to their market
value, if lower. Inventory consists of material used in the installation of
pipelines and material used in repairing and modifying of vehicles. Inventory
also consists of natural gas and gasoline.
  19
  Revenue
Recognition. The
Company's revenue recognition policies are in compliance with Staff Accounting
Bulletin (SAB) 104. Revenue is recognized when services are rendered to
customers, when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue. Revenue from gas sales is recognized when gas is pumped through
pipelines to the end users. Revenue from installation of pipelines is recorded
when the contract is completed and accepted by the customers. The installation
contracts are usually completed within one to two months time.
 
 Unearned
Revenue. Unearned
revenue represents prepayments by customers for gas purchases and advance
payments on installation of pipeline contracts. The Company records such
prepayment as unearned revenue when the payments are received.
 
 CONSOLIDATED RESULTS OF
OPERATIONS
 
 Comparing Fiscal Years Ended December
31, 2007 and 2006:
 
 The
following table presents certain consolidated statement of operations
information. Financial information is presented for the 12-month period ending
December 31, 2007 and December 31, 2006.
 2007
                    
                    2006Revenues
                    
                    $
                    35,392,053
                    
                    $
                    18,828,790Cost
      of Revenues
                    
                    $
                    18,025,075
                    
                    $
                    9,718,000Operating
      Expenses
                    
                    $
                    6,288,929
                    
                    $
                    2,596,199Income
      from Operations
                    
                    $
                    11,078,049
                    
                    $
                    6,514,591Net
      Income
                    
                    $
                    9,116,070
                    
                    $
                    5,451,095




Revenue.
We generated approximately 80.7% of our revenues in 2007 from the sale of
natural gas and approximately 17.4% of our revenues from installation fees
charged to connect end-user customers to our natural gas distribution system.
Sales of natural gas at the Company-owned filling stations accounted for
approximately 76.5% of our total revenues in 2007, or approximately $27,060,537
which was the largest contribution of our three business lines. Sales of natural
gas to end-user customers connected to our pipeline distribution system
accounted for approximately 21.4% of our total revenues in 2007, or
approximately $7,576,286 including both natural gas sales and installation fees.
Sales of natural gas to third party-owned filling stations accounted for
approximately 0.2% of our total revenues in 2007, or approximately $79,200.The
Company expects natural gas revenues to increase on both an actual basis and as
a percentage of revenue. In 2008, the Company expects to add up to 15,600
pipeline customers and construct an additional 18 filling stations, which the
Company estimates will increase sales of natural gas by 69 million cubic
meters.
  We had
total revenues of $35,392,053 for the twelve months ended December 31, 2007, an
increase of $16,563,263 or approximately 87.97%, compared to $18,828,790 for the
twelve months ended on December 31, 2006. The increase in revenues was due
primarily to the addition of 13 new company-owned filling stations during 2007
as well as an increase in the number of residential, commercial and industrial
pipeline customers from approximately 75,000 in 2006 to approximately 84,500 in
2007.
  New
pipeline customers pay approximately 60% of the installation costs to connect to
our pipeline system up front and the balance is payable as part of their monthly
natural gas bill. During 2007, our installation revenues increased approximately
39.06% over the previous year and our sales of natural gas increased
approximately 106.21% over the previous year. Four customers accounted for
approximately 13.6%, 11.8%, 8.8% and 8.4% of the Company's installation revenue
for the year ended December 31, 2007.
  During
the year of 2007, we had sold compressed natural gas of  84,744,620 cubic
meters, compared to 39,279,689 cubic meters in the same period of 2006, through
Company-owned fueling stations. In terms of average station sales value and
volume, in the year of 2007, we had sold approximately $1,500,000 and
4,760,000 cubic meters of compressed natural gas per station, compared to
approximately $1,500,000 and 4,900,000 cubic meters in the same period of
2006. The reason for the higher unit selling price in 2007 than in 2006 is
mainly due to the appreciation of Renminbi ("RMB") compared to US dollar in the
period of 2007. The unit
selling price in RMB was decreased slightly in 2007.  The decrease in
average unit selling price in 2007 resulted from the Company's increased
sales volume in 2007 to bus companies and prepaid VIP members at a lower
discounted price than the regular retail price charged to taxi drivers.As for our natural gas pipeline business, in the year of 2007, we had
sold 7,403,314 cubic meters, compared to 6,497,186 cubic meters in the same
period of 2006 through our pipeline network.
  Cost of
Sales. Our cost of sales consists of both the cost of gas sales and the cost of
installation. Cost of gas sales consists primarily of the cost that we pay for
natural gas purchased from our supplier, together with transportation costs and
depreciation of equipment. Cost of connection includes certain installation
costs related to connecting customers to our pipeline system that are generally
expensed when incurred.
  20
  Cost of
sales in 2007 was $18,025,075, an increase of $8,307,075 or approximately 85.48%
from 2006. Cost of gas sales increased by approximately 93.64% to $14,838,997 in
2007, as compared with $7,663,060 in 2006. The increase in our cost of sales was
primarily related to a material increase in the amount of gas sold and the price
that we paid to our suppliers in 2007. The opening cost per station during the
twelve months ended December 31, 2007 is approximately $900,000, compared to
approximately $800,000 in the year of 2006. In 2007, the transportation cost per
million cubic meters is approximately $5,800. In addition, our installation
costs increased in 2007 by approximately 55.04% to $3,186,078, as compared with
$2,054,940 in 2006 as a result of the addition of new pipeline customers. The
price that we paid for gas in 2007 remained relatively constant compared to
2006. We had sold natural gas of 92,147,935 cubic meters in 2007, compared to
45,776,875 cubic meters in 2006.
  We
purchase all of our natural gas for resale from three vendors, PetroChina
Changqing Oilfield Company, Shaanxi Natural Gas Co Ltd, and Jingcheng city
Mingshi Coal Bed Methane Exploitage Ltd. As the government owns all land in
China, the government controls and owns all the natural resources coming from
the ground, thus the government controls the price and flow of the natural gas.
Due to the soaring crude oil price and ever increasing demand for energy
consumption, the National Development and Reform Commission, which regulates the
energy price in China, adjusted the upstream natural gas price for industrial
users and vehicular CNG distributors upward by ¥ 0.4/CM,
or 35% in November, 2007. The retail price for vehicular CNG was adjusted upward
at a ratio of 0.75:1 to the retail price of #90 gasoline at November, 2007. Many
large cities see dramatic increase in retail vehicular CNG price, for example
66% in Shanghai and 21% (taxi) and 38% (bus) in Tianjin. However, natural gas
price for residential customers is not adjusted to keep the rate at an
affordable level. As China shifts from a centrally planned economy to a market
economy, we believe that it is in the government's best interest to keep prices
stable, and maintain a stable flow of supply. The government has also undertaken
programs to promote the economy growth of the region in which we are located.
Therefore, we expect supply and price to continue to be stable in the
future.
 
 Gross
profit. The Company earned a gross profit of $17,366,978 for the twelve months
ended December 31, 2007, an increase of $8,256,188 or approximately 90.62%,
compared to $9,110,790 for the twelve months ended December 31, 2006. The
increase in gross profit is due to a material increase in gas sales and
installation revenues in 2007, partially offset by an increase in cost of
sales.
  Gross
margin. Gross margin, as a percentage of revenues, increased to approximately
49.07% for the twelve months ended December 31, 2007, from approximately 48% for
the twelve months ended December 31, 2006. The increase in gross margin is
primarily attributable to the significant increase in revenues generated from
our Company-owned filling stations.
 
 Operating
expenses. The Company incurred operating expenses of $6,288,929 for the twelve
months ended December 31, 2007, an increase of $3,692,730 or approximately
142.24%, compared to $2,596,199 for the twelve months ended December 31, 2006.
Our operating expenses increased primarily as a result of expenses related to
the construction, acquisition, and operation of 13 new filling stations in 2007,
as well as continuing expenses related to the identification of possible
locations for additional filling stations and the governmental licensing and
approval process, as well as the evaluation of existing natural gas filling
stations as potential acquisition targets. In addition, sales and marketing
costs increased in 2007 as we increased our efforts to obtain new residential
and commercial customers and attract customers to our filling stations. General
and administrative expenses increased from $1,287,735 in 2006 to $2,837,768 in
2007 due to an increase in personnel as a result of our growth.
  For the
year ended December 31, 2007, two suppliers accounted for 29.66% and 11.36% of
the total equipment we purchased for construction activities. We believe that as
a result of our relationships within the construction industry and the
construction equipment vendor community, and the availability of other vendors
to supply the construction equipment and materials, the loss of any one of these
two vendors would not have a material adverse effect on our
operations.
  Net
Income. Net income increased to $9,116,070 for the twelve months ended December
31, 2007, an increase of $3,664,975, from $5,451,095 for the twelve months ended
December 31, 2006. Increase in net income is attributed to our material increase
in revenues, partially offset by a higher increase in cost of sales and
operating expenses in 2007. The company expects revenue from our CNG filling
stations to increase on both an actual basis and as a percentage of revenue. In
2008, the Company expects to add up to 15,600 pipeline customers and construct
or acquire an additional 18 filling stations, which the Company estimates will
increase sales of natural gas by 69 million cubic meters. In addition, the
Company began selling gasoline in late 2007 and expects gasoline sales will be a
minor portion of our entire business.
  21
  Income
tax was $1,913,923 for the twelve months ended December 31, 2007, as compared to
$1,025,584 for the twelve months ended December 31, 2006. The increase in income
tax was attributed to the growth of installation fees and the sale of
natural gas.
  Liquidity and Capital
Resources
  As of
December 31, 2007 the Company had $13,291,729 of cash and cash equivalents on
hand compared to $5,294,213 of cash and cash equivalents as of December 31,
2006.
  The
primary sources of cash in 2007 were income from operations and financing
activities. The Company had net cash flows provided by operations of $10,476,441
for the twelve months ended December 31, 2007 as compared to net cash provided
by operations of $4,385,524 in the corresponding period last year. The increase
in net cash flows from operations in 2007 as compared to 2006 was mainly due to
the increase in net income and a decrease in accounts receivable and advances
during the twelve months ended December 31, 2007 offset by a decrease in other
payables and tax payable.
  On August
2, 2007, we completed a private placement offering, which generated net proceeds
of $13,823,467, which were used for the construction of natural gas filling
stations, the purchase of raw materials and working capital.
  Cash
outflows for investing activities increased from $9,738,469 in 2006 to
$16,885,340 in 2007 as a result of advance payments made to equipment suppliers
for investments necessary to construct and acquire filling stations and for
construction materials used to build the pipelines to individual
households.
  The
Company expects to construct an additional 18 CNG filing stations in 2008. The
Company expects the funds for these investing activities will come from the
Company's operating cash flow.
  Based on
past performance and current expectations, we believe our cash and cash
equivalents, cash generated from operations, as well as future possible cash
investments, will satisfy our working capital needs, capital expenditures (other
than the LNG Project) and other liquidity requirements associated with our
operations for at least the next 12 months.
  The
majority of the Company's revenues and expenses were denominated primarily in
Renminbi ("RMB"), the currency of the People's Republic of China. There is no
assurance that exchange rates between the RMB and the U.S. Dollar will remain
stable. The Company does not engage in currency hedging. Inflation has not had a
material impact on the Company's business.
  Off-Balance Sheet Arrangements and
Contractual Obligations
  We
entered in to a 15 day foreign currency forward contract in late December 2007;
please refer to financial statement footnote under "Derivative Accounting" for
more details. We also entered into series of long term lease agreements with
outside parties to lease land use right to the self-built natural gas filling
stations located in the PRC, and please refer to footnote "Commitments and
Contingencies" to the financial statements for details. We have purchase
agreements with several natural gas suppliers and please see
footnote "Current Vulnerability Due to Certain Concentrations" for more
explanations. We do not have any other 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, capital expenditures or capital resources that are
material to our investors.
 
 Foreign Currency Transactions and
Comprehensive Income (Loss)
  Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain statements, however, require entities to
report specific changes in assets and liabilities, such as gain or loss on
foreign currency translation, as a separate component of the equity section of
the balance sheet. Such items, along with net income, are components of
comprehensive income. Our transactions occur in Chinese Renminbi. The unit of
Renminbi is in Yuan.
  22
  RECENT ACCOUNTING
PRONOUNCEMENTS
  In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The
objective of SFAS No. 157 is to increase consistency and comparability in fair
value measurements and to expand disclosures about fair value measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on the
Company‘s future reported financial position or results of
operations.
 
 In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of SFAS No. 159 on its financial position and results of
operations.
 
 In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, "Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities" ("FSP EITF 07-3"), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
Management is currently evaluating the effect of this pronouncement on financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations." SFAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS No. 141
(Revised 2007) requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value,
with limited exceptions, and applies to a wider range of transactions or events.
SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
after December 15, 2008 and early adoption and retrospective application is
prohibited. The Company is currently evaluating the impact that adopting SFAS
No. 141R will have on its financial statements.
 
 In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements", which is an amendment of Accounting Research
Bulletin ("ARB") No. 51.  This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.
 
 ITEM 7A. QUANTITIAVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
 
 Not
required for smaller reporting issuers.
 
  23
  ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
  
 CHINA
NATURAL GAS, INC.
 AND
SUBSIDIARIES
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 AS OF
DECEMBER 31, 2007 AND 2006
 
 24




CHINA
NATURAL GAS, INC.
 AND
SUBSIDIARIES
 CONTENTS
 PagesReports
      of Independent Registered Public Accounting Firms
                  
                  F-1Consolidated
      Balance Sheets as of December 31, 2007 and 2006
                  
                  F-3Consolidated
      Statements of Income and Other Comprehensive income for the years ended
      December 31, 2007 and 2006
                  
                  F-4Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2007
      and 2006
                  
                  F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and
      2006
                  
                  F-6Notes
      to Consolidated Financial Statements as of December 31,
    2007
                  
                  F-7 –
      F-22







REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 China
Natural Gas, Inc. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of China Natural Gas, Inc.
and Subsidiaries as of December 31, 2007, and the related consolidated
statements of income and other comprehensive income, stockholders’ equity, and
cash flows for year then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of China Natural Gas, Inc. and Subsidiaries as
of December 31, 2006 were audited by other auditors whose report dated March 12,
2007, expressed an unqualified opinion on those statements.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Natural Gas, Inc. and
Subsidiaries as of December 31, 2007, and the results of its operations and its
cash flows for the year ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
 
 /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
  Walnut,
California
 March 31,
2008
  1




Report of Independent Registered
Public Accounting Firm
  
 
 
 Board of
Directors and Stockholders of
 China
Natural Gas, Inc.
 
 We have
audited the accompanying consolidated balance sheet of China Natural Gas, Inc.
and subsidiaries as of December 31, 2006, and the related consolidated
statements of operations and other comprehensive income, stockholders' equity,
and cash flows for the year ended December 31, 2006. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provide a reasonable basis for our opinion.
 
 In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of China
Natural Gas, Inc. and subsidiaries as of December 31, 2006, and the consolidated
results of their operations and their consolidated cash flows for the year ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
 
 
 
 /s/
Kabani & Company, Inc.
 Certified Public
Accountants
 
 Los
Angeles, California
 March 12,
2007




2






CHINA NATURAL GAS, INC. AND
SUBSIDIARIES
 CONSOLIDATED BALANCE
SHEETS
 AS OF DECEMBER 31, 2007 and
2006
 2007
                
                2006ASSETSCURRENT
      ASSETS:Cash
      & cash equivalents
                
                $
                13,291,729
                
                $
                5,294,213Short-term
      investments
                
                
                238,554
                
                
                -Accounts
      receivable
                
                
                306,179
                
                
                569,037Other
      receivable - employee advances
                
                
                824,020
                
                
                711,279Inventories
                
                
                231,339
                
                
                285,537Advances
                
                
                663,041
                
                
                960,681Prepaid
      expense and other current assets
                
                
                109,722
                
                
                304,620Total current
      assets
                
                
                15,664,584
                
                
                8,125,367PROPERTY AND EQUIPMENT,
      net
                
                
                32,291,995
                
                
                17,193,728CONSTRUCTION IN
      PROGRESS
                
                
                2,210,367
                
                
                2,343,499OTHER
    ASSETS
                
                
                3,123,052
                
                
                803,757TOTAL ASSETS
                
                $
                53,289,998
                
                $
                28,466,351LIABILITIES AND
      STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable and accrued liabilities
                
                $
                487,710
                
                $
                406,212Other
      payables
                
                
                55,979
                
                
                279,236Unearned
      revenue
                
                
                327,220
                
                
                284,011Taxes
      Payable
                
                
                1,211,775
                
                
                1,866,688Total current
      liabilities
                
                
                2,082,684
                
                
                2,836,147COMMITMENTS AND
      CONTINGENCIES
                
                
                -
                
                
                -STOCKHOLDERS'
      EQUITY:Preferred
      stock, $0.0001 per share; authorized 5,000,000 shares; none issued
                
                
                -
                
                
                -Common
      stock, $0.0001 per share; 45,000,000 authorized shares 29,200,304 and
      24,210,183 shares issued and outstanding at December 31, 2007 and 2006,
      respectively
                
                
                2,920
                
                
                2,421Additional
      paid-in capital
                
                
                32,046,879
                
                
                18,223,911Cumulative
      translation adjustment
                
                
                3,477,025
                
                
                839,452Statutory
      reserves
                
                
                1,802,735
                
                
                750,886Retained
      earnings
                
                
                13,877,755
                
                
                5,813,534Total stockholders' equity
                
                
                51,207,314
                
                
                25,630,204TOTAL LIABILITIES AND
      STOCKHOLDERS' EQUITY
                
                $
                53,289,998
                
                $
                28,466,351




See
report of independent registered public accounting firm.




The
accompanying notes are an integral part of these statements.




F-3




CHINA NATURAL GAS, INC. AND
SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME AND
OTHER COMPREHENSIVE INCOME
 FOR THE YEARS ENDED DECEMBER 31, 2007
AND 2006
 
 Years Ended December
      31,2007
              
              2006RevenueNatural
      gas revenue
              
              $
              28,278,033
              
              $
              13,713,145Installation
      and other
              
              
              7,114,020
              
              
              5,115,645Total
      revenue
              
              
              35,392,053
              
              
              18,828,790Cost of
      revenueNatural
      gas cost
              
              
              14,838,997
              
              
              7,663,060Installation
      and other
              
              
              3,186,078
              
              
              2,054,940Total
      cost of revenue
              
              
              18,025,075
              
              
              9,718,000Gross
    profit
              
              
              17,366,978
              
              
              9,110,790Operating
      expensesSelling
      expenses
              
              
              3,451,161
              
              
              1,308,464General
      and administrative expenses
              
              
              2,837,768
              
              
              1,287,735Total
      operating expenses
              
              
              6,288,929
              
              
              2,596,199Income from
      operations
              
              
              11,078,049
              
              
              6,514,591Non-operating income
      (expense):Interest
      income
              
              
              70,697
              
              
              41,109Other
      income
              
              
              39,076
              
              
              -Other
      expense
              
              
              (7,100
              )
              
              (79,021
              )Foreign
      exchange loss
              
              
              (150,729
              )
              
              -Total
      non-operating expense
              
              
              (48,056
              )
              
              (37,912
              )Income before income
      tax
              
              
              11,029,993
              
              
              6,476,679Provision for income
      tax
              
              
              1,913,923
              
              
              1,025,584Net
    income
              
              
              9,116,070
              
              
              5,451,095Other comprehensive
      incomeForeign
      currency translation gain
              
              
              2,637,573
              
              
              610,705Comprehensive Income
              
              $
              11,753,643
              
              $
              6,061,800Weighted average shares
      outstandingBasic
              
              
              26,200,679
              
              
              23,872,936Diluted
              
              
              26,301,802
              
              
              23,872,936Earnings per shareBasic
              
              $
              0.35
              
              $
              0.23Diluted
              
              $
              0.35
              
              $
              0.23




See
report of independent registered public accounting firm.
  The
accompanying notes are an integral part of these statements.


F-4





CHINA NATURAL GAS, INC. AND
SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
 Common
    Stock
                
                Additional
                
                Accumulative Other
                
                
                
                
                
                TotalShares
                
                Amount
                
                Paid in
                  Capital
                
                Comprehensive
      Gain
                
                Statutory
      Reserve
                
                Retained
      Earnings
                
                Stockholders'
      EquityBalance
      December 31, 2005
                
                
                20,204,088
                
                $
                2,020
                
                $
                8,331,458
                
                $
                228,747
                
                $
                169,722
                
                $
                943,603
                
                $
                9,675,550Shares
      issued for cash, at $2.80
                
                
                3,714,428
                
                
                371
                
                
                10,399,629
                
                
                
                
                
                
                
                
                
                
                
                10,400,000Offering
      costs
                
                
                
                
                
                
                
                
                (1,557,147
                )
                
                
                
                
                
                
                
                
                
                
                (1,557,147
                )Cash
      exercise of warrants
                
                
                291,667
                
                
                30
                
                
                1,049,971
                
                
                
                
                
                
                
                
                
                
                
                1,050,001Cumulative
      translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                610,705
                
                
                
                
                
                
                
                
                610,705Net
      Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,451,095
                
                
                5,451,095Transfer
      to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                581,164
                
                
                (581,164
                )
                
                -Balance December 31, 2006
                
                
                24,210,183
                
                $
                2,421
                
                $
                18,223,911
                
                $
                839,452
                
                $
                750,886
                
                $
                5,813,534
                
                $
                25,630,204Shares
      issued for cash, at $3.25
                
                
                4,615,385
                
                
                462
                
                
                14,999,538
                
                
                
                
                
                
                
                
                
                
                
                15,000,000Offering
      costs
                
                
                
                
                
                
                
                
                (1,176,533
                )
                
                
                
                
                
                
                
                
                
                
                (1,176,533
                )Cashless exercise
      of warrants
                
                
                374,736
                
                
                37
                
                
                (37
                )
                
                
                
                
                
                
                
                
                
                
                -Cumulative
      translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                2,637,573
                
                
                
                
                
                
                
                
                2,637,573Net
      Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                9,116,070
                
                
                9,116,070Transfer
      to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,051,849
                
                
                (1,051,849
                )
                
                -Balance December 31, 2007
                
                
                29,200,304
                
                $
                2,920
                
                $
                32,046,879
                
                $
                3,477,025
                
                $
                1,802,735
                
                $
                13,877,755
                
                $
                51,207,314




See
report of independent registered public accounting firm.
  The
accompanying notes are an integral part of these statements.




F-5


CHINA NATURAL GAS, INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS


FOR THE YEARS ENDED DECEMBER 2007 AND
2006





Years Ended December
      31,2007
            
            2006CASH FLOWS FROM OPERATING
      ACTIVITIES:Net
      income
            
            $
            9,116,070
            
            $
            5,451,095Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            1,639,685
            
            
            731,723Change
      in assets and liabilities:Accounts
      receivable
            
            
            290,660
            
            
            (550,831
            )Other
      receivable
            
            
            36,929
            
            
            (636,262
            )Inventory
            
            
            71,226
            
            
            (233,582
            )Advances
            
            
            245,514
            
            
            (1,611,967
            )Prepaid
      expense and other current assets
            
            
            (11,113
            )
            
            (282,103
            )Accounts
      payable
            
            
            (130,228
            )
            
            201,661Accrued
      expense
            
            
            158,759
            
            
            -Other
      payables
            
            
            (208,669
            )
            
            1,352,866Unearned
      revenue
            
            
            22,425
            
            
            (28,882
            )Taxes
      payable
            
            
            (754,817
            )
            
            (8,194
            )Net
      cash provided by operating activities
            
            
            10,476,441
            
            
            4,385,524CASH FLOWS FROM INVESTING
      ACTIVITIESPurchase
      of property and equipment
            
            
            (14,180,053
            )
            
            (9,192,482
            )Purchase
      short term investments
            
            
            (229,106
            )
            
            -Additions
      to construction in progress
            
            
            (519,309
            )
            
            (545,987
            )Prepayment
      on long term assets
            
            
            (1,914,343
            )
            
            -Payment
      for land use rights
            
            
            (42,529
            )
            
            -Net
      cash used in investing activities
            
            
            (16,885,340
            )
            
            (9,738,469
            )CASH FLOWS FROM FINANCING
      ACTIVITIES:Stock
      issued for cash
            
            
            15,000,000
            
            
            10,400,000Proceeds
      from exercise of warrants
            
            
            -
            
            
            1,050,001Payment
      for offering costs
            
            
            (1,176,533
            )
            
            (1,557,147
            )Net
      cash provided by financing activities
            
            
            13,823,467
            
            
            9,892,854Effect
      of exchange rate changes on cash and cash equivalents
            
            
            582,948
            
            
            78,680NET INCREASE IN CASH & CASH
      EQUIVALENTS
            
            
            7,997,516
            
            
            4,618,589CASH & CASH EQUIVALENTS,
      BEGINNING OF YEAR
            
            
            5,294,213
            
            
            675,624CASH & CASH EQUIVALENTS,
      END OF YEAR
            
            $
            13,291,729
            
            $
            5,294,213SUPPLEMENTAL DISCLOSURE OF CASH
      FLOW INFORMATION:Interest
      paid
            
            $
            -
            
            $
            -Income
      taxes paid
            
            $
            2,387,487
            
            $
            -




See
report of independent registered public accounting firm.
  The
accompanying notes are an integral part of these statements.




F-6




China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007


Note 1 - Organization and Basis of
Presentation
 
 Organization and Line of
Business
  China
Natural Gas, Inc. (formerly Coverture International Inc.) was incorporated in
the state of Delaware on March 31, 1999 as Bullet Environmental Systems, Inc.
and on May 25, 2000, the Company changed its name to Liquidpure Corp. On
February 14, 2002 the Company changed its name to Coventure International,
Inc.
 
 Xi’an
Xilan Natural Gas Co, Ltd. (“XXNGC”) was incorporated on January 8, 2000 in
Xi’an city in the Shaanxi province, China. The core business of XXNGC is
distribution of natural gas to commercial, industrial and residential customers,
construction of pipeline networks, and installation of natural gas fittings and
parts for end-users. XXNGC has an exclusive permit to provide gas utility
service in Lantian County,  Lintong
and Baqiao District of Xi’an city, China.
 
 On
December 6, 2005, XXNGC executed a share purchase agreement with Coventure
International, Inc. (“Coventure”), a public shell in the United States of
America. Pursuant to the purchase agreement, Coventure acquired all of the
issued and outstanding capital stock of XXNGC in exchange for 16,000,000
(post-split) shares of Coventure’s common stock.
 
 Concurrently
with the closing of the purchase agreement and as a condition thereof, Coventure
entered into an agreement with John Hromyk, its President and Chief Financial
Officer, pursuant to which Mr. Hromyk returned 23,884,712 (post-split) shares of
Coventure's common stock for cancellation. Upon completion of the foregoing
transactions, Coventure had an aggregate of 20,204,088 (post-split) shares of
common stock issued and outstanding.
 
 As a
result of the merger, XXNGC’s stockholders own approximately 80% of the combined
company and the directors and executive officers of XXNGC became the directors
and executive officers of the Coventure. Accordingly, the transaction has been
accounted for as a reverse acquisition of Coventure by XXNGC resulting in a
recapitalization of XXNGC rather than as a business combination. XXNGC is deemed
to be the purchaser and surviving company for accounting purposes. Accordingly,
its assets and liabilities are included in the balance sheet at their historical
book values and the results of operations of XXNGC have been presented for the
comparative prior period. The historical cost of the net liabilities of
Coventure that were acquired was $3,378. In addition, Coventure changed it name
to China Natural Gas, Inc. (hereafter referred to as the “Company”) and the
stockholders approved a stock dividend of three shares for each share held,
which has been accounted for as a four to one forward stock split. All shares
and per share data have been restated retrospectively.
 
 However,
this merger acquisition was not able to be approved under the certain laws of
the People’s Republic of China (“PRC”). PRC law currently has limits on foreign
ownership of companies in certain industries. To comply with these foreign
ownership restrictions, the Company established its wholly owned subsidiary,
Xilan Natural Gas Equipment Ltd. (“XNGE”), a limited liability company organized
under the PRC law on February 21, 2006. The Company through XNGE entered into
exclusive arrangements with XXNGC. Through these arrangements, the Company has
the ability to substantially influence XXNGC’s daily operations and financial
affairs, appoint its senior executives and approve all matters requiring
shareholder approval. These arrangements were formalized on August 17, 2007, and
made retroactive to March 8, 2006. As a result, XXNGC became a variable interest
entity effective on March 8, 2006
  See
report of independent registered public accounting
firm.
 F-7
 China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  Shaanxi
Jingbian Liquefied Natural Gas Co., Ltd (“SJLNG”) was incorporated on October
24, 2006 with registered capital of $3,792,000 (RMB 30,000,000) in Jingbian
District, Shaanxi province, People’s Republic of China (“PRC”). SJLNG was
established for the purpose of constructing a liquefied natural gas (“LNG”)
facility to be located in Jingbian, Shaanxi province and to administer the
production and sales of LNG. SJLNG is 100% owned by XXNGC.
 
 Xi'an
Xilan Auto Bodyshop Co., Ltd (“XXABC”) was incorporated on May 15, 2007 with
registered capital of $519,200 (RMB 4,000,000) in Shaanxi province, People’s
Republic of China (“PRC”). XXABC was established for the purpose of providing
modification services to different types of automobiles to be able to use
natural gas. XXABC is 100% owned by XXNGC.
 
 Principles of Consolidation
 
 The
accompanying consolidated financial statements include the accounts of China
Natural Gas, Inc. and its wholly owned subsidiaries, Shaanxi Natural Gas
Equipment Co., Ltd (incorporated in February 2006) and its 100% variable
interest entities (“VIE”), Xi’an Xilan Natural Gas Co. Ltd., Shaanxi Jingbian
Liquefied Natural Gas Co., Ltd, and Xian Xilan Auto Bodyshop. All inter-company
accounts and transactions have been eliminated in the
consolidation.
 
 In
accordance with Financial Interpretation No. 46R, Consolidation of Variable
Interest Entities ("FIN 46R"), VIEs are generally entities that lack sufficient
equity to finance their activities without additional financial support from
other parties or whose equity holders lack adequate decision making ability. All
VIEs with which the Company is involved must be evaluated to determine the
primary beneficiary of the risks and rewards of the VIE. The primary beneficiary
is required to consolidate the VIE for financial reporting
purposes.
  On
February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., (“Xilan
Equipment”) as a wholly owned foreign enterprise (WOFE). We then, through Xilan
Equipment, entered into exclusive arrangements with Xian Xilan Natural Gas and
its shareholders that give us the ability to substantially influence Xian Xilan
Natural Gas’ daily operations and financial affairs, appoint its senior
executives and approve all matters requiring shareholder approval. We
memorialized these arrangements on August 17, 2007. As a result, the Company
consolidates the financial results of Xian Xilan Natural Gas as variable
interest entity pursuant to Financial Interpretation No. 46R, “Consolidation of
Variable Interest Entities.”
 a.
              Xian
      Xilan Natural Gas holds the licenses and approvals necessary to operate
      its natural gas business in China.
 
 b.
              Xilan
      Equipment provides exclusive technology consulting and other general
      business operation services to Xian Xilan Natural Gas in return for a
      consulting services fee which is equal to Xian Xilan Natural Gas’s
      revenue.
 
 c.
              Xian
      Xilan Natural Gas’s shareholders have pledged their equity interests in
      Xian Xilan Natural Gas to the
Company.
  See
report of independent registered public accounting
firm.
 F-8
 China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31, 2007
 d.
              Irrevocably
      granted the Company an exclusive option to purchase, to the extent
      permitted under PRC law, all or part of the equity interests in Xian Xilan
      Natural Gas and agreed to entrust all the rights to exercise their voting
      power to the person appointed by the
Company.
 
 Basis of
Presentation
 
 The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the
Company’s reporting currency is the United States Dollar (“USD”), therefore, the
accompanying consolidated financial statements have been translated and
presented in USD.
 
 Foreign Currency Translation
 
 As of
December 31, 2007 and 2006, the accounts of the Company were maintained, and
their consolidated financial statements were expressed in RMB. Such consolidated
financial statements were translated into USD in accordance with Statement of
Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation,"
with the RMB as the functional currency. According to the Statement, all assets
and liabilities were translated at the exchange rate on the balance sheet date,
stockholder's equity are translated at the historical rates and statement of
income and cash flow items are translated at the weighted average exchange rate
for the year. The resulting translation adjustments are reported under other
comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive
Income."
 
 Translation
adjustments resulting from this process amounted to $3,477,025 and $839,452 as
of December 31, 2007 and 2006, respectively. The balance sheet amounts with the
exception of equity at December 31, 2007 were translated 7.29 RMB to $1.00 USD
as compared to 7.80 RMB at December 31, 2006. The equity accounts were stated at
their historical rate. The average translation rates applied to income and cash
flow statement amounts for the years ended December 31, 2007 and 2006 were 7.59
RMB and 7.96 RMB to $1.00 USD, respectively.
 
 Note 2 – Summary of Significant
Accounting Policies
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include cash on hand and cash in banks maintained with state
owned with the PRC and the United States. The Company considers all highly
liquid investments with original maturities of three months or less at the time
of purchase to be cash equivalents.
  See
report of independent registered public accounting
firm.
 F-9
  China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  Certain
financial instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial institutions
which, from time to time, may exceed Federal Deposit Insurance Corporation
insured limits for the banks located in the Unites States. Balances at financial
institutions or state owned banks within the PRC are not covered by insurance.
As of December 31, 2007 and 2006, the Company had deposits in excess of
federally insured limits total of $13,053,994 and $5,183,581, respectively. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risks on its cash in bank accounts.
 
 Short Term
Investments
 
 Short-term
investments are securities available for sale, held by a private investment
trust company for investing activities. Gain or loss on securities is computed
using cost basis of first-in, first-out (FIFO) basis. The fair value of
securities at December 31, 2007 totaled $238,554, which equaled the original
costs, and was returned to the Company in March 2008.
 
 Accounts
Receivable
 
 Accounts
and other receivable are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as needed. The
Company allowance for uncollectible accounts is not significant.
 
 The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Reserves are recorded primarily on a specific
identification basis. The Company’s management has determined that all
receivables are collectible and there is no need for a reserve for bad debts as
of December 31, 2007 and 2006.
 
 Other Receivable
- Employee Advances
 
 As needed
for normal business purpose, the Company advances predetermined amounts based
upon internal Company policy to certain employees and internal units to ensure
certain transactions to be performed in a timely manner. The Company has full
oversight and control over the advanced accounts. Therefore, the allowance for
the uncollectible accounts is nil.
 
 Advances
 
 The
Company advances to certain vendors for purchase of its material. The advances
are interest free and unsecured.
 
 Inventory
 
 Inventory
is stated at the lower of cost, as determined on a first-in, first-out basis, or
market. Management compares the cost of inventories with the market value, and
allowance is made for writing down the inventories to their market value, if
lower. Inventory consists of material used in the installation of pipelines and
material used in repairing and modifying of vehicles. Inventory also consist of
natural gas and gasoline
  See
report of independent registered public accounting firm.
 F-10
 China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  At
December 31, 2007 and 2006, the following are the details of the
inventories:
 
 2007
              
              2006Materials
      and supplies
              
              $
              109,333
              
              $
              283,997Natural
      gas and gasoline
              
              
              122,006
              
              
              1,540$
              231,339
              
              $
              285,537
 
 Property and Equipment
 
 Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives as follows:
 
 Office
      equipment
              5
      yearsOperating
      equipment
              5-20
      yearsVehicles
              5
      yearsBuildings
              30
      years
 
 At
December 31, 2007 and 2006, the following are the details of the property and
equipment:
 
 2007
              
              2006Office
      equipment
              
              $
              163,432
              
              $
              73,636Operating
      equipment
              
              
              22,413,270
              
              
              13,219,979Vehicles
              
              
              1,484,892
              
              
              1,210,552Buildings
              
              
              11,943,006
              
              
              4,559,00336,004,600
              
              
              19,063,170Less
      accumulated depreciation
              
              
              (3,712,605
              )
              
              (1,869,442
              )$
              32,291,995
              
              $
              17,193,728
 
 Depreciation
expense for the years ended December 31, 2007 and 2006 was $1,639,685 and
$731,723, respectively.
  Long-Lived
Assets
 
 The
Company applies the provision of Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144") to all long lived assets., SFAS 144 addresses accounting and reporting for
impairment and disposal of long-lived assets. The Company periodically evaluates
the carrying value of long-lived assets to be held and used in accordance with
SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of December 31,
2007 there were no significant impairments of its long-lived
assets.
  See
report of independent registered public accounting firm.
 F-11
  China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  Construction In
Progress
 
 Construction
in progress consists of the cost of constructing property and equipment for the
Company’s use. The major cost of construction in progress relates to material,
labor and overhead.
 
 Fair Value of Financial
Instruments
 
 Statement
of Financial Accounting Standard No. 107, Disclosures about fair value of
financial instruments, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value. The Company
considers the carrying amount of these current assets and current liabilities to
approximate their fair values because of the short period of time between the
origination of such instruments and their expected realization and their current
market rate of interest.
 
 Derivative Accounting
 
 The
Company entered into a 15 days foreign currency forward contract on December 25,
2007. As of December 31, 2007, the fair value of the contract is $3,055,505 (or
342,030,266 Japanese Yen) and is recorded in cash and cash equivalents in the
accompanying consolidated balance sheets due to the short term nature of the
investment.
 
 The
financial instruments are accounted for in accordance with Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, which established accounting and reporting requirements for
derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS
No. 138 and 149, requires that all derivative instruments subject to the
requirements of the statement be measured at fair market value and recognized as
assets or liabilities in the balance sheet. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and the
resulting designation is generally established at the inception of a derivative.
For derivatives designated as cash flow hedges and meeting the effectiveness
guidelines of SFAS No. 133, changes in fair value, to the extent effective, are
recognized in other comprehensive income until the hedged item is recognized in
earnings. Hedge effectiveness is measured at least quarterly based on the
relative changes in fair value between the derivative contract and the hedged
item over time. Any change in fair value of a derivative resulting from
ineffectiveness or an excluded component of the gain/loss is recognized
immediately in the statement of operations.
 
 The
Company elected not to apply hedge accounting. For a derivative instrument that
is not designated, as a hedge, the change in fair value is recognized in
earnings in the period of change. For the year ended December 31, 2007, no gain
or loss was incurred.
  See
report of independent registered public accounting firm.
 F-12
 China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  Revenue
Recognition
 
 The
Company's revenue recognition policies are in accordance with Staff
accounting bulletin (SAB) 104. Revenue is recognized when services are rendered
to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectibility is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue. Revenue from gas and gasoline sales is recognized when gas
and gasoline is pumped through pipelines to the end users. Revenue from
installation of pipelines is recorded when the contract is completed and
accepted by the customers. The installation contracts are usually completed
within one to two months time. Revenue from repairing and modifying vehicles is
recorded when service are rendered to and accepted by the customers
 
 Unearned
Revenue
 
 Unearned
revenue represents prepayments by customers for gas purchases and advance
payments on installation of pipeline contracts. The Company records such
prepayment as unearned revenue when the payments are received .
 
 Stock-Based
Compensation
 
 The
Company accounts for its stock-based compensation in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 123R, "Share-Based Payment, an
Amendment of Financial Accounting Standards Board (“FASB”) Statement No. 123."
The Company recognizes in the statement of operations the grant-date fair value
of stock options and other equity-based compensation issued to employees and
non-employees. The
Company did not grant any options and no options were cancelled or exercised
during the period ended December 31, 2007 and 2006. As of December 31, 2007 and
2006, there were no options outstanding.
 
 The
Company accounts for non-employee stock-based compensation expense in accordance
with EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employee for Acquiring, or in Conjunction with Selling, Goods or
Services (“EITF 96-18”). The Company used the Black-Scholes option-pricing model
as its method of valuation for share-based awards granted. The Company’s
determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Company’s stock price as well
as assumptions regarding a number of complex and subjective variables. These
variables include, but are not limited to, the Company’s expected stock price
volatility over the term of the awards and the expected term of the
awards.
 See
report of independent registered public accounting firm.
 F-13
  China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  Income
Taxes
 
 The
Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. At December 31, 2007 and 2006, there was no significant
book to tax differences. There is no difference between book depreciation and
tax depreciation as the Company uses the same method for both book and tax. The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
affect on the Company’s financial statements.
 
 Local PRC Income
Tax
 
 The
Company’s subsidiary or variable interest entities operate in China. Pursuant to
the tax laws of China, general enterprises are subject to income tax at an
effective rate of 33%. The Company’s variable interest entity, XXNGC, is in the
natural gas industry whose development is encouraged by the government.
According to the income tax regulation, any company engaged in the natural gas
industry enjoys a favorable tax rate. Accordingly, except for income from XNGE, SJLNG, XXABC,
which subjects to 33% PRC income tax rate, XXNGC’s income is subject to a
reduced tax rate of 15%.
 
 A
reconciliation of tax at United States federal statutory rate to provision for
income tax recorded in the financial statements is as follows:
 
 
 For
      the Years
                Ended
      December 31,2007
              
              2006Tax
      provision (credit) at statutory rate
              
              
              34
              %
              
              34
              %Foreign
      tax rate difference
              
              
              (1
              )%
              
              (1
              )%Effect
      of favorable tax rate
              
              
              (15
              )%
              
              (14
              )%18
              %
              
              19
              %
 
 The
estimated tax savings for the years ended December 31, 2007 and 2006 amounted to
approximately $2,174,806 and $1,232,074, respectively. The net effect on
earnings per share had the income tax been applied would decrease basic earnings
per share for the years ended December 31, 2007 and 2006 from $0.35 to $0.26 and
$0.23 to $0.18, respectively.
 
 Beginning
January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law will replace
the existing laws for Domestic Enterprises (“DES”) and Foreign Invested
Enterprises (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate
currently applicable to both DES and FIEs.
 
 Starting
from January 1, 2008, XNGE, SJLNG and XXABC will be subject to 25% income tax
rate according to the newly issued Income Tax Laws of PRC. As XXNGC is in
the natural
gas industry , XXNGC
is continuing to enjoy the reduced tax rate of 15% until 2010.
  See
report of independent registered public accounting firm.
 F-14
 China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  Value added tax
 
 Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s variable interest entity XXNGC’s products that are
sold in the PRC are subject to a Chinese value-added tax at a rate of 13% of the
gross sales price. This VAT may be offset by VAT paid by the XXNGC on raw
materials and other materials included in the cost of producing their finished
product. XXNGC recorded VAT payable and VAT receivable net of payments in the
financial statements. The VAT tax return is filed offsetting the payables
against the receivables.
 
 All
revenues from XXABC subject to a Chinese value-added tax at a rate of 6%. This
VAT cannot offset with VAT paid for materials included in the cost of revenues.
 
 Basic and Diluted Earning
Per Share
  Earning
per share is calculated in accordance with the Statement of Financial Accounting
Standards No. 128 (“SFAS No. 128”), “Earnings per share”. Basic net earnings per
share is based upon the weighted average number of common shares outstanding.
Diluted net earnings per share is based on the assumption that all dilutive
convertible shares and stock options were converted or exercised. Dilution
is computed by applying the treasury stock method. Under this method, options
and warrants are assumed to be exercised at the beginning of the period (or at
the time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the period.
 
 Statement of Cash
Flows
 
 In
accordance with Statement of Financial Accounting Standards No. 95, "Statement
of Cash Flows," cash flows from the Company's operations is calculated based
upon the local currencies and translated to USD at average translation rates for
the period. As a result, translation adjustments amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.
 
 Reclassifications
 
 Certain
prior period amounts have been reclassified to conform to current period’s
presentation. This reclassification had no material effect on operations or cash
flows.
 
 Recent
Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements“. The
objective of SFAS No. 157 is to increase consistency and comparability in fair
value measurements and to expand disclosures about fair value measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on the
Company‘s future reported financial position or results of
operations.
  See
report of independent registered public accounting firm.
 F-15
  China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities“. This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of SFAS No. 159 on its financial position and results of
operations.
 
 In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
Management is currently evaluating the effect of this pronouncement on financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS No. 141
(Revised 2007) requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value,
with limited exceptions, and applies to a wider range of transactions or events.
SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
after December 15, 2008 and early adoption and retrospective application is
prohibited. The Company is currently evaluating the impact that adopting SFAS
No. 141R will have on its financial statements.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51.  This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.
  See
report of independent registered public accounting firm.
 F-16
 China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31, 2007
 Note 3 – Other
Assets
 
 Other
assets at December 31, 2007 and 2006 consisted of the following,
 
 2007
              
              2006Prepaid
      rent – natural gas stations
              
              $
              225,924
              
              $
              -Prepayment
      for acquiring land use right
              
              
              993,975
              
              
              128,200Advances
      on purchasing equipment/construction in progress
              
              
              1,501,443
              
              
              341,333Refundable
      security deposits
              
              
              356,460
              
              
              333,320Others
              
              
              45,250
              
              
              904Total
              
              $
              3,123,052
              
              $
              803,757
 
 All land
in the People’s Republic of China is government owned. However, the government
grants the user a land use right to use the land. As of December, 2007 and 2006,
the Company prepaid $993,975 and $128,200, respectively, to the PRC local
government to purchase land use rights. The Company is in the process of
negotiating the final purchase price with the local government and the land use
rights have not been granted to the Company. Therefore, the Company did not
amortize the prepaid land use rights.
 
 Advances
on the purchase of equipment/construction in progress are monies deposited or
advanced to outside vendors/subcontractors for the purchase of operating
equipment or for services to be provided for constructions in progress.
 
 Refundable
security deposit is monies deposited to one of its major vendor and gas station
landlord. These amounts will be returned to the Company if they terminate the
business relationship or at the end of the lease.
  Note 4 – Stockholders’
Equity
 
 Common
stock
 
 On
January 6, 2006 and January 9, 2006, the Company entered into securities
purchase agreements with four accredited investors and completed the sale of
$5,380,000 of units. The units contained an aggregate of 1,921,572 shares of
common stock and 523,055 common stock purchase warrants. Each warrant is
exercisable for a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the warrant, each investor has contractually agreed to
restrict its ability to exercise the warrants to an amount which would not
exceed the difference between the number of shares of common stock beneficially
owned by the holder or issuable upon exercise of the warrant held by such holder
and 9.9% of the outstanding shares of common stock of the Company.
 
 In
connection with the offering, the Company paid a placement fee of 10% of the
proceeds in cash, together with non-accountable expenses in the amount of 3% of
the proceeds, in cash. In addition, the placement agent was issued warrants to
purchase 298,888 shares of common stock on the same terms and conditions as the
investors. The warrants issued to the placement agent are being treated as a
cost of raising capital.
  See
report of independent registered public accounting firm.
 F-17
  China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  On
January 10, 2006 through January 13, 2006, the Company entered into securities
purchase agreements with four accredited investors and completed the sale of
$2,195,198 of units. The units contained an aggregate of 783,999 shares of
common stock and 213,422 common stock purchase warrants. Each warrant is
exercisable for a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the warrant, each investor has contractually agreed to
restrict its ability to exercise the warrants to an amount which would not
exceed the difference between the number of shares of common stock beneficially
owned by the holder or issuable upon exercise of the warrant held by such holder
and 9.9% of the outstanding shares of common stock of the Company.
 
 In
connection with the offering, the Company paid a placement fee of 10% of the
proceeds in cash, together with non-accountable expenses in the amount of 3% of
the proceeds, in cash. In addition, the placement agent was issued warrants to
purchase 121,955 shares of common stock on the same terms and conditions as the
investors. The warrants issued to the placement agent are being treated as a
cost of raising capital.
 
 On
January 17, 2006, the Company entered into securities purchase agreements with
an accredited investor and completed the sale of $2,824,802 of units. The units
contained an aggregate of 1,008,857 shares of common stock and 274,633 common
stock purchase warrants. Each common stock purchase warrant is exercisable for a
period of three years at an exercise price of $3.60 per share. Pursuant to the
terms of the warrant, each investor has contractually agreed to restrict its
ability to exercise the warrants to an amount which would not exceed the
difference between the number of shares of common stock beneficially owned by
the holder or issuable upon exercise of the warrant held by such holder and 9.9%
of the outstanding shares of common stock of the Company.
 
 In
September 2006, the Company received $1,050,001 from the exercise of 291,667
warrants.
 
 On August
2, 2007, the Company entered into a Securities Purchase Agreement with investors
to sell 4,615,385 shares of the Company’s common stock and attached warrants to
purchase up to 692,308 shares of Common stock (“Investor warrants”) for $3.25
per share (or an aggregate purchase price of $15,000,000) and for total net
proceeds of $13,823,467. Warrants are exercisable for a period of five years
with exercise price of $7.79 per share.
 
 In
connection with the above-mentioned offering, the Company entered into a finance
representation agreement (“Agreement”) with a placement agent (“Agent”).
Pursuant to the agreement, the Company agreed to pay the Agent $10,000 and
issued a warrant (“Placement Agent Warrants”) to acquire 75,000 shares of the
Company’s common stock. In addition, the Company paid $1,050,000 fee (7% of the
gross proceeds).
 
 Warrants
associated with the above-mentioned issuance of common stock were issued in
October 2007 upon the effective filling of its certificate of Amendment of
Articles of Incorporation to increase the authorized number of common stock from
30,000,000 to 45,000,000.
 
 Both
Investor Warrants and Placement Agent Warrants meet the conditions for equity
classification pursuant to FAS 133 “Accounting for Derivatives” and EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Therefore, these warrants were classified as
equity and accounted as common stock issuance cost.




See
report of independent registered public accounting firm.


F-18
 China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  Following
is a summary of the warrant activity:
 
 Warrants
      Outstanding
              
              Weighted
                Average
                Exercise
      Price
              
              Aggregate
                Intrinsic
                ValueOutstanding,
      December 31, 2005
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              1,431,953
              
              $
              3.60
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              (291,667
              )
              $
              3.60
              
              
              -Outstanding,
      December 31, 2006
              
              
              1,140,286
              
              $
              3.60
              
              
              -Granted
              
              
              767,308
              
              $
              7.79
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              (819,110
              )
              $
              3.60
              
              
              -Outstanding,
      December 31, 2007
              
              
              1,088,484
              
              $
              6.55
              
              $
              376,977
 
 Following
is a summary of the status of warrants outstanding at December 31, 2007:
 
 Outstanding
      warrants
              
              
              
              Exercisable
      WarrantsExercise
                Price
              
              Number
              
              Average
                Remaining
      Contractual
                Life
              
              Average
                Exercise
                Price
              
              Number$3.60
              
              
              321,176
              
              
              1.03
              
              $
              3.60
              
              
              321,176$7.79
              
              
              767,308
              
              
              4.59
              
              $
              7.79
              
              
              767,308$6.55
              
              
              1,088,484
              
              
              3.54
              
              $
              6.55
              
              
              1,088,484
 
 Note 5 – Defined Contribution
Plan
 
 The
Company is required to participate in a defined contribution plan operated by
the local municipal government in accordance with Chinese law and regulations.
The Company makes annual contributions of 14% of all employees' salaries to the
plan. The total expense for the above plan was $122,677 and $51,765 for the
years ended December 31, 2007 and 2006, respectively.
 
 Note 6 – Statutory Common
Welfare Fund
 
 As
stipulated by the Company Law of the People’s Republic of China (PRC) as
applicable to Chinese companies with foreign ownership, net income after
taxation can only be distributed as dividends after appropriation has been made
for the following:
  i.
              Making
      up cumulative prior years’ losses, if
any;
  See
report of independent registered public accounting firm.
  F-19
  China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31, 2007
 ii.
              Allocations
      to the “Statutory surplus reserve” of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered capital;
 
 iii.
              Allocations
      of 5-10% of income after tax, as determined under PRC accounting rules and
      regulations, to the Company's “Statutory common welfare fund”, which is
      established for the purpose of providing employee facilities and other
      collective benefits to the Company's employees; and
 
 iv.
              Allocations
      to the discretionary surplus reserve, if approved in the shareholders’
      general meeting.
 
 The
Company has appropriated $1,051,849 and $581,164 as reserve for the statutory
surplus reserve and welfare fund for the years ended December 31, 2007 and 2006,
respectively.
 
 Note 7 – Earnings Per
Share
 
 Earnings
(loss) per share for the years ended December 31, 2007 and 2006 is determined by
dividing net income (loss) for the periods by the weighted average number of
both basic and diluted shares of common stock and common stock equivalents
outstanding. The following is an analysis of the differences between basic and
diluted earnings per common share in accordance with Statement of Financial
Accounting Standards No. 128, “Earnings Per Share.”
 
 The
following demonstrates the calculation for earnings per share for the years
ended December 31, 2007 and 2006:
 
 Year Ended December
      31,2007
              
              2006Basic earning per
      shareNet
      income
              
              $
              9,116,070
              
              $
              5,451,095Weighted
      shares outstanding-Basic
              
              
              26,200,679
              
              
              23,872,936Earnings
      per share-Basic
              
              $
              0.35
              
              $
              0.23Diluted earning per
      shareNet
      income
              
              $
              9,116,070
              
              $
              5,451,095Weighted
      shares outstanding-Basic
              
              
              26,200,679
              
              
              23,872,936Effect
      of diluted securities-Warrants
              
              
              101,123
              
              
              -Weighted
      shares outstanding-Diluted
              
              
              26,301,802
              
              
              23,872,936Earnings
      per share -Diluted
              
              $
              0.35
              
              $
              0.23
  See
report of independent registered public accounting firm.
  F-20
  China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  At
December 31, 2007 and 2006, the Company had outstanding warrants of 1,088,484
and 1,140,286, respectively. For the year ended December 31, 2007, the average
stock price was greater than the exercise prices of the 321,176 warrants which
resulted in additional weighted average common stock equivalents of 101,123;
767,308 outstanding warrants were excluded from the diluted earnings per share
calculation as they are anti-dilutive. The average stock price for the year
ended December 31, 2006 was less than the exercise price of the warrants;
therefore, 1,140,286 outstanding warrants are not factored into the diluted
earning per share calculation as they are anti-dilutive.
 
 Note 8 – Current Vulnerability
Due to Certain Concentrations
 
 For the
years ended December 31, 2007 and 2006, the Company purchased all of the natural
gas for resale from three vendors, PetroChina Changqing Oilfield Company,
Shaanxi Natural Gas Co Ltd, and Jingcheng city Mingshi Coal Bed Methane
Exploitage Ltd. No amount was owed to these vendors at December 31, 2007. Except
for Shaanxi Natural Gas Co Ltd, the other two vendors have long-term agreements
with the Company without minimum purchase requirements. The Company has had
annual agreements with Shaanxi Natural Gas Co Ltd to purchase certain amount of
natural gas. For the year ended December 31, 2007, the minimum purchase was
12.93 million cubic meters. Contracts are renewed on an annual basis. The
Company’s management reports that it does not expect any issues or difficulty in
continuing to renew the supply contracts with these vendors going forward. Price
points for natural gas are strictly controlled by the government and have
remained stable over the past 3 years.
  For the
year ended December 31, 2007, three suppliers accounted for 88.4% of the total
inventory purchased by the Company and for the year ended December 31, 2006, two
supplier accounts for 72.4% of the total inventory purchased by the
Company
 
 For the
year ended December 31, 2007, two suppliers accounted for 41.02% of the total
equipment purchased by the Company and for the year ended December 31, 2006, two
suppliers accounted for 44.9% of the total equipment purchased by the
Company.
 
 Four
customers accounted for 42.6% of the Company’s installation revenue for the year
ended December 31, 2007 and four customers accounted for 78.4% of the Company’s
installation revenue for the year ended December 31, 2006.
 
 The
Company's operations are carried out in the People’s Republic of China.
Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environments
in the People’s Republic of China, by the general state of the People’s Republic
of China‘s economy. The Company's business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
  See
report of independent registered public accounting firm.
  F-21
 China Natural Gas, Inc. and
Subsidiaries
 Notes to Consolidated Financial
Statements
 December 31,
2007
  Note 9 – Commitments and
Contingencies
 
 The
Company recognizes lease expense on a straight line basis over the term of the
lease in accordance to SFAS 13, “Accounting for leases.” The
Company entered into series of long term lease agreements with outside parties
to lease land use right to the self-built Natural Gas filing stations located in
the PRC. The agreements have terms ranging from 10 to 30 years. The Company
makes annual prepayment for most lease agreements. The Company also entered into
three office leases in Xian, PRC and one office lease in New York, NY. The
minimum future payment for leasing land use rights and offices is as
follows:
  Year
      ended December 31, 2008
              
              $
              529,921Year
      ended December 31, 2009
              
              
              532,236Year
      ended December 31, 2010
              
              
              534,621Year
      ended December 31, 2011
              
              
              531,874Year
      ended December 31, 2012
              
              
              477,156Thereafter
              
              
              2,665,256Total
              
              $
              5,271,064
  For the
year ended December 31, 2007 and 2006, the land use right and office lease
expenses were $433,755 and $60,289, respectively.
 
 Note 10 – Subsequent
Event
 
 In
January 2008, the Company purchased an additional Compressor Station in
Xianyang, PRC, approximately 15 miles from Xi’an, PRC.
 
 On
December 30, 2007, as previously reported, China Natural Gas, Inc. (the
“Company”) entered into a Securities Purchase Agreement with Abax Lotus Ltd.
(the “Investor”) which was subsequently amended on January 29, 2008 (as amended,
the “Purchase Agreement”). Pursuant to the Purchase Agreement the Company, among
other things, (i) agreed to issue to the Investor 5.00% Guaranteed Senior Notes
due 2014 (the “Senior Notes”) in aggregate principal amount of RMB 145,000,000
(approximately $20,000,000), (ii) granted the Investor an option to purchase up
to RMB145,000,000 (approximately $20,000,000) in aggregate principal amount of
its Senior Notes (the “First Option Notes”) if such option was exercised on or
before March 3, 2008 and subject to the Company meeting certain closing
conditions, and (iii) granted the Investor an option to purchase up to RMB
73,000,000 (approximately $10,000,000) in principal amount of its Senior Notes
within 30 days following the issuance of the First Option Notes, subject to the
Company meeting certain closing conditions.
  On March
3, 2008, the Investor exercised its option to purchase the First Option Notes
for an additional RMB145,000,000 in aggregate principal amount of Senior Notes.
On March 10, 2008, the Company issued Senior Notes for an additional aggregate
principal amount of RMB145,000,000 (approximately $20,000,000) representing the
First Option Notes for total Senior Notes of RMB290,000,000 (approximately
$40,000,000).
  See
report of independent registered public accounting firm.
  F-22




ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  None.
  ITEM 9A(T). CONTROLS AND
PROCEDURES
 
 Evaluation of Disclosure Controls and
Procedures
 
 The
Company’s management has evaluated, under the supervision and with the
participation of the Company’s Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operations of the Company’s
disclosure controls and procedures (as defined in Securities Exchange Act Rule
13a-15(e)), as of the end of the period covered by this annual report. Based on
that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer have concluded that the evaluation of the effectiveness of our
disclosure controls and procedures was completed; our disclosure controls and
procedures were effective.
  Management’s Annual Report on
Internal Control over Financial Reporting
 
 The
Company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Further, because of changes in conditions,
effectiveness of internal control over financial reporting may vary over
time.
 
 25
  A
significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the company’s ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the company’s annual or interim
financial statements that is more than inconsequential will not be prevented or
detected. An internal control material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
 
 Management
of the Company conducted an evaluation of the effectiveness of the Company’s
internal control over financial reporting based on the Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on that evaluation, the Company’s
management identified the following significant deficiencies:
  ·The Company is lacking qualified resources to perform the
internal audit functions properly. In addition, the scope and effectiveness of
the Company's internal audit function are yet to be developed.
  ·     Inadequate
US GAAP expertise - The current staff in the accounting department is
inexperienced and they were primarily engaged in ensuring compliance with PRC
accounting and reporting requirement for our operating subsidiaries and was not
required to meet or apply U.S. GAAP requirements. They need substantial training
to meet the higher demands of being a U.S. public company. The accounting skills
and understanding necessary to fulfill the requirements of US GAAP-based
reporting, including the skills of subsidiary financial statements
consolidation, are inadequate
 Remediation
Initiative
  ·
                  We
      are committed to establishing the internal audit functions but due to
      limited qualified resources in the region, we were not able to hire
      sufficient internal audit resources before the end of 2007. However,
      internally we established a central management center to recruit more
      senior qualified people in order to improve our internal control
      procedures. Externally, we recently engaged Ernst & Young Hua Ming to
      assist the Company in improving the Company's internal control system
      based on COSO Framework. We also will increase our efforts to hire the
      qualified resources.
  ·
                    Prior
      to December 31, 2007, we engaged Pickard & Green, CPAs, a Certified
      Public Accounting firm in Valencia, CA, to serve as our accountant. They
      are mainly engaged to perform our financial statements consolidation and
      to prepare our financial statements. In addition, we are seeking
      accountants experienced in several key areas of accounting, including
      persons with experience in Chinese and U.S. GAAP, U.S. GAAP consolidation
      requirements, and SEC financial reporting requirements. In addition, we
      plan to allocate additional resources to train our existing accounting
      staff and continue this effort in the
future.
 Conclusion
 
 Despite
of the deficiencies reported above, and in light of the remediation initiatives,
the Company's management concluded that our internal control over financial
reporting was effective as of December 31, 2007.  Additionally, the
Company management believes that its consolidated financial statements included
in this report fairly present in all material respects the Company's financial
condition, results of operations and cash flows for the periods presented and
that this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this report.
  Changes in Internal Control over
Financial Reporting
 Except as
described above, there were no changes in its internal controls over financial
reporting in connection with its fourth quarter evaluation that would materially
affected, or are reasonably likely to materially affect, its internal control
over financial reporting.
  ITEM 9B. OTHER INFORMATION
  None.
  26
  PART III
  ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS, AND CORPORATE GOVERNANCE.
 
 Below are
the names and certain information regarding our executive officers and
directors:
  Name
              
              Age
              
              Position
              
              Held
      Position SinceQinan
      Ji
              
              50
              
              Chief
      Executive Officer and Chairman of the Board
              
              2005Lihong
      Guo
              
              41
              
              Chief
      Financial Officer
              
              2007Zhiqiang
      Wang
              
              67
              
              Director
              
              2006James
      Garner
              
              62
              
              Director
              
              2006
  Officers
are elected annually by the Board of Directors, at our annual meeting, to hold
such office until an officer's successor has been duly appointed and qualified,
unless an officer sooner dies, resigns or is removed by the Board.
 
 Background of Executive Officers and
Directors
  Qinan Ji,
Chairman of the Board of Directors - Mr. Ji joined Xilan as the Chairman of the
Board of Directors in 2005. In 1996, he founded the Anxian Hotel in Weinan City
in Shaanxi Province. In 2001, he formed the Xi’an Sunway Technology and Industry
Co., Ltd. He has more than 20 years experience in the energy and petroleum
industries in operational, administrative, management and government relations
roles. He received a Bachelors of Economic Management from Northwestern
University (Shaanxi).
  Lihong
Guo, Chief Financial Officer - Ms. Guo has over 12 years of financial experience
at various companies in China, including previously serving in the role of Chief
Financial Officer. Most recently, from September 2005 to July 2007, Ms. Guo was
the Chief Financial Officer of Aoda Enterprise Group Co., Ltd. Prior to that,
Ms. Guo served as Director of Finance of Xi’an Yangsen Pharmaceutical Ltd., a
subsidiary of Johnson & Johnson Company.  Ms. Guo
received her Bachelor’s Degree in Economics and Management from Shaanxi Normal
University in 1987 and her MBA from Northwestern University in Shaanxi, China,
in 2002.
  Zhiqiang
Wang, Vice Chairman of the Board of Directors - Mr. Wang was the former head of
energy industry regulations from 1992 to 2002 as well as the Vice Mayor of the
city of Xi'An, China's largest western city with a population of 8 million, in
which position he was in charge of regulating and licensing the city's energy
and natural gas businesses. From 2002 until his retirement in 2004, Mr. Wang was
the Chief Executive Officer of Xi'An Municipal Government Construction Company
where he was in charge of the city's major construction projects. Since 2004,
Mr. Wang has been an independent advisor to the Company. Mr. Wang graduated from
the Northwestern University of Politics and Law in China in 1962.
 
 James A.
Garner, Director, Chairman of Nominating Committee - Mr. Garner brings over 30
years of experience in business and political contacts to China Natural Gas. He
served as Mayor of Hempstead, New York for 16 years until his retirement to the
private sector in April 2005. He has won national recognition and awards from
national agencies such as the U.S. Housing & Urban Development Agency and
the American Planning Association (APA). Mayor Garner was elected the 61st
President of the United States Conference of Mayors in June 2003 and served the
Conference for one year traveling worldwide and advocating the needs of U.S.
cities. Mr. Garner holds a Bachelor of Science Degree from Adelphi University
and an Honorary Degree of Doctorate of Civil Law from Molloy College. He was
recently appointed to the United States Small Business Administration's National
Advisory Council.
 
 27
  Board of
Directors.
  Our
Directors are elected by the vote of a plurality in interest of the holders of
our voting stock and hold office for a term of one year or until a successor has
been elected and qualified.
  A
majority of the authorized number of directors constitutes a quorum of the Board
for the transaction of business. The directors must be present at the meeting to
constitute a quorum. However, any action required or permitted to be taken by
the Board may be taken without a meeting if all members of the Board
individually or collectively consent in writing to the action.
  There are
no family relationships, or other arrangements or understandings between or
among any of the directors, executive officers or other person pursuant to which
such person was selected to serve as a director or officer.
  Our
directors, executive officers and control persons have not been involved in any
of the following events during the past five years:
  1. any
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time;
  2. any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);
  3. being
subject to any order, judgment, or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business, securities or banking activities; or
  4. being
found by a court of competent jurisdiction (in a civil action), the Commission
or the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
 
 Corporate Governance Matters
  Audit Committee:
  Currently
we do not have an audit committee or committee performing similar
functions.
 
 Compensation
Committee
  On March
27, 2006, the Board of Directors established a Compensation Committee and
appointed James Garner as the Committee's sole member.
 
 Nominating
Committee
 
 James A.
Garner is Chairman, and the only member, of the Nominating
Committee.
  Code of Ethics
  On June
14, 2006, the Company adopted a Code of Ethics that applies to all officers,
directors and employees of the Company.
  28
 COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
  Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors and persons who own more than 10% of a registered class
of our equity securities to file with the Securities and Exchange Commission
initial statements of beneficial ownership, reports of changes in ownership and
annual reports concerning their ownership of our common stock and other equity
securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and
greater than 10% shareholders are required by the Securities and Exchange
Commission regulations to furnish our Company with copies of all Section 16(a)
reports they file.
  To the
Company's knowledge, based solely on a review of the copies of the reports
furnished to the Company, all executive officers, directors and greater than 10%
shareholders filed the required reports in a timely manner, except for James
Garner and Zhiqiang Wang who did not timely file Form 3s when they were
appointed to the Company’s Board of Directors.
  ITEM 11. EXECUTIVE
COMPENSATION
  EXECUTIVE
COMPENSATION
 
 The
following table sets forth all cash compensation paid by us to our principal
executive officer for fiscal year 2007.
 
 Summary Compensation
Table
 
 Name and Principal
                  Position
                
                Year
                
                Salary
                  ($)
                
                Bonus
                  ($)
                
                Option
                  Awards
                  ($)
                
                All Other
      Compensation
                  ($)
                
                Total
                  ($)Qinan
      Ji, Chief Executive
                  Officer
      and Chairman of the Board
                
                
                2007
                
                
                15,000
                
                
                -
                
                
                -
                
                
                -
                
                
                15,000
  During
the last fiscal year, none of our officers had a salary and bonus greater than
$100,000.
  Stock-Based
Compensation
  None of
our officers or other employees have been granted stock options or stock
appreciation rights, or paid any other stock-based compensation, by our company
or any of our subsidiaries.
  Director Compensation
 
 The
following Director Compensation Table summarizes the compensation of our
directors for services rendered to the Company during the year ended December
31, 2007.
 
 Name
                
                Fees
                  Earned
                  or
      Paid in
                  Cash
                  ($)
                
                Stock
                  Awards
                  ($)
                
                Option
                  Awards
                  ($)
                
                All
      Other Compensation
                  ($)
                
                Total
                  ($)James
      Garner
                
                
                36,000
                
                
                -
                
                
                -
                
                
                -
                
                
                36,000Qinan
      Ji(1)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Zhiqiang
      Wang(2)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Patrick
      McManus(3)
                
                
                15,000
                
                
                -
                
                
                -
                
                
                -
                
                
                15,000
  (1)
                Ji
      Qinan, our Chief Executive Officer, does not receive any compensation for
      his service as a director.(2)
                Zhiqiang
      Wang was appointed as a director in September 2006; he receives no
      compensation for his service as a director.(3)
                Patrick
      McManus resigned as a director in July 2007.
 
 29
  The
Company did not pay any other compensation to these directors in
2007.
 
 Employment
Agreements
 
 There are
currently no employment agreements between the Company and any of its named
executive officers.
 
 Outstanding Equity Awards at Fiscal
Year End
 
 There has
been no outstanding equity awards at fiscal year ended December 31,
2007.
  ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
  The
following table sets forth certain information, as of March 13, 2008 with
respect to the beneficial ownership of the outstanding common stock by (i) any
holder of more than five (5%) percent; (ii) each of our executive officers and
directors; and (iii) our directors and executive officers as a group. Except as
otherwise indicated, each of the stockholders listed below has sole voting and
investment power over the shares beneficially owned.
 
 Name of Beneficial Owner
      (1)
                
                Number of
                  Common
                  Stock
                  Beneficially
                  Owned
                
                Percentage
                  Of Common
                  Stock
                  Outstanding(2)Executive Officers and
      DirectorsQinan
      Ji
                
                
                5,931,596
                (3)
                
                20.3
                %Lihong
      Guo
                
                
                —
                
                
                —All officers and directors as a
      group (2 persons)
                
                
                5,931,596
                (3)
                
                20.3
                %5%
    holdersYangling
      Bodisen Biotech Development co, Ltd.
                  c/o
      New York Global Group, Inc.
                  14
      Wall Street, 12thFloor, New York, NY 10005
                
                
                2,063,768
                (4)
                
                7.1
                %Xiang
      Ji
                
                
                1,456,232
                
                
                5.0
                %Robert
      Moses
                
                
                2,000,000
                (5)
                
                6.9
                %Heartland
      Value Fund
                
                
                1,725,000
                (6)
                
                5.9
                %Xi’an
      Sunway Technology &
                  Industry
      Co., Ltd
                
                
                2,875,364
                (3)
                
                9.8
                %
 
 (1)
Except as otherwise indicated, the address of each beneficial owner is c/o Xi’an
Xilan Natural Gas Co., Ltd., 19th Floor, Building B, Van Metropolis, Tangyan
Road, Hi-Tech Zone, Xi’an, Shaanxi Province, China.
  (2)
Applicable percentage ownership is based on 29,200,304 shares of common stock
outstanding as of March 13, 2008, together with securities exercisable or
convertible into shares of common stock within 60 days of March 13, 2008 for
each stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock that are
currently exercisable or exercisable within 60 days of March 13, 2008 are deemed
to be beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.
  30
  (3) Of
which 2,875,364 shares are owned by Xi’an Sunway Technology & Industry Co.,
Ltd. Qinan Ji owns 42.1% of Xi’an Sunway and may be deemed to beneficially own
such shares.
  (4) As
set forth in the Schedule 13D filed with the SEC on December 23,
2005.
 
 (5) As
set forth in the Schedule 13G filed with the SEC on September 7,
2007.
 
 (6)
William J. Nasgovitz has shared voting and dispositive power with respect to
such shares as reported in the Schedule 13G filed with the SEC on February 8,
2008.
  No
Director, executive officer, affiliate or any owner of record or beneficial
owner of more than 5% of any class of voting securities of the Company is a
party adverse to the Company or has a material interest adverse to the
Company.
  Securities Authorized for Issuance
under Equity Compensation Plans
  The
Company had no equity compensation plans as of the fiscal year ended December
31, 2007.
  ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  Transactions with related
persons
 
 None
 
 Director Independence
 
 The Board
has determined that all Board members, excluding Qinan Ji, are independent under
the applicable NASDAQ rules. The Board has also determined the members of each
committee of the Board are independent under the listing standards of the NASDAQ
Global Select Market. In making these determinations, the Board considered,
among other things, the types and amounts of the commercial dealings between the
Company and the companies and organizations with which the directors are
affiliated.
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
  The
following table shows the fees paid or accrued for the audit and other services
provided by our independent auditors for 2007 and 2006.
 Audit
      fees
                  
                  2007
                  
                  2006Moore
      Stephens Wurth Frazen and Torbet, LLP
                  
                  $
                  150,000
                  **Kabani
      & Company, Inc.
                  
                  $
                  35,000
                  
                  $
                  72,500Manning
      Elliott
                  
                  
                  
                  
                  $
                  —Audit-related
      fees
                  
                  $
                  9,000
                  
                  
                  —Tax
      fees
                  
                  
                  
                  
                  $
                  —All
      other fees
                  
                  $
                  -
                  
                  
                  10,000
      *Total
      fees paid or accrued to our principal accountants
                  
                  $
                  150,000
                  
                  $
                  82,500
  31
  * The
fees billed related to the preparation of our Registration Statement on Form
SB-2 (333-131738) filed with the SEC on February 10, 2006.
 **The
fees billed for professional services rendered for the audit of the Company’s
consolidated annual financial statements and review of the interim consolidated
financial statements included in quarterly reports and services that are
normally provided by our auditors in connection with statutory and regulatory
filings or engagements.
 
 ITEM 15. EXHIBITS
 
 Exhibits:
 ExhibitNumber
                  
                  Description
      of Exhibit3.1
                  
                  Articles
      of Incorporation (incorporated by reference to same exhibit filed with the
      Company's Form 10SB Registration Statement filed September 15, 2000, SEC
      file no. 000-31539).3.2
                  
                  Registrant's
      Amended and Restated By-Laws (incorporated by reference to exhibit 3.1
      filed with the Registrant's Form 8K filed June 16, 2006, SEC file no.
      000-31539).10.1
                  
                  Share
      Purchase Agreement made as of December 6, 2005 among Coventure
      International Inc., Xi’an Xilan Natural Gas Co., Ltd. and each of Xilan's
      shareholders. (incorporated by reference to the exhibits to Registrant’s
      Form 8-K filed on December 9, 2005).10.2
                  
                  Return
      to Treasury Agreement between Coventure International Inc. and John
      Hromyk, dated December 6, 2005. (incorporated by reference to the exhibits
      to Registrant’s Form 8-K filed on December 9, 2005).10.3
                  
                  Purchase
      Agreement made as of December 19, 2005 between China Natural Gas, Inc. and
      John Hromyk (incorporated by reference to the exhibits to Registrant’s
      Form 8-K filed on December 23, 2005).10.4
                  
                  Form
      of Securities Purchase Agreement (incorporated by reference to the
      exhibits to Registrant’s Form 8-K filed on January 12,
    2006).10.5
                  
                  Form
      of Common Stock Purchase Agreement (incorporated by reference to the
      exhibits to Registrant’s Form 8-K filed on January 12,
    2006).10.6
                  
                  Form
      of Registration Rights Agreement (incorporated by reference to the
      exhibits to Registrant’s Form 8-K filed on January 12,
    2006).10.7
                  
                  CNG
      Product Purchase and Sale Agreement between Xi’an Xilan Natural Gas Co.,
      Ltd. and Zhengzhou Zhongyou Hengran Petroleum Gas Co., Ltd. made as of
      July 20, 2006, (translated from the original Mandarin) (incorporated by
      reference to the exhibits to Registrant’s Form 10-KSB filed on April 17,
      2007).10.8
                  
                  Securities
      Purchase Agreement dated August 2, 2007 between the Company and the
      Investors named therein (incorporated by reference to the exhibits to
      Registrant’s Form 8-K filed on August 8, 2007).10.9
                  
                  Registration
      Rights Agreement dated August 2, 2007 between the Company and the
      Investors named therein (incorporated by reference to the exhibits to
      Registrant’s Form 8-K filed on August 8,
2007).
  32
  10.10
                  
                  Consulting
      Services Agreement dated August 17, 2007 between Shaanxi Xilan Natural Gas
      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
      2007).10.11
                  
                  Operating
      Agreement dated August 17, 2007 between Shaanxi Xilan Natural Gas
      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
      2007).10.12
                  
                  Equity
      Pledge Agreement dated August 17, 2007 between Shaanxi Xilan Natural Gas
      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
      2007).10.13
                  
                  Option
      Agreement dated August 17, 2007 between Shaanxi Xilan Natural Gas
      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
      2007).10.14
                  
                  Proxy
      Agreement dated August 17, 2007 between Shaanxi Xilan Natural Gas
      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
      2007).10.15
                  
                  Securities
      Purchase Agreement dated December 30, 2007 between the Company and Abax
      Lotus Ltd. (incorporated by reference to the exhibits to Registrant’s Form
      8-K filed on January 31, 2008).10.16
                  
                  Amendment
      to Securities Purchase Agreement dated January 29, 2008 between the
      Company and Abax Lotus Ltd. (incorporated by reference to the exhibits to
      Registrant’s Form 8-K filed on January 31, 2008).10.17
                  
                  Indenture,
      dated January 29, 2008, by and among the Company and DB Trustees (Hong
      Kong) Limited, as trustee, relating to the 5.00% Guaranteed Senior Notes
      due 2014(incorporated
      by reference to the exhibits to Registrant’s Form 8-K filed on January 31,
      2008).10.18
                  
                  Warrant
      Agreement, dated January 29, 2008, by and among the Company, Mr. Qinan Ji,
      Deutsche Bank AG, Hong Kong Branch as Warrant Agent and Deutsche Bank
      Luxembourg S.A. as Warrant Agent(incorporated
      by reference to the exhibits to Registrant’s Form 8-K filed on January 31,
      2008).10.19
                  
                  Equity
      Registration Rights Agreement, dated January 29, 2008, by and between the
      Company and Abax Lotus Ltd. (incorporated by reference to the exhibits to
      Registrant’s Form 8-K filed on January 31, 2008).10.20
                  
                  Investor
      Rights Agreement, dated January 29, 2008, by and among the Company, its
      subsidiaries, Mr. Qinan Ji, and Abax Lotus Ltd. (incorporated by reference
      to the exhibits to Registrant’s Form 8-K filed on January 31,
      2008).10.21
                  
                  Information
      Rights Agreement, dated January 29, 2008. between the Company and Abax
      Lotus Ltd. (incorporated by reference to the exhibits to Registrant’s Form
      8-K filed on January 31, 2008).10.22
                  
                  Onshore
      Share Pledge Agreement, dated January 29, 2008, between the Company and DB
      Trustees (Hong Kong) Limited, as security agent (incorporated by reference
      to the exhibits to Registrant’s Form 8-K filed on January 31,
      2008).10.23
                  
                  Account
      Pledge and Security Agreement, dated January 29, 2008, by and between the
      Company and DB Trustees (Hong Kong) Limited as Security Agent
      (incorporated by reference to the exhibits to Registrant’s Form 8-K filed
      on January 31, 2008).
  33
  14.1
                  
                  Code
      of Ethics adopted by the Company on June 14, 2006 (incorporated by
      reference to the exhibits to Registrant’s Form 8-K filed on June 16,
      2006).21.1
                  
                  List
      of Subsidiaries. (incorporated by reference to the exhibits to
      Registrant’s Form 10-KSB filed on April 17, 2007).31.1
                  
                  Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended31.2
                  
                  Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended32.1
                  
                  Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)32.2
                  
                  Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer)
  34
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
  Date:
December 23, 2008
  CHINA NATURAL GAS,
      INC.By:
                /s/
      Qinan JiQinan
      Ji
                  Chief
      Executive Officer
                  (Principal
      Executive Officer)By:
                /s/
      Richard Peidong WuRichard
      Peidong Wu
                  Chief
      Financial Officer
                  (Principal
      Financial and Accounting Officer)
  Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
registrant and in the capacities and on the dates indicated.
 
 /s/
      Qinan Ji
                                  
                                  President
      and Chief
                                    Executive
      Officer and

                                      Director
      (Principal Executive Officer)
                                  
                                  December
      23, 2008Qinan
      Ji/s/
      Zhiqiang Wang
                                  
                                  Director
                                  
                                  December
      23, 2008Zhiqiang
      WangDirector
                                  
                                  December
      23, 2008Donald
      Yang/s/
      Richard Peidong Wu
                                  
                                  Chief
      Financial Officer
                                    (Principal
      Accounting Officer)
                                  
                                  December
      23, 2008Richard
      Peidong Wu/s/
      Carl Yeung
                                  
                                  Director
                                  
                                  December
      23, 2008Carl
      YeungDirector
                                  
                                  December
      23, 2008Lawrence
      Leighton