Document:

SERIES B CONVERTIBLE
PREFERRED STOCK

     

    SECURITIES ESCROW
AGREEMENT

     

    THIS
SERIES B CONVERTIBLE PREFERRED STOCK SECURITIES ESCROW AGREEMENT (the “Agreement”), dated as
of April 30, 2009, is entered into by and among China New Energy Group Company,
a Delaware corporation (the “Company”), China Hand
Fund I, LLC, a Delaware limited liability company, for itself and as
representative (together with its successors and assigns, the “Purchaser
Representative”) of any additional investors which may become parties to
this Agreement  (together with their respective successors and
assigns, each, a “Purchaser” and
collectively, the “Purchasers”), and
Escrow, LLC, with an address at 360 Main Street, P.O. Box 391, Washington,
Virginia 22747 (the “Escrow Agent”).
Capitalized terms used, but not defined herein shall have the meanings set forth
in the Series B Purchase Agreement (as defined below).

     

    WITNESSETH:

     

    WHEREAS,
the Purchaser Representative will be purchasing on the date hereof (the “Closing Date”) from
the Company, 1,116,388 shares of the Company’s Series B Convertible Preferred
Stock, par value $0.001 per share (the “Series B Preferred”),
convertible into 39,073,580 shares of the Company’s common stock, par value
$0.001 per share (the “Common Stock), and
certain common stock purchase warrants to purchase 7,814,719 shares of Common
Stock (the “Warrants”) pursuant
to a Series B Convertible Preferred Securities  Purchase Agreement
dated as of the date hereof by and between the Company and the Purchaser
Representative (the “Series B Purchase
Agreement”);

     

    WHEREAS,
as an inducement to the Purchaser Representative to enter into the Series B
Purchase Agreement, the Company has agreed within 30 days following the Closing
Date to issue and deposit the 334,916 shares of Series B Preferred Stock (which
equals 30% of the number of shares of Series B Preferred Stock issued under the
Series B Purchase Agreement) to be held by the Escrow Agent for the benefit of
the Purchasers in the event the Company fails to achieve any of the following
financial performance thresholds for the 12-month periods ending December 31,
2009 (“2009”):
After-Tax Net Income of at least (w) $5.0 million if the Company receives at
least $5.4 million in gross proceeds from the sale of Securities at the Closings
held not later than 30 days after the filing of the Company’s Annual Report on
Form 10-K for the fiscal year ending December 31, 2008 (the “10-K Filing Date”) or
(x) $4.5 million, if the Company does not receive at least $5.4 million in gross
proceeds from the sale of Securities at the Closing held on or prior to the 10-K
Filing Date (individually the “2009 Target Number”
and they are collectively referred to herein as the “2009 Performance
Threshold”);

     

    WHEREAS, as a further inducement to the
Purchaser Representative to enter into the Series B Purchase Agreement, the
Company has agreed within 30 days following the Closing Date to place the
Listing Escrow Shares (as hereinafter defined) into escrow for the benefit of
the Purchasers in the event that shares of Common Stock are not listed and
trading on a National Stock Exchange by January 31, 2010;

    
       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

     

    WHEREAS, as an incentive to the members
of management of the Company set forth on Exhibit A attached hereto (“Management”) (which
exhibit shall be completed within 30 days following the Closing Date) to
cause the Company to meets its financial projections, the Purchaser
Representative has agreed to place Purchaser Deposited Escrow Shares (as
hereinafter defined) into escrow for the benefit of the Management;
and

     

    WHEREAS,
the Company and the Purchaser Representative have requested that the Escrow
Agent hold the Company Deposited Escrow Shares (as herein after defined), the
Listing Escrow Shares and the Purchaser Deposited Escrow Shares on the terms and
conditions set forth in this Agreement and the Escrow Agent has agreed to act as
escrow agent pursuant to the terms and conditions of this
Agreement.

     

    NOW,
THEREFORE, in consideration of the covenants and mutual promises contained
herein and other good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged and intending to be legally bound
hereby, the parties agree as follows:

     

    ARTICLE
I

     

    TERMS OF
THE ESCROW

     

    1.1.         The
parties hereby agree to establish an escrow account with the Escrow Agent
whereby the Escrow Agent shall hold the Company Deposited Escrow Shares, the
Listing Escrow Shares and the Purchaser Deposited Escrow Shares as contemplated
by this Agreement.

     

    1.2.         Within
30 days following the execution of this Agreement, the Company shall issue and
deliver to the Escrow Agent a stock certificate or stock certificates evidencing
an aggregate of 334,916 shares of Series B Preferred (which number of shares of
Series B Preferred shall be  equivalent to 30% of the number of shares
of Series B Preferred to be issued and sold to the Purchaser Representative on
the Closing Date and which shares of Series B Preferred may be converted into
11,722,060 shares of Common Stock).  The shares of Series B Preferred
described in this Section 1.2 shall be referred to in this Agreement as the
“Company Deposited
Escrow Shares”).  All Company Deposited Escrow Shares shall be
accompanied by stock powers executed in blank with signature medallion
guaranteed.

     

    1.3.         The
parties hereby agree that the Company Deposited Escrow Shares shall be delivered
based on the achievement of the Performance Thresholds as set forth
below:

     

    

    (i)       
    If the After-Tax Net Income for 2009 is less than the
2009 Target Number, then if the Percentage Shortfall (as hereinafter defined)
for 2009, is less than fifty percent (50%), but equal or greater than fifteen
percent (15%), then an Adjustment Percentage for such year shall be
determined.  For purposes of this Section, the “Percentage Shortfall”
shall mean the percentage obtained by dividing (w) the
amount of the shortfall of the After-Tax Net Income from the 2009 Target Number
by (x) the 2009
Target Number.   For purposes of this Section, the “Adjustment
Percentage” for 2009 shall mean the percentage that the Percentage
Shortfall for such year bears to fifty percent (50%).  Within five
days after the determination of the Percentage Shortfall for 2009 the Purchaser
Representative and the Company shall give joint written instructions to the
Escrow Agent to, and upon receipt of such written instructions, the Escrow Agent
shall, within five days after receipt of such instructions deliver to the
Purchasers on a pro rata basis such number of shares of Series B Preferred as is
determined by multiplying the Adjustment Percentage for such year by the total
number of Company Deposited Escrow Shares then required to be in
escrow.  In the case of a delivery of less than all of the shares of
the Company Deposited Escrow Shares in respect of the computation of the
Adjustment Percentage for 2009, the balance of the Company Deposited Escrow
Shares which are not required to be delivered to the Purchasers shall be
returned to the Company.  For example, if the Percentage Shortfall for
2009 is 20%, the Adjustment Percentage would be 40%, and 40% of the total number
of Company Deposited Escrow Shares then required to be in escrow would be
delivered to the Purchasers on a pro rata basis, with the balance being returned
to the Company pursuant to this Agreement.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (ii)           If
the Percentage Shortfall for 2009, is equal to or greater than fifty percent
(50%), then within five days after the determination of the Percentage Shortfall
for 2009 the Purchaser Representative and the Company shall give joint written
instructions to the Escrow Agent, and upon receipt of such written instructions,
the Escrow Agent shall within five days after receipt of such instructions,
deliver all of the Company Deposited Escrow Shares then held by the Escrow Agent
to Purchasers on a pro rata basis.

     

    (iii)          If
the Percentage Shortfall for 2009 is less than fifteen percent (15%), then the
Purchaser Representative and the Company shall give joint written instructions
to the Escrow Agent to, and upon receipt of such written instructions, the
Escrow Agent shall within five days after receipt of such instructions, return
to the Company for cancellation all of the Company Deposited Escrow
Shares.

     

     

    (iv)          The
determination regarding the number and the distribution, if any, of Company
Deposited Escrow Shares to be distributed to the Purchasers pursuant to this
Section 1.3 shall be made within five (5) Trading Days after the date the
Company is required to file its Annual Report on Form 10-K for the applicable
fiscal year with the Commission (after giving effect to any extension pursuant
to Rule 12b-25 of the Exchange Act). In the event that the Company does not file
(after giving effect to any extension pursuant to Rule 12b-25 of the Exchange
Act) its Annual Report on Form 10-K for the year ended December 31, 2009 with
the Commission then within (30 days after the date the Company is required to
file its Annual Report  after giving effect to any extension pursuant
to Rule 12b-25 of the Exchange Act, all of the Company Deposited Escrow Shares
shall be delivered to the Purchasers on a pro rata basis within five (5) Trading
Days following the expiration of such thirty (30) day period.

     

    (v)           Notwithstanding
anything to the contrary set forth herein, only those Purchasers who own shares
of Series B Preferred issued under the Purchase Agreement and remain
shareholders of the Company at the time that any Company Deposited Escrow Shares
become deliverable hereunder shall be entitled to their pro rata portion of such
Company Deposited Escrow Shares calculated based on their ownership interest at
the time when the Company Deposited Escrow Shares become deliverable hereunder.
Any Company Deposited Escrow Shares not delivered to Purchasers because the
Purchasers no longer hold shares of Series B Preferred acquired under the
Purchase Agreement shall remain in escrow with the Escrow Agent until
transferred either to the Purchasers or returned to the Company pursuant to
Section 1.3(ii) or 1.3(iii), as applicable.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (vi)          Notwithstanding
anything to the contrary contained in this Section 1.3 or in the Series B
Purchase Agreement, the Parties agree that for purposes of determining whether
or not the Target Numbers have been achieved,

     

    (A)           the
release of any or all of the Company Deposited Escrow Shares shall not be
counted as an expense, charge, or other deduction from revenues in calculating
net income even though GAAP may require contrary treatment,

     

    (B)           any
registration delay payments arising under the Registration Rights Agreement that
are accrued or paid by the Company to any Series B Purchaser will be excluded
from the calculation of net income, and

     

    (vii)         So
long as the Company Deposited Escrow Shares remain in escrow, such shares shall
not be counted in calculating a quorum for stockholder voting purposes nor shall
such shares be voted at any meeting of stockholders or included in a written
consent.

     

    1.4.          (i)
Within 30 days if the execution of this Agreement, the Purchaser Representative
shall deliver to the Escrow Agent a stock certificate or stock certificates
evidencing an aggregate of 22,328 shares of Series B Preferred (which number of
shares of Series B Preferred is equivalent to 2.0% of the number of shares of
Series B Preferred issued and sold to the Purchaser Representative on the
Closing Date and which shares of Series B Preferred may be converted into
781,480 shares of Common Stock). Such shares shall be collectively referred to
in this Agreement as the “Purchaser Deposited Escrow
Shares”). All Purchaser Deposited Escrow Shares shall be accompanied by
stock powers executed in blank with signature medallion guaranteed.

     

    (ii)  If the Company
achieves the 2009 Performance Threshold, then within five Trading Days after the
filing of the Company’s Annual Report on Form 10-K for the fiscal year ending
December 31, 2010 the Company and the Purchaser Representative shall give joint
written instructions to the Escrow Agent to, and upon receipt of such
instructions, the Escrow Agent shall within five days after receipt of such
instructions, transfer all of the Purchaser Deposited Escrow Shares to
Management, pro rata in accordance with the percentages set forth in
Exhibit A.   In such instance, the Purchaser Deposited Escrow
Shares shall be converted to common stock in accordance with their terms prior
to distribution to Management.

     

    (iii)  If the Company fails
to achieve the 2009 Performance Threshold, then within five Trading Days after
the filing of the Company’s Annual Report on Form 10-K for the fiscal year
ending December 31, 2009 the Company and the Purchaser Representative shall give
joint written instructions to the Escrow Agent to, and upon receipt of such
instructions, the Escrow Agent shall within five days after receipt of such
instructions, transfer all of the Purchaser Deposited Escrow Shares to the
Purchasers who deposited such shares.

     

    1.5.          The
Company will provide the Purchaser Representative with the Company’s audited
financial statements for 2009 prepared in accordance with US GAAP, on or before
March 31, 2010 so as to allow the Purchaser Representative the opportunity to
evaluate whether the 2009 Performance Threshold was attained.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    1.6.          The
parties hereby agree that the Listing Escrow Shares (as hereinafter defined)
shall be deposited in escrow and as set forth below:

     

    (a)           Within
30 days following the execution of this Agreement, the Company shall issue and
deliver to the Escrow Agent a stock certificate or stock certificates evidencing
an aggregate of 27,910 shares of Series B Preferred (which number of shares of
Series B Preferred is equivalent to 2.5% of the number of shares of Series B
Preferred to be issued and sold to the Purchaser Representative on the Closing
Date and which shares of Series B Preferred may be converted into 976,850 shares
of Common Stock). All of the shares of Series B Preferred described in this
Section 1.6 shall be collectively referred to in this Agreement as the “Listing Escrow
Shares”).

     

    (b)           In
the event shares of Common Stock are not listed and trading on a National Stock
Exchange by January 31, 2010, the Purchaser Representative and the Company shall
within five days thereafter give joint written instructions to the Escrow Agent
to, and upon receipt of such written instructions, the Escrow Agent shall,
within five days after receipt of such instructions deliver to the Purchasers on
a pro rata basis all of the Listing Escrow Shares. In the event shares of
Common Stock are listed and trading on a National Stock Exchange by January 31,
2010, the Company and Purchaser Representative shall within five days after such
listing give joint written instructions to the Escrow Agent to, and upon receipt
of such written instructions, the Escrow Agent shall, within five days after
receipt of such instructions deliver to the Company all of the Listing Escrow
Shares and the Company shall cancel all of such Listing Escrow
Shares

     

    ARTICLE
II

    REPRESENTATIONS
OF THE COMPANY

     

    2.1.          The
Company hereby represents and warrants to the Purchasers and the Purchaser
Representative as follows:

     

    (i)          
 The Company Deposited Escrow Shares and the Listing Escrow Shares being
placed into escrow immediately prior to the Closing Date are, upon release from
escrow in accordance with this Agreement validly issued, fully paid and
nonassessable shares of the Company, free and clear of all pledges, liens,
claims and encumbrances, except encumbrances created by this Agreement. There
are no restrictions on the ability of the Company to issue and deposit in
escrow the Company Deposited Escrow Shares or Listing Escrow Shares or to enter
into this Agreement other than transfer restrictions under applicable federal
and state securities laws. Upon any delivery to the Purchasers of Company
Deposited Escrow Shares or Listing Escrow Shares placed into escrow pursuant to
this Agreement, the Purchasers will acquire good and valid title to such Company
Deposited Escrow Shares or Listing Escrow Shares, free and clear of any pledges,
liens, claims and encumbrances.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (ii)           The
performance of this Agreement and compliance with the provisions hereof will not
violate any provision of any law applicable to the Company and will not conflict
with or result in any breach of any of the terms, conditions or provisions of,
or constitute a default under, or result in the creation or imposition of any
lien, charge or encumbrance upon, any of the properties or assets of the Company
pursuant to the terms of the certificate of incorporation or by-laws of the
Company or any indenture, mortgage, deed of trust or other agreement or
instrument binding upon the Company or affecting the Company Deposited Escrow
Shares or Listing Escrow Shares. No notice to, filing with, or authorization,
registration, consent or approval of any governmental authority or other person
is necessary for the execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby by the
Company.

     

    ARTICLE
III

    REPRESENTATIONS
OF THE PURCHASERS

     

    3.1.          Each
Purchaser hereby severally represents and warrants to the Company and the
Purchaser Representative as follows:

     

    (i)    
       The Purchaser Deposited Escrow Shares
being placed into escrow at the Closing Date are owned by the Purchaser free and
clear of all pledges, liens, claims and encumbrances, except encumbrances
created by this Agreement. There are no restrictions on the ability of the
Purchaser to deposit in escrow the Purchaser Deposited Escrow Shares or to enter
into this Agreement other than transfer restrictions under applicable federal
and state securities laws. Upon any delivery to Management of Purchaser
Deposited Escrow Shares placed into escrow pursuant to this Agreement,
Management will acquire good and valid title to such Purchaser Deposited Escrow
Shares, free and clear of any pledges, liens, claims and
encumbrances.

     

    (ii)           The
performance of this Agreement and compliance with the provisions hereof will not
violate any provision of any law applicable to the Purchaser and will not
conflict with or result in any breach of any of the terms, conditions or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon, any of the properties or
assets of the Purchaser pursuant to the terms of any indenture, mortgage, deed
of trust or other agreement or instrument binding upon the Purchaser or
affecting the Purchaser Deposited Escrow Shares. No notice to, filing with, or
authorization, registration, consent or approval of any governmental authority
or other person is necessary for the execution, delivery or performance of this
Agreement or the consummation of the transactions contemplated hereby by the
Purchaser.

    

    ARTICLE
IV

    ESCROW
AGENT

    

    4.1 Interpleader. In the
event this Agreement, the Company Deposited Escrow Shares, the Purchaser
Deposited Escrow Shares or the Escrow Agent becomes the subject of litigation,
or if the Escrow Agent shall desire to do so for any other reason, the Company
authorizes the Escrow Agent, at its option, to deposit the Company Deposited
Escrow Shares, the Listing Escrow Shares and/or the Purchaser Deposited Escrow
Shares with the clerk of the court in which the litigation is pending, or a
court of competent jurisdiction if no litigation is pending, and thereupon
the Escrow Agent shall be fully relieved and discharged of any further
responsibility with regard thereto. The Company also authorizes the Escrow
Agent, if it receives conflicting claims to the Company Deposited Escrow
Shares,  and/or the Purchaser Deposited Escrow Shares, is threatened
with litigation or if the Escrow Agent shall desire to do so for any other
reason, to interplead all interested parties in any court of competent
jurisdiction and to deposit the Company Deposited Escrow Shares, the Listing
Escrow Shares and/or the Purchaser Deposited Escrow Shares with the clerk of
that court and thereupon the Escrow Agent shall be fully relieved and discharged
of any further responsibility hereunder to the parties from which they were
received.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    4.2           Exculpation and
Indemnification of Escrow Agent

    

    (a)   The Escrow Agent
shall have no duties or responsibilities other than those expressly set forth
herein.  The Escrow Agent shall have no duty to enforce any obligation
of any person to make any payment or delivery, or to direct or cause any payment
or delivery to be made, or to enforce any obligation of any person to perform
any other act.  The Escrow Agent shall be under no liability to the
other parties hereto or anyone else, by reason of any failure, on the part of
any party hereto or any maker, guarantor, endorser or other signatory of a
document or any other person, to perform such person’s obligations under any
such document.  Except for amendments to this Escrow Agreement
referenced below, and except for written instructions given to the Escrow Agent
by the Company and the Purchaser Representative relating to the Company
Deposited Shares, the Listing Escrow Shares and the Purchaser Deposited Escrow
Shares, the Escrow Agent shall not be obligated to recognize any agreement
between or among any of the other parties, notwithstanding that references
hereto may be made herein and whether or not it has knowledge
thereof.

    

    (b)   The  Escrow
Agent shall not be liable to the  Company, the Purchaser
Representative, any Purchaser or to anyone else for any action taken or omitted
by it, or any action suffered by it to be taken or omitted, in good faith and
acting upon any order, notice, demand, certificate, opinion or advice of counsel
(including counsel chosen by the Escrow Agent), statement, instrument, report,
or other paper or document (not only as to its due execution and the validity
and effectiveness of its provisions, but also as to the truth and acceptability
of any information therein contained), which is believed by the Escrow Agent to
be genuine and to be signed or presented by the proper person or
persons.  The  Escrow Agent shall not be bound by any of the
terms thereof, unless evidenced by written notice delivered to the Escrow Agent
signed by the proper party or parties and, if the duties or rights of the Escrow
Agent are affected, unless it shall give its prior written consent
thereto.

    

    (c)  The  Escrow
Agent shall not be responsible for the sufficiency or accuracy of the form, or
of the execution, validity, value or genuineness of, any document or property
received, held or delivered to it hereunder, or of any signature or endorsement
thereon, or for any lack of endorsement thereon, or for any description therein;
nor shall the Escrow Agent be responsible or liable to the Company, the
Purchaser Representative, any Purchaser or to anyone else in any respect on
account of the identity, authority or rights, of the person executing or
delivering or purporting to execute or deliver any document or property or this
Escrow Agreement.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (d)   The Escrow Agent
shall have the right to assume, in the absence of written notice to the contrary
from the proper person or persons, that a fact or an event, by reason of which
an action would or might be taken by the Escrow Agent, does not exist or has not
occurred, without incurring liability to the  Company, the Purchaser
Representative, any Purchaser or to anyone else for any action taken or omitted
to be taken or omitted, in good faith and in the exercise of its own best
judgment, in reliance upon such assumption.

    

    (e)    The Escrow
Agent shall be indemnified and held harmless against any liability for taxes and
for any penalties in respect of taxes, on any investment income or payments with
respect to the Company Deposited Escrow Shares and the Purchaser Deposited
Escrow Shares in the manner provided in Section 4.2 (f).

    

    (f)  The  Escrow
Agent will be indemnified and held harmless by the  Company from and
against all expenses, including all counsel fees and disbursements, or loss
suffered by the Escrow Agent in connection with any action, suit or proceedings
involving any claim, or in connection with any claim or demand, which in any
way, directly or indirectly, arises out of or relates to this Escrow Agreement,
the services of the Escrow Agent hereunder, except for claims relating to gross
negligence by Escrow Agent or breach of this Escrow Agreement by the Escrow
Agent, or the monies or other property held by it hereunder or for willful
misconduct of the Escrow Agent.  Promptly after the receipt of the
Escrow Agent of notice of any demand or claim or the commencement of any action,
suit or proceeding, the Escrow Agent shall, if a claim in respect thereof is to
be made against the Company, notify the Company thereof in writing, but the
failure by the Escrow Agent to give such notice shall not relieve the Company
from any liability which the Company may have to the Escrow Agent
hereunder.  Notwithstanding any obligation to make payments and
deliveries hereunder, the Escrow Agent may retain and hold for such time as it
deems necessary such amount of monies or property, including shares of the
Company’s capital stock as it shall, from time to time, in its sole discretion,
seem sufficient to indemnify itself for any such loss or expense and for any
amounts due it under Section 7.

    

    (g)  For purposes hereof, the
term “expense or loss” shall include all amounts paid or payable to satisfy any
claim, demand or liability, or in settlement of any claim, demand, action, suit
or proceeding settled with the express written consent of the Escrow Agent, and
all costs and expenses, including, but not limited to, counsel fees and
disbursements, paid or incurred in investigating or defending against any such
claim, demand, action, suit or proceeding.

     

    ARTICLE
V

     

    TERMINATION
OF AGREEMENT

    

    5.1           This
Escrow Agreement shall terminate upon delivery by the Escrow Agent in accordance
with this Agreement of all of the Company Deposited Escrow Shares, the Listing
Escrow Shares and Purchaser Deposited Escrow Shares, provided that the rights of
the Escrow Agent and the obligations of the  Company under Article
IV  shall survive the termination hereof.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    5.2           The  Escrow
Agent may resign at any time and be discharged from its duties as Escrow Agent
hereunder by giving the Company and the Purchaser Representative at least five
days written notice thereof (the “Notice
Period”).  As soon as practicable after its resignation, the
Escrow Agent shall, if it receives notice from the Company within the Notice
Period, turn over to a successor escrow agent appointed by the Company all of
the Company Deposited Escrow Shares, the Listing Escrow Shares and Purchaser
Deposited Escrow Shares then held by the Escrow Agent upon presentation of the
document appointing the new escrow agent and its acceptance
thereof.  If no new agent is so appointed within the Notice Period,
the Escrow Agent may deposit the Company Deposited Escrow Shares and Purchaser
Deposited Escrow Shares with the clerk of a court of competent jurisdiction in
accordance with Section 4.1 of this Agreement.

    

    ARTICLE
VI

    COMPENSATION
OF ESCROW AGENT

    

    The Escrow Agent shall be entitled to
the following compensation from the Company:

    

    6.1           Documentation
Fee: The Company shall pay a documentation fee to the Escrow Agent
of $2,500, on the Closing Date.

    

    6.2           Delivery Fee. The
Company shall pay a fee of $500 to the Escrow Agent each time during the term of
the Agreement in which the Escrow Agent delivers any of Company Deposited Escrow
Shares, the Listing Escrow Shares and Purchaser Deposited Escrow
Shares.

     

    ARTICLE
VII

    MISCELLANEOUS

     

    7.1           No
waiver or any breach of any covenant or provision herein contained shall be
deemed a waiver of any preceding or succeeding breach thereof, or of any other
covenant or provision herein contained. No extension of time for performance of
any obligation or act shall be deemed an extension of the time for performance
of any other obligation or act.

     

    7.2           All
notices, communications and instructions required or desired to be given under
this Agreement must be in writing and shall be deemed to be duly given if sent
by registered or certified mail, return receipt requested, or overnight courier
to the following addresses:

     

    If to
Escrow Agent:

    

    Escrow,
LLC

    360 Main
Street

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    P.O. Box
391

    Washington,
Virginia 22747

    Attt:
Jonnie Zarecor

    Tel No.:
800-984-2155 or 540-675-2155

    Fax No.:
540-675-3155

    Email:

    

    If to the
Company:

     

    China New
Energy Group Company

    17th
Floor, HongJi Building, JinWei Road

    HeBei
District

    Tianjin,
People’s Republic of China

    Attn:
_________________________

    Tel. No.:
__________________________

    Fax No.:
___________________________

    Email:
______________________________

     

    With a
copy to:

     Pillsbury
Winthrop Shaw Pittman LLP

    2300 N
Street , NW

    Wahsington
DC 20037-1122

    Attn.:  Louis
A. Bevilacqua

    Tel.
No.:   (202) 663-8158

    Fax
No.::  (202) 663-8007

    Email:
louis.bevilacqua@pillsburylaw.com

     

    If to the
Purchaser

    Representative:

    

    China
Hand Fund I, LLC

    558 Lime
Rock Road

    Lakeville,
CT  06039

    Attn:
Mary Fellows

    Tel. No.:
860-435-7000

    Fax No.:
860-435-6540

    Email:
mfellows@kuhnsbrothers.com

     

     or
to such other address and to the attention of such other person as any of the
above may have furnished to the other parties in writing and delivered in
accordance with the provisions set forth above.

     

    7.3           This
Escrow Agreement shall be binding upon and shall inure to the benefit of the
permitted successors and permitted assigns of the parties hereto.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    7.4           This
Escrow Agreement and the rights and obligations hereunder of the Company may not
be assigned.  This Escrow Agreement and the rights and obligations
hereunder of the Escrow Agent may be assigned by the Escrow
Agent.  This Escrow Agreement shall be binding upon and inure to the
benefit of each party’s respective successors, heirs and permitted assigns. No
other person shall acquire or have any rights under or by virtue of this Escrow
Agreement. This Escrow Agreement may not be changed orally or modified, amended
or supplemented without an express written agreement executed by the Escrow
Agent, the Company and the Purchaser Representative. This Escrow Agreement is
intended to be for the sole benefit of the parties hereto and the Purchasers and
their respective successors, heirs and permitted assigns, and none of the
provisions of this Escrow Agreement are intended to be, nor shall they be
construed to be, for the benefit of any third person.

    

    7.5           This
Escrow Agreement shall be construed without regard to any presumption or other
rule requiring construction against the party causing such instrument to be
drafted.  The  terms “hereby,” “hereof,” “hereunder,” and
any similar terms, as used in this Escrow Agreement, refer to the Escrow
Agreement in its entirety and not only to the particular portion of this Escrow
Agreement where the term is used.  The word “person” shall mean any
natural person, partnership, corporation, government and any other form of
business of legal entity.  All words or terms used in this Escrow
Agreement, regardless of the number or gender in which they were used, shall be
deemed to include any other number and any other gender as the context may
require.  This Escrow Agreement shall not be admissible in evidence to
construe the provisions of any prior agreement.

     

    7.6           The
parties hereto expressly agree that this Escrow Agreement shall be governed by,
interpreted under and construed and enforced in accordance with the laws of the
State of Virginia, without regard to conflicts of law principles that would
result in the application of the substantive laws of another jurisdiction. Each
of the parties  hereby irrevocably consents to the jurisdiction of the
courts of the State of Virginia and of any Federal court located in such state
in connection with any action, suit or proceedings arising out of or relating to
this Escrow Agreement or any action taken or omitted hereunder, and waives
personal service of any summons, complaint or other process and agrees that the
service thereof may be made by certified or registered mail directed to it at
the address for notices set forth in Section 7.2.

     

    7.7           The
Escrow Agent’s duties hereunder may be altered, amended, modified or revoked
only by a writing signed by the Company, the Purchaser Representative and the
Escrow Agent.

     

    

    7.8           The
representations and warranties contained in this Escrow Agreement shall survive
the execution and delivery hereof and any investigations made by any
party.  The headings in this Escrow Agreement are for purposes of
reference only and shall not limit or otherwise affect any of the terms
thereof.

    

    7.9           This
Escrow Agreement may be executed in a number of counterparts, by facsimile, each
of which shall be deemed to be an original as of those whose signature appears
thereon, and all of which shall together constitute one and the same
instrument.  This Escrow Agreement shall become binding when one or
more of the counterparts hereof, individually or taken together, are signed by
all the parties.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    7.10         If
the Escrow Agent reasonably requires other or further instruments in connection
with this Escrow Agreement or obligations in respect hereto, the necessary
parties hereto shall join in furnishing such instruments.

     

     [Signature
Page Follows]

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    [SIGNATURE
PAGE TO SECURITIES ESCROW AGREEMENT]

     

    IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of this
30th 
day of April, 2009.

     

    
      
        
          
            	
                    CHINA
      NEW ENERGY GROUP COMPANY

                  
	 
      
	
                    By:

                  	
                    /s/ James Li

                  	 
      
	 
      	
                    Name:
      James Li

                  
	 
      	
                    Title:
      Authorized Signatory

                  
	 
      	 
      
	
                    PURCHASER
      REPRESENTATIVE:

                  
	 
      
	
                    CHINA
      HAND FUND I, LLC

                  
	 
      
	
                    By:

                  	
                    /s/ John D. Kuhns

                  	 
      
	 
      	
                    Name:
      John D. Kuhns

                  
	 
      	
                    Title:
      Member-Manager

                  
	 
      	 
      
	
                    ESCROW
      AGENT:

                  
	 
      
	
                    ESCROW,
      LLC

                  
	 
      	 
      
	
                    By:

                  	
                    /s/ Johnnie Zarecor

                  	 
      
	 
      	
                    Name:
      Johnnie Zarecor

                  
	 
      	
                    Title:

                  

          

        

      

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    EXHIBIT
A

    

    MANAGEMENT

    

    
      
        
          	
                  Name

                	 
      	
                  Percentage
      of Purchaser Deposited Escrow

                  Shares
      to Which Entitled if Performance

                  Thresholds are AttainedWAIVER

    

    This
Waiver (the “Waiver”) is made as
of April 30, 2009, by and among China New Energy Group Company, a Delaware
corporation (the "Company"), and China Hand Fund I,
LLC, a Delaware limited liability company (together with its successors and
assigns, the “Purchaser”
or  “China
Hand”).

    

    RECITALS

    

    WHEREAS, on August 8, 2008, in
connection with a financing transaction which closed on August  20,
2008 (the “August 2008
Financing”), the Company entered into the following agreements with China
Hand:  (i) a Series A Convertible Preferred Stock Securities Purchase
Agreement (the “August
Securities Purchase Agreement”), (ii) a Registration Rights Agreement
(the “August
Registration Rights Agreement”), (iii) a Securities Escrow Agreement with Escrow, LLC as
Escrow Agent (the “August Securities Escrow
Agreement”),  (iv) a Closing Escrow Agreement with the Escrow
Agent  (the “August Closing Escrow
Agreement” and together with the August Securities Purchase Agreement,
the August Registration Rights Agreement, the August Securities Escrow
Agreement, and the Letter Agreement dated August 20, 2008 between the Company
and the Purchaser, the “August Transaction
Agreements”); and

    

    WHEREAS, pursuant to the
August Securities Purchase Agreement the Company issued to China Hand 1,857,373
shares of Series A Convertible Preferred Stock of the Company, par value $0.001
per share (the “Series
A Preferred Stock”), and warrants to purchase 13,001,608 shares of the
Company’s  common stock, par value $0.001 per share (“Common Stock”), at an
initial exercise price of $0.187 per share (subject to adjustments) for a period
of five (5) years following the date of their issuance (the “Warrants”), for an
aggregate purchase price of Nine Million U.S. Dollars
($9,000,000);  and

    

    WHEREAS under the terms of the
August Securities Purchase Agreement and August Securities Escrow Agreement, the
Company delivered to the Escrow Agent 557,212 shares of Series A Preferred Stock
(the “Make Good Escrow
Shares”) to be released from escrow to China Hand if certain performance
thresholds set forth in the August Securities Purchase Agreement are not met by
the Company; and

    

    WHEREAS,  the
Company did not meet the 2008 Target Numbers (as defined in the August
Securities  Purchase Agreement) and consequently under the terms of
Section 6.18 of the August Securities Purchase Agreement Purchaser is entitled
to all of the Make Good Shares; and

    

    WHEREAS, under Section 6.32 of
the August Securities Purchase Agreement, prior to March 31, 2009 the Company
was required to effect a reverse stock split of its Common Stock at the ratio of
one share of Common Stock for every 35 shares of Common Stock outstanding (the
“Reverse
Split”).

    

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

     

    WHEREAS, the Reverse Split has
not occurred and under the terms of Section 6.32 the August Securities Purchase
Agreement China Hand is entitled to liquidated damages  equal to
$90,000 for each 30 day period the Reverse Split has not occurred calculated for
each day that the reverse split shall not have become effective, such liquidated
damages not to exceed $1,350,000;

    

    WHEREAS, under the August
Registration Rights Agreement, the Company agreed, among other things, to
register all of the shares of Common Stock underlying the Series A Preferred
Stock and Warrants issued to the Purchaser (the “Shares”) within a
defined period and in connection therewith agreed  to prepare and
file, prior to November 20, 2008,  a registration statement under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
(the “Commission”) covering
the resale of all of the Shares. 

    

    WHEREAS,
the  Company has not filed a registration statement with the
Commission and under August Registration Rights Agreement  the Company
is required to pay China Hand and the other investors certain liquidated
damages; and

    

    WHEREAS, in connection with
the April 2009 Financing (as defined below) the Company is entering into an
Amended and Restated Registration Rights Agreements with China Hand which will
replace the August Registration Rights Agreement  and which will grant
China Hand certain registration rights with respect to the Shares and will
provide  for liquidated damages for failure to meet the schedule set
forth therein; and

    

    WHEREAS, the August Securities
Purchase Agreement contemplated an additional closing where the Purchaser could
invest up to an additional $5.4 million on the same terms as provided for in the
August Securities Purchase Agreement;

    

    WHEREAS, the Purchaser and
certain other investors are willing to invest the additional $5.4 million in the
Company (the “April
2009 Financing”) but in lieu of the issuance of further shares of Series
A Preferred Stock contemplated by the August Securities Purchase Agreement the
Purchaser has requested that it be issued shares of a new class of preferred
stock to be called  Series B Preferred Stock (“Series B Preferred”)
which would entitle the holders thereof to seventy percent (70%) of the voting
power of the Company.  Except for super voting provisions of the
Series B Preferred set forth in the Certificate of Designation for the Series B
Preferred, the terms of the Series B Preferred are substantially similar to the
terms of  Series A Preferred Stock;

    

    WHEREAS, the Company is
willing to issue shares of Series  B Preferred Stock in
the  April 2009 Financing and  in connection therewith the
Purchaser  is willing to waive certain rights as set forth in this
waiver.

    

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    NOW, THEREFORE, in
consideration of the mutual terms, conditions and other agreements set forth
herein, the parties hereto hereby agree as follows:

     

    Section
1.  Waiver. Simultaneously
with the issuance and delivery of the Company’s shares of Series B Preferred
Stock to the Purchaser pursuant to the terms of Series B Preferred Stock
Securities Purchase Agreement dated as of April 30, 2009 by and between the
Company and Purchaser (the  “Series B Preferred Stock
Securities Purchase Agreement”), Purchaser hereby waives the following
(for the avoidance of doubt, the execution and delivery by the Company of Series
B Preferred Stock Securities Purchase Agreement and the issuance of the Series B
Preferred Stock by the Company to the Purchaser contemplated thereby shall be a
condition precedent to the Waiver):

     

    
      	
              (a)

            	
              its
      rights to the all of the 557,212 Make Good Escrow Shares currently held in
      escrow under the terms of the August Securities Purchase Agreement and the
      August Securities Escrow Agreement arising from the Company’s failure to
      meet the 2008 Target Numbers (as defined in the August Securities Purchase
      Agreement); provided,
      however,
      that in lieu thereof China Hand shall receive  241,545 shares of
      Series A Preferred Stock (which number is based on an assumed After Tax
      Net Income (as defined in the August Securities Purchase Agreement) for
      the fiscal year ended December 31, 2008 of  $3.368
      million).   The Company will cause the Escrow Agent to
      release and the Escrow Agent shall deliver to China
      Hand  241,545 shares of Series A Preferred Stock from the Make
      Good Escrow Shares within 30 days of  the closing of the April
      2009 Transaction and the Company will deliver to the Escrow
      Agent  within 30 days of  the closing of the April
      2009 Transaction 241,545 additional shares of Series A Preferred
      Stock  to be held as Make Good Escrow Shares under the terms of
      the August Securities Purchase Agreement and the August Securities Escrow
      Agreement; and

            

    

    

    
      	
              (b)

            	
              its
      rights under Section 6.18(ii) of the August Securities Purchase Agreement
      to receive additional shares of Series A Preferred Stock  if the
      Company’s audited consolidated After-Tax Net Income for the fiscal year
      ended December 31, 2009 is less than $6,000,000 and the Company’s Earnings
      Per Share on a Full-Diluted Basis (both as defined in the August
      Securities Purchase Agreement) is less than $0.0294; provided, however, that
      in lieu thereof China Hand shall be entitled to receive such additional
      shares if the Company’s audited consolidated After-Tax Net Income for the
      fiscal year ended December 31, 2009 is less than
    $5,000,000.

            

    

    

    
      	
              (c)

            	
              all
      of its rights to liquidated damages under Section 6.31 of the
      August  Securities Purchase Agreement arising from the Company’
      s failure to effect the Reverse Split prior to March  31, 2009;
      and

            

    

    

    
      	
              (d)

            	
              all
      of its rights to liquidated damages under the
      August  Registration  Rights
      Agreement;  provided, however, that
      the execution and delivery by the Company of Amended and Restated
      Registration Rights Agreement in connection with the April 2009 Financing
      (which agreement is intended to replace the August Registration Rights
      Agreement) shall be a condition precedent to the waiver of these
      liquidated damages.

            

    

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    Section
2.  Effect on August Transaction
Agreements.  Except as expressly set forth above, all of the
terms and conditions of the August Transaction Agreements and any agreements,
documents and instruments signed by the Company and any Purchaser in connection
therewith shall continue in full force and effect after the execution of this
Waiver and shall not be in any way changed, modified or superseded by the terms
set forth herein.

    

    Section
3.  Miscellaneous.

     

    
      	
               
      

            	
              a.

            	
              Amendments and
      Waivers.  The provisions of this Waiver, including the
      provisions of this sentence, may not be amended, modified or supplemented,
      and waivers or consents to departures from the provisions hereof may not
      be given, unless the same shall be in writing and signed by the Company
      and the Purchaser.

            

    

     

    
      	
               
      

            	
              b.

            	
              Notices.  Any
      and all notices or other communications or deliveries required or
      permitted to be provided hereunder shall be delivered as set forth in the
      August Securities Purchase
Agreement.

            

    

     

    
      	
               
      

            	
              c.

            	
              Successors and
      Assigns.  This Waiver shall inure to the benefit of and
      be binding upon the successors and permitted assigns of each of the
      parties.

            

    

     

    
      	
               
      

            	
              d.

            	
              Execution and
      Counterparts.  This Waiver  may be executed in
      any number of counterparts, each of which when so executed shall be deemed
      to be an original and, all of which taken together shall constitute one
      and the same agreement and shall become effective when counterparts have
      been signed by each party and delivered to the other parties hereto, it
      being understood that all parties need not sign the same
      counterpart.  In the event that any signature is delivered by
      facsimile transmission, such signature shall create a valid binding
      obligation of the party executing (or on whose behalf such signature is
      executed) the same with the same force and effect as if such facsimile
      signature were the original
thereof.

            

    

     

    
      	
               
      

            	
              e.

            	
              Governing
      Law.  All questions concerning the construction,
      validity, enforcement and interpretation of this Waiver shall be
      determined in accordance with New York
law.

            

    

     

    
      	
               
      

            	
              f.

            	
              Severability.  If
      any term, provision, covenant or restriction of this Waiver  is
      held by a court of competent jurisdiction to be invalid, illegal, void or
      unenforceable, the remainder of the terms, provisions, covenants and
      restrictions set forth herein shall remain in full force and effect and
      shall in no way be affected, impaired or invalidated, and the parties
      hereto shall use their commercially reasonable efforts to find and employ
      an alternative means to achieve the same or substantially the same result
      as that contemplated by such term, provision, covenant or restriction. It
      is hereby stipulated and declared to be the intention of the parties that
      they would have executed the remaining terms, provisions, covenants and
      restrictions without including any of such that may be hereafter declared
      invalid, illegal, void or
unenforceable.

            

    

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    
      	
               
      

            	
              g.

            	
              Headings.  The
      headings in this Waiver are for convenience only, do not constitute a part
      of the Waiver and shall not be deemed to limit or affect any of the
      provisions hereof.

            

    

    

    IN
WITNESS WHEREOF, the undersigned have executed this Wavier as of the day and
year written above.

    

    
      
        
          	 
      	
                  CHINA
      NEW ENERGY GROUP

                  COMPANY

                
	 
      	 
      
	 
      	
                  By:

                	
                  /s/ James Li

                
	 
      	 
      	
                  Name:  James
      Li

                
	 
      	 
      	
                  Title:  Authorized
      Signatory

                
	 
      	 
      	 
      
	 
      	
                  CHINA
      HAND FUND I LLC

                
	 
      	 
      
	 
      	
                  By:

                	
                  /s/ John D. Kuhns

                
	 
      	 
      	
                  Name:  John
      D. Kuhns

                
	 
      	 
      	
                  Title:
       Member-Manager

                

        

      

    

     

    
      
         

      

      
        5

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