Edgar Filing: China Natural Gas, Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended March 31, 2006

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to _______________

000-31539
(Commission file number)

CHINA NATURAL GAS, INC.
(Exact name of small business issuer as specified in its charter)

Delaware 98-0231607
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

Tang Xing Shu Ma Building, Suite 418
Tang Xing Road
Xian High Tech Area
Xian, Shaanxi Province, China
(Address of principal executive offices)

86-29-88323325
(Issuer's telephone number)

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

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[_]

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of May 12, 2006 -
23,918,516 shares of common stock

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

Transitional Small Business Disclosure Format (check one): Yes [_] No [X]

CHINA NATURAL GAS, INC.
Index

Page
Number
------

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheet as of March 31, 2006 (unaudited) 2

Consolidated Statements of Operations Other Comprehensive Income for
the three months ended March 31, 2006 and 2005 (unaudited) 3

Consolidated Statements of Cash Flows for the three months ended
March 31, 2006 and 2005 (unaudited) 4

Notes to Consolidated Financial Statements (unaudited) 5

Item 2. Management's Discussion and Analysis or Plan of Operations 14

Item 3. Controls and Procedures 19

PART II. OTHER INFORMATION 19

Item 1. Legal Proceedings 19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19

Item 3. Defaults Upon Senior Securities 19

Item 4. Submission of Matters to a Vote of Security Holders 19

Item 5. Other Information 19

Item 6. Exhibits 20

SIGNATURES 21

CHINA NATURAL GAS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET

March 31,
2006
-------------
(unaudited)

ASSETS

CURRENT ASSETS:
Cash & cash equivalents $ 8,262,640
Accounts receivable, net of allowance for doubtful accounts of $0 151,892
Other receivable 582,894
Inventory 47,147
Advances to suppliers 122,233
Prepaid expense 235,274
-------------
Total current assets 9,402,080

PROPERTY AND EQUIPMENT, net 9,284,650

CONTRACTS IN PROGRESS 162,596

CONSTRUCTION IN PROGRESS 1,732,555

INTANGIBLE ASSETS 1,048
-------------
TOTAL ASSETS $ 20,582,929
=============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable & accrued expense $ 450,074
Other payables 892,308
Unearned revenue 248,908
-------------
Total current liabilities 1,591,290

STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 per share; authorized 5,000,000 shares;
none issued
Common stock, $0.0001 per share; authorized 30,000,000 shares;
issued and outstanding 23,918,516 2,391
Additional paid-in capital 17,173,940
Cumulative translation adjustment 291,403
Statutory reserve 231,309
Retained earnings 1,292,596
-------------
Total stockholders' equity 18,991,639
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,582,929
=============

The accompanying notes are an integral part of these
consolidated financial statements.

CHINA NATURAL GAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

Three Months Ended March 31,
2006 2005
-------------- --------------
(unaudited) (unaudited)

Revenue
Natural gas revenue $ 864,953 $ 232,767
Construction / installation revenue 922,261 9,955
-------------- --------------
Total revenue 1,787,214 242,722

Cost of revenue
Natural gas cost 505,863 179,028
Construction / installation cost 336,649 2,124
-------------- --------------
842,512 181,152

Gross profit 944,702 61,570

Operating expenses
Selling expenses 244,734 83,847
General and administrative expenses 219,702 26,027
-------------- --------------
Total operating expenses 464,436 109,874
-------------- --------------
Income (loss) from operations 480,266 (48,304)

Non-operating income (expense):
Gain on settlement of debt
Interest expense
Interest income 2,744 249
Other income (expense) 26 (208)
-------------- --------------
Total non-operating income (expense) 2,770 41
-------------- --------------

Income (loss) before income tax 483,036 (48,263)

Income tax 72,456 --
-------------- --------------
Net income (loss) $ 410,580 $ (48,263)

Other comprehensive income / (loss)
Foreign currency translation gain 62,656 --
-------------- --------------
Comprehensive Income (loss) $ 473,236 $ (48,263)
============== ==============

Weighted average shares outstanding
Basic 23,422,553 15,925,282
============== ==============
Duiluted 23,685,565 15,925,282
============== ==============

Earnings (loss) per share
Basic $ 0.02 $ (0.00)
============== ==============
Diluted $ 0.02 $ (0.00)
============== ==============

The accompanying notes are an integral part of these
consolidated financial statements.

CHINA NATURAL GAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,
2006 2005
-------------- --------------
(unaudited) (unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 410,580 $ (48,263)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 163,738 144,749
(Increase) / decrease in assets:
Accounts receivable (145,086) 4,509
Other receivable (423,129) (3,503,932)
Inventory (1,478) --
Advances to suppliers (107,933) (37)
Prepaid expense (218,281) 4
Contract in progress (161,850) (3,644)
Increase / (decrease) in current liabilities:
Accounts payable 254,029 (8,941)
Other payables 148,003 (483)
Unearned revenue (56,020) 31,459
-------------- --------------
Net cash used in operating activities (137,427) (3,384,579)
-------------- --------------

CASH FLOWS FROM INVESTING ACTIVITIES
Payment on purchase of property and equipment (1,121,178) (72,509)
(Additions) reductions to construction in progress 5,684 (72)
-------------- --------------
Net cash used in investing activities (1,115,494) (72,581)
-------------- --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issued for cash 10,400,000 3,504,190
Payment of offering costs (1,557,147) --
-------------- --------------
Net cash provided by in financing activities 8,842,853 3,504,190
-------------- --------------

Effect of exchange rate changes on cash and cash equivalents (2,916) --

NET INCREASE IN CASH & CASH EQUIVALENTS 7,587,016 47,030

CASH & CASH EQUIVALENTS, BEGINNING BALANCE 675,624 62,998
-------------- --------------

CASH & CASH EQUIVALENTS, ENDING BALANCE $ 8,262,640 $ 110,028
============== ==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ --
============== ==============
Income taxes paid $ -- $ --
============== ==============

The accompanying notes are an integral part of these
consolidated financial statements.

CHINA NATURAL GAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 - Organization and Basis of Presentation

The unaudited consolidated financial statements have been prepared by China
Natural Gas, Inc. (the "Company"), pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and adjustments) which
are, in the opinion of management, necessary to fairly present the operating
results for the respective periods. Certain information and footnote disclosures
normally present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes for the year ended December 31,
2005 included in the Company's Annual Report on Form 10-KSB. The results of the
three months ended March 31, 2006 are not necessarily indicative of the results
to be expected for the full year ending December 31, 2006.

Organization and Line of Business

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 and operation of retail filling stations for the
distribution of compressed natural gas as a vehicular fuel to retail 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 entered into and closed a share purchase agreement
with Coventure International, Inc. ("Coventure"), a public shell in the United
States of America incorporated in the state of Delaware. 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 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. Pro forma information is not presented
as the financial statements of Coventure are insignificant. 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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of China
Natural Gas, Inc. and its wholly owned subsidiary, XXNGC. All inter-company
accounts and transactions have been eliminated in consolidation.

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; however the
accompanying consolidated financial statements have been translated and
presented in United States Dollars (USD).

Foreign Currency Translation

As of March 31, 2006 and 2005, the accounts of the Company were maintained, and
their consolidated financial statements were expressed in the Chinese Yuan
Renminbi (RMB). Such consolidated financial statements were translated into
United States Dollars (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 operations 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."

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 time deposits,
certificates of deposit and all highly liquid debt instruments with original
maturities of three months or less.

Accounts and Other 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.

Advances to Suppliers

The Company advances to certain vendors for purchase of its material. The
advances to suppliers 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 construction of
pipelines.

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 years
Operating equipment 5-20 years
Vehicles 5 years
Buildings 30 years

At March 31, 2006, the following are the details of the property and equipment:

Office equipment $ 35,381
Operating equipment 8,714,144
Vehicles 259,558
Buildings 1,532,327
------------
10,541,410
Less accumulated depreciation (1,256,760)
------------
$ 9,284,650
============

Depreciation expense for the three months ended March 31, 2006 and 2005 was
$163,682 and $144,749, respectively.

Long-Lived Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." 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.

Construction In Progress

Construction in progress consist of the cost of constructing fixed assets for
the Company's use. The major cost of construction in progress relates to
material, labor and overhead.

Contracts In Progress

Contracts in progress consist of the cost of constructing pipelines for
customers. The major cost of construction relates to material, labor and
overhead. Revenue from construction and installation of pipelines is recorded
when the contract is completed and accepted by the customers. The construction
contracts are usually completed within one to two months time. As of March 31,
2006, the Company had $162,596 of contracts in progress.

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.

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 construction and installation
of pipelines is recorded when the contract is completed and accepted by the
customers. The construction contracts are usually completed within one to three
months time.

Deferred Revenue

Deferred revenue represents prepayments by customers for gas purchases and
advance payments on construction and installation of pipeline contracts. The
Company records such prepayment as unearned revenue when the payments are
received.

Advertising Costs

The Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the three months
ended March 31, 2006 and 2005 were insignificant.

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with SFAS
No. 123R, "Share-Based Payment, an Amendment of 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.

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 March 31, 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.

Local PRC Income Tax

Pursuant to the tax laws of China, general enterprises are subject to income tax
at an effective rate of 33%. The Company 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, the Company's income is subject to a reduced tax rate of
15%.

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". SFAS No.
128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net earning
per share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net earning per share is based upon the weighted average
number of common shares outstanding. Diluted net earning per share is based on
the assumption that all dilutive convertible shares and stock options were
converted or exercised. At March 31, 2006, the Company had outstanding 1,431,953
warrants that resulted 263,012 common stock equivalents.

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. As a result, 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.

Segment Reporting

Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure
About Segments of an Enterprise and Related Information" requires use of the
"management approach" model for segment reporting. The management approach model
is based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a company. SFAS
131 has no effect on the Company's consolidated financial statements as the
Company consists of one reportable business segment. All revenue is from
customers in the People's Republic of China. All of the Company's assets are
located in the People's Republic of China.

Recent Pronouncements

In March 2006 FASB issued SFAS 156 `Accounting for Servicing of Financial
Assets' this Statement amends FASB Statement No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement:

1. Requires an entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by
entering into a servicing contract.

2. Requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable.

3. Permits an entity to choose `Amortization method' or Fair value
measurement method' for each class of separately recognized servicing
assets and servicing liabilities:

4. At its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided that
the available-for-sale securities are identified in some manner as
offsetting the entity's exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.

5. Requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately
recognized servicing assets and servicing liabilities.

This Statement is effective as of the beginning of the Company's first fiscal
year that begins after September 15, 2006. Management believes that this
statement will not have a significant impact on the consolidated financial
statements.

Note 3 - Other Payables

Other payable consists of the following as of March 31, 2006:

Other accounts payable $525,563
Welfare payable 5,524
Tax payable 358,193
Other 3,028
--------
$892,308
========

Note 4 - Stockholders' Equity

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 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 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. The warrants were valued using the Black Scholes
pricing model; however, recording the value of the warrants in the financial
statements has no impact as the value of the warrants is both debited and
credited to additional paid in capital.

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 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 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. The warrants were valued using the Black Scholes
pricing model; however, recording the value of the warrants in the financial
statements has no impact as the value of the warrants is both debited and
credited to additional paid in 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.

Note 5 - Employee Welfare Plan

The Company has established its own employee welfare plan in accordance with
Chinese law and regulations. The Company makes annual contributions of 14% of
all employees' salaries to employee welfare plan. The total expense for the
above plan was $9,875 and $1,522 for the three months ended March 31, 2006 and
2005, 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;

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 $61,587 and $0 as reserve for the statutory surplus
reserve and welfare fund for the three months ended March 31, 2006 and 2005,
respectively.

Note 7 - Earnings Per Share

Earnings per share for three months March 31, 2006 and 2005 were determined by
dividing net income 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".

Three Months Ended March 31,
---------------------------------------------------------------------
2006 2005
------------------------------- --------------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----

Basic earnings (loss) per share

-------- --------
Net income (loss) $410,580 $(48,263)
======== ========

Weighed shares outstanding 23,422,553 15,925,282

------ ------
$ 0.02 $(0.00)
====== ======

Diluted earnings (loss) per share

-------- --------
Net income $410,580 $(48,263)
======== ========

Weighed shares outstanding 23,422,553 15,925,282
Effect of dilutive securities

Warrants 263,012 --
---------- ----------
23,685,565 15,925,282
========== ==========

------ ------
$ 0.02 $(0.00)
====== ======

Note 8 - Current Vulnerability Due to Certain Concentrations

For the three months ended March 31, 2006 and 2005, the Company purchased all of
the natural gas for resale from one vendor, Shaanxi Natural Gas Co., Ltd., a
government owned enterprise. $112,500 was owing to this vendor at March 31,
2006. The Company has had annual agreements with Shaanxi Natural Gas that
requires the Company to purchase a minimum amount of natural gas. For the years
ended December 31, 2005, the minimum purchases was 2.36 million cubic meters. In
the past, contracts were renewed on an annual basis. However, as the volume of
usage has increased, Shaanxi Natural Gas has revised their policies, and
contract terms are now six months and subject to review prior to renewal. The
Company's management reports that it does not expect any issues or difficulty in
continuing to renew the supply contracts going forward. Price points for natural
gas are strictly controlled by the government and have remained stable over the
past 3 years.

For the three months ended March 31, 2006, two supplier accounts for 58% and 27%
of the total equipment purchased by the Company.

Four customers accounted for 31%, 9%, 6% and 5% of the Company's revenue for the
three months ended March 31, 2006 and three customers accounted for 57%, 2.5%
and 1.5% of the Company's revenue for the three months ended March 31, 2005.

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.

Note 9 - Related Party Transactions

Included in other payables in the accompanying balance sheet at March 31, 2006
is $522,655 due to stockholder of the Company.

Item 2. Management's Discussion and Analysis or Plan of Operations

Forward-Looking Statements

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
audited financial statements included in our Annual Report on Form 10KSB for the
year ended December 31, 2005. 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.

Corporate History

We were incorporated in the state of Delaware on March 31, 1999, as Bullet
Environmental Systems, Inc. and 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 closed a Share Purchase Agreement
with Xian Xilan Natural Gas Co., Ltd., a corporation formed under the laws of
the People's Republic of China on January 8, 2000, and the shareholders of Xian
Xilan Natural Gas Co., Ltd. Pursuant to the Agreement, we acquired all of the
issued and outstanding capital stock of Xian Xilan Natural Gas Co., Ltd. from
the shareholders of Xian Xilan Natural Gas Co., Ltd. In exchange the
shareholders of Xian Xilan Natural Gas Co., Ltd. received 16,000,000 (post
split) shares of common stock of Coventure International Inc. On December 19,
2005 we changed our name to China Natural Gas, Inc.

Significant Accounting Policies

Use of estimates

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. Our
allowance for uncollectible accounts is not significant.

We maintain 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.

Advances to Suppliers

We advance to certain vendors for purchase of our material. The advances to
suppliers are interest free and unsecured.

Inventory

Property and equipment

Construction In Progress

Construction in progress consist of the cost of constructing fixed assets for
our use. The major cost of construction in progress relates to material, labor
and overhead.

Contracts In Progress

Revenue recognition

Our 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 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 construction and installation of
pipelines is recorded when the contract is completed and accepted by the
customers. The construction contracts are usually completed within one to three
months time.

Stock-based compensation

We account for our stock-based compensation in accordance with SFAS No. 123R,
"Share-Based Payment, an Amendment of FASB Statement No. 123." We recognize in
the statement of operations the grant- date fair value of stock options and
other equity-based compensation issued to employees and non-employees.

Income taxes

We utilize 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.

Local PRC Income Tax

Pursuant to the tax laws of China, general enterprises are subject to income tax
at an effective rate of 33%. We are 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, our income is subject to a reduced tax rate of 15%.

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.

Recent Accounting Pronouncements

1. Requires an entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by
entering into a servicing contract.

2. Requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable.

3. Permits an entity to choose `Amortization method' or Fair value
measurement method' for each class of separately recognized servicing
assets and servicing liabilities:

Results of Operations

Three Months Ended March 31, 2006 compared to Three Months Ended March 31, 2005

Revenue. We generated revenues of $1,787,214 for the three months ended March
31, 2006, an increase of $1,544,492 or 636%, compared to $242,722 for the three
months ended March 31, 2005. The increase in revenues was due to increased
construction and installation revenue as we signed new residential and
commercial customers. In addition, we completed the construction and started
operating three natural gas retail filling stations during the quarter ended
March 31, 2006. We sell the compressed natural gas at these filling stations to
CNG powered vehicles. The sale of natural gas for the three month ended March
31, 2006 increased 271% over the prior year period. For the three months ended
March 31, 2006 residential households, commercial/retail and industrial
customers accounted for approximately 13% of our natural gas revenues. Our
company owned natural gas filling stations accounted for approximately 64% of
our natural gas revenues during the period and approximately 23% of our natural
gas revenues were from the wholesale distribution of natural gas to third party
filling stations.

New households pay approximately 60% of the construction costs of the pipeline
that supplies their homes with natural gas up front and the balance is paid as
part of the monthly natural gas bill. Construction/installation revenue for the
three month period ended March 31, 2006 was 52% of all revenues during the
period. In the three months ended March 31, 2005 construction/installation
revenue was less than 4% of all revenues during the period.

Gross profit. We have achieved a gross profit of $944,702 for the three months
ended March 31, 2006, an increase of $883,132 or 1,434%, compared to $61,570 for
the three months ended March 31, 2005. Gross profit for natural gas sale for the
three month period ended March 31, 2006 was $359,090 or 38% of the total gross
profit, construction and installation accounted for $585,612 or 62% of the
period's gross profit. Gross margin, as a percentage of revenues, increased to
52.9% for the three months ended March 31, 2006, from 25.4% for the three months
ended March 31, 2005. The increase in gross profit is due to the increased
construction and installation activity. Gross profit on the construction and
installation activity increased to $585,612 for the three months ended March 31,
2006, an increase of $577,781 or 7,378%, compared to $7,831 for the three months
ended March 31, 2005. We work with gross margins on the construction and
installation activity that are approximately 65%, dependent on the scope of the
job, mostly due to the low cost of labor. This segment of our business, although
not a monthly recurring business is highly profitable.

We purchase all of our natural gas for resale from a government owned entity,
the Shaanxi Natural Gas Co. Inc. As all land in China is owned by the
government, 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. 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, as
they have been for the last 3 years, and maintain a stable flow of supply. The
government has undertaken programs to promote the growth of the region in which
we are located. The rate that we pay for natural gas is set by the central
government, and has been stable for the past 3 years. Therefore, we expect
supply and our cost to continue to be stable in the future. There is one price
that we charge all of our household, retail/commercial and industrial customers
set by the local provincial government. There is no fixed formula to derive the
selling price, nor are the rates designed to capture costs and expenses, or
achieve a specified level of profit.

For the three months ended March 31, 2006, two suppliers accounted for 58% and
27% 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 the
two vendors would not have a material adverse effect on our operations.

Operating expenses. We incurred operating expenses of $464,436 for the three
months ended March 31, 2006, an increase of $354,562 or 322.7%, compared to
$109,874 for the three months ended March 31, 2005. These operating expenses are
related to increased sales and marketing costs to sign new residential and
commercial customers that were put on line during the period. As we began to
operate our natural gas filling stations, we opened three filling stations
during this period, we added staff necessary to operate the stations. We
commenced a marketing strategy targeting professional drivers to increase their
awareness of our filling stations and educating them about the differences
between our filling stations and our competitors run by inefficient government
entities or other privately owned operators that lack sufficient supply. We
continue identifying possible locations for new filling stations, and applying
to the proper governmental agencies for all necessary approvals and licenses to
construct the new filling stations.

Net Income. Net income was $410,580 for the three months ended March 31, 2006,
an increase of $458,843, from $(48,263) for the three months ended March 31,
2005. The increase is attributed to the growth of all segments of our business
from construction and installation to the sale of natural gas to our three
classes of customers as well as through our natural gas filling stations.

Liquidity and Capital Resources

As of March 31, 2006 we had $8,262,640 cash and cash equivalents on hand
compared to $675,624 cash and cash equivalents as of December 31, 2005. 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 and
other liquidity requirements associated with our operations.

In January 2006, we entered into securities purchase agreements with several
accredited investors and completed the sale of $10.4 million of units. The
proceeds of the financing are intended for the investment necessary to construct
natural gas filling stations, purchase of raw materials and working capital. Our
plans for 2006 are to construct between 15 and 22 natural gas filling stations
during 2006. Each filling station costs approximately $600,000 to construct. We
believe that the proceeds of the financing along with operating cash flow will
cover all expenses associated with the build out of these filling stations.

We had net cash flows used in operations of $137,427 for the three months ended
March 31, 2006 as compared to net cash used in operations of $3,384,579 in the
corresponding period in 2005. The increase in net cash flows from operations for
the three months ended March 31, 2006 as compared to corresponding period in
2005 was mainly due to the decrease of other receivables.

Cash outflows used in investing activities increased to $1,115,494 for the three
months ended March 31, 2006 as compared to $72,581 for the corresponding period
in 2005 as a result of payments made for property and equipment for investments
necessary to construct and build the filling stations and for construction
materials used to build the pipelines to individual households. Typically, this
construction is completed within thirty to sixty days. Any prepayments that we
make to our construction equipment/material vendors are made to ensure timely
delivery and ensure preferred treatment of any last minute or rush delivery of
materials that we may need. Based on our relationships with our vendors the
prepayments are unsecured and interest free, however, since most construction
projects are completed in slightly more than 30 days this fact becomes
inconsequential as materials are delivered to the job site well in advance of
the completion of each project.

We had cash flows from financing activities of $8,842,853 for the three months
ended March 31, 2006, as compared to $3,504,190 for the corresponding period in
2005. The increase is due to the sale of units of 3,714,428 shares of common
stock and 1,432,953 warrants to purchase common stock, for gross proceeds of
$10.4 million

The majority of our 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. We do not engage in currency hedging. Inflation has not had
a material impact on our business.

Item 3. Controls and Procedures

The Chief Executive Officer and Chief Financial Officer conducted an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
There were no significant changes in internal control over financial reporting
(as defined in Rule 13a-15f under the Exchange Act) that occurred during the
first quarter of 2006 that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

Exhibit Number Description of Exhibit

3.1 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 Certificate of Ownership of Coventure international Inc. and China Natural Gas,
Inc., dated December 12, 2005 (incorporated by reference to same exhibit filed
with the Company's Form 10KSB filed March 22, 2006)

3.3 Registrant's By-Laws (incorporated by reference to same exhibit filed with the
Company's Form 10SB Registration Statement filed September 15, 2000, SEC file
no. 000-31539).

10.1 Share Purchase Agreement made as of December 6, 2005 among Coventure
International Inc., Xian Xilan Natural Gas Co., Ltd. and each of Xilan's
shareholders. (incorporated by reference to the exhibits to Registrants 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
Registrants 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 Registrants Form
8-K filed on December 23, 2005).

10.4 Form of Securities Purchase Agreement (incorporated by reference to the exhibits
to Registrants Form 8-K filed on January 12, 2006).

10.5 Form of Common Stock Purchase Agreement (incorporated by reference to the exhibits
to Registrants Form 8-K filed on January 12, 2006).

10.6 Form of Registration Rights Agreement (incorporated by reference to the exhibits
to Registrants Form 8-K filed on January 12, 2006).

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 amended

31.2 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 amended

32.1 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)

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

China Natural Gas, Inc.

May 15, 2006 By: /s/ Minqing Lu
------------------------
Minqing Lu
Chief Executive Officer (Principal
Executive Officer)

May 15, 2006 By: /s/ Xiaogang Zhu
------------------------
Xiaogang Zhu
Chief Financial Officer
(Principal Financial and Accounting
Officer)