CHINA NATURAL GAS, INC.

(Name of small business issuer in its charter)

Delaware	98-0231607
State or other jurisdiction of	I.R.S. Employer
incorporation or organization	Identification Number

 

Tang Xing Shu Ma Building, Suite 418

Tang Xing Road

Xian High Tech Area

Xian, Shaanxi Province

China

(Address of principal executive office)

 

Issuer's telephone number: 86-29-88323325

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act: None

 

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 o

 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No x

 

The Issuer's revenues for the year ending December 31, 2005 were $4,850,699. As of March 17, 2006 the number of shares outstanding of the Issuer's common stock was 23,918,516.

 

As of March 17, 2006 the aggregate number of shares held by non-affiliates was approximately 15,227,500.

 

As of March 17, 2006 the aggregate market value of the Issuer's common stock held by non-affiliates was $65,478,250, based on the average high and low price of $4.30 per share as of March 17, 2006.

 

DOCUMENTS INCORPORATED BY REFERENCE None

 

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EXPLANATORY STATEMENT

This Amendment No. 1 to Form 10-KSB, which amends the Company’s Form 10-KSB for the year ended December 31, 2005, filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2006, is being filed to revise the disclosure regarding the Company’s organizational history and the disclosure in Footnote 1 to the Company’s Consolidated Financial Statements, in Item 1, Description of Business and in Item 6. Management’s Discussion and Analysis or Plan of Operations to clarify that Xian Xilan Natural Gas Co. Ltd. is a 100% Variable Interest Entity of the Company, which financial results are consolidated with those of the Company’s in accordance with Financial Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R").

 

1

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FORM 10-KSB

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

INDEX

			Page
PART I			4
ITEM 1.	DESCRIPTION OF BUSINESS		4
ITEM 2.	DESCRIPTION OF PROPERTY		7
ITEM 3.	LEGAL PROCEEDINGS		8
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS		8
PART II			9
ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES		9
ITEM 6.	MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION		10
ITEM 7.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		15
ITEM 8.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		16
ITEM 8A.	CONTROLS AND PROCEDURES		16
ITEM 8B.	OTHER INFORMATION		16
PART III			17
ITEM 9.	DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT		17
ITEM 10.	EXECUTIVE COMPENSATION		18
ITEM 11.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		19
ITEM 12.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		20
ITEM 13.	EXHIBITS		21
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		21

 

2

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ITEM 1. DESCRIPTION OF BUSINESS

 

Organizational History

We were incorporated in the state of Delaware on March 31, 1999, as Bullet Environmental Systems, Inc. On May 25, 2000 we changed our name to Liquidpure Corp. and on February 14, 2002 we changed our name to Coventure International, Inc.

On December 6, 2005, we issued an aggregate of 4 million shares to all of the registered shareholders of Xian Xilan Natural Gas Co., Ltd., and entered into exclusive arrangements with Xian Xilan Natural Gas Co., Ltd. and these shareholders that give us the ability to substantially influence Xian Xilan Natural Gas’ daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. As a result, the Company consolidates the financial results of Xian Xilan Natural Gas as a variable interest entity pursuant to Financial Interpretation No. 46R, “Consolidation of Variable Interest Entities.” On December 19, 2005, we changed our name to China Natural Gas, Inc.

 

Overview of Business

 

We primarily engage in the transmission and distribution of natural gas to commercial, industrial and residential customers. As well as the distribution of compressed natural gas as a vehicular fuel to retail end users.

 

Business

 

End User Delivery of Natural Gas

 

We are the sole authorized provider of natural gas to residential customers in certain parts of the Xian area, including Lantian County and the Baqiao District. We are currently supplying natural gas to approximately 50,000 households in the Xian area. Via a connecting point with a high pressure pipeline network from the government operated Shaanxi Natural Gas Company, natural gas with much lower pressure is delivered to our residential, commercial and industrial customers. We own approximately 120 km of high pressure pipeline. We are the only private company in Shaanxi province to own this type of high pressure pipeline.

 

Our management is seeking to expand supply services to the Shangluo and Ankang areas of Shaanxi province. Upon approval from the government, we would also have the exclusive right to provide natural gas to residential and commercial end users in those areas. In order to obtain such approval, we were required to submit a project proposal for the feasibility of supplying gas to each area. In Ankang, we applied to the Urban and Rural Construction Bureau. In Shangluo, applications were made to the Municipal Administration Bureau. The approval process takes approximately four to six months and is pending.

 

Wholesale to Filling Stations

 

We sell compressed natural gas to filling stations on a wholesale basis. The stations, in turn, sell natural gas to taxis and buses in Xian which operate on compressed natural gas (CNG) technology. Government statistics indicate that there are currently 5,000 buses and 20,000 taxis using natural gas in Xian. Each bus uses an average of 70 cubic meters of CNG per day and taxis use an average of 30 cubic meters of CNG per day (source: Xian Clean Fuel Vehicles Commission 2005).

 

In July 2005, we purchased a Compressor Station which is operated in proximity to our pipeline and which allows us to compress and transport natural gas via truck to retail gas stations. We also plan to develop a liquefied form of natural gas (LNG) that can be transported over longer distances by gas tanker truck and which could expand our geographical sales. We are currently conducting a feasibility study with regard to LNG production. This study should be completed in June 2006. In order to construct an appropriate LNG plant, we will require approximately US$19 million (RMB 150 million), with construction of the plant completed by year end 2006, testing in October 2007 and production commencing in December 2007, assuming appropriate financing can be obtained. We can begin the process with our current licenses but in the future will require approval from Shaanxi Development and Reform Commission for LNG production.

 

4

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ITEM 2. DESCRIPTION OF PROPERTY

 

Our principal executive offices are located at Tang Xing Shu Ma Building, Suite 418, Tang Xing Road, Xian High Tech Area, Xian, Shaanxi Province, China. Office #1 consists of approximately 137.9 square meters which are rented on a monthly basis for $510.11 and office #2 consists of approximately 265.59 square meters which are rented on a monthly basis for $982.45.

 

Our properties are located in Lantian county, Baqiao District and Gaoxin District of Xian, Shaanxi province. We own a 120km high-pressure underground pipeline network and two Citygate stations (terminals) with accompanying buildings and equipment. We lease the main office building where we are headquartered and three filling station sites.

 

We believe that current facilities are adequate for our current and immediately foreseeable operating needs. We do not have any policies regarding investments in real estate, securities or other forms of property.

 

7

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

 

None

 

8

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

 

 

Period		High*			Low*
December 31, 2005		$	3.60		$	0.5275
July 31, 2005		$	6.00		$	0.50
April 30, 2005		$	2.90		$	1.05
January 31, 2005		$	7.25		$	0.45
October 30, 2004		$	0.45		$	0.45
July 31, 2004		$	1.50		$	0.25
April 30, 2004		$	0.30		$	0.30

 

As of February 13, 2006, there were approximately 50 holders of record and 492 beneficial owners of our common stock.

 

Dividends

 

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Delaware General Corporation Law, however, does prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:

 

1. We would not be able to pay our debts as they become due in the usual course of business; or

 

2. Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future.

 

Recent Issuances of Unregistered Securities.

 

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.

 

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. New York Global Securities acted as the placement agent of the transaction and received warrants to purchase 121,955 shares of common stock on the same terms and conditions as the investors.

 

9

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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

INTRODUCTION

 

The following discussion should be read in conjunction with the Financial Statements and Notes thereto. Our fiscal year ends December 31. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See "Factors Which May Affect Future Results"). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which the Company operates; and (iv) various competitive market factors that may prevent us from competing successfully in the marketplace.

 

Corporate History

We were incorporated in the state of Delaware on March 31, 1999, as Bullet Environmental Systems, Inc. On May 25, 2000 we changed our name to Liquidpure Corp. and on February 14, 2002 we changed our name to Coventure International, Inc.

On December 6, 2005, we issued an aggregate of 4 million shares to all of the registered shareholders of Xian Xilan Natural Gas Co., Ltd., and entered into exclusive arrangements with Xian Xilan Natural Gas Co., Ltd. and these shareholders that give us the ability to substantially influence Xian Xilan Natural Gas’ daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. As a result, the Company consolidates the financial results of Xian Xilan Natural Gas as a variable interest entity pursuant to Financial Interpretation No. 46R, “Consolidation of Variable Interest Entities.” On December 19, 2005, we changed our name to China Natural Gas, Inc.

 

10

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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

 

Construction In Progress

 

Construction in progress consists of the cost of constructing building and plant for our 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.

 

Revenue Recognition

 

Our revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized when services are rendered to our customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations by us 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 two months time.

 

11

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Liquidity and Capital Resources

 

As of December 30, 2005 the Company had $675,624 cash and cash equivalents on hand compared to $62,998 cash and cash equivalents as of December 30, 2004. 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.

 

13

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14

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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

FINANCIAL STATEMENT INDEX

China Natural Gas, Inc. and Subsidiary

Consolidated Financial Statements

Years Ended December 31, 2005 and 2004

 

Contents

		Page
Report of Independent Registered Public Accounting Firm			F-1
Financial Statements:
Consolidated Balance Sheet as of December 31, 2005			F-2
Consolidated Statements of Operations and Other Comprehensive Income for the years ended December 31, 2005 and 2004			F-3
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2005 and 2004			F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004			F-5
Notes to Consolidated Financial Statements			F-6

15

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Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders of

China Natural Gas, Inc.

 

We have audited the accompanying consolidated balance sheets of China Natural Gas, Inc. and subsidiary as of December 31, 2005, and the related consolidated statements of operations and other comprehensive income, stockholders' equity, and cash flows for the years ended December 31, 2005 and 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Natural Gas, Inc. and subsidiary as of December 31, 2005, and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 2005 and 2004, in conformity with U.S. generally accepted accounting principles.

		/s/ Kabani & Company, Inc.,
		Certified Public Accountants Los Angeles, California
		February 24, 2006

CHINA NATURAL GAS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

		Years Ended December 31,
		2005			2004
Revenue
Natural gas revenue		$	1,687,154		$	306,306
Construction / installation revenue			3,163,545			578,107
Total revenue			4,850,699			884,413
Cost of revenue
Natural gas cost			1,293,585			226,944
Construction / installation cost			1,110,452			287,102
			2,404,037			514,046
Gross profit			2,446,662			370,367
Operating expenses
Selling expenses			474,855			387,768
General and administrative expenses			500,228			142,449
Total operating expenses			975,083			530,217
Income (loss) from operations			1,471,579			(159,850	)
Non-operating income (expense):
Interest income			2,131			1,618
Other expense			(671	)		(3,536	)
Total non-operating income (expense)			1,460			(1,918	)
Income (loss) before income tax			1,473,039			(161,768	)
Income tax			220,956			—
Net income (loss)			1,252,083			(161,768	)
Other comprehensive income / (loss)
Foreign currency translation gain			228,175			—
Comprehensive Income (loss)		$	1,480,258		$	(161,768	)
Basic and diluted weighted average shares outstanding			16,299,469			9,275,362
Basic and diluted earnings (loss) per share		$	0.08		$	(0.02	)

 

F-3

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CHINA NATURAL GAS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

								Additional			Accumulative Other			Retained						Total
		Common Stock						Paid			Comprehensive			Statutory			Earnings			stockholders'
		Shares			Amount			in Capital			Gain			Reserve			(deficit)			equity
Balance January 1, 2004			9,275,362		$	928		$	4,831,468		$	—		$	3,457		$	19,553		$	4,855,406
Cumulative translation adjustment			—			—			—			—						572
Net loss for the year ended December 31, 2004			—			—			—			—			—			(161,768	)		(161,768	)
Balance December 31, 2004			9,275,362			928			4,831,468			572			3,457			(142,215	)		4,694,210
Shares issued for cash			6,724,638			672			3,503,788			—			—			—			3,504,460
Recapitalization on reverse acquisition			4,204,088			420			(3,798	)		—			—			—			(3,378	)
Cumulative translation adjustment			—			—			—			228,175			—			—			228,175
Net Income for the year ended December 31, 2005			—			—			—			—			—			1,252,083			1,252,083
Retained earning for year 2005 reserve			—			—			—			—			166,265			(166,265	)		—
Balance December 31, 2005			20,204,088		$	2,020		$	8,331,458		$	228,747		$	169,722		$	943,603		$	9,675,550

 

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

 

F-4

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Note 1 - Organization and Basis of Presentation

 

Organization and Line of Business

 

China Natural Gas, Inc. (formerly Coventure International, Inc.) was incorporated in Delaware on March 31, 1999 as Bullet Environmental Systems, Inc. and on May 25, 2000 the Company changed its name to Liquidpure Corp. On February 14, 2002, the Company changes its name to Coventure International, Inc. ("Coventure")

 

Xi'an Xilan Natural Gas Co, Ltd. ("Xian Xilan Natural Gas") was incorporated on January 8, 2000 in Xi'an city in the Shaanxi province, China. The core business of Xian Xilan Natural Gas 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. Xian Xilan Natural Gas 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, we issued an aggregate of 4 million shares to all of the registered shareholders of Xian Xilan Natural Gas Co., Ltd. (“Xian Xilan Natural Gas”), and entered into exclusive arrangements with Xian Xilan Natural Gas and these shareholders that give us the ability to substantially influence Xian Xilan Natural Gas’ daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. Concurrently, 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. On December 19, 2005, we changed our name to China Natural Gas, Inc.

 

As a result of the share issuance, the stockholders of Xian Xilan Natural Gas owned approximately 80% of both companies and the directors and executive officers became the directors and executive officers of Coventure. Accordingly, the transaction has been accounted for as a reverse acquisition of Coventure by Xian Xilan Natural Gas resulting in a recapitalization of Xian Xilan Natural Gas rather than as a business combination. Xian Xilan Natural Gas 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 value and the results of operations of Xian Xilan Natural Gas have been presented for the comparative prior period. The historical cost of the net liabilities of Coventure that were acquired was $3,378. Subsequent to the share issuance, the stockholders of the Company approved a stock dividend of three shares for each share held, which has been accounted for as a four for one forward stock split. As a result, the Company consolidates the financial results of Xian Xilan Natural Gas as variable interest entity pursuant to Financial Interpretation No. 46R, “Consolidation of Variable Interest Entities.”

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of China Natural Gas, Inc. and its 100% VIE, Xian Xilan Natural Gas. All inter-company accounts and transactions have been eliminated in consolidation.

Consolidation of Variable Interest Entity

In accordance with FIN 46R, VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company entered into exclusive arrangements with Xian Xilan Natural Gas. These arrangements obligate the Company to absorb a majority of the risk of loss from Xian Xilan Natural Gas’ activities and enable the Company to receive a majority of Xian Xilan Natural Gas’ expected residual returns. As a result, the Company accounts for Xian Xilan Natural Gas as a VIE under FIN 46R. The arrangements consist of the following agreements:

 

a.

Xian Xilan Natural Gas holds the licenses and approvals necessary to operate its natural gas business in China,

b.

The Company provides exclusive technology consulting and other general business operation services to Xian Xilan Natural Gas in return for a consulting services fee which is equal to Xian Xilan Natural Gas’ revenue.

c.

Xian Xilan Natural Gas’s shareholders have pledged their equity interests in Xian Xilan Natural Gas to the Company.

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company's functional currency is the Chinese Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars ($).

 

Foreign Currency Translation

 

As of December 31, 2005 and 2004, the accounts of the Company were maintained, and their consolidated financial statements were expressed in the Chinese Yuan Renminbi (CNY). Such consolidated financial statements were translated into U.S. Dollars (USD) in accordance with Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation," with the CNY 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."

 

F-6

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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. Allowance for uncollectible accounts as of December 31, 2005 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

 

 

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

 

Office equipment		$	31,167
Operating equipment			7,788,345
Vehicles			257,847
Buildings			1,301,555
			9,378,914
Less accumulated depreciation			(1,111,017	)
		$	8,267,897

F-7

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		For the Years Ended December 31,
		2005			2004
Tax provision (credit) at statutory rate			34	%		(34	%)
Foreign tax rate difference			(19	%)		19	%
Change in valuation allowance			—			15	%
			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. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

F-9

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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 May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." This statement applies to all voluntary changes in accounting principle and requires retrospective application to prior periods' financial statements of changes in accounting principle, unless this would be impracticable. This statement also makes a distinction between "retrospective application" of an accounting principle and the "restatement" of financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

 

In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company's first fiscal year that begins after September 15, 2006.

 

In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective beginning in the Company's first quarter of fiscal 2006.

 

In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. The guidance in EITF 05-6 will be applied prospectively and is effective for periods beginning after June 29, 2005. EITF 05-6 is not expected to have a material effect on its consolidated financial position or results of operations.

 

F-10

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Note 3 - Other Payables

 

Other payable consists of the following as of December 31, 2005:

Other accounts payable		$	350,151
Welfare payable			1,933
Tax payable			377,316
Other levies			5,908
Other			3,437
		$	738,745

 

Note 4 - Stockholders' Equity

 

During the year ended December 31, 2005 the Company sold 6,724,638 shares of common stock for cash proceeds of $3,504,460. Also, in connection with the reverse merger transaction with Coventure, the Company issued 4,204,088 shares (See Note 1). In addition, the Company affected a four to one forward stock split which was accounted for retrospectively.

 

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 $13,275 and $10,045 for the years ended December 31, 2005 and 2004, 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 $166,265 as reserve for the statutory surplus reserve and welfare fund for the year ended December 31, 2005 and $3,547 for the year ended December 31, 2003. No allocation was made for the year ended December 31, 2004 as the Company had net loss from operations.

 

Note 7 - Earnings Per Share

 

Earnings (loss) per share for the years ended December 31, 2005 and 2004 is determined by dividing net income (loss) for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding. At December 31, 2005 and 2004, there were no dilutive securities.

 

Note 10 - Subsequent Events

 

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 1,921,428 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. New York Global Securities acted as the placement agent of the transaction.

 

The Company is obligated to file a registration statement registering the resale of shares of the Company's common stock and those issuable upon exercise of the warrants. If the registration statement is not filed within 45 days from the date of investment, or declared effective within 90 days thereafter (135 days if the registration statement receives a full review by the SEC), or if the registration is suspended other than as permitted in the registration rights agreement between the Company and the investors, the Company is obligated to pay the investors certain fees in the amount of 1% of the aggregate amount invested, per month, and the obligations may be deemed to be in default.

 

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.

F-13

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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

 

ITEM 8A. CONTROLS AND PROCEDURES

 

 

ITEM 8B. OTHER INFORMATION

 

16

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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

 

 

Name		Age		Position
Minqing Lu		43		Chief Executive Officer and Director
Xiaogang Zhu		51		Chief Financial Officer
Yuman Chen		35		Vice President - Marketing
Liangzhong Li		44		Vice President - Construction
Qinan Ji		48		Chairman of the Board
Bo Chen		48		Vice Chairman of the Board

 

Officers are elected annually by the Board of Directors, at our annual meeting, to hold such office until an officer's successor has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.

 

Background of Executive Officers and Directors

 

Qinan Ji, Chairman of the Board of Directors - Mr. Ji joined Xilan as the Chairman of the Board of Directors in 2005. In 1996, he founded the Anxian Hotel in Weinan City in Shaanxi Province. In 2001, he formed the Xian Sunway Technology and Industry Co., Ltd. He has more than 20 years experience in the energy and petroleum industries in operational, administrative, management and government relations roles. He received a Bachelor of Economy Management from North West University (Shaanxi).

 

Bo Chen, Vice Chairman of the Board of Directors - Mr. Chen was named Vice Chairman of the Board of Directors of Xilan in October 2005. He is currently the President of Bodisen Biotech, Inc., a publicly listed company on the AMEX (symbol: BBC), and is one of its original founders and stockholders having joined that company in 2000. From August 1997 to August 2001, Mr. Chen was Chief Operations Officer and Chief Technology Officer of Shaanxi Bodisen Chemical Co., Ltd. From July 1994 to December 1997, he was the Chief Executive Officer and President of Yang Ling Shikanglu Chemical Technology Development Co., Ltd. He received his Bachelor of Science degree from Shaanxi Normal College in July 1984.

 

Minqing Lu, Chief Executive Officer, Member of the Board of Directors - Mr. Lu joined Xilan in February 2005. He is Chief Executive Officer and serves on the Board of Directors. From February 1999 to May 2002, he was the executive director of Beijing Peixinkenu Investment Consultancy Company. From May 2002 to July 2004, he was President of Fenghua Aidi Air Service Company in Beijing. He received a Certificate of Management in July 1994 from Central Party College.

 

Xiaogang Zhu, Chief Financial Officer - Mr. Zhu joined Xilan as the Chief Financial Officer in January 2005. He spent 16 years working at the Ministry of General Logistics 3546 Company and his last position there was manager of the Finance Department. From September 2000 to December 2004, Mr. Zhu was the Vice General Manager and CFO of Xian Dapeng Biotech Co., Ltd. He received a Bachelor of Accounting degree from Xian Jiaotong University.

 

Yuman Chen, Vice President, Marketing - Ms. Chen joined Xilan in the beginning of 2000. She has spent the last five years at Xilan serving in the finance department until January 2001 when she became the manager of the Operations Department. In January 2005, she became the Vice President of Marketing Development and Customer Support. She received a Bachelors Degree in Management from North West University (Shaanxi) in July 1996.

 

Liangzhong Li, Vice President, Construction - Mr. Li joined Xilan in February 2005. He has 15 years experience in the natural gas industry. He is Vice President of Construction and oversees the construction pipeline networks and installation of gas fittings. From 1999 to 2002, he was Vice General Manager of Leqing Pipeline of Liquefied Oil Gas Company in Zhejiang Province. From 2002 to 2004, he was Vice General Manager and Manager of Construction Department in Leqing Natural Gas Company. He received a certificate of literature from North West University (Shaanxi) in July 1986.

 

ITEM 10. EXECUTIVE COMPENSATION

 

 

SUMMARY COMPENSATION TABLE

		Long Term Compensation
		Annual Compensation												Awards												Payouts
Name And Principal Position		Year			Salary ($)			Bonus ($)			Other Annual Compensation ($)			Restricted Stock Compensation ($)			Securities Under-Lying SARs (#)						LTIP Options/ ($)			Payouts			All Other Compensation($)
Minqing Lu, Chief			2005			7,500			-0-			-0-			-0-						-0-			-0-						-0-
Executive Officer
and Director
Huai'pu Zhang,			2004			5,000			-0-			-0-			-0-		-0-							-0-						-0-
Former President,			2003			5,000			-0-			-0-			-0-						-0-			-0-						-0-
Chief Executive
Officer and
Director

 

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

		Number of			Percentage
		Shares			of Shares
		Beneficially			Beneficially
Name of Beneficial Owner (1)		Owned			Owned (2)
Minqing Lu			695,652			2.9	%
Xiaogang Zhu			0			*
Yuman Chen			0			*
Liangzhong Li			0			*
Qinan Ji			5,931,596	(3)		24.8	%
Bo Chen			2,063,768	(4)		8.6	%
Yangling Bodisen Biotech Development Co, Ltd.			2,063,768	(4)		8.6	%
Xiang Ji			1,456,232			6.1	%
Shaohu Jia			1,080,580			4.5	%
Xian Sunway Technology & Industry Co., Ltd			2,875,364	(3)		12.0	%
Amaranth LLC			1,363,096			5.7	%
All officers and directors as a group (6 persons)			8,691,016	(3)(4)		36.3	%

 

* Less than 1%.

 

(1) Except as otherwise indicated, the address of each beneficial owner is c/o Xian Xilan Natural Gas Co., Ltd., Tang Xing Shu Ma Building, Suite 418, Tang Xing Road, Xian High Tech Area, Xian, Shaanxi Province, China.

 

(2) Applicable percentage ownership is based on 23,918,516 shares of common stock outstanding as of February 8, 2006, together with securities exercisable or convertible into shares of common stock within 60 days of February 8, 2006 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of February 8, 2006 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

EQUITY COMPENSATION PLAN INFORMATION

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
		(a)			(b)			(c)
Equity compensation plans approved			0			0			0
by security holders
Equity compensation plans not			0			0			0
approved by security holders
Total			0			0			0

 

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

In July 2005, we loaned $77,169 to Qinan Ji, Chairman of the Board. The loan was made on a interest free basis and was repaid in its entirety in October 2005.

 

In July 2005, we loaned $94,393 to Xian Sunway Technology & Industry Co., Ltd., one of our principal shareholders. The loan was made on an interest free basis and was repaid in its entirety on November 2005.

21

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: November 1, 2007

	CHINA NATURAL GAS, INC.
	By:	/s/ Qinan Ji
		Qinan Ji
		Chief Executive Officer (Principal Executive Officer)

 

	By:	/s/ Xiaogang Zhu
		Xiaogang Zhu
		Chief Financial Officer (Principal Financial and Accounting Officer)

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE		TITLE		DATE
/s/ Qinan Ji		Chairman of the Board		November 1, 2007
Qinan Ji
		Director		November 1, 2007
James A. Garner
/s/ Zhiqiang Wang		Director		November 1, 2007
Zhiqiang Wang
/s/ Xiaogang Zhu		Chief Financial Officer		November 1, 2007
Xiaogang Zhu