China New Energy Announces Third Quarter FY 2010 Results

TIANJIN, China, Nov. 26, 2010 /PRNewswire-Asia-FirstCall/ -- China New Energy Group Company (OTC Bulletin Board: CNER) ("China New Energy" or the "Company"), a natural gas network developer and distributor of natural gas to residential, industrial, and commercial users in small and medium sized cities in China, today announced its third quarter financial results ended September 30, 2010.

Third Quarter 2010 Results

For the third quarter ended September 30, 2010, revenues were $162,066 compared to $1.1 million in the same quarter last year. The decrease was due to a decline in number of connection households. Revenues from connection fees were $124,803 compared to $1.1 million in the same period last year. Revenues from natural gas sales were $37,263 compared to $42,427 for the third quarter of last year.

Gross loss was $33,339 compared to a gross profit of $0.8 million from the third quarter of 2009. Operating expenses were $1.4 million compared to $1.3 million for the third quarter of last year. This increase was primarily due to the fact that the Company is expanding by adding more resources in areas like business development, outside consultants, and the hiring of additional staff to help strengthen the Company's internal controls. Operating loss was $1.4 million, compared to an operating loss of $513,842 for the same period last year.

The Company's third quarter 2010 and third quarter 2009 financial statements include the non-cash impact from the change in fair value of derivative financial instruments of ($8.3) million and $6.0 million, respectively.

Net loss from continuing operations was $10.9 million compared to net income from continuing operations of $5.4 million, or $0.06 per diluted share, in the same period last year. Excluding the non-cash impact from the change in fair value of derivative financial instruments, the Company's adjusted net loss from continuing operations was $2.6 million, compared to an adjusted net loss from continuing operations of $0.7 million for the third quarter of last year. (*)

In March 2010, the Company sold its subsidiary, Yingkou Zhongneng Gas Development Co., Ltd., for RMB 21.9 million (approximately $3.2 million). In December 2009, the Company sold its Acheng Division for RMB 40 million (approximately $6 million). The results of Yingkou Zhongneng and Acheng Division are classified as discontinued operations on the Company's financial statements.

Net loss attributable to common shareholders was $17.3 million compared to net income attributable to common shareholders of $5.9 million, or $0.03 per diluted share, in the same period last year. Adjusted net loss attributable to common shareholders, which excludes the non-cash impact of the change in fair value of derivative financial instruments, was $9.0 million, compared to an adjusted net loss of $130,557 for the third quarter of last year (*)

(*) See table at the end of this press release for a reconciliation of income from continuing operations to exclude the non-cash impact from the change in fair value of derivative financial instruments and for a reconciliation of net income attributable to common shareholders to exclude the non-cash impact from the change in fair value of derivative financial instruments.

First Nine Months of FY2010 Results

For the nine months ended September 30, 2010, revenues were $2.6 million compared to $1.8 million in the same period last year, an increase of 39.9%. Revenues from connection services fees were $2.5 million compared to $1.7 million in the same period last year, an increase of 41.9%. Sales of natural gas were relatively flat at $84,165. Gross profit was $1.7 million compared to $1.2 million in the same period last year, an increase of 46.7%. Gross margin was 67.2% compared to 64.1% last year. Operating loss was $2.3 million compared to $1.4 million in the prior year period, an increase of 62.7%.

Net loss from continuing operations was $11.9 million compared to net income from continuing operations of $6.4 million for the nine months ended September 30, 2009. Adjusted net loss from continuing operations, which excludes the non-cash impact of the change in fair value of derivative financial instruments, was $3.9 million compared with an adjusted net loss from continuing operations of $1.6 million, for the first nine months of 2009.

Net loss attributable to common shareholders was $18.8 million compared to net income attributable to common shareholders of $8.9 million, or $0.05 per diluted share, in the first nine months of 2009. Adjusted net loss attributable to common shareholders, which excludes the non-cash impact of the change in fair value of derivative financial instruments, was $10.8 million, compared to an adjusted net income of $837,686 for the first nine months of 2009.

Financial Condition

As of September 30, 2010, the Company had cash and cash equivalents of $0.6 million. The Company has no long term debt. Shareholders' equity was negative $27.9 million as of September30, 2010. During the first nine months of 2010, operating cash flow was negative $0.5 million versus negative cash from operations of $0.9 million in the prior year period. Capital expenditures for the nine months ended September 30, 2010 were approximately $38.4 million, which was primarily for the construction of gas pipelines and stations.

Recent Developments

In September 2010, the Company's wholly-owned PRC subsidiary, China New Energy Investment Co., Ltd, entered into certain equity transfer agreements with Beijing Fengyin Xianghe Scientific Technology Co., Ltd. a PRC company controlled by Mr. Tang Zhixiang, to acquire 70% equity interests in Beijing Century Dadi Gas Engineering Co., Ltd. and Zhoulu Dadi Gas Co. Ltd. (collectively, "Dadi Gas") for a total purchase price of RMB 270 million (approximately $40 million).

Business Outlook

Mr. Chong concluded, "We believe that we remain on track to complete three significant acquisitions by year end—Dadi Gas, Fuzhou Zhongran and Lean Longran. These firms can add tremendously to our business prospects, since they are all players in under-penetrated, fast-growing small- and medium-sized cities. The efforts of the Company's management are very much focused on closing the acquisitions and positioning China New Energy to execute on its business plan once the deals are concluded. We anticipate that the acquisitions will bring about substantial synergies, including guaranteed and steady supply of gas from upstream suppliers; better pricing for gas, related products and other purchases; lower transportation costs; lower operating expenses; and flexible mobilization and placement of professional and technical staff. In addition, we expect the acquisitions to improve our cash flow and overall financial position, creating great opportunities for revenue, profit growth, and an increase in shareholder value."

Use of Non-GAAP Financial Information

GAAP results for three and nine month periods ended September 30, 2010 and 2009 include the significant non-cash charges which do not relate to the operation of the business including non-cash expenses related to the change in fair value of derivative financial instruments. These are non-cash events which do not affect the Company's operations. To supplement the Company's consolidated financial statements presented on a GAAP basis, the Company has provided non-GAAP financial information excluding the impact of these items in this release, which are adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations, adjusted net income attributable to common shareholders and adjusted earnings per share attributable to common shareholders. The Company's management believes that these non-GAAP measures provide investors with a better understanding of how the results relate to the Company's historical performance. The additional adjusted information is not meant to be considered in isolation or as a substitute for GAAP financials. The adjusted financial information that the Company provides also may differ from the adjusted information provided by other companies. Management believes that these adjusted financial measures are useful to investors because they exclude non-cash expenses that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions as these measures provide a consistent method of comparison to historical periods. As a result, the provision of these adjusted measures allows investors to evaluate the Company's performance using the same methodology and information as that used by the Company's management. Moreover, management believes that these adjusted measures reflect the essential operating activities of the Company. Adjusted measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the adjusted financial measure. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded. A reconciliation of each adjusted measure to the nearest GAAP measure appears in the table at the end of this release.

About China New Energy Group Company

China New Energy Group Company ("China New Energy" or the "Company") is a vertically integrated natural gas company engaged in the development of natural gas distribution networks, and the distribution of natural gas to residential, industrial, and commercial users in small and medium sized cities in China. The Company generates revenues primarily from the connection fees it charges its customers for interconnecting to pipelines in its natural gas distribution networks, and fees for natural gas usage. For more information, please visit http://www.cnegc.com.

Safe Harbor Statement

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Any statements set forth above that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to, the Company's ability to access natural gas for distribution, and ability to identify and develop operational locations under favorable terms, changes in natural gas pricing mechanism imposed by the Chinese government, changes in the regulatory environment and future national or regional economic and competitive conditions, and other factors detailed from time to time in the Company's filings with the United States Securities and Exchange Commission and other regulatory authorities. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

-FINANCIAL TABLES FOLLOW-

CHINA NEW ENERGY GROUP COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) - (UNAUDITED)
	For the three months ended		For the nine months ended
	September 30,		September 30,
	2010	2009	2010	2009

Revenues:
Connection services	$ 124,803	$ 1,095,454	$ 2,479,344	$ 1,747,312
Natural gas	37,263	42,427	84,165	84,670
	162,066	1,137,881	2,563,509	1,831,982
Cost of Sales:
Connection services	145,435	329,665	717,113	551,248
Natural gas	49,970	48,202	123,555	106,619
	195,405	377,867	840,668	657,867
Gross (Loss) Profit	(33,339)	760,014	1,722,841	1,174,115

Operating Expenses:
General and administrative expenses	1,312,808	853,577	3,797,133	1,625,875
Selling expenses	65,509	42,279	217,145	128,881
Registration right liabilities	-	378,000	-	828,000
Total operating expenses	1,378,317	1,273,856	4,014,278	2,582,756

Operating loss	(1,411,656)	(513,842)	(2,291,437)	(1,408,641)

Other Income (Expenses):
Change in fair value of derivative
financial instruments - warrants	1,654,806	6,041,231	1,946,842	8,017,275
Change in fair value of derivative
financial instruments - put options of
backstop agreements and obligation to
issuance of common stock relating to
Series D preferred stock	(9,975,502)	-	(9,975,502)	-
Interest income	11,916	5,520	14,466	7,754
Interest expense	(1,035,478)	(1,113)	(1,039,843)	(4,123)
Other income	14,476	3,307	27,566	3,400
Other expenses	(190,016)	-	(190,016)	-

Total other income (expenses)	(9,519,798)	6,048,945	(9,216,487)	8,024,306

(Loss) Income From continuing
operations, Before Income Tax	(10,931,454)	5,535,103	(11,507,924)	6,615,665

Income Tax	2,238	181,885	384,835	187,993

(Loss) Income From continuing
operations, net of Income Tax	(10,933,692)	5,353,218	(11,892,759)	6,427,672
Discontinued Operations:
(Loss) Income from discontinued
operations, net of income tax	(231)	809,506	(85,877)	1,894,543

(Loss) Income from discontinued
operations, net of Income Tax	(231)	809,506	(85,877)	1,894,543

Net (Loss) Income	(10,933,923)	6,162,724	(11,978,636)	8,322,215

Net Loss (Income) attributable to
Non-controlling Interest	4,597	(25,104)	1,876	(18,200)

Net (Loss) Income attributable to China
New Energy Group	(10,929,326)	6,137,620	(11,976,760)	8,304,015

Dividend and Deemed Dividend on
Preferred Stock	(6,378,098)	(226,946)	(6,851,248)	550,946

Net (Loss) Income attributable to China
New Energy Group Common Stockholders	(17,307,424)	5,910,674	(18,829,008)	8,854,961

Other Comprehensive Income:
Net (Loss) Income	(10,933,923)	6,162,724	(11,978,636)	8,322,215
Foreign currency translation loss	(557,564)	(13,763)	(710,103)	(24,442)
Comprehensive Income attributable to
Non-controlling interest	-	(17,052)	-	(12,026)
Comprehensive (loss) income	$ (11,491,487)	$ 6,131,909	$(12,688,739)	$ 8,285,747

(Loss) Income per share - Basic
(Loss) Income from continuing operations	$ (0.16)	$ 0.06	$ (0.18)	$ 0.05
(Loss) Income from discontinued
operations	$ (0.00)	$ 0.01	$ (0.00)	$ 0.02
Total (loss) income per share	$ (0.16)	$ 0.07	$ (0.18)	$ 0.07

(Loss) Income per share - Diluted
(Loss) Income from continuing operations	$ (0.16)	0.03	(0.18)	0.04
(Loss) Income from discontinued
operations	$ (0.00)	$ -	$ (0.00)	$ 0.01
Total (loss) income per share	$ (0.16)	$ 0.03	$ (0.18)	$ 0.05

Weighted average common shares
outstanding
Basic	106,687,887	100,000,041	102,488,123	100,000,041
Diluted	252,046,676	217,949,744	234,554,522	199,844,225

CHINA NEW ENERGY GROUP COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
	September 30,	December 31,
	2010	2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$ 580,731	$ 2,672,884
Restricted cash	39,691	180,352
Accounts receivable, net of allowance for doubtful accounts
of $219,842 and $-	3,306,894	4,619,232
Receivable from sale of a subsidiary	3,368,119	5,119,055
Inventories, net	338,008	271,104
Prepaid expenses	197,389	179,011
Deemed receivable from former shareholders of subsidiaries
acquired for settlement of certain liabilities	1,250,976	1,983,782
Current assets held for sale	1,430,758	1,768,278
NET CURRENT ASSETS	10,512,566	16,793,698

Property, plant and equipment, net	10,472,634	8,000,069
Other receivables	1,546,130	2,091,092
Deposits for acquisitions of subsidiaries	18,822,946	197,696
Intangible assets, net	1,195,612	1,186,272
Deposits paid for acquisition of long term assets	2,245,362	1,972,162
Goodwill	229,150	224,488
Non-current assets held for sale	10,135,011	9,760,345
Derivative assets - put options	1,598,093	-

TOTAL ASSETS	$ 56,757,504	$ 40,225,822

LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable	$ 422,944	$ 614,642
Deposits receipt for disposal	1,045,072	-
Accruals and other payable	539,449	187,904
Acquisition consideration payable	1,353,474	1,651,888
Short term bank loan	223,944	-
Tax payable	174,358	1,323,815
Registration rights penalties payable	2,160,000	2,160,000
Related party payables	99,926	97,893
Dividends payable on preferred stock	249,411	509,381
Derivative financial instruments - warrants	4,821,264	6,768,106
Derivative financial instruments - call options related to
Series D Convertible Preferred Stock	43,665,345	-
Liabilities to be settled by former shareholders of
subsidiaries acquired	1,250,976	1,983,782
Convertible notes	4,034,315	-
Current liabilities held for sale	437,761	548,832
TOTAL CURRENT LIABILITIES	60,478,239	15,846,243
Preferred Stock : 10,000,000 shares authorized, $0.001 par value Series A Convertible Preferred Stock : 2,098,918 and 2,098,918 shares issued and outstanding, liquidation preference of $10,137,774 and $10,137,774 as of September 30, 2010 and December 31, 2009	7,031,818	7,031,818

Series B Convertible Preferred Stock: 1,116,388 and 1,116,388 shares issued and outstanding, liquidation preference of $5,399,969 and $5,399,969 as of September 30, 2010 and December 31, 2009	2,153,307	2,153,307

Series C Convertible Preferred Stock : 18.73 and 0 shares issued and outstanding, liquidation preference of $15,000,000 and $0 as of September 30, 2010 and December 31, 2009	15,000,000	-

CHINA NEW ENERGY'S STOCKHOLDERS' EQUITY
Series D Convertible Preferred Stock (see Derivative financial instruments - call options): 4 and 0 shares issued and outstanding, liquidation preference of $ 0 as of both September 30, 2010 and December 31, 2009	-	-

Common Stock: 500,000,000 shares authorized, $0.001 par value, 107,070,281 and 101,788,199 shares issued and outstanding, respectively	107,070	101,788

Additional paid in capital	(14,831,844)	10,152,971
(Accumulated deficit)/ Retained earnings	(17,405,485)	1,423,523
Statutory surplus reserve fund	1,746,890	1,746,890
Accumulated other comprehensive income	2,311,044	1,600,941
TOTAL CHINA NEW ENERGY'S STOCKHOLDERS' EQUITY (DEFICIT)	(28,072,325)	15,026,113

Non-controlling interest	166,465	168,341
TOTAL EQUITY (DEFICIT)	(27,905,860)	15,194,454

TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND EQUITY (DEFICIT)	$ 56,757,504	$ 40,225,822

CHINA NEW ENERGY GROUP COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
	For The Nine Months Ended
	September 30,
	2010	2009

Cash flows from operating activities:
Net (loss) income	$ (11,978,636)	$ 8,322,215
Net loss (income) from discontinued operations	85,877	(1,894,543)
Net (loss) income from continuing operations	$ (11,892,759)	$ 6,427,672

Adjustments to reconcile net (loss) income to net cash used in operating activities
:
Change in fair value of derivative financial instruments -
	(1,946,842)	(8,017,275)
Change in fair value of derivative financial instruments -
put options of backstop agreements and obligation to issuance of common stock relating to Series D preferred stock	9,975,502	-

Registration rights penalties	-	828,000
Depreciation and amortization	269,782	140,275
Non cash interest	1,034,314	-

Changes in operating assets and liabilities:
Accounts receivable	1,383,826	(3,063,448)
Other receivables	578,176	183,628
Inventories	(60,210)	(37,228)
Prepayment	(14,544)	18,010
Other current assets	-	(87,610)
Accounts payable	(200,914)	(461,528)
Accruals and other payables	1,370,634	(541,671)
Tax payable	(1,156,523)	(765,519)
Cash used in operating activities - continuing operations	(659,558)	(5,376,694)
Cash provided by (used in) operating activities -
discontinued operations	172,504	4,461,586

Net cash used in operating activities	(487,054)	(915,108)

Cash flows from investing activities
Deposit paid for property, plant and equipment	(2,749,365)	(1,108,880)
Deposits paid for acquisitions of subsidiaries	(18,625,250)	-
Payment made to acquire subsidiary - Chensheng	-	(1,838,946)
Proceeds from sale of subsidiary	1,825,010	-
Acquisition consideration payable	(313,949)	-
Cash provided by (used in) investing activities-continuing operations	(19,863,554)	(2,947,826)
Cash used in investing activities-discontinued operations	(179,733)	(2,083,662)

Net cash provided by (used in) investing activities	(20,043,287)	(5,031,488)

Cash flows from financing activities
Proceeds from convertible loan	3,000,000	-
Proceeds from short term bank loan	220,058	-
Change from restricted cash	140,661	24,279
Proceeds from issuance of preferred stock	15,000,000	4,752,140
Cash provided by financing activities-continuing operations	18,360,719	4,776,419
Cash provided by financing activities-discontinued operations	-	439,060

Net cash flows provided by financing activities	18,360,719	5,215,479

Effect of exchange rate changes in cash and cash equivalents	77,469	(2,488)

Net increase (decrease) in cash and cash equivalents	(2,092,153)	(733,605)

Cash and cash equivalents - beginning of period	2,672,884	5,612,356

Cash and cash equivalents - end of period	$ 580,731	$ 4,878,751

Supplemental disclosure of cash flow information:
Cash paid for interest	$ -	$ -
Cash paid for income tax	$ 1,420,494	$ 448,252

Supplemental disclosure of non-cash investing and financing activities:

Preferred stock dividends payable	$ 260,872	$ 135,000
Preferred stock dividends paid in common stock	$ 948,884	$ -
Registration rights payable	$ 2,160,000	$ 900,000
Acquisition consideration payable related to the acquisition of Wuyuan	$ 636,850	$ -

Acquisition consideration payable related to the acquisition of Zhanhua Jiutai	$ 716,624	$ -

Receivable for disposal of discontinued operations	$ 3,368,119	$ -

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

	Three Months Ended September 30,		Nine Months Ended September 30,
Adjusted Net Income (Loss) and Diluted EPS From Continuing Operations	2010	2009	2010	2009

GAAP Net Income (Loss) from Continuing Operations	(10,933,692)	5,353,218	(11,892,759)	6,427,672
Less: Change in fair value of derivative financial instruments - warrants	1,654,806	6,041,231	1,946,842	8,017,275
Less: Change in fair value of derivative financial instruments - Options	(9,975,502)	-	(9,975,502)	-
Adjusted Amount Net Income from Continuing Operations	(2,612,996)	(688,013)	(3,864,099)	(1,589,603)
Weighted average number of shares - Diluted	252,046,676	217,949,744	234,554,522	199,844,225
Adjusted Diluted EPS from Continuing Operations	(0.01)	(0.00)	(0.02)	(0.01)

	Three Months Ended September 30,		Nine Months Ended September 30,
Adjusted Net Income (Loss) and Diluted EPS Attributable to Common Shareholders	2010	2009	2010	2009

GAAP Net Income (Loss) and Attributable to Common Shareholders	(17,307,424)	5,910,674	(18,829,008)	8,854,961
Less: Change in fair value of derivative financial instruments - warrants	1,654,806	6,041,231	1,946,842	8,017,275
Less: Change in fair value of derivative financial instruments - Options	(9,975,502)	-	(9,975,502)	-
Adjusted Amount	($8,986,728)	($130,557)	($10,800,348)	$837,686
Weighted average number of shares - Diluted	252,046,676	217,949,744	234,554,522	199,844,225
Adjusted Diluted EPS Attributable to Common Shareholders	($0.04)	($0.00)	($0.05)	$0.00

Company Contact:
Eric Yu, Chief Financial Officer
Email: ericyu@cnegc.com
Website: www.cnegc.com

Investor Relations Contact:
CCG Investor Relations
Mr. Athan Dounis, Account Manager
Phone: +1-646-213-1916
Email: athan.dounis@ccgir.com

Mr. Crocker Coulson, President
Phone: +1-646-213-1915
Email: crocker.coulson@ccgir.com
Website: www.ccgirasia.com