Filed Pursuant to Rule 424(b)(3)
under the Securities Act of 1933,
as amended (File No. 333-131738)
Prospectus
CHINA NATURAL GAS, INC.
5,146,382 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up
to 5,146,382 shares of our common stock, including up to 1,431,954 shares of
common stock issuable upon the exercise of common stock purchase warrants. The
selling stockholders may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions. The selling stockholders may be deemed underwriters of
the shares of common stock, which they are offering. We will pay the expenses of
registering these shares.
We are not selling any shares of common stock in this offering and
therefore will not receive any proceeds from the sale of common stock hereunder.
We may receive proceeds from any exercise of outstanding warrants. The warrants
may also be exercised by surrender of the warrants in exchange for an equal
value of shares in accordance with the terms of the warrants.
Our common stock is listed on the Over-The-Counter Bulletin Board under
the symbol "CHNG." The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on April 21, 2006, was $4.25.
Investing in these securities involves significant risks. See "Risk
Factors" beginning on page 7.
No other underwriter or person has been engaged to facilitate the sale
of shares of common stock in this offering. None of the proceeds from the sale
of stock by the selling stockholders will be placed in escrow, trust or any
similar account.
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read the entire prospectus and
any amendments or supplements carefully before you make your investment
decision.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is May 12, 2006.
Table Of Contents
Prospectus Summary.............................................................3
Risk Factors...................................................................5
Use Of Proceeds...............................................................10
Market For Common Equity And Related Stockholder Matters......................10
Business......................................................................13
Facilities....................................................................16
Employees.....................................................................17
Legal Proceedings.............................................................17
Management....................................................................17
Certain Relationships And Related Transactions................................19
Security Ownership Of Certain Beneficial Owners And Management................20
Description Of Securities To Be Registered....................................21
Indemnification For Securities Act Liabilities................................21
Plan Of Distribution..........................................................21
Penny Stock...................................................................21
Selling Stockholders..........................................................23
Legal Matters.................................................................25
Experts.......................................................................25
Available Information.........................................................25
2
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements. As used throughout this prospectus, the terms "China Natural Gas,"
"CHNG," the "Company," "we," "us," and "our" refer to China Natural Gas, Inc.
CHINA NATURAL GAS, INC.
We primarily engage in the transmission and distribution of natural gas
to commercial, industrial and residential customers.
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. On December 19, 2005 we
changed our name to China Natural Gas, Inc.
For the fiscal year ended December 31, 2005, we had revenue of
$4,850,699, with gross profits of $2,446,662.
Our executive offices are located at Tang Xing Shu Ma Building, Suite
418, Tang Xing Road, Xian High Tech Area, Xian, Shaanxi Province, China, and our
telephone number is 86-29-88323325. We are a Delaware corporation.
The Offering
Common stock offered by
selling stockholders 5,146,382 shares, including up to 1,431,954 shares
of common stock issuable upon the exercise of
common stock purchase warrants at an exercise
price of $3.60 per share
Common stock to be
outstanding after the
offering 25,350,470 shares
Use of proceeds We will not receive any proceeds from the sale of
the common stock hereunder. See "Use of Proceeds"
for a complete description.
OTCBB Symbol CHNG
Summary of Recent Transactions
Acquisition of Xian Xilan Natural Gas Co., Ltd.
On December 6, 2005, China Natural Gas, Inc., formerly Coventure
International Inc., entered into and 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, and each of Xilan's shareholders. Pursuant to the Agreement,
Coventure acquired all of the issued and outstanding capital stock of Xilan from
the Xilan shareholders in exchange for 4,000,000 shares of Coventure 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
5,971,178 shares of Coventure common stock to Coventure for cancellation. Mr.
Hromyk was not compensated in any way for the cancellation of his shares of
Coventure Common Stock. Upon completion of the foregoing transactions, Coventure
had an aggregate of 5,051,022 shares of common stock issued and outstanding.
3
Private Offering of Units
January 6, 2006 and January 9, 2006
On January 6, 2006 and January 9, 2006, we 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. New York Global Securities acted as the placement agent of the
transaction.
In connection with the offering, the Company paid a placement fee of
10% of the proceeds in cash, together with a flat fee for general miscellaneous
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.
January 10, 2006 through January 13, 2006
On January 10, 2006 through January 13, 2006, we 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.
In connection with the offering, the Company paid a placement fee of
10% of the proceeds in cash, together with a flat fee for general miscellaneous
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.
January 17, 2006
On January 17, 2006, we 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.
4
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Related To Our Business
Prices of natural gas can be subject to significant fluctuations, which may
affect our ability to provide supplies to our customers.
While we obtain supplies of natural gas from a government owned entity,
our supply contracts are subject to review every six months and our prices have
not historically fluctuated much. While our management does not expect any
issues or difficulty in continuing to renew the supply contracts going forward
and our costs for natural gas are strictly controlled by the government and have
remained stable over the past 3 years, the price of natural gas can fluctuate in
response to changing national or international market forces. Accordingly, price
levels of natural gas may rise or fall significantly over the short to medium
term due to political events, OPEC actions and other factors, industry economics
over the long term.
We are dependent on supplies of natural gas to deliver to our customers.
We obtain our supplies of natural gas from one supplier, a government
owned entity. The ability to deliver our product is dependent on a sufficient
supply of natural gas and if we are unable to obtain a sufficient natural gas
supply it could prevent us making deliveries to our customers who are dependent
on our supply. While we have a supply contract, we do not control the government
owned supplier, nor are we able to control the amount of time and effort they
put forth on our behalf. It is possible that this supplier may not perform as
expected, and that they may breach or terminate their agreements with us before
completing their work. It is also possible that, after a semi-annual review of
our supply contract, they may choose to provide services to a competitor. Any
failure to obtain supplies of natural gas could prevent us from delivering such
to our customers.
Our business operations are subject to a high degree of risk and insurance may
not be adequate to cover liabilities resulting from accidents or injuries that
occur during our physically demanding events.
Our operations are subject to potential hazards incident to the
gathering, processing, separation and storage of natural gas, such as
explosions, product spills, leaks, emissions and fires. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, and pollution or other environmental damage, and may result in
curtailment or suspension of operations at the affected facility.
The occurrence of a significant event for which we are not fully
insured or indemnified, and/or the failure of a party to meet its
indemnification obligations, could materially and adversely affect our
operations and financial condition. Moreover, no assurance can be given that we
will be able to maintain adequate insurance in the future at rates it considers
reasonable. To date, however, we have maintained adequate coverage at reasonable
rates and have experienced no material uninsured losses.
Changes in the regulatory atmosphere could adversely affect our business.
The distribution of natural gas and operations of filling stations are
highly regulated requiring registrations for the issuance of licenses required
by various governing authorities in China. In addition, there are various
standards that must be met for filling stations including handling and storage
of natural gas, tanker handling, and compressor operation which are regulated.
The costs of complying with regulations in the future may harm our business.
Furthermore, future changes in environmental laws and regulations could occur
that result in stricter standards and enforcement, larger fines and liability,
and increased capital expenditures and operating costs, any of which could have
a material adverse effect on our financial condition or results of operations.
5
Because we depend on our senior management's experience and knowledge of the
industry, we would be adversely affected if senior management left.
We are dependent on the continued efforts of our senior management
team. We do not currently have employment contracts with our senior executives.
If, for any reason, senior executives do not continue to be active in
management, our business, financial condition or results of operations could be
adversely affected. In addition, we do not maintain key personnel life insurance
on our senior executives and other key employees.
We may need to raise capital to fund our operations, and our failure to obtain
funding when needed may force us to delay, reduce or eliminate acquisitions and
business development plans.
If in the future, we are not capable of generating sufficient revenues
from operations and our capital resources are insufficient to meet future
requirements, we may have to raise funds to continue the development,
commercialization and marketing of our business.
We cannot be certain that funding will be available on acceptable
terms, or at all. To the extent that we raise additional funds by issuing equity
securities, our stockholders may experience significant dilution. Any debt
financing, if available, may involve restrictive covenants that impact our
ability to conduct our business. If we are unable to raise additional capital if
required or on acceptable terms, we may have to significantly delay, scale back
or discontinue our planned acquisitions or business development plans or obtain
funds by entering into agreements on unattractive terms.
Risks Related To The People's Republic of China
China's economic policies could affect our business.
Substantially all of our assets are located in China and substantially
all of our revenue is derived from our operations in China. Accordingly, our
results of operations and prospects are subject, to a significant extent, to the
economic, political and legal developments in China.
While China's economy has experienced a significant growth in the past
twenty years, growth has been uneven, both geographically and among various
sectors of the economy. The Chinese government has implemented various measures
to encourage economic growth and guide the allocation of resources. Some of
these measures benefit the overall economy of China, but may also have a
negative effect on us. For example, our operating results and financial
condition may be adversely affected by the government control over capital
investments or changes in tax regulations.
The economy of China has been transitioning from a planned economy to a
more market-oriented economy. In recent years the Chinese government has
implemented measures emphasizing the utilization of market forces for economic
reform and the reduction of state ownership of productive assets and the
establishment of corporate governance in business enterprises; however, a
substantial portion of productive assets in China are still owned by the Chinese
government. In addition, the Chinese government continues to play a significant
role in regulating industry development by imposing industrial policies. It also
exercises significant control over China's economic growth through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies.
Capital outflow policies in The People's Republic of China may hamper our
ability to remit income to the United States.
The People's Republic of China has adopted currency and capital
transfer regulations. These regulations may require that we comply with complex
regulations for the movement of capital. Although we believe that we are
currently in compliance with these regulations, should these regulations or the
interpretation of them by courts or regulatory agencies change we may not be
able to remit all income earned and proceeds received in connection with our
operations or from the sale of our operating subsidiary to the U.S. or to our
stockholders.
6
Although we do not import goods into or export goods out of The People's
Republic of China, fluctuation of the Renminbi may indirectly affect our
financial condition by affecting the volume of cross- border money flow.
The value of the Renminbi fluctuates and is subject to changes in The
People's Republic of China's political and economic conditions. Since July 2005,
the conversion of Renminbi into foreign currencies, including United States
dollars, has been based on rates set by the People's Bank of China which are set
based upon the interbank foreign exchange market rates and current exchange
rates of a basket of currencies on the world financial markets. As of January 9,
2006, the exchange rate between the Renminbi and the United States dollar was
8.07 Renminbi to every one United States dollar.
We may face obstacles from the communist system in The People's Republic of
China.
Foreign companies conducting operations in The People's Republic of
China face significant political, economic and legal risks. The Communist regime
in The People's Republic of China, including a stifling bureaucracy, may hinder
Western investment.
We may have difficulty establishing adequate management, legal and financial
controls in The People's Republic of China.
The People's Republic of China historically has been deficient in
Western style management and financial reporting concepts and practices, as well
as in modern banking, computer and other control systems. We may have difficulty
in hiring and retaining a sufficient number of qualified employees to work in
The People's Republic of China. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and
corporate records and instituting business practices that meet Western
standards.
Because our assets and operations are located in China, you may have difficulty
enforcing any civil liabilities against us under the securities and other laws
of the United States or any state.
We are a holding company, and all of our assets are located in the
Republic of China. In addition, our directors and officers are non-residents of
the United States, and all or a substantial portion of the assets of these
non-residents are located outside the United States. As a result, it may be
difficult for investors to effect service of process within the United States
upon these non-residents or to enforce against them judgments obtained in United
States courts, including judgments based upon the civil liability provisions of
the securities laws of the United States or any state.
There is uncertainty as to whether courts of the Republic of China
would enforce:
o Judgments of United States courts obtained against us or these
non-residents based on the civil liability provisions of the
securities laws of the United States or any state; or
o In original actions brought in the Republic of China,
liabilities against us or these non-residents predicated upon
the securities laws of the United States or any state.
Enforcement of a foreign judgment in the Republic of China also may be
limited or otherwise affected by applicable bankruptcy, insolvency, liquidation,
arrangement, moratorium or similar laws relating to or affecting creditors'
rights generally and will be subject to a statutory limitation of time within
which proceedings may be brought.
We may face political and/or judicial corruption in The People's Republic of
China.
Another obstacle to foreign investment is corruption. There is no
assurance that we will be able to obtain recourse, if desired, through The
People's Republic of China's poorly developed and often corrupt judicial
systems.
7
The admission of China into the World Trade Organization could lead to increased
foreign competition.
The natural gas industry is regulated by the provincial and central
government authorities for safety and to ensure that all areas receive natural
gas service in an economically sound fashion. However, as a result of China
becoming a member of the World Trade Organization (WTO), restrictions on foreign
investment in the industry may be reduced. With China's need to meet growth in
natural gas demand and the WTO's requirement for a reduction of restrictions on
foreign investment as a condition of membership, such events could lead to
increased competition in the natural gas industry.
Risks Related To This Offering
There Is No Assurance Of An Established Public Trading Market, Which Would
Adversely Affect The Ability Of Investors In Our Company To Sell Their
Securities In The Public Markets.
Although our common stock trades on the Over-the-Counter Bulleting
Board (the "OTCBB"), a regular trading market for the securities may not be
sustained in the future. The NASD has enacted recent changes that limit
quotations on the OTCBB to securities of issuers that are current in their
reports filed with the Securities and Exchange Commission. The effect on the
OTCBB of these rule changes and other proposed changes cannot be determined at
this time. The OTCBB is an inter-dealer, Over-The-Counter market that provides
significantly less liquidity than the NASD's automated quotation system (the
"NASDAQ Stock Market"). Quotes for stocks included on the OTCBB are not listed
in the financial sections of newspapers as are those for The Nasdaq Stock
Market. Therefore, prices for securities traded solely on the OTCBB may be
difficult to obtain and holders of common stock may be unable to resell their
securities at or near their original offering price or at any price. Market
prices for our common stock will be influenced by a number of factors,
including:
o the issuance of new equity securities;
o changes in interest rates;
o competitive developments, including announcements by
competitors of new products or services or significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
o the depth and liquidity of the market for our common stock;
o investor perceptions of our company and the technologies
industries generally; and
o general economic and other national conditions.
The Limited Prior Public Market And Trading Market May Cause Volatility In The
Market Price Of Our Common Stock.
Our common stock is currently traded on a limited basis on the OTCBB
under the symbol "CHNG." The quotation of our common stock on the OTCBB does not
assure that a meaningful, consistent and liquid trading market currently exists,
and in recent years such market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of many smaller
companies like us. Our common stock is thus subject to volatility. In the
absence of an active trading market:
o investors may have difficulty buying and selling or obtaining
market quotations;
o market visibility for our common stock may be limited; and
o a lack of visibility for our common stock may have a
depressive effect on the market for our common stock.
Our Common Stock Could Be Considered To Be A "Penny Stock."
Our common stock could be considered to be a "penny stock" if it meets
one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under
Section 15(g) of the Securities Exchange Act of 1934, as amended. These include
but are not limited to the following: (i) the stock trades at a price less than
$5.00 per share; (ii) it is NOT traded on a "recognized" national exchange;
(iii) it is NOT quoted on The Nasdaq Stock Market, or even if so, has a price
less than $5.00 per share; or (iv) is issued by a company with net tangible
assets less than $2.0 million, if in business more than a continuous three
years, or with average revenues of less than $6.0 million for the past three
years. The principal result or effect of being designated a "penny stock" is
that securities broker-dealers cannot recommend the stock but must trade in it
on an unsolicited basis.
8
Broker-Dealer Requirements May Affect Trading And Liquidity.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and
Rule 15g-2 promulgated thereunder by the SEC require broker-dealers dealing in
penny stocks to provide potential investors with a document disclosing the risks
of penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account.
Potential investors in our common stock are urged to obtain and read
such disclosure carefully before purchasing any shares that are deemed to be
"penny stock." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to
approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for holders of our common stock to
resell their shares to third parties or to otherwise dispose of them in the
market or otherwise.
Shares Eligible For Future Sale May Adversely Affect The Market Price Of Our
Common Stock, As The Future Sale Of A Substantial Amount Of Our Restricted Stock
In The Public Marketplace Could Reduce The Price Of Our Common Stock.
From time to time, certain of our stockholders may be eligible to sell
all or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act ("Rule 144"), subject to certain limitations. In general,
pursuant to Rule 144, a stockholder (or stockholders whose shares are
aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of securities, without any limitations, by a non-affiliate of our company that
has satisfied a two-year holding period. Any substantial sale of common stock
pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse
effect on the market price of our securities.
9
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares to be offered
by the selling stockholders. The proceeds from the sale of each selling
stockholders' common stock will belong to that selling stockholder. However, we
may receive the sale price of any common stock we sell to the selling
stockholders upon exercise of outstanding warrants.
Unless otherwise indicated in the applicable prospectus supplement, we
anticipate that any net proceeds from the sale of the securities that we may
offer under this prospectus and any accompanying prospectus supplement will be
used for general corporate purposes. General corporate purposes may include
acquisitions, investments, repayment of debt, capital expenditures, repurchase
of our capital stock and any other purposes that we may specify in any
prospectus supplement. We may invest the net proceeds temporarily until we use
them for their stated purpose.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On March 17, 2004, our common stock was approved for listing on the
Over-the-Counter Bulletin Board under the symbol "CVNI" and on December 19, 2005
our symbol was changed to "CHNG" and our fiscal year end was changed to December
31. The following table sets forth, for the range of high and low closing bid
quotations for our common stock since our common stock was listed on the
Over-the-Counter Bulletin Board, reflecting the applicable fiscal periods based
on the change in our fiscal year end. The quotations represent inter-dealer
prices without retail markup, markdown or commission, and may not necessarily
represent actual transactions.
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 Apirl 21, 2006, there were approximately 46 holders of record and
549 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.
10
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows information with respect to each equity
compensation plan under which our common stock is authorized for issuance as of
the fiscal year ended December 31, 2005.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
Number of securities remaining available for
to be issued upon Weighted average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a)
------------------------------------ ------------------------ ----------------------- ---------------------------
(a) (b) (c)
------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans approved
by security holders -0- -0- -0-
Equity compensation plans not
approved by security holders -0- -0- -0-
Total -0- -0- -0-
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 financial statements, included herewith. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment of our management.
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. On December 19, 2005 we
changed our name to China Natural Gas, Inc.
Twelve Months Ended December 31, 2005 compared to Twelve Months Ended December
31, 2004
Revenue. We generated revenues of $4,850,699 for the twelve months
ended December 31, 2005, an increase of $3,966,286 or 448%, compared to $884,413
for the twelve months ended December 31, 2004. The increase in revenues was due
to increased construction and installation revenue as we signed new residential
and commercial customers as well as the sale of natural gas. The sale of natural
gas increased 450% over the previous year. In the year ended December 31, 2005
households accounted for 9%, retail/commercial 4%, industrial customers 11% of
our annual revenues. The balance of our revenues, 76%, of the sale of natural
gas was sold wholesale to third party natural gas filling station operators. New
households pay approximately 60% of the construction costs up front and the
balance is paid as part of the monthly natural gas bill. Four customers
accounted for 34.7%, 21.2%, 14.0% and 10.8% of our revenue for the year ended
December 31, 2005 and three customers accounted for 37.3%, 36.1% and 10.0% of
our revenue for the year ended December 31, 2004. Three customers accounted for
40%, 17% and 17%, respectively, of construction/installation revenue for 2005
and two customers accounted for 36% and 37%, respectively, of our
construction/installation revenue in 2004.
11
Gross profit. We have achieved a gross profit of $2,446,662 for the
twelve months ended December 31, 2005, an increase of $2,076,295 or 560%,
compared to $370,367 for the twelve months ended December 31, 2004. Gross
margin, as a percentage of revenues, increased to 50.4% for the twelve months
ended December 31, 2005, from 41.9% for the twelve months ended December 31,
2004. The increase in gross profit is due to the increased construction and
installation activity. Gross profit on the construction and installation
activity increased to $2,053,093 for the twelve months ended December 31, 2005,
an increase of $1,762,088 or 606%, compared to $291,005 for the twelve months
ended December 31, 2004. We work with gross margins on the construction and
installation activity that are approximately 50%, 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
governments 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. Therefore,
we expect supply and price to continue to be stable in the future. For the year
ended December 31, 2005, two suppliers accounted for 51.5% and 13.3% 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.
We purchase natural gas from a state owned entity, Shaanxi Natural Gas.
The rate that we pay for natural gas is set by the central government, and has
been stable for the past 3 years. 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.
Operating expenses. We incurred operating expenses of $975,083 for the
twelve months ended December 31, 2005, an increase of $444,866 or 83.9%,
compared to $530,217 for the twelve months ended December 31, 2004. These
operating expenses are related to increased sales and marketing costs to sign
new residential and commercial customers that were put on line in 2005. In
addition we began to address the filling station strategy, identifying possible
locations for the filling stations and commencing the process of applying to the
proper governmental agencies for all necessary approvals and licenses to
construct the new filling stations.
Net Income. Net income was $1,252,083 for the twelve months ended
December 31, 2005, an increase of $1,413,851, from $(161,768) for the twelve
months ended December 31, 2004. There was no income tax in the year ended
December 2004, we had a net loss for the year. The increase is attributed to the
growth of construction and installation fees and the sale of natural gas.
Liquidity and Capital Resources
As of December 30, 2005 we 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. 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.
12
We had net cash flows provided by operations of $1,935,871 for the
twelve months ended December 30, 2005 as compared to net cash provided by
operations of $24,035 in the corresponding period last year. The increase in net
cash flows from operations in the current period as compared to corresponding
period last year was mainly due to the decrease of payables to related parties
in 2004 of $917,642, an increase of $662,950 in other payables during the twelve
months ended December 31, 2005. However, unearned revenue did decrease $642,254
during the twelve months ended December 31, 2005.
Cash outflows for investing activities increased from $4,773 to
$4,871,821 as a result of advance payments made to equipment suppliers 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. In July 2005, we purchased a
compressor station for a total purchase price of 22.3 million RMB
($2.721million). At the time of purchase, the company paid cash of 10 million
RMB ($1.220million) for the purchase with the balance of the purchase price due
by November 2005. In November 2005, the company paid the balance due by
tendering 8.8 million ($1.074million) RMB in cash and 3.5 million RMB
($.427million) in natural gas supply. We had inflows from investment activities
of $3,504,460 during the year ended December 31, 2005, Xilan issued 29,000,000
shares of common stock prior to the merger with the company.
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.
BUSINESS
Overview of Business
We primarily engage in the transmission and distribution of natural gas
to commercial, industrial and residential customers.
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).
13
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.
Retail Filling Stations
Based on company estimates, by the end of June 2005, the total demand
for compressed natural gas vehicular fuel in the Xian area was approximately one
million cubic meters per day. We expect demand for natural gas as a transport
fuel to continue to increase based on government clean energy policy as
expressed in the proposal for the Eleventh Ten Year Plan (2006-2010) and the
end-user cost advantages of CNG fuel over gasoline. We estimate that the average
filling station in Xian pumps approximately 12,000 cubic meters of natural gas
per day. Based on a survey we conducted, as of November 1, 2005, there were 31
filling stations in Xian pumping approximately 372,000 cubic meters of CNG fuel
per day, a figure well below estimated total demand.
As of February 9, 2006 we have completed construction and are operating
two natural gas filling stations in the Xian metropolitan area. Currently, we
purchase natural gas for 1.16 RMB/cubic meter and sell each cubic meter for
1.90RMB net of VAT. The construction time for each filling station is 45-60 days
and the cost is approximately US$600,000. The construction of additional
facilities is dependent upon our ability to acquire sufficient additional
capital when needed.
Our management believes that our vertically integrated operation should
allow us to be able to surpass the average sales volume of competing stations,
estimated at 12,000 cubic meters per day, based on our proprietary supply of CNG
from our own pipeline.
Marketing
We market the end user delivery of the natural gas segment of the
business through advertising in the general media and direct solicitation of
real estate development companies and government officials. We participate in
trade shows and conferences such as the 7th Xian Global Gas Fuels Technology
Equipment and Auto Service Station Exhibition which was held in June 2005. For
the retail filling station segment of the business, we will target advertising
to taxi drivers, who are the largest segment of end-users of our CNG fuel
product. A discount loyalty card will be made available to the professional
driving community including taxi and bus drivers. Brochures, radio and newspaper
advertisements and point of sale displays will also be utilized.
Suppliers
Currently, we have only one natural gas supplier, the Shaanxi Natural
Gas Co., Ltd., a government owned enterprise. 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. Our management reports that we do
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.
14
Customers
Residential/Commercial
We supply natural gas to approximately 50,000 residential customers in
Lantian County, Lintong and Baqiao Districts in the jurisdiction of Xian. These
residences include apartment blocks and small estates. Commercial customers
include small businesses like restaurants and office buildings.
Industrial
Within the Xian region there are several industries to which we supply
natural gas as a raw material for their production process including the Xiwei
Aluminum Company.
Wholesale to Filling Stations
Currently, we supply natural gas to several of the privately owned and
operated CNG filling stations in the Xian area. Upon the completion of
construction of their company-owned filling stations, we will also supply their
own filling stations for sales to retail end users.
Industry Overview
China's rapidly expanding economy is stretching the limits of its
energy resources. Currently, only 3% of China's total energy usage is natural
gas, while the world's average consumption of natural gas is 24% of total energy
usage. (source: US Energy Information Administration ("EIA"), August 2005) Over
the next 5 years, China's use of natural gas is generally expected to double.
China's domestic reserve of natural gas was estimated to be 53.3 trillion cubic
feet (tcf) at the beginning of 2005 (source: EIA August 2005). The country's
largest reserves are located in western and north central China, including the
Province of Shaanxi, the home of Xilan.
In order to meet the growth in natural gas demand, the PRC government
has encouraged private companies to invest in and build the natural gas
infrastructure. On December 27, 2002, the Ministry of Construction issued a
memorandum stating that regulation of the public utility industry (including gas
distribution) should be liberalized and foreign and private investment
participation should be encouraged and welcomed. The memorandum encouraged
private investment in the sector and provided a legal framework for private
urban natural gas distribution.
Intellectual Property
We have applied for a service mark on the "Xilan" name, which is used
in connection with all services.
Research and Development
We have not had any material research and development expenses over the
past two years. We project expenditures of approximately $100,000 for research
and development in 2006. The funding source for all research and development
expenses is expected to come from operating cash flows.
Governmental and Environmental Regulation
To date, we have been compliant with all registrations and requirements
for the issuance and maintenance of all licenses required by the applicable
governing authorities in China. These licenses include:
o Qualified Urban Fuel Operator Business License authorized by
the Shaanxi Construction Bureau, the local office of the
Ministry of Construction, effective from January 2, 2004 to
January 2, 2009. (License number SHAANRANZHI 166)
o License to Supply, Install Equipment and Maintain Gas Fuel
Lines issued by the local Gas Fuels for Heating Bureau, an
agency of the Ministry of Construction and the Xian Natural
Gas Management Bureau. (License number: XIRAN 136)
o Safety and Inspection Regulation for Special Equipment Safety
Inspection Standards for High Pressure Pipeline and Technical
Safety Inspection Regulations from the Shaanxi Quality and
Technology Inspection Bureau for compressor stations and
pressure storage tank system. (Approval letter reference:
2004SHAANGUOCHUHAN033)
o Annual Safety Inspection of Lightning Conductor Equipment
approved by the Shaanxi Meteorology Bureau. (Certificate
number 0005274)
15
The Citygate and Compressor Stations are approved by the local office
of the Ministry of Construction.
Fuel service station standards are subject to regulation by the
Ministry of Construction, the General Administration of Quality Supervision, and
the Bureau of Inspection and Quarantine of the People's Republic of China.
Certificates will be issued upon satisfactory inspection of service stations.
There are various standards that must be met for filling stations
including handling and storage of gas, tanker handling, and compressor
operation. These standards are regulated by the Local Ministry of Construction
and the Gas Field Operation Department of the Municipal Administration
Committee. Inspections will be carried out by the Municipal Development and
Reform Commission which will issue a certificate for the handling of dangerous
chemical agents.
Standards for the design and construction of filling stations must
conform to GB50156-2202 and technology standard BJJ84-2000.
Competition
The three largest state owned energy companies, CNPC (China National
Petroleum Corporation) Group, SINOPEC, and CNOOC are principally engaged in the
upstream supply of energy and are major players in exploration and
transportation of oil and gas. They build much of the country's high pressure
pipeline infrastructure. Natural gas is distributed to smaller regional firms
that redistribute the gas to the end user, either through lower pressure
pipeline networks, or via tankers in the form of liquid natural gas (LNG).
We are aware of two privately owned companies in China which may be
considered to be our direct competitors: Xinjiang Guanghui LNG Development
Corporation Ltd and Xin'Ao Gas Field Ltd. Xinjiang Guanghui LNG Development
Corporation Ltd is primarily involved in the transportation of LNG via tanker
truck to storage facilities from natural gas wells. Xin'Ao Gas Field Ltd. is a
publicly owned company traded on the Hong Kong Exchange, distributing natural
gas via pipeline, doing business in 13 provinces and municipalities that have a
combined population of 31 million. Neither Xinjiang Guanghui nor Xin'Ao is
approved to supply natural gas to any area in which Xilan is currently
operating.
Currently, there are approximately 31 filling stations in Xian City.
Thirteen of these stations are state owned enterprises. The other 18 stations
are privately owned with the majority of these being single station operators.
We believe that we can effectively compete with the stations based upon its
organization, experience and financial resources.
FACILITIES
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.
16
EMPLOYEES
As of January 31, 2006 we had a total of 208 employees in the following
capacities: 14 in management; 9 in administrative; 81 in operations; 4 in sales
department; 16 in R and D; 9 in finance and 75 employees at the retailing
filling station. We have not experienced any work stoppages and we consider
relations with our employees to be good. We are not a party to any collective
bargaining agreements.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and
legal proceedings, which arise in the ordinary course of business. We are not
currently aware of any such legal proceedings or claims.
MANAGEMENT
Executive Officers and Directors
Below are the names and certain information regarding our executive
officers and directors:
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
Patrick McManus 51 Director
James A. Garner 60 Director
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.
17
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.
Patrick McManus, Board Member, Chairman of Audit Committee - Mr.
McManus joined China Natural Gas in March 2006. Mr. McManus brings over 25 years
of experience in business, finance and law to China Natural Gas. He was elected
Mayor of the City of Lynn, Massachusetts in 1992 and served in this position
until his retirement to the private practice of law and accounting in 2002.
While serving the City of Lynn as its Mayor, he was elected a member and trustee
of the Executive Committee of the U.S. Conference of Mayors (USCM) with
responsibility for developing policy for the USCM. He also served as the
Chairman of the USCM Science and Technology Subcommittee, the Urban Water
Council, and the USCM Audit Committee. Mayor McManus started his career in
business with the General Electric Company in 1979, and was a Professor of
Business and Finance at Salem State College in Massachusetts. Mayor McManus has
extensive business and political expertise on China. He was instrumental in
establishing a close alliance as well as coordinating a regular exchange of
visits by members of the U.S. Conference of Mayors and the China Association of
Mayors. Mr. McManus has been a Certified Public Accountant since 1985. Mr.
McManus received his Juris Doctorate from Boston College Law School and an M.B.A
from Suffolk University. Mr. McManus currently serves on the board of directors
of Bodisen Biotech, Inc. and Harbin Electric, Inc.
James A. Garner, Board Member, Chairman of Nominating Committee - Mr.
Garner joined China Natural Gas in March 2006. Mr. Garner brings over 30 years
of experience in business and political contacts to China Natural Gas. He served
as Mayor of Hempstead, New York for 16 years until his retirement to the private
sector in April 2005. He has won national recognition and awards from national
agencies such as the U.S. Housing & Urban Development Agency and the American
Planning Association (APA). Mayor Garner was elected the 61st President of the
United States Conference of Mayors in June 2003 and served the Conference for
one year traveling worldwide and advocating the needs of U.S. cities. Mr. Garner
holds a Bachelor of Science Degree from Adelphi University and an Honorary
Degree of Doctorate of Civil Law from Molloy College. He was recently appointed
to the United States Small Business Administration's National Advisory Council.
Board of Directors
Our Directors are elected by the vote of a plurality in interest of the
holders of our voting stock and hold office for a term of one year and until a
successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum
of the Board for the transaction of business. The directors must be present at
the meeting to constitute a quorum. However, any action required or permitted to
be taken by the Board may be taken without a meeting if all members of the Board
individually or collectively consent in writing to the action.
Directors may receive compensation for their services and reimbursement
for their expenses as shall be determined from time to time by resolution of the
Board.
18
Executive Compensation
The following table sets forth all compensation paid in respect of our
Chief Executive Officer and those individuals who received compensation in
excess of $100,000 per year (collectively, the "Named Executive Officers") for
our last three completed fiscal years.
SUMMARY COMPENSATION TABLE
Long Term Compensation
--------------------------------------------------------
Annual Compensation Awards Payouts
------------------------------- ---------------------------- -------------------------
Securities
Under-
Restricted Lying LTIP
Name And Salary Bonus Other Annual Stock Options/ Payouts All Other
Principal Position Year ($) ($) Compensation ($) Compensation ($) SARs (#) ($) 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
EQUITY COMPENSATION PLAN INFORMATION
There has been no common stock authorized for issuance with respect to
any equity compensation plan as of the fiscal year ended December 31, 2005.
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.
19
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 21,
2006 with respect to the beneficial ownership of the outstanding common stock by
(i) any holder of more than five (5%) percent; (ii) each of our named executive
officers and directors; and (iii) our directors and executive officers as a
group. Except as otherwise indicated, each of the stockholders listed below has
sole voting and investment power over the shares beneficially owned.
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%
Patrick McManus 0 *
James A. Garner 0 *
Bo Chen 2,063,768(4) 8.6%
Yangling Bodisen Biotech Development Co, 2,063,768(4) 8.6%
Ltd.
Xiang Ji 1,456,232 6.1%
Xian Sunway Technology & Industry Co., 2,875,364(3) 12.0%
Ltd
Amaranth LLC 1,363,096 5.6%
All officers and directors as a group (8 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 April 21, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days
of April 21, 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 April 21, 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.
(3) Of which 2,875,364 shares are owned by Xian Sunway Technology &
Industry Co., Ltd. ("Sunway"). Qinan Ji owns 42.1% of Xian Sunway and
may be deemed to beneficially own such shares.
(4) Of which 2,063,768 shares are owned by Yangling Bodisen Biotech
Development Co, Ltd. ("Bodisen"). Mr. Chen is President, a member of
the Board of Directors and a 23% stockholder of Bodisen and may be
deemed to beneficially own such shares.
No Director, executive officer, affiliate or any owner of record or
beneficial owner of more than 5% of any class of voting securities of the
Company is a party adverse to the Company or has a material interest adverse to
the Company.
20
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
Our authorized capital stock consists of 30,000,000 shares of common
stock at a par value of $0.0001 per share and 5,000,000 shares of preferred
stock, par value $.0001. As of April 21, 2006, there were 23,918,516 shares of
our common stock issued and outstanding and no shares of preferred stock
outstanding.
Holders of our common stock are entitled to one vote for each share on
all matters submitted to a stockholder vote. Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
common stock voting for the election of directors can elect all of the
directors. Holders of our common stock representing a majority of the voting
power of our capital stock issued, outstanding and entitled to vote, represented
in person or by proxy, are necessary to constitute a quorum at any meeting of
stockholders. A vote by the holders of a majority of our outstanding shares is
required to effectuate certain fundamental corporate changes such as
liquidation, merger or an amendment to our articles of incorporation.
Holders of our common stock are entitled to share in all dividends that
the board of directors, in its discretion, declares from legally available
funds. In the event of liquidation, dissolution or winding up, each outstanding
share entitles its holder to participate pro rata in all assets that remain
after payment of liabilities and after providing for each class of stock, if
any, having preference over the common stock. Our common stock has no
pre-emptive rights, no conversion rights and there are no redemption provisions
applicable to our common stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Company's directors and executive officers are indemnified as
provided by the Delaware General Corporation Law and the Company's Bylaws. These
provisions state that the Company's directors may cause the Company to indemnify
a director or former director against all costs, charges and expenses, including
an amount paid to settle an action or satisfy a judgment, actually and
reasonably incurred by him as a result of him acting as a director. The
indemnification of costs can include an amount paid to settle an action or
satisfy a judgment. Such indemnification is at the discretion of the Company's
board of directors and is subject to the Securities and Exchange Commission's
policy regarding indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and
regulations of any state or the United States;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the
box, puts and calls and other transactions in our securities or derivatives of
our securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
21
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
22
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
SELLING STOCKHOLDERS
The following table sets forth the common stock ownership of the
selling stockholders as of Fenruary 8, 2006. The selling stockholders acquired
their securities through a private placement offering which closed on January
17, 2006.
We will not receive any proceeds from the resale of the common stock by
the selling stockholders. Assuming all the shares registered below are sold by
the selling stockholders, none of the selling stockholders will continue to own
any shares of our common stock. Other than as set forth in the following table,
the selling stockholders have not held any position or office or had any other
material relationship with us or any of our predecessors or affiliates within
the past three years. In addition, except as set forth below, the selling
stockholders are not registered broker-dealers.
Total
Shares Owned Number of Percentage of
and Issuable Shares Owned Common Stock
Upon Exercise Number of After Owned After
of Warrants Shares Offered Completion of Completion of
Name Before Offering for Sale Offering (1) Offering (2)
-------------------------------------- --------------- -------------- ------------- -------------
Amaranth LLC(3) 1,363,096 1,363,096 0 0%
SovGem Limited(4) 454,365 454,365 0 0%
MidSouth Investor Fund LP(5) 181,889 181,889 0 0%
Jayhawk China Fund (Cayman) Ltd.(6) 445,278 445,278 0 0%
T2 Capital Management, LLC(7) 36,349 36,349 0 0%
Broadlawn Master Fund, Ltd.(8) 22,718 22,718 0 0%
Jon D. Gruber and Linda Gruber Trust(9) 68,152 68,152 0 0%
Gruber & McBaine International(10) 77,243 77,243 0 0%
J. Patterson McBaine 22,721 22,721 0 0%
Lagunitas Partners(11) 286,250 286,250 0 0%
Primarius China Fund, LP(12) 227,182 227,182 0 0%
Nite Capital LP(13) 68,154 68,154 0 0%
Antoine de Sejournet 63,611 63,611 0 0%
Philippe de Cock de Rameye 11,450 11,450 0 0%
Vision Opportunity Master Fund, Ltd.(14) 90,874 90,874 0 0%
Citizens Security Life Insurance Co.(15) 22,718 22,718 0 0%
Peijian Sun 636,111 636,111 0 0%
Jiakuan Wang 647,379 647,379 0 0%
New York Global Securities (16) 420,843 420,843 0 0%
TOTAL 5,146,382 5,146,382 0 0%
23
* Less than 1%.
(1) Assumes that all securities registered will be sold.
(2) Applicable percentage ownership is based on 23,918,516 shares of common
stock outstanding as of April 21, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days
of April 21, 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 April 21, 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.
(3) Amaranth Advisors L.L.C., the trading advisor for Amaranth LLC,
exercises voting and dispositive power rights over the shares held by
Amaranth LLC. Nicholas M. Maounis is the managing member of Amaranth
Advisors L.L.C. Each of Amaranth Advisors L.L.C. and Amaranth Global
Securities Inc., affiliates of Amaranth LLC, is a broker-dealer
registered pursuant to Section 15(b) of the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers,
Inc. Neither of such broker-dealers is authorized to engage in
securities offerings either as an underwriter or as a selling group
participant and neither of such broker-dealers actually engages in any
such activity.
(4) Peter Charles St. George has the voting and dispositive rights over the
shares held by SovGem Limited.
(5) Lyman O. Heidtke has the voting and dispositive rights over the shares
held by MidSouth Investor Fund LP.
(6) Kent C. McCarthy has the voting and dispositive rights over the shares
held by Jayhawk China Fund (Cayman) Ltd.
(7) Richard Taney has the voting and dispositive rights over the shares
held by T2 Capital Management, LLC.
(8) Jon Bloom has the voting and dispositive rights over the shares held by
Broadlawn Master Fund, Ltd.
(9) Jon D. Gruber has the voting and dispositive rights over the shares
held by Jon D. Gruber and Linda Gruber Trust.
(10) Gruber & McBaine Capital Management is the general partner and has the
voting and dispositive rights over the shares held by Gruber & McBaine
International and Jon D. Gruber and J. Patterson McBaine oversee all
voting and investment activity of Gruber & McBaine Capital Management.
(11) Gruber & McBaine Capital Management is the general partner and has the
voting and dispositive rights over the shares held by Lagunitas
Partners and Jon D. Gruber and J. Patterson McBaine oversee all voting
and investment activity of Gruber & McBaine Capital Management.
(12) Patrick Lin has the voting and dispositive rights over the shares held
by Primarius China Fund, LP.
(13) Keith Goodman, a manager of the general partner of Nite Capital LP, has
the voting and dispositive rights over the shares held by Nite Capital
LP.
(14) Adam Benowtiz has the voting and dispositive rights over the shares
held by Vision Opportunity Master Fund, Ltd.
(15) Darrell Wells has the voting and dispositive rights over the shares
held by Citizens Security Life Insurance Co.
(16) Scott Morrison has the voting and dispositive rights over the shares
held by New York Global Securities.
24
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Our financial statements as of December 31, 2005 and 2004 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period of December 31, 2005 and 2004, appearing in this prospectus
and registration statement have been audited by Kabani & Company, Inc.,
independent registered public accountants, as set forth on their report thereon
appearing elsewhere in this prospectus, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 to
register the securities offered by this prospectus. For future information about
us and the securities offered under this prospectus, you may refer to the
registration statement and to the exhibits filed as a part of the registration
statement.
In addition, after the effective date of this prospectus, we will be
required to file annual, quarterly, and current reports, or other information
with the SEC as provided by the Securities Exchange Act. You may read and copy
any reports, statements or other information we file at the SEC's public
reference facility maintained by the SEC at 100 F Street, N.E., Washington, D.C.
20549. You can request copies of these documents, upon payment of a duplicating
fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference room. Our SEC filings are
also available to the public through the SEC Internet site at http\\www.sec.gov.
25
CHINA NATURAL GAS, INC.
(FORMERLY XI'AN XILAN NATURAL GAS CO., LTD)
INDEX TO FINANCIAL STATEMENTS
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
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
F-1
CHINA NATURAL GAS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2005
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 675,624
Accounts receivable 6,096
Other receivable 158,584
Inventory 45,361
Advances to suppliers 13,712
Prepaid expense 15,882
--------------
Total current assets 915,259
PROPERTY AND EQUIPMENT, net 8,267,897
CONSTRUCTION IN PROGRESS 1,726,810
INTANGIBLE ASSETS 1,096
--------------
TOTAL ASSETS $ 10,911,062
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable & accrued expense $ 193,592
Other payables 738,745
Unearned revenue 303,175
--------------
Total current liabilities 1,235,512
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 20,204,088 2,020
Additional paid-in capital 8,331,458
Cumulative translation adjustment 228,747
Statutory reserve 169,722
Retained earnings 943,603
--------------
Total stockholders' equity 9,675,550
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,911,062
==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
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)
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CHINA NATURAL GAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Accumulative
Additional 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 -- -- -- 572 572
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
CHINA NATURAL GAS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,252,083 $ (161,768)
Adjustments to reconcile net income (loss)
to net cash provided in operating activities:
Loss on disposal of property 971 3,242
Depreciation and amortization 347,923 314,453
(Increase) / decrease in assets:
Accounts receivable (1,011) (4,943)
Inventory 2,234 (46,440)
Other receivable (132,553) (6,525)
Advances to suppliers (12,773) 14,982
Prepaid expense (15,441) (99)
Contract in progress 381,315 118,537
Increase / (decrease) in current liabilities:
Accounts payable 92,427 (64,344)
Payable to related party -- (917,642)
Other payables 662,950 (2,854)
Unearned revenue (642,254) 777,436
-------------- --------------
Net cash provided by operating activities 1,935,871 24,035
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment on purchase of property and equipment (3,170,629) (5,981)
Cash acquired in reverse merger transaction 86 --
Additions to construction in progress (1,700,792) --
Additions to Intangible assets (1,096) --
Proceeds from disposal of property 610 1,208
-------------- --------------
Net cash used in investing activities (4,871,821) (4,773)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issued for cash 3,504,460 --
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents 44,116 --
NET INCREASE IN CASH & CASH EQUIVALENTS 612,626 19,262
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 62,998 43,736
-------------- --------------
CASH & CASH EQUIVALENTS, ENDING BALANCE 675,624 $ 62,998
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -- $ --
============== ==============
Income tax $ 969 $ 210
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
Note 1 - Organization and Basis of Presentation
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. 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. Pursuant to the purchase agreement, Coventure acquired all of
the issued and outstanding capital stock of XXNGC in exchange for 16,000,000
(post-split) shares of Coventure's common stock.
Concurrently with the closing of the purchase agreement and as a condition
thereof, Coventure entered into an agreement with John Hromyk, its President and
Chief Financial Officer, pursuant to which Mr. Hromyk returned 23,884,712
(post-split) shares of Coventure's common stock for cancellation. Upon
completion of the foregoing transactions, Coventure had an aggregate of
20,204,088 (post-split) shares of common stock issued and outstanding.
As a result of the merger, XXNGC's stockholders own approximately 80% of the
combined company and the directors and executive officers of XXNGC became the
directors and executive officers of the Coventure. Accordingly, the transaction
has been accounted for as a reverse acquisition of Coventure by XXNGC resulting
in a recapitalization of XXNGC rather than as a business combination. XXNGC is
deemed to be the purchaser and surviving company for accounting purposes.
Accordingly, its assets and liabilities are included in the balance sheet at
their historical book values and the results of operations of XXNGC have been
presented for the comparative prior period. The historical cost of the net
liabilities of Coventure that were acquired was $3,378. Pro forma information is
not presented as the financial statements of Coventure are insignificant. In
addition, Coventure changed it name to China Natural Gas, Inc. (hereafter
referred to as the "Company") and the stockholders approved a stock dividend of
three shares for each share held, which has been accounted for as a four to one
forward stock split. All shares and per share data have been restated
retrospectively.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of China
Natural Gas, Inc. and its wholly owned subsidiary, XXNGC. All inter-company
accounts and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. The Company's functional currency is the Chinese Renminbi; however the
accompanying consolidated financial statements have been translated and
presented in United States Dollars ($).
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
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
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 December 31, 2005, the following are the details of the property and
equipment:
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
Depreciation expense for the years ended December 31, 2005 and 2004 was $347,923
and $314,453, 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. Based on its
review, the Company believes that, as of December 31, 2005 there were no
significant impairments of its long-lived assets.
Construction In Progress
Construction in progress consists of the cost of constructing building and plant
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 December
31, 2005, the Company has no 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 two
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.
F-8
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 years ended
December 31, 2005 and 2004 were insignificant.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and
related interpretations with pro forma disclosure of what net income and
earnings per share would have been had the Company adopted the new fair value
method. The Company uses the intrinsic value method prescribed by APB 25 and has
opted for the disclosure provisions of SFAS No.123. No options have been granted
for the years ended December 31, 2005.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. At December 31, 2005, 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%.
A reconciliation of tax at United States federal statutory rate to provision for
income tax recorded in the financial statements is as follows:
For the Years
Ended December 31,
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
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
The Company believes that the adoption of these standards will have no material
impact on its financial statements.
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.
F-11
Note 8 - Current Vulnerability Due to Certain Concentrations
For the years ended December 31, 2005 and 2004, the Company purchased all of the
natural gas for resale from one vendor, Shaanxi Natural Gas Co., Ltd., a
government owned enterprise. No amount was owing to this vendor at December 31,
2005. 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 and 2004, the minimum purchases were 2.36 million and
1.60 million cubic meters, respectively. 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 year ended December 31, 2005, two supplier accounts for 51.5% and 13.3%
of the total equipment purchased by the Company.
Four customers accounted for 34.7%, 21.2%, 14.0% and 10.8% of the Company's
revenue for the year ended December 31, 2005 and three customers accounted for
37.3%, 36.1% and 10.0% of the Company's revenue for the years ended December 31,
2004.
Three customers accounted for 40%, 17% and 17%, respectively, of
construction/installation revenue for 2005. Two customers accounted for 36% and
37%, respectively, of construction/installation revenue in 2004.
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 December 31,
2005 is $349,916 due to stockholder of the Company.
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-12
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.
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 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.
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.
F-13
5,146,382 Shares
Common Stock
_________________
PROSPECTUS
May 12, 2006
_________________
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
which is set forth in this prospectus. We are offering to sell shares of our
common stock and seeking offers to buy shares of our common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of these securities. Our
business, financial condition, results of operation and prospects may have
changed after the date of this prospectus.