Unassociated Document
As filed with the Securities and Exchange Commission on April 17, 2008
Registration No. 333-149719

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Amendment No. 1
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

China Natural Gas, Inc.
(Exact name of registrant as specified in its charter)
Delaware 
 
4923 
 
98-0231607
(State or other jurisdiction of
 incorporation or organization) 
 
(Primary Standard Industrial
Classification Code Number) 
 
(I.R.S. Employer
Identification Number)

19th Floor, Building B, Van Metropolis
No. 35 Tangyan Road, High Tech Zone
Xi’an 710065, Shaanxi Province
The People’s Republic of China
011-86-29-88323325
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

The Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
(302) 685-7581
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:
Adam M. Guttmann, Esq.
Crone Rozynko, LLP
101 Montgomery Street, Suite 1950
San Francisco, California 94104
(415) 955-8900
(415) 955-8910 (fax)

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o  Accelerated filer box. x
 
Non-accelerated filer o  Smaller reporting company o
(Do not check if a smaller reporting company)



CALCULATION OF REGISTRATION FEE
 
Title of each class of securities to be registered 
 
Dollar amount
to be
registered 
 
Proposed
maximum
offering price
per unit  
 
Proposed
maximum
aggregate
offering price 
 
Amount of registration
fee 
 
Common Stock, 0.0001 par value issuable upon exercise of Warrants 
 
$
21, 359,080
(1)
$
7.3652
(2)
$
21, 359,080
 
$
840
(3) 
 
(1)   
Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933.
(2)   
Calculated in accordance with Rule 457(g)(1).
(3)
Previously paid in connection with the filing of the original Registration Statement on March 14, 2008.
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


 
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED April 17, 2008

PROSPECTUS
china natural gas

CHINA NATURAL GAS, INC.

2,900,000 SHARES OF COMMON STOCK

This prospectus relates to the resale by the selling stockholders identified in this prospectus of up to 2,900,000 shares of common stock issuable upon the exercise of warrants. All of the shares, when sold, will be sold by these selling stockholders. The selling stockholders may sell these shares from time to time in the open market at prevailing prices or in individually negotiated transactions, through agents designated from time to time or through underwriters or dealers. We will not control or determine the price at which the selling stockholders decide to sell their shares. 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 15, 2008, was $5.41.

Investing in these securities involves significant risks. See “Risk Factors” beginning on page 5.

No 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 ___________, 2008.
 

 
TABLE OF CONTENTS

   
 
PAGE NO. 
 
SUMMARY 
   
3
 
ABOUT THIS OFFERING 
   
4
 
RISK FACTORS 
   
5
 
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 
   
11
 
USE OF PROCEEDS 
   
12
 
MARKET FOR COMMON EQUITY AND RELATED STOCHOLDER MATTERS 
   
12
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 
   
14
 
DESCRIPTION OF BUSINESS 
   
19
 
DIRECTORS AND EXECUTIVE OFFICERS 
   
25
 
EXECUTIVE COMPENSATION 
   
27
 
CERTAIN RELATIONSIHIPS AND RELATED TRANSACTIONS 
   
28
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 
   
28
 
DESCRIPTION OF SECURITIES 
   
28
 
SELLING STOCKHOLDERS 
   
30
 
PLAN OF DISTRIBUTION 
   
32
 
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 
   
33
 
LEGAL MATTERS 
   
34
 
EXPERTS 
   
34
 
WHERE YOU CAN FIND MORE INFORMATION 
   
34
 
 

 
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., its subsidiary, Shaanxi Xilan Natural Gas Equipment Co., Ltd., and its 100% variable interest entities, Xi’an Xilan Natural Gas Co., Ltd. (“Xian Xilan Natural Gas”), Shaanxi Jingbian Liquefied Natural Gas Co., Ltd., and Xi’an Xilan Auto Bodyshop. 

OUR COMPANY
 
We are principally engaged in the distribution and sale of compressed natural gas (CNG) as vehicular fuel through company owned filling stations as well as the transmission, distribution and sale of natural gas to commercial, industrial and residential customers. We also generate additional revenue through the Auto Conversion Bodyshop owned by the Company.
 
We distribute and sell CNG as a vehicular fuel directly to customers through our own and third-party owned CNG filling stations located in Shaanxi and Henan Provinces. As of December 31, 2007, we own and operate 16 CNG filling stations in Shaanxi Province and eight CNG filling stations in Henan Province. We also own and operate a network of approximately 120 km of high pressure pipelines in Shaanxi Province servicing 84,500 commercial, industrial and residential customers.
 
Our principal executive offices are located at 19th Floor, Building B, Van Metropolis, No. 35 Tangan Road, High Tech Zone, Xi’an 710065, Shaanxi Province, The People’s Republic of China, and our telephone number at that address is 011 86-29-88323325. We maintain Internet websites at www.xltrq.com (Chinese language) and www.naturalgaschina.com (English language). Information on our websites is not part of this prospectus.
 
3

 
ABOUT THIS OFFERING

This prospectus relates to the resale by the selling stockholders identified in this prospectus of up to 2,900,000 shares of common stock, issuable upon the exercise of common stock purchase warrants. All of the shares, when sold, will be sold by these selling stockholders. The selling stockholders may sell their shares of common stock from time to time at prevailing market prices. We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders.

Common Stock Offered:
Up to 2,900,000 shares of common stock,
issuable upon the exercise of common stock purchase warrants at an exercise price of $7.3652 per share.
 
 
Common Stock Outstanding at April 15, 2008:
29,200,304
 
 
Use of Proceeds:
We will not receive any proceeds from the sale of the 2,900,000 shares of common stock subject to sale by the selling stockholders under this prospectus. However, we may receive the sale price of any common stock we sell to the selling stockholders upon exercise of the outstanding warrants. Any net proceeds we receive from the Selling Stockholders through the exercise of warrants will be used for general corporate purposes.
 
 
OTC Bulletin Board Symbol:
CHNG
 
4

 
RISK FACTORS

An investment in our common stock is speculative and involves a high degree of risk and uncertainty. You should carefully consider the risks described below, together with the other information contained in this prospectus, including the consolidated financial statements and notes thereto of our Company, before deciding to invest in our common stock. The risks described below are not the only ones facing our Company. Additional risks not presently known to us or that we presently consider immaterial may also adversely affect our Company. If any of the following risks occur, our business, financial condition and results of operations and the value of our common stock could be materially and adversely affected.

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.

We obtain most of our supplies of natural gas from a government owned entity and our supply contracts are subject to review every six months. However, our costs for natural gas are strictly controlled by the government and have remained stable over the past 3 years. Management does not expect any difficulty in continuing to renew the supply contracts during the next 12 months. 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.

With the exception of certain compressed and liquid natural gas supplies, we obtain our supplies of natural gas from one supplier, which is 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. While we have supply contracts, we do not control the government owned or other suppliers, nor are we able to control the amount of time and effort they put forth on our behalf. It is possible that our suppliers will not perform as expected, and that they may breach or terminate their agreements with us. It is also possible that, after a semi-annual review of our primary supply contract, they will choose to provide services to a competitor. Any failure to obtain supplies of natural gas could prevent us from delivering such to our customers and could have a material adverse affect on our business and financial condition.

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 may occur.

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 our operations.

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, various standards 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 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

 
We depend on our senior management’s experience and knowledge of the industry and would be adversely affected by the loss of any of our senior managers.

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, our senior executives do not continue to be active in management, our business, or the financial condition of our Company, our results of operations could be adversely affected. In addition, we do not maintain 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. 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 delay, scale back, 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 irregular, 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 PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency outside of the PRC. We receive substantially all of our revenues in Renminbi. Under our current structure, our income is primarily derived from payments from Xi’an Xilan Natural Gas Co. Shortages in the availability of foreign currency may restrict the ability of Xi’an Xilan Natural Gas to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required in those cases in which Renminbi is to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies. The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.

6

 
Although we do not import goods into or export goods out of The People’s Republic of China, fluctuation of the RMB may indirectly affect our financial condition by affecting the volume of cross-border money flow.

The value of the RMB fluctuates and is subject to changes in the People’s Republic of China political and economic conditions. Since July 2005, the conversion of RMB into foreign currencies, including USD, 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 March 13, 2008, the exchange rate between the RMB and the United States dollar was 7.095 RMB to every one USD.

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:
 
 
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

 
In original actions brought in the Republic of China, liabilities against us or 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.

The PRC legal system embodies uncertainties, which could limit law enforcement availability.

The PRC legal system is a civil law system based on written statutes. Unlike common law systems, decided legal cases have little precedence. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past 27 years has significantly enhanced the protections afforded to various forms of foreign investment in China. Each of our PRC operating subsidiaries and affiliates is subject to PRC laws and regulations. However, these laws and regulations change frequently and the interpretation and enforcement involve uncertainties. For instance, we may have to resort to administrative and court proceedings to enforce the legal protection that we are entitled to by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting statutory and contractual terms, it may be difficult to evaluate the outcome of administrative court proceedings and the level of law enforcement that we would receive in more developed legal systems. Such uncertainties, including the inability to enforce our contracts, could affect our business and operation. In addition, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the industries in which we operate, including the promulgation of new laws. This may include changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the availability of law enforcement, including our ability to enforce our agreements with the government entities and other foreign investors.

7

 
The admission of China into the World Trade Organization could lead to increased foreign competition.

Provincial and central government authorities regulate the natural gas industry for safety and ensure that all areas receive natural gas service. 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.

PRC laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.
 
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our contractual arrangements with our variable interest entity, XXNG, and its shareholders. We are considered a foreign person or foreign invested enterprise under PRC law. As a result, we are subject to PRC law limitations on foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
 
The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.
 
We may be adversely affected by complexity, uncertainties and changes in PRC regulation of natural gas business and companies, including limitations on our ability to own key assets.
 
The PRC government regulates the natural gas industry including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the natural gas industry. These laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be a violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC government regulation of the bio-pharmaceutical industry include the following:

   —
we only have contractual control over XXNG. We do not own it due to the restriction of foreign investment in Chinese businesses; and
 
8


   —
uncertainties relating to the regulation of the natural gas business in China, including evolving licensing practices, means that permits, licenses or operations at our company may be subject to challenge. This may disrupt our business, or subject us to sanctions, requirements to increase capital or other conditions or enforcement, or compromise enforceability of related contractual arrangements, or have other harmful effects on us.

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, natural gas businesses in China, including our business.
 
In order to comply with PRC laws limiting foreign ownership of Chinese companies, we conduct our natural gas business through Xi’an Xilan Natural Gas by means of contractual arrangements. If the government of the People’s Republic of China determines that these contractual arrangements do not comply with applicable regulations, our business could be adversely affected.

The government of the People’s Republic of China restricts foreign investment in natural gas businesses in China. Accordingly, we operate our business in China through Xi’an Xilan Natural Gas. Xi’an Xilan Natural Gas holds the licenses and approvals necessary to operate our natural gas business in China. We have contractual arrangements with Xi’an Xilan Natural Gas and its shareholders that allow us to substantially control Xi’an Xilan Natural Gas. We cannot assure you, however, that we will be able to enforce these contracts.

Although we believe we comply with current regulations of the People’s Republic of China, we cannot assure you that the government of the People’s Republic of China would agree that these operating arrangements comply with the People’s Republic of China’s licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. If the government of the People’s Republic of China determines that we do not comply with applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business.

Our contractual arrangements with Xi’an Xilan Natural Gas and its shareholders may not be as effective in providing control over these entities as direct ownership.
 
Since the law of the People’s Republic of China limits foreign equity ownership in natural gas companies in China, we operate our business through Xi’an Xilan Natural Gas. We have no equity ownership interest in XXNG and rely on contractual arrangements to control and operate such businesses. These contractual arrangements may not be effective in providing control over Xi’an Xilan Natural Gas as direct ownership. For example, Xi’an Xilan Natural Gas could fail to take actions required for our business despite its contractual obligation to do so. If Xi’an Xilan Natural Gas fails to perform under its agreements with us, we may have to incur substantial costs and resources to enforce such arrangements and may have to rely on legal remedies under the law of the People’s Republic of China, which may not be effective. In addition, we cannot assure you that Xi’an Xilan Natural Gas’ shareholders would always act in our best interests.

Risks Related to Corporate and Stock Matters

Our largest stockholder has significant influence over our management and affairs and could exercise this influence against your best interests.

At March 13, 2008, Mr. Qinan Ji, our founder, Chairman of the Board and Chief Executive Officer and our largest stockholder, beneficially owned approximately 20.3% of our outstanding shares of common stock. As a result, pursuant to our Bylaws and applicable laws and regulations, our controlling shareholder and our other executive officers and directors are able to exercise significant influence over our Company, including, but not limited to, any stockholder approvals for the election of our directors and, indirectly, the selection of our senior management, the amount of dividend payments, if any, our annual budget, increases or decreases in our share capital, new securities issuance, mergers and acquisitions and any amendments to our Bylaws. Furthermore, this concentration of ownership may delay or prevent a change of control or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which could decrease the market price of our shares. The limited prior public market and trading market may cause volatility in the market price of our common stock.

9

 
The limited trading volume in our stock 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.OB” 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:

   —
investors may have difficulty buying and selling or obtaining market quotations;

   —
market visibility for our common stock may be limited; and
 
   —
a lack of visibility for our common stock may have a depressive effect on the market for our common stock.

If our stock trades below $5.00 per share, it may be considered a penny stock, trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.

If our stock trades below $5.00 per share our stock would be a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
 
NASD sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

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.

10

 
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.
 
If we or our independent registered public accountants cannot attest our adequacy in the internal control measures over our financial reporting, as required by Section 404 of the U.S. Sarbanes-Oxley Act, for the fiscal year ending December 31, 2007, we may be adversely affected.
 
As a public company, we are subject to report our internal control structure and procedures for financial reporting in our annual reports on Form 10-K, as a requirement of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 by the U.S. Securities and Exchange Commission (the “SEC”). The report must contain an assessment by management about the effectiveness of our internal controls over financial reporting. Moreover, the independent registered public accountants of our Company must attest to and report on management’s assessment of the same. Even if our management attests to our internal control measures to be effective, our independent registered public accountants may not be satisfied with our internal control structure and procedures. We cannot guarantee the outcome of the report and it could result in an adverse impact on us in the financial marketplace due to the loss of investor confidence in the reliability of our financial statements, which could negative influence to our stock market price.

Stockholders should have no expectation of any dividends.

The holders of our common stock are entitled to receive dividends when declared by the Board of Directors out of funds available. To date, we have not declared nor paid any cash dividends. The Board of Directors does not intend to declare any dividends in the near future, but instead intends to retain all earnings, if any, for use in our business operations.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and elsewhere in this prospectus constitute forward-looking statements. These statements involve risks known to us, significant uncertainties, and other factors which may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by those forward-looking statements.

You can identify forward-looking statements by the use of the words “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “proposed,” or “continue” or the negative of those terms. These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risks outlined above. These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

11


USE OF PROCEEDS

We will not receive any proceeds from the sale of our common stock by the Selling Stockholders. However, we may receive the sale price of any common stock we sell to the selling stockholder upon exercise of outstanding warrants.

Unless otherwise indicated in the applicable prospectus supplement, we anticipate that any net proceeds from the sale of securities that we offer under this prospectus and any accompanying prospectus supplement will be used for general corporate purposes. Such general 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

Our shares began trading on the OTC Bulletin Board on March 17, 2004. Prior to that date, there was no public market for our common stock.
 
Our common stock is traded on the OTC Bulletin Board under the symbol “CHNG.” Prior to December 19, 2005, the date on which our reverse acquisition of Xi’an Xilan Natural Gas was consummated, our common stock was traded on the OTC Bulletin Board under the symbol “CVNI.”

The following table contains information about the range of high and low bid prices for our common stock for each full quarterly period since our shares began publicly trading, based upon reports of transactions on the OTC Bulletin Board. The source of this information for Fiscal Year 2006 and 2005 is Yahoo Finance and for Fiscal Year 2007 is Bloomberg L.P. The quotations represent inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.

Quarter 
 
High 
 
Low 
 
Fiscal Year 2007 
         
Fourth Quarter
  $ 14.95   $ 6.50  
Third Quarter 
 
$
8.34
 
$
4.39
 
Second Quarter 
 
$
5.06
 
$
1.85
 
First Quarter 
 
$
3.16
 
$
1.65
 
Fiscal Year 2006 
         
Fourth Quarter 
 
$
3.46
 
$
2.51
 
Third Quarter 
 
$
3.24
 
$
2.60
 
Second Quarter 
 
$
4.45
 
$
2.05
 
First Quarter 
 
$
5.67
 
$
3.00
 
Fiscal Year 2005 
         
Fourth Quarter 
 
$
3.40
 
$
3.30
 
Third Quarter 
 
$
3.00
 
$
3.00
 
Second Quarter 
 
$
5.50
 
$
5.50
 
First Quarter 
 
$
1.35
 
$
1.35
 

Holders

As of March 13, 2008, there were approximately 43 holders of record of our common stock.

Dividends
 
We have never paid any cash dividends on our common stock. We currently anticipate that we will retain any future earnings for use in our business. Consequently, we do not anticipate paying any cash dividends in the foreseeable future.
 
The payment of dividends in the future will depend upon our results of operations, as well as our short-term and long-term cash availability, working capital, working capital needs and other factors, as determined by our board of directors. Currently, except as may be provided by applicable laws, there are no contractual or other restrictions on our ability to pay dividends if we were to decide to declare and pay them.

The Company has no securities authorized for issuance under any equity compensation plan.

12


SELECTED CONSOLIDATED FINANCIAL DATA
 
The following sets forth selected financial data as of December 31, 2007, 2006, 2005 and 2004 and July 31, 2003 and 2002 and years ended December 31, 2007, 2006, 2005, and 2004 and July 31, 2003 and 2002. The data as of December 31, 2007, 2006, 2005 and 2004 and July 31, 2003 and 2002 and for the years ended December 31, 2007, 2006, 2005, and 2004 and July 31, 2003 and 2002 are derived from our audited financial statements, which are included elsewhere in this prospectus. The data set forth below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
   
Year ended December 31
 
Year ended July 31
 
   
2007
 
2006
 
2005
 
2004
 
2003
 
2002
 
STATEMENT OF OPERATIONS:
                               
                                 
Revenue
                               
Natural gas revenue
   
28,278,033
   
13,713,145
   
1,687,154
   
306,306
    237,312        
Construction / installation and other
   
7,114,020
   
5,115,645
   
3,163,545
   
578,107
    1,334,981        
Total revenue
   
35,392,053
   
18,828,790
   
4,850,699
   
884,413
   
1,572,293
   
2,678
 
                                       
Cost of revenue
                                     
Natural gas cost
   
14,838,997
   
7,663,060
   
1,293,585
   
226,944
    94,617        
Construction / installation and other
   
3,186,078
   
2,054,940
   
1,110,452
   
287,102
    963,775        
      18,025,075    
9,718,000
   
2,404,037
   
514,046
   
1,058,392
       
Gross profit
   
17,366,978
   
9,110,790
   
2,446,662
   
370,367
   
513,902
   
2,678
 
                                       
Operating expenses
                                     
Selling expenses
   
3,451,161
   
1,308,464
   
474,855
   
387,768
   
344,242
   
5,064
 
General and administrative expenses
   
2,837,768
   
1,287,735
   
500,228
   
142,449
   
143,476
   
56,964
 
Total operating expenses
   
6,288,929
   
2,596,199
   
975,083
   
530,217
   
487,718
   
62,028
 
                                       
Income from operations
   
11,078,049
   
6,514,591
   
1,471,579
   
(159,850
)
 
26,183
   
(59,350
)
                                       
Non-operating income (expense):
                                   
Interest income
   
70,697
   
41,109
   
2,131
   
1,618
    -     -  
Other income (expense)
   
(118,753
)  
(79,021
)
 
(671
)
 
(3,536
)
 
-
   
-
 
Total non-operating income (expense)
   
48,056
   
(37,912
)
 
1,460
   
(1,918
)
 
69,649
   
 
 
Income before income tax
   
11,029,993
   
6,476,679
   
1,473,039
   
(161,768
)
 
95,833
   
(59,530
)
                                       
Income tax
   
1,913,923
   
1,025,584
   
220,956
   
-
   
16,618
   
-
 
Net income
   
9,116,070
   
5,541,095
   
1,252,083
   
(161,768
)
 
79,214
   
(59,530
)
                                       
Other comprehensive income
                                     
Foreign currency translation gain
   
2,637,573
   
610,705
   
228,175
   
-
   
-
   
-
 
Comprehensive income
   
11,753,643
   
6,061,800
   
1,480,258
   
(161,768
)
 
-
   
(59,530
)
                                       
Weighted average shares outstanding
                                     
Basic
   
26,200,679
   
23,872,936
   
16,299,469
   
9,275,362
   
10,082,192
   
9,745,460
 
Diluted
   
26,301,802
   
23,872,936
   
16,299,469
   
9,275,362
   
10,082,192
   
9,745,460
 
                                       
Earnings per share
                                     
Basic
   
0.35
   
0.23
   
0.08
   
(0.02
)
 
(0.01
)
 
(0.01
)
Diluted
   
0.35
   
0.23
   
0.08
   
(0.02
)
 
(0.01
)
 
(0.01
)
                                       
BALANCE SHEET DATA (at end of period):
                                     
                                       
PROPERTY AND EQUIPMENT, net
   
32,291,995
   
17,193,728
   
8,267,897
   
20,935
   
365
   
766
 
Working Capital
   
13,581,900
   
5,289,220
   
(320,253
)
 
(130,368
)
 
(18,422
)
 
(24,544
)
TOTAL ASSETS
   
53,289,998
   
28,466,351
   
10,911,062
   
28,875
   
6,181
   
2,257
 
Long Term Debt    
-
   
-
         
24,078
   
-
   
-
 
Shareholder Equity
   
51,207,314
   
25,630,204
   
9,675,550
   
(133,511
)
 
(18,057
)
 
(23,788
)
 
13

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
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.

Overview

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

On December 6, 2005, we issued an aggregate of 4 million shares to all of the registered shareholders of Xi’an Xilan Natural Gas Co., Ltd., and entered into exclusive arrangements with Xi’an Xilan Natural Gas Co., Ltd. and these shareholders that give us the ability to substantially influence Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. On December 19, 2005, we changed our name to China Natural Gas, Inc.

On February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., (“Xilan Equipment”) as a wholly owned foreign enterprise (WOFE). We then, through Xilan Equipment, entered into exclusive arrangements with Xi’an Xilan Natural Gas Co., Ltd. and these shareholders that give us the ability to substantially influence Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. We memorialized these arrangements on August 17, 2007. As a result, the Company consolidates the financial results of Xi’an Xilan Natural Gas as variable interest entity pursuant to FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities.”

We transport, distribute and sell natural gas to commercial, industrial and residential customers in the Xi’an area, including Lantian County and the districts of Lintong and Baqiao, in the Shaanxi Province of The Peoples’ Republic of China (“China” or the “PRC”) through a network of approximately 120 km of high pressure pipelines. We also distribute and sell CNG as vehicular fuel through a network of  CNG filling stations in Shaanxi and Henan Provinces.  As of December 31, 2007, we owned and operated 16 CNG filling stations in Shaanxi Province and eight CNG filling stations in Henan Province.

14

 
We operate three primary business lines:

Distribution and sale of compressed natural gas (CNG) through Company-owned CNG filling stations for hybrid (natural gas/gasoline) powered vehicles (24 stations as of December 31, 2007);

Distribution and sale of piped natural gas to commercial, industrial and residential customers through Company-owned pipelines. The Company distributes and sells natural gas to approximately 84,500 homes and businesses; and

Conversion of gasoline-fueled vehicles to hybrid (natural gas/gasoline) powered vehicles at our Auto Bodyshop Division.
 
We buy all of the natural gas that we sell and distribute to our customers. We do not mine or produce any of our own natural gas and have no plans to do so during the next 12 months. The natural gas that we buy is available in two forms: (i) piped natural gas; and (ii) CNG.

On October 24, 2006, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary, Shaanxi Jingbian Liquified Natural Gas Co., Ltd., for the purpose of constructing a liquefied natural gas facility to be located in Jingbian, Shaanxi Province. We plan to invest approximately $40 million to construct this facility, and we have secured such funding for this project through security purchase agreement with Abax Lotus Ltd. The LNG plant is under construction and is expected to start operation in 2009. Once completed, the plant as designed could process 500,000 cubic meters per day, or approximately 150 million cubic meters on an annual basis.
 
Critical 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.

Accounts and Other Receivables. Accounts and other receivables are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company allowance for uncollectible accounts is not significant.

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. The Company’s management determined that all receivables are good and there is no need for a bad debt reserve as of December 31, 2007.

As needed for normal business purpose, the Company advances predetermined amounts based upon internal Company policy to certain employees and internal units to ensure certain transactions to be performed in timely manner. The Company has full oversight and control over the advanced accounts. Therefore, the allowance for the uncollectible accounts is nil.

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 installation of pipelines and material used in repairing and modifying of vehicles. Inventory also consists of natural gas and gasoline.
 
15

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

Unearned Revenue. Unearned revenue represents prepayments by customers for gas purchases and advance payments on installation of pipeline contracts. The Company records such prepayment as unearned revenue when the payments are received.
 
CONSOLIDATED RESULTS OF OPERATIONS

Comparing Fiscal Years Ended December 31, 2007 and 2006:
  
The following table presents certain consolidated statement of operations information. Financial information is presented for the 12-month period ending December 31, 2007 and December 31, 2006.

 
 
2007
 
2006
 
Revenues
 
$
35,392,053
 
$
18,828,790
 
Cost of Revenues
 
$
18,025,075
 
$
9,718,000
 
Operating Expenses
 
$
6,288,929
 
$
2,596,199
 
Income from Operations
 
$
11,078,049
 
$
6,514,591
 
Net Income
 
$
9,116,070
 
$
5,451,095
 
 
Revenue. We generated approximately 79.9% of our revenues in 2007 from the sale of natural gas and approximately 17.4% of our revenues from installation fees charged to connect end-user customers to our natural gas distribution system. Sales of natural gas at the Company-owned filling stations accounted for approximately 76.5% of our total revenues in 2007, or approximately $27,060,537 which was the largest contribution of our three business lines. Sales of natural gas to end-user customers connected to our pipeline distribution system accounted for approximately 21.4% of our total revenues in 2007, or approximately $7,576,286 including both natural gas sales and installation fees. Sales of natural gas to third party-owned filling stations accounted for approximately 0.2% of our total revenues in 2007, or approximately $79,200.The Company expects natural gas revenues to increase on both an actual basis and as a percentage of revenue. In 2008, the Company expects to add up to 15,600 pipeline customers and construct an additional 18 filling stations, which the Company estimates will increase sales of natural gas by 69 million cubic meters.
 
We had total revenues of $35,392,053 for the twelve months ended December 31, 2007, an increase of $16,563,263 or approximately 87.97%, compared to $18,828,790 for the twelve months ended on December 31, 2006. The increase in revenues was due primarily to the addition of 13 new company-owned filling stations during 2007 as well as an increase in the number of residential, commercial and industrial pipeline customers from approximately 75,000 in 2006 to approximately 84,500 in 2007.
 
New pipeline customers pay approximately 60% of the installation costs to connect to our pipeline system up front and the balance is payable as part of their monthly natural gas bill. During 2007, our installation revenues increased approximately 39.06% over the previous year and our sales of natural gas increased approximately 106.21% over the previous year. Four customers accounted for approximately 13.6%, 11.8%, 8.8% and 8.4% of the Company’s installation revenue for the year ended December 31, 2007.
 
Cost of Sales. Our cost of sales consists of both the cost of gas sales and the cost of installation. Cost of gas sales consists primarily of the cost that we pay for natural gas purchased from our supplier, together with transportation costs and depreciation of equipment. Cost of connection includes certain installation costs related to connecting customers to our pipeline system that are generally expensed when incurred.
 
16

 
Cost of sales in 2007 was $18,025,075, an increase of $8,307,075 or approximately 85.48% from 2006. Cost of gas sales increased by approximately 93.64% to $14,838,997 in 2007, as compared with $7,663,060 in 2006. The increase in our cost of sales was primarily related to a material increase in the amount of gas sold and the price that we paid to our suppliers in 2007. In addition, our installation costs increased in 2007 by approximately 55.04% to $3,186,078, as compared with $2,054,940 in 2006 as a result of the addition of new pipeline customers. The price that we paid for gas in 2007 remained relatively constant compared to 2006.
 
We purchase all of our natural gas for resale from three vendors, PetroChina Changqing Oilfield Company, Shaanxi Natural Gas Co Ltd, and Jingcheng city Mingshi Coal Bed Methane Exploitage Ltd. As the government owns all land in China, 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. Due to the soaring crude oil price and ever increasing demand for energy consumption, the National Development and Reform Commission, which regulates the energy price in China, adjusted the upstream natural gas price for industrial users and vehicular CNG distributors upward by ¥0.4/CM, or 35% in November, 2007. The retail price for vehicular CNG was adjusted upward at a ratio of 0.75:1 to the retail price of #90 gasoline at November, 2007. Many large cities see dramatic increase in retail vehicular CNG price, for example 66% in Shanghai and 21% (taxi) and 38% (bus) in Tianjin. However, natural gas price for residential customers is not adjusted to keep the rate at an affordable level. As China shifts from a centrally planned economy to a market economy, we believe that it is in the government’s best interest to keep prices stable, and maintain a stable flow of supply. The government has also undertaken programs to promote the economy growth of the region in which we are located. Therefore, we expect supply and price to continue to be stable in the future.

Gross profit. The Company earned a gross profit of $17,366,978 for the twelve months ended December 31, 2007, an increase of $8,256,188 or approximately 90.62%, compared to $9,110,790 for the twelve months ended December 31, 2006. The increase in gross profit is due to a material increase in gas sales and installation revenues in 2007, partially offset by an increase in cost of sales.
 
Gross margin. Gross margin, as a percentage of revenues, increased to approximately 49.07% for the twelve months ended December 31, 2007, from approximately 48% for the twelve months ended December 31, 2006. The increase in gross margin is primarily attributable to the significant increase in revenues generated from our Company-owned filling stations.

Operating expenses. The Company incurred operating expenses of $6,288,929 for the twelve months ended December 31, 2007, an increase of $3,692,730 or approximately 142.24%, compared to $2,596,199 for the twelve months ended December 31, 2006. Our operating expenses increased primarily as a result of expenses related to the construction, acquisition, and operation of 13 new filling stations in 2007, as well as continuing expenses related to the identification of possible locations for additional filling stations and the governmental licensing and approval process, as well as the evaluation of existing natural gas filling stations as potential acquisition targets. In addition, sales and marketing costs increased in 2007 as we increased our efforts to obtain new residential and commercial customers and attract customers to our filling stations. General and administrative expenses increased from $1,287,735 in 2006 to $2,837,768 in 2007 due to an increase in personnel as a result of our growth.
 
For the year ended December 31, 2007, two suppliers accounted for 29.66% and 11.36% 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 these two vendors would not have a material adverse effect on our operations.
 
Net Income. Net income increased to $9,116,070 for the twelve months ended December 31, 2007, an increase of $3,664,975, from $5,451,095 for the twelve months ended December 31, 2006. Increase in net income is attributed to our material increase in revenues, partially offset by a higher increase in cost of sales and operating expenses in 2007. The company expects revenue from our CNG filling stations to increase on both an actual basis and as a percentage of revenue. In 2008, the Company expects to add up to 15,600 pipeline customers and construct or acquire an additional 18 filling stations, which the Company estimates will increase sales of natural gas by 69 million cubic meters. In addition, the Company began selling gasoline in late 2007 and expects gasoline sales will be a minor portion of our entire business.
 
17

 
Income tax was $1,913,923 for the twelve months ended December 31, 2007, as compared to $1,025,584 for the twelve months ended December 31, 2006. The increase in income tax was attributed to the growth of installation fees and the sale of natural gas.
 
Liquidity and Capital Resources
 
As of December 31, 2007 the Company had $13,291,729 of cash and cash equivalents on hand compared to $5,294,213 of cash and cash equivalents as of December 31, 2006.
 
The primary sources of cash in 2007 were income from operations and financing activities. The Company had net cash flows provided by operations of $10,476,441 for the twelve months ended December 31, 2007 as compared to net cash provided by operations of $4,385,524 in the corresponding period last year. The increase in net cash flows from operations in 2007 as compared to 2006 was mainly due to the increase in net income and a decrease in accounts receivable and advances during the twelve months ended December 31, 2007 offset by a decrease in other payables and tax payable.
 
On August 2, 2007, we completed a private placement offering, which generated net proceeds of $13,823,467, which were used for the construction of natural gas filling stations, the purchase of raw materials and working capital.
 
Cash outflows for investing activities increased from $9,738,469 in 2006 to $16,885,340 in 2007 as a result of advance payments made to equipment suppliers for investments necessary to construct and acquire filling stations and for construction materials used to build the pipelines to individual households.
 
The Company expects to construct an additional 18 CNG filing stations in 2008. The Company expects the funds for these investing activities will come from the Company’s operating cash flow.
 
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 (other than the LNG Project) and other liquidity requirements associated with our operations for at least the next 12 months.
 
The majority of the Company’s 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. The Company does not engage in currency hedging. Inflation has not had a material impact on the Company’s business.
 
Off-Balance Sheet Arrangements and Contractual Obligations
 
We entered in to a 15 day foreign currency forward contract in late December 2007; please refer to financial statement footnote under “Derivative Accounting” for more details. We also entered into series of long term lease agreements with outside parties to lease land use right to the self-built natural gas filling stations located in the PRC, and please refer to footnote “Commitments and Contingencies” to the financial statements for details. We have purchase agreements with several natural gas suppliers and please see footnote “Current Vulnerability Due to Certain Concentrations” for more explanations. We do not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.

Foreign Currency Transactions and Comprehensive Income (Loss)
 
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Our transactions occur in Chinese Renminbi. The unit of Renminbi is in Yuan.
 
18

 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The objective of SFAS No. 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material effect on the Company‘s future reported financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This Statement permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its financial position and results of operations.

In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. Management is currently evaluating the effect of this pronouncement on financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting enterprise accounts for the acquisition of a business. SFAS No. 141 (Revised 2007) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited. The Company is currently evaluating the impact that adopting SFAS No. 141R will have on its financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51.  This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest.  This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.
 
DESCRIPTION OF BUSINESS

Organizational History

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

On December 6, 2005, we issued an aggregate of 4 million shares to all of the registered shareholders of Xi’an Xilan Natural Gas Co., Ltd., and entered into exclusive arrangements with Xi’an Xilan Natural Gas Co., Ltd. and these shareholders that give us the ability to substantially influence Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. On December 19, 2005, we changed our name to China Natural Gas, Inc.

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On February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., (“Xilan Equipment”) as a wholly owned foreign enterprise (WOFE). We then, through Xilan Equipment, entered into exclusive arrangements with Xi’an Xilan Natural Gas Co., Ltd. and these shareholders that give us the ability to substantially influence Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. We memorialized these arrangements on August 17, 2007. As a result, the Company consolidates the financial results of Xi’an Xilan Natural Gas as variable interest entity pursuant to Financial Interpretation No. 46R, “Consolidation of Variable Interest Entities.”

Overview of our Business

We transport, distribute and sell natural gas to commercial, industrial and residential customers in the Xi’an area, including Lantian County and the Lintong and Baqiao Districts, of Shaanxi province of The Peoples’ Republic of China (“China” or the “PRC”) through a network of approximately 120 km of high pressure pipelines.  We also distribute and sell CNG as vehicular fuel through a network of CNG filling stations in Shaanxi and Henan Provinces.  As of December 31, 2007, we owned and operated 16 CNG filling stations in Shaanxi Province and eight CNG filling stations in Henan Province.

We operate three primary business lines:

  —
Distribution and sale of compressed natural gas (CNG) through Company-owned CNG filling stations for hybrid (natural gas/gasoline) powered vehicles (24 stations as of December 31, 2007);

  —
Distribution and sale of piped natural gas to commercial, industrial and residential customers through Company-owned pipelines. The Company distributes and sells natural gas to approximately 84,500 homes and businesses; and

  —
Conversion of gasoline-fueled vehicles to hybrid (natural gas/gasoline) powered vehicles at our Auto Bodyshop Division.

We buy all of the natural gas that we sell and distribute to our customers from government owned enterprises. We do not mine or produce any of our own natural gas and have no plans to do so during the next 12 months. The natural gas that we buy is available in two forms: (i) piped natural gas; and (ii) CNG.
 
Our Products, Services and Customers

20


CNG Filling Stations

As of December 31, 2007, we own and operate 16 CNG natural gas filling stations in the Xi’an metropolitan area and 8 natural gas filling stations in Henan province. Through these company-owned filling stations, CNG is sold to taxis, buses and private cars that operate on CNG technology. Currently, we purchase natural gas for 1.22 RMB/cubic meter and sell each cubic meter for 2.35 RMB net of value added taxes.

We continue expanding our CNG filling station base by constructing new stations as well as acquiring existing stations. We can construct a CNG filling station in approximately 60 days for a cost of approximately US$900,000. We are evaluating additional sites for CNG filling stations in Xi’an and in other regions such as Henan province.

In July 2005, we purchased a Compressor Station located in Hongqing, near our pipeline. A compressor station compresses natural gas and allows trucks to transport CNG to filling stations. In January 2008, we purchase an additional Compressor Station in Xianyang, approximately 15 miles from Xi’an. 
 
Our Pipeline Distribution System

We own and operate a network of approximately 120 km of high pressure pipeline in the Xian area. Our pipeline network connects with a high pressure pipeline network from the government operated Shaanxi Natural Gas Company. This pipeline supplies natural gas directly from a gas field in the northern region of the province to the high pressure pipes that then feed into citygate “let-down” stations at HongQing and Lantian County. At HongQing and LanTian the pressure is reduced and transported through a network of low-pressure distribution pipes to supply our residential, commercial and industrial customers in Lantian County, and the Lintong and Baqiao Districts. The spur also feeds a compressor station at HongQing where CNG is collected by tankers to supply CNG filling stations.

Each of our pipeline customers is physically connected to our pipeline network through Company installed and maintained connection equipment and natural gas usage monitoring systems, from which we generate additional revenues.

We believe that we are currently the sole authorized provider of natural gas to residential customers in our service area and the only privately owned company in the Shaanxi province to own and operate this type of high pressure pipeline.

Our Liquefied Natural Gas (LNG) Project

During 2007, we made significant progress to move into the processing, distribution and sale of LNG. We believe that adding LNG to our product offerings will expand our geographic sales footprint and improve revenues and profitability.

Both CNG and LNG are natural gas compressed into canisters for convenient transportation, usually by tank trucks, to locations of distribution or consumption. Typically CNG is compressed at 200 times atmospheric pressure and can be transported at normal temperatures to distances of up to 300 kilometers. LNG is compressed at up to 625 times atmospheric pressure and must be transported at sub-zero degree temperatures. The cost of compressing and processing LNG is higher than those of CNG, but LNG can be transported over longer distance and per unit transportation costs are therefore lower.

In September 2007 we have started the construction of an LNG processing and distribution plant in Jingbian, Shaanxi province (the “LNG Project”). We estimate that the LNG Project will cost approximately $40 million (RMB 309 million). As of March 10, 2008, we have secured such financing and we believe that the plant can be completed by 2009. We have obtained the required permits and approvals to build the LNG plant from local government authorities; we are still required to have approval from the Shaanxi Development and Reform Commission to begin LNG production at the plant.
 
The approval process for LNG plant construction of this type is lengthy and arduous—a factor which we believe is a significant barrier to entry to potential competitors and which better positions our company for long-term growth. This project also allows us to diversify our business and focus on two high-growth areas: CNG filling station business and LNG production, distribution, and sale. We believe that the PRC’s clean energy policies will bolster demand for natural gas in China and we have government support to be a leader in this area.

Our CNG Market

We estimate that currently there are approximately 50,000 vehicles using CNG in the Xi’an area. Currently it is estimated that there are 5,000 buses and 20,000 taxis using CNG in Xi’an. 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: Xi’an Clean Fuel Vehicles Commission 2005) The PRC government estimates in its Eleventh Five Year Plan (2006-2010) that current total demand for CNG as a vehicular fuel in the Xi’an area is approximately 1,070,000 cubic meters per day. Compared to gasoline and diesel, natural gas as vehicular fuel is cheaper, cleaner and safer. The PRC government’s Clean Energy Policy encourages the use of CNG as a vehicular fuel.

We estimate that the average CNG station in Xi’an pumps approximately 15,000 cubic meters of CNG per day. In the end of 2007, there were 64 CNG filling stations in Xi’an. We estimate that approximately 877,500 cubic meters of CNG is pumped per day during the year, a figure well below estimated total demand. As a result, we believe that there is significant unmet demand for CNG as vehicular fuel in the Xi’an area that provides us great opportunities for profit and growth.

We believe that our vertically integrated operations, proprietary pipeline and secured supply contracts give us greater access to CNG supplies and customers and a unique competitive position as a major supplier of CNG vehicular fuel in the Xi’an area.

Our Pipeline Network Customers

As of December 31, 2007, we had approximately 84,500 customers, including residential, industrial and commercial customers. We are continuing to expand our customer base in Xi’an’s newly developed business and residential areas including the districts of Xihan and Chanliu. Our industrial customers, including the Xiwei Aluminum Company and the Hungtian Company, use natural gas as a raw material for their production process. We are not dependent upon any single customer or group of customers for a material portion of our natural gas sales or revenues.
 
Our pipeline customers purchase natural gas by means of prepaid cards that can be inserted into the connection equipment to initiate gas flow.

We are currently seeking to expand pipeline distribution to the Shangluo and Ankang areas of Shaanxi province. In September 2005, we submitted applications to local government authorities for approval to supply the Shanglou and Ankang areas on an exclusive basis. Approval is still pending and can take up to three years. As a result, we cannot be certain if we will receive such government approval at all or, if approved, when we will receive such government approval. However, we believe that if we receive government approval, the approval would give us the exclusive right to provide natural gas to residential, commercial and industrial customers in those areas.
 
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Our Subsidiaries and Variable Interest Entities

On October 24, 2006, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary, Shaanxi Jingbian Liquefied Natural Gas Co., Ltd., a limited liability company organized under the laws of PRC to administer the production and sales of LNG.

In 2006, Xi’an Xilan Natural Gas, through its wholly-owned subsidiary, Shaanxi Jingbian Liquefied Natural Gas Co., Ltd, received a letter from PetroChina Company Limited pursuant to which PetroChina agreed in principle, subject to the negotiation and execution of a final contract, to supply up to 150,000,000 cubic meters of natural gas annually upon the completion of our LNG project.

In 2006, we formed a wholly-owned subsidiary, Xi’an Xilan Natural Gas Equipment Ltd., a limited liability company organized under the laws of PRC (“Xilan Equipment”), to provide equipment to our own CNG filling stations.

Effective March 8, 2006, we also established a variable interest entity, Xi’an Xilan Natural Gas by entering into exclusive arrangement with Xi’an Xilan Natural Gas through our subsidiary Xilan Equipment. Pursuant to the exclusive arrangement, the Company, though Xilan Equipment, the Company has the ability to substantially influence Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. As a result, based on Financial Interpretation No. 46R, Consolidation of Variable Interest Entities, the Company is able to treat Xi’an Xilan Natural Gas as a variable interest entity of the Company and consolidate its financial results.
 
In May 2007, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary, Xian Xilan Auto Bodyshop.
 
Suppliers

The Company purchases all of the natural gas for resale from three vendors, PetroChina Changqing Oilfield Company, Shaanxi Natural Gas Co. Ltd., and Jingcheng City Mingshi Coal Bed Methane Exploitage Ltd. The Company has long-term supply agreements with PetroChina Changqing Oilfield Company and Jingcheng City Mingshi Coal Bed Methane Exploitage Ltd. with no minimum purchase requirements. The price of natural gas is strictly controlled by the government and has remained stable over the past 3 years.

On October 19, 2006, we received a letter from PetroChina Company Limited pursuant to which PetroChina agreed in principle to supply up to 150 million cubic meters of LNG annually to our subsidiary subject to the negotiation of a final agreement once our LNG plant is built.

We do not expect any difficulty in continuing to renew our supply contracts during the next 12 months.

PRC Natural Gas Industry Overview

China’s rapidly expanding economy is stretching the limits of its energy resources. The country is the world’s second largest energy consumer after the United States, with an annual energy consumption growth rate as high as 12.8% between 2002 and 2006. During the same period, natural gas consumption grows at 13.3% annually. Natural gas currently accounts for only 3% of the country’s total energy usage, compared to the world average 23%. Over the next 5 years, usage of natural gas in China is expected to grow 5% annually and make up 5.1% of the total energy consumption. As of January 1, 2007, China’s domestic reserve of natural gas was estimated to be 80 trillion cubic feet. (Source: EIA). The country’s largest reserves are located in western and north central China.

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In order to meet the demand for natural gas, the PRC government has encouraged private companies to invest in and build the necessary transportation, distribution and sale infrastructure for natural gas. On December 27, 2002, the Ministry of Construction issued a memorandum stating that regulation of the public utility industry (including natural gas distribution) should be liberalized. It also stated that foreign and private investment participation should be encouraged and welcomed. The memorandum provided a legal framework for private urban natural gas distribution.
 
Sources of Energy
 
Traditionally, the PRC has relied heavily on coal and crude oil as its primary energy sources. According to the China Statistical Yearbook, in 2005, coal, crude oil, hydro-electricity and natural gas accounted for 67.7%, 22.7%, 7% and 3%, respectively, of the PRC’s total energy consumption. The PRC government’s Eleventh Five Year Plan (2006-2010), estimates that during the five year plan, the percentage of the PRC’s total energy consumption of coal, crude oil and hydro-electricity would go down to 66.1%, 20.5% and 6.8% respectively, while that of natural gas would increase to 5.1%. Traditionally, natural gas has been primarily used as a raw material for the production of fertilizer. A little over 10% of natural gas is consumed as fuel. (Source: The Institute of Energy Economics of Japan).

The PRC’s heavy reliance on coal exceeds world consumption rates for the same period, which was 22.2% (Source: Energy Information Administration, U.S. Department of Energy). The use of coal, however, causes air pollution and other negative consequences to the environment. In the PRC, the heavy use of unwashed coal has led to large emissions of sulfur dioxide and particulate matter. An air pollution study conducted by the World Health Organization in 1998 showed that seven of the 10 most polluted cities in the world were located in the PRC. As such, there have been serious environmental concerns in many countries around the world, resulting in a global trend to reduce coal usage. In consideration of such trends, in 1996, the PRC presented a plan to raise the share of natural gas in the country’s energy mix (Source: Ninth Five-Year Plan (1996-2000)). In many locations where natural gas supply is available, local governments often require all new residential buildings to install piped gas connections as a condition to the issuance of the construction or occupancy permits. Before 2000, local municipal governments controlled gas distribution. Since then, the industry has been opened to private companies, whose investments have fostered an increase in the use of natural gas in the PRC. The PRC government has deemed the natural gas industry a suitable industry for public and private investments.

China’s Natural Gas Reserves and Gas Pipeline Infrastructure

Recognizing the serious problems caused by the heavy reliance on coal usage, the PRC government has aggressively moved to reduce coal usage by substituting coal with other, more environmentally friendly forms of fuel, such as natural gas. The PRC abounds in rich natural gas reserves, which are distributed among Xinjiang, Sichuan, and Shaanxi Provinces, as well as Inner Mongolia. According to the Second Oil and Gas Reserve Assessment published by the Geological and Mineral Resources Department of China, natural gas reserves in China are estimated to be 80,000 billion cubic meters. These reserves are sufficient for approximately 74 to 120 years of Chinese consumption based on current consumption levels.

China's largest reserves of natural gas are located in western and north-central China. In 2002, the Chinese government initiated the construction of a 4,000 kilometer long high pressure pipeline project in order to transport natural gas from Xinjiang and Shaanxi in the northwestern parts of China to Beijing, Shanghai, and other cities in the southern and eastern regions of China which are economically stronger and thus account for more energy consumption. The pipeline network, which runs across nine provinces on the Chinese mainland, started operation in December 2004, and has optimized the energy infrastructure of China. In addition, the natural gas pipeline presented a business opportunity for natural gas distributors at the major junctures, such as Shaanxi province.

23

 
Demand for Natural Gas

Currently, natural gas consumption in the PRC accounts for less than 3% of its total energy consumption. However, driven by environmental pressures, improvements in social infrastructure fueled by economic growth, and a stable energy supply, it is anticipated that the use of natural gas will grow very rapidly in the PRC over the next 20 years.

Intellectual Property

We have applied for a service mark on the “Xilan” name, which is used in connection with all our products and services.

Research and Development

We have not had and do not anticipate having any material research and development expenses. The funding for all research and development expenses is expected to come from operating cash flows.

Governmental and Environmental Regulation

To date, we comply with all registrations and requirements for the issuance and maintenance of all licenses required by the applicable governing authorities in China. These licenses include:

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)

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)

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)

Annual Safety Inspection of Lightning Conductor Equipment approved by the Shaanxi Meteorology Bureau. (Certificate number 0005274) The Citygate and Compressor Stations are approved by the local office of the Ministry of Construction.
 
Business license to operate Xilan Equipment effective from February 22, 2006 to February 21, 2021.
 
Business license to operate Xilan Liquified Natural Gas effective from October 24, 2006 to October 23, 2036.
 
Business license to operate Xi’an Xilan Auto Bodyshop effective as of May 15, 2007.
 
Business license to operate Xi’an Xilan Natural Gas effective as of January 8, 2000.
 
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. Upon satisfactory inspection of service stations, certificates will be issued.

Various standards must be met for filling stations, including the handling and storage of CNG, tanker handling, and compressor operation. The Local Ministry of Construction and the Gas Field Operation Department of the Municipal Administration Committee regulates these standards. The Municipal Development and Reform Commission, which issues certificates for the handling of dangerous chemical agents, carries out inspections.

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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 (China Petroleum and Chemical Corporation Group), and CNOOC (China National Offshore Oil Corporation Group) are principally engaged in the upstream supply of energy and are material competitors in the 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).
 
With respect to our pipeline services, we compete with privately owned companies: 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 that distributes natural gas via pipeline 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.

With respect to our CNG filling station market, currently, there are approximately 64 CNG filling stations in Xian City. Fifteen of these stations are state owned enterprises. The other 49 stations are privately owned with the majority of these being single station operators. We believe that we effectively compete with the stations based upon our organization, experience and financial resources.

Employees

Currently, we have 599 employees, including, 7 in management; 57 in administrative; 13 in operations; 12 in sales; 5 in research and development; 17 in finance and 457 employees at the retail filling stations. We have not experienced any industrial actions and we have excellent relationships with our employees. We are not a party to any collective bargaining agreements.

Legal Proceedings

Neither our company nor any of our subsidiaries is a party to any legal proceedings that, individually or in the aggregate, are material to our company as a whole.

DIRECTORS AND EXECUTIVE OFFICERS

Management and Board of Directors

Our current members of the Board of Directors and executive officers are listed below.

Name
 
Age
 
Position
 
Held Position Since
Qinan Ji
 
50
 
Chief Executive Officer and Chairman of the Board
 
2005
Guo Lihong
 
41
 
Chief Financial Officer
 
2007
Zhiqiang Wang
 
67
 
Director
 
2006
James Garner
 
62
 
Director
 
2006

All directors serve for one year and until their successors are elected and qualified. 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. There are no family relations among any of our officers and directors.

25


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 Xi’an 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 Bachelors of Economic Management from North West University (Shaanxi).

Lihong Guo, Chief Financial Officer - Ms. Guo has over 12 years of financial experience at various companies in China, including previously serving in the role of Chief Financial Officer. Most recently, from September 2005 to July 2007, Ms. Guo was the Chief Financial Officer of Aoda Enterprise Group Co., Ltd. Prior to that, Ms. Guo served as Director of Finance of Xi’an Yangsen Pharmaceutical Ltd., a subsidiary of Johnson & Johnson Company.  Ms. Guo received her bachelor’s degree in economics and management from Shaanxi Normal University in 1987 and her MBA from Northwest University in Shaanxi, China, in 2002.

Zhiqiang Wang, Vice Chairman of the Board of Directors - Mr. Wang was the former head of energy industry regulations from 1992 to 2002 as well as the Vice Mayor of the city of Xi’An, China’s largest western city with a population of 8 million, in which position he was in charge of regulating and licensing the city’s energy and natural gas businesses. From 2002 until his retirement in 2004, Mr. Wang was the Chief Executive Officer of Xi’An Municipal Government Construction Company where he was in charge of the city’s major construction projects. Since 2004, Mr. Wang has been an independent advisor to the Company. Mr. Wang graduated from the Northwest College of Law in 1962.
 
James A. Garner, Director, Chairman of Nominating Committee - 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.

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 or 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.

There are no family relationships, or other arrangements or understandings between or among any of the directors, executive officers or other person pursuant to which such person was selected to serve as a director or officer.

Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:

1.  
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

2.  
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

3.  
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

4.  
being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

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EXECUTIVE COMPENSATION

The following table sets forth all cash compensation paid by us to each of the following named executive officers for the last three completed fiscal years.

Summary Compensation Table

Name and Principal Position
 
  Year 
 
Salary 
($) 
 
Bonus 
($) 
 
Option
Awards 
($) 
 
All
Other
Compensation
($)
 
Total 
($)
 
Qinan Ji, Chief Executive Officer and Chairman of the Board(1)
   
2007
   
15,000
   
-
   
-
   
-
   
15,000
 
      2006    
15,000
   
-
   
-
   
-
   
15,000
 
Guo Lihong(2)
    2007     10,000     -     -     -     10,000  
 
(1) Mr. Ji was elected as the Chief Executive Officer on May 22, 2006.
(2) Ms. Guo joined the Company in July 2007.
 
During the last fiscal year, none of our other officers had a salary and bonus greater than $100,000.
 
Stock-Based Compensation
 
None of our officers or other employees have been granted stock options or stock appreciation rights, or paid any other stock-based compensation, by our company or any of our subsidiaries.
 
Director Compensation

The following Director Compensation Table summarizes the compensation of our directors for services rendered to the Company during the year ended December 31, 2007.

Name
 
Fees 
Earned or 
Paid in 
Cash 
($)  
 
Stock 
Awards ($)
 
Option 
Awards ($)
 
All Other 
Compensation 
($)  
 
Total
($)
 
James Garner
   
36,000
   
-
   
-
   
-
   
36,000
 
Qinan Ji(1)
   
-
   
-
   
-
   
-
   
-
 
Zhiqiang Wang(2)
   
-
   
-
   
-
   
-
   
-
 
Patrick McManus(3)
   
15,000
   
-
   
-
   
-
   
15,000
 
 

(1)   
Ji Qinan, our Chief Executive Officer, does not receive any compensation for his service as a director.
(2)   
Zhiqiang Wang was appointed as a director in September 2006; he receives no compensation for his services as a director.
(3)   
Patrick McManus resigned as a director in July 2007.

The Company did not pay any other compensation to these directors in 2007.

Employment Agreements

There are currently no employment agreements between the Company and any of its named executive officers.

27

Outstanding Equity Awards at Fiscal Year End

There has been no outstanding equity awards at fiscal year ended December 31, 2007.

CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS

None.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The following table sets forth certain information, as of March 13, 2008 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 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.

Name of Beneficial Owner (1)
 
Number of
Common
Stock
Beneficially
Owned
 
Percentage
Of Common
Stock
Outstanding(2) 
 
           
Executive Officers and Directors
 
   
 
   
 
Qinan Ji
   
5,931,596
(3)
 
20.3
%
               
Lihong Guo
   
   
 
               
All officers and directors as a group (2 persons)
   
5,931,596
(3)
 
20.3
%
               
5% holders
         
               
Yangling Bodisen Biotech Development co, Ltd.
c/o New York Global Group, Inc.
14 Wall Street, 12th Floor, New York, NY 10005
   
2,063,768

(4) 
 
7.1
% 
Xiang Ji
   
1,456,232
   
5.0
%
Robert Moses
   
2,000,000
(5)
 
6.9
%
Heartland Value Fund
   
1,725,000
(6)
 
5.9
%
Xi’an Sunway Technology &
Industry Co., Ltd
   

2,875,364
(3)  
9.8
%
 
(1) Except as otherwise indicated, the address of each beneficial owner is c/o Xi’an Xilan Natural Gas Co., Ltd., 19th Floor, Building B, Van Metropolis, Tangyan Road, Hi-Tech Zone, Xi’an, Shaanxi Province, China.
 
(2) Applicable percentage ownership is based on 29,200,304 shares of common stock outstanding as of March 13, 2008, together with securities exercisable or convertible into shares of common stock within 60 days of March 13, 2008 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 March 13, 2008 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 Xi’an Sunway Technology & Industry Co., Ltd. Qinan Ji owns 42.1% of Xi’an Sunway and may be deemed to beneficially own such shares.
 
(4) As set forth in the Schedule 13D filed with the SEC on December 23, 2005.

(5) As set forth in the Schedule 13G filed with the SEC on September 7, 2007.

(6) William J. Nasgovitz has shared voting and dispositive power with respect to such shares as reported in the Schedule 13G filed with the SEC on February 8, 2008.
 
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.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
The Company had no equity compensation plans as of the fiscal year ended December 31, 2007.
 
DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 45,000,000 shares of common stock, $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share. As of December 31, 2007, 29,200,304 shares of common stock were issued and outstanding and no shares of preferred stock were issued and outstanding. In addition, at such date, 1,802,735 shares of common stock were reserved for issuance upon the exercise of outstanding common stock purchase warrants.
28


Common Stock

Voting, Dividend and Other Rights. Each outstanding share of common stock entitles the holder to one vote on all matters presented to the shareholders for a vote. Holders of shares of common stock have no cumulative voting, preemptive, subscription or conversion rights. All shares of common stock to be issued pursuant to this registration statement will be duly authorized, fully paid and non-assessable. Our Board of Directors determines if and when distributions may be paid out of legally available funds to the holders. To date, we have not declared any dividends with respect to our common stock. Our declaration of any cash dividends in the future will depend on our Board of Directors’ determination as to whether, in light of our earnings, financial position, cash requirements and other relevant factors existing at the time, it appears advisable to do so. We do not anticipate paying cash dividends on the common stock in the foreseeable future.

Rights Upon Liquidation. Upon liquidation, subject to the right of any holders of the preferred stock to receive preferential distributions, each outstanding share of common stock may participate pro rata in the assets remaining after payment of, or adequate provision for, all our known debts and liabilities.

Majority Voting. The holders of a majority of the outstanding shares of common stock constitute a quorum at any meeting of the shareholders. A plurality of the votes cast at a meeting of shareholders elects our directors. The common stock does not have cumulative voting rights. Therefore, the holders of a majority of the outstanding shares of common stock can elect all of our directors. In general, a majority of the votes cast at a meeting of shareholders must authorize shareholder actions other than the election of directors. Most amendments to our certificate of incorporation require the vote of the holders of a majority of all outstanding voting shares.
 
Preferred Stock

Authority of Board of Directors to Create Series and Fix Rights. Under our certificate of incorporation, as amended, our Board of Directors can issue up to 5,000,000 shares of preferred stock from time to time in one or more series. The Board of Directors is authorized to fix by resolution as to any series the designation and number of shares of the series, the voting rights, the dividend rights, the redemption price, the amount payable upon liquidation or dissolution, the conversion rights, and any other designations, preferences or special rights or restrictions as may be permitted by law. Unless the nature of a particular transaction and the rules of law applicable thereto require such approval, our Board of Directors has the authority to issue these shares of preferred stock without shareholder approval. Our Board of Directors has not designated any shares of the authorized but unissued preferred stock.

Warrants

At December 31, 2007, the following warrants were outstanding:
 
— 
Warrants to purchase 321,176 shares of common stock at any time on or prior to January 13 or January 17, 2009 at an initial exercise price of $3.60 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is, subject to adjustment in the event of stock splits, combinations or the like of our common stock.
 
— 
Warrants to purchase 767,308 shares of common stock at any time on or prior to October 26, 2012 at an initial exercise price of $7.79 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, combinations or the like of our common stock.
 
Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws

Our certificate of incorporation and our Bylaws contain certain provisions that could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions and certain provisions of Delaware law, which are summarized below, may discourage coercive takeover practices and inadequate takeover bids. These provisions also may encourage persons seeking to acquire control of us to first negotiate with our Board of Directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.

29


Undesignated Preferred Stock. As discussed above, our Board of Directors has the ability to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in our control or management.

Delaware Anti-Takeover Statute. We are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, Section 203 prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder unless:

— 
Prior to the date of the transaction, the Board of Directors of the corporation approved either the business combination or the transaction that resulted in the stockholder’s becoming an interested stockholder;

— 
Upon completion of the transaction that resulted in the stockholder’s becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, but not the outstanding voting stock owned by the interested stockholder, (1) shares owned by persons who are directors and also officers and (2) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

— 
At or subsequent to the date of the transaction, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock that is not owned by the interested stockholder.

Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation’s outstanding voting stock. We expect the existence of this provision to have an anti-takeover effect with respect to transactions our Board of Directors does not approve in advance. We also anticipate that Section 203 may discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
 
The provisions of Delaware law and the provisions of our certificate of incorporation and Bylaws, as amended, could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

Transfer Agent and Register

The transfer agent and registrar for our common stock is Interwest Transfer, Inc., 1981 East 4800s Suite 100, Salt Lake City, Utah 84117, telephone number (801) 272-9294.

Market Information

Our common stock price is quoted on the OTC Bulletin Board, or OTCBB, under the symbol “CHNG.”
 
SELLING STOCKHOLDERS

The following table sets forth as of March 13, 2008, information regarding the current beneficial ownership of our common stock by the persons identified, based on information provided to us by them, which we have not independently verified. Although we have assumed for purposes of the table that the Selling Stockholders will sell all of the shares offered by this prospectus, because they may from time to time offer all or some of their shares under this prospectus or in another manner, no assurance can be given as to the actual number of shares that will be resold by the Selling Stockholder (or any of them), or that will be held after completion of the resales. In addition, a Selling Stockholder may have sold or otherwise disposed of shares in transactions exempt from the registration requirements of the Securities Act or otherwise since the date he or she provided information to us. The Selling Stockholders are not making any representation that the shares covered by this prospectus will be offered for sale. Except as set forth below, no Selling Stockholder has held any position nor had any material relationship with us or our affiliates during the past three years.

30


 
 
Shares of Common Stock
 Beneficially Owned 
Prior to Offering(1)
 
Shares 
Being 
Offered 
 
  Shares of Common Stock 
Beneficially Owned
 After Offering(2)
 
Selling Stockholder
 
Shares
 
%
 
 
 
Shares
 
%
 
Abax Lotus Ltd. (3)
 
2,900,000
 
9.93
 
2,900,000
 
0
 
*
 
                       
Total  
2,900,000
 
9.93
% 
2,900,000
 
0
 
*
 
* Less than one percent

(1)   
This table is based upon information supplied by officers, directors and principal stockholders, and in Schedules 13D and 13G filed with the Securities and Exchange Commission. Unless otherwise indicated in the footnotes to this table and subject to community property laws, where applicable, we believe each stockholder named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. The number and percentage of shares beneficially owned are based on an aggregate of 29,200,304 shares of our common stock outstanding as of March 13, 2008, and are determined under rules promulgated by the Securities and Exchange Commission. This information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise of any stock option or other right.
 
31


(2)
Because the selling shareholders identified in this table may sell some, all or none of the shares owned by them that are registered under this registration statement, and because, to our knowledge, there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares registered hereunder, no estimate can be given as to the number of shares available for resale hereby that will be held by the selling shareholders at the time of this registration statement. Therefore, we have assumed for purposes of this table that the selling shareholders will sell all of the shares beneficially owned by them.
   
(3) 
Christopher Chung-Yi Hsu and Yang Xiang Dong exercise sole or shared voting or investment powers over the Common Stock held by Abax Lotus, Ltd.
 
PLAN OF DISTRIBUTION

The Selling Stockholders and any of their pledgees, donees, transferees, assignees and 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:

  
ordinary brokerage transactions and transactions in which the broker-dealer solicits Investors;

  
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;

  
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

  
an exchange distribution in accordance with the rules of the applicable exchange;

  
privately negotiated transactions;

  
to cover short sales made after the date that this Registration Statement is declared effective by the Commission;

  
broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

  
a combination of any such methods of sale; and

  
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.

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.

The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of Common Stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.

Upon the Company being notified in writing by a Selling Stockholder that any material arrangement has been entered into with a broker-dealer for the sale of Common Stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Stockholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such the shares of Common Stock were sold, (iv)the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified in writing by a Selling Stockholder that a donee or pledgee intends to sell more than 500 shares of Common Stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law.

32


The Selling Stockholders also may transfer the shares of Common Stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. 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. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of Securities will be paid by the Selling Stockholder and/or the purchasers. Each Selling Stockholder has represented and warranted to the Company that it acquired the securities subject to this registration statement in the ordinary course of such Selling Stockholder’s business and, at the time of its purchase of such securities such Selling Stockholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities.
 
The Company has advised each Selling Stockholder that it may not use shares registered on this Registration Statement to cover short sales of Common Stock made prior to the date on which this Registration Statement shall have been declared effective by the Commission. In addition, the Company has advised each Selling Stockholder that the Commission currently takes the position that coverage of short sales “against the box” prior to the effective date of the registration statement of which this prospectus is a part would be a violation of Section 5 of the Securities Act, as described in Item 65, Section A, of the Manual of Publicly Available Telephone Interpretations, dated July 1997, compiled by the Office of Chief Counsel, Division of Corporate Finance.

If a Selling Stockholder uses this prospectus for any sale of the Common Stock, it will be subject to the prospectus delivery requirements of the Securities Act. The Selling Stockholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such Selling Stockholders in connection with resales of their respective shares under this Registration Statement.

The Company is required to pay all fees and expenses incident to the registration of the shares, but the Company will not receive any proceeds from the sale of the Common Stock. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
 
DISCLOSURE OF COMMISSION POSITION OF 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.

33

 
LEGAL MATTERS

The legality of the issuance of the shares offered in this prospectus will be passed upon for us by Crone Rozynko LLP, San Francisco, California. Crone Rozynko LLP holds an option to purchase 100,000 shares of common stock at an initial exercise price of $8.00 per share.
 
EXPERTS

The consolidated financial statements of our company as of December 31, 2007 and 2006 included in this prospectus have been audited by Moore Stpehens Wurth Frazner and Torbet, LLP and Kabani & Company, Inc., independent registered public accountants, as stated in its report appearing herein and elsewhere in this prospectus, and have been so included in reliance upon the report of this firm given upon their authority as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration statement on Form SB-2 (including exhibits) under the Securities Act, with respect to the shares to be sold in this offering. This prospectus does not contain all the information set forth in the registration statement. For further information with respect to our company and the common stock offered in this prospectus, reference is made to the registration statement, including the exhibits filed thereto, and the financial statements and notes filed as a part thereof. With respect to each such document filed with the SEC as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved.
 
We file quarterly and annual reports, proxy statements and other information with the SEC. You may read and copy any document that we file at the public reference facilities of the SEC in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s website at http://www.sec.gov.

34

 

CHINA NATURAL GAS, INC.
AND SUBSIDIARIES

CONTENTS

   
Pages
     
Reports of Independent Registered Public Accounting Firms
 
F-1
     
Consolidated Balance Sheets as of December 31, 2007 and 2006
 
F-3
     
Consolidated Statements of Income and Other Comprehensive income for the years ended December 31, 2007 and 2006
 
F-4
     
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2007 and 2006
 
F-5
     
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006
 
F-6
     
Notes to Consolidated Financial Statements as of December 31, 2007
 
F-7 – F-22
 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
China Natural Gas, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of China Natural Gas, Inc. and Subsidiaries as of December 31, 2007, and the related consolidated statements of income and other comprehensive income, stockholders’ equity, and cash flows for year then ended. 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 audit. The consolidated financial statements of China Natural Gas, Inc. and Subsidiaries as of December 31, 2006 were audited by other auditors whose report dated March 12, 2007, expressed an unqualified opinion on those statements.

We conducted our audit 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 financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Natural Gas, Inc. and Subsidiaries as of December 31, 2007, and the results of its operations and its cash flows for the year ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

/s/ Moore Stephens Wurth Frazer and Torbet, LLP
 
Walnut, California
March 31, 2008
 
F-1

 

Report of Independent Registered Public Accounting Firm
 



Board of Directors and Stockholders of
China Natural Gas, Inc.

We have audited the accompanying consolidated balance sheet of China Natural Gas, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of operations and other comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2006. 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 audit.

We conducted our audit 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 audit 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 subsidiaries as of December 31, 2006, and the consolidated results of their operations and their consolidated cash flows for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.



/s/ Kabani & Company, Inc.
Certified Public Accountants

Los Angeles, California
March 12, 2007

 
F-2

 
 
CHINA NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 and 2006
    
   
2007
 
2006
 
ASSETS
         
CURRENT ASSETS:
         
Cash & cash equivalents
 
$
13,291,729
 
$
5,294,213
 
Short-term investments
   
238,554
   
-
 
Accounts receivable
   
306,179
   
569,037
 
Other receivable
   
824,020
   
711,279
 
Inventories
   
231,339
   
285,537
 
Advances
   
663,041
   
960,681
 
Prepaid expense and other current assets
   
109,722 
   
304,620
 
Total current assets
   
15,664,584
   
8,125,367
 
               
PROPERTY AND EQUIPMENT, net
   
32,291,995
   
17,193,728
 
CONSTRUCTION IN PROGRESS
   
2,210,367
   
2,343,499
 
OTHER ASSETS
   
3,123,052
   
803,757
 
               
TOTAL ASSETS  
 
$
53,289,998
 
$
28,466,351
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
               
CURRENT LIABILITIES:
             
Accounts payable and accrued liabilities
  $
487,710
 
$
406,212
 
Other payables
   
55,979
   
279,236
 
Unearned revenue
   
327,220
   
284,011
 
Taxes Payable
   
1,211,775
   
1,866,688
 
Total current liabilities
   
2,082,684
   
2,836,147
 
               
COMMITMENTS AND CONTINGENCIES
   
-
   
-
 
               
STOCKHOLDERS’ EQUITY:
             
Preferred stock, $0.0001 per share; authorized 5,000,000 shares; none issued
   
-
   
-
 
Common stock, $0.0001 per share; 45,000,000 authorized shares 29,200,304 and 24,210,183 shares issued and outstanding at December 31, 2007 and 2006, respectively
   
2,920
   
2,421
 
Additional paid-in capital
   
32,046,879
   
18,223,911
 
Cumulative translation adjustment
   
3,477,025
   
839,452
 
Statutory reserves
   
1,802,735
   
750,886
 
Retained earnings
   
13,877,755
   
5,813,534
 
Total stockholders’ equity
   
51,207,314 
   
25,630,204
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  
 
$
53,289,998
 
$
28,466,351
 
 
See report of independent registered public accounting firm.
 
The accompanying notes are an integral part of these statements.
 
F-3

 
CHINA NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

   
Years Ended December 31,
 
   
2007
 
2006
 
Revenue
         
Natural gas revenue
 
$
28,278,033
 
$
13,713,145
 
Installation and other
   
7,114,020
   
5,115,645
 
               
Total revenue
   
35,392,053
   
18,828,790
 
               
Cost of revenue
             
Natural gas cost
   
14,838,997
   
7,663,060
 
Installation and other
   
3,186,078
   
2,054,940
 
               
Total cost of revenue
   
18,025,075
   
9,718,000
 
               
Gross profit
   
17,366,978
   
9,110,790
 
               
Operating expenses
             
Selling expenses
   
3,451,161
   
1,308,464
 
General and administrative expenses
   
2,837,768
   
1,287,735
 
                 
Total operating expenses
   
6,288,929 
   
2,596,199
 
           
Income from operations
   
11,078,049
   
6,514,591
 
               
Non-operating income (expense):
             
Interest income
   
70,697
   
41,109
 
Other income
   
39,076
   
-
 
Other expense
   
(7,100
)
 
(79,021
)
Foreign exchange loss
   
(150,729
)
 
-
 
Total non-operating expense
   
(48,056
)
 
(37,912
)
               
Income before income tax
   
11,029,993
   
6,476,679
 
               
Provision for income tax
   
1,913,923
   
1,025,584
 
                 
Net income
   
9,116,070
   
5,451,095
 
               
Other comprehensive income
             
Foreign currency translation gain
   
2,637,573
   
610,705
 
Comprehensive Income
 
$
11,753,643
 
$
6,061,800
 
               
Weighted average shares outstanding
             
Basic
   
26,200,679
   
23,872,936
 
Diluted
   
26,301,802
   
23,872,936
 
               
Earnings per share
             
Basic
 
$
0.35
 
$
0.23
 
Diluted
 
$
0.35
 
$
0.23
 
 
See report of independent registered public accounting firm.
 
The accompanying notes are an integral part of these statements.
 
F-4


 
CHINA NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

   
Common Stock
 
Additional
 
Accumulative Other
 
 
 
 
 
Total
 
 
 
Shares
 
Amount
 
Paid in
Capital
 
Comprehensive Gain
 
Statutory Reserve
 
Retained Earnings
 
Stockholders’ Equity
 
Balance December 31, 2005
   
20,204,088
 
$
2,020
 
$
8,331,458
 
$
228,747
 
$
169,722
 
$
943,603
 
$
9,675,550
 
                                             
Shares issued for cash, at $2.80
   
3,714,428
   
371
   
10,399,629
                     
10,400,000
 
Offering costs
               
(1,557,147
)
                   
(1,557,147
)
Cashless exercise of warrants
   
291,667
   
30
   
1,049,971
                     
1,050,001
 
Cumulative translation adjustment
                     
610,705
               
610,705
 
Net Income
                                 
5,451,095
   
5,451,095
 
Transfer to statutory reserve
                           
581,164
   
(581,164
)
 
 
       
 
     
 
     
 
     
 
      
 
     
 
     
 
  
Balance December 31, 2006
   
24,210,183
 
$
2,421
 
$
18,223,911
 
$
839,452
 
$
750,886
 
$
5,813,534
 
$
25,630,204
 
                                             
Shares issued for cash, at $3.25
   
4,615,385
   
462 
   
14,999,538
                     
15,000,000
 
Offering costs
               
(1,176,533
)
                   
(1,176,533
)
Cashless exercise of warrants
   
374,736
   
37 
   
(37
)
                   
 
Cumulative translation adjustment
                     
2,637,573
               
2,637,573
 
Net Income
                                 
9,116,070
   
9,116,070
 
Transfer to statutory reserve
                           
1,051,849
   
(1,051,849
)
 
 
                                             
Balance December 31, 2007
   
29,200,304
 
$
2,920
 
$
32,046,879
 
$
3,477,025
 
$
1,802,735
 
$
13,877,755
 
$
51,207,314
 
 
See report of independent registered public accounting firm.
 
The accompanying notes are an integral part of these statements.
 
F-5


CHINA NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 2007 AND 2006

   
Years Ended December 31,
 
   
2007
 
2006
 
           
CASH FLOWS FROM OPERATING ACTIVITIES:
         
Net income
 
$
9,116,070
 
$
5,451,095
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
1,639,685
   
731,723
 
Change in assets and liabilities:
             
Accounts receivable
   
290,660
   
(550,831
)
Other receivable
   
36,929
   
(636,262
)
Inventory
   
71,226
   
(233,582
)
Advances
   
245,514
   
(1,611,967
)
Prepaid expense and other current assets
   
(11,113
)
 
(282,103
)
Accounts payable
   
(130,228
)
 
201,661
 
Accrued expense
   
158,759
   
-
 
Other payables
   
(208,669
)
 
1,352,866
 
Unearned revenue
   
22,425
   
(28,882
)
Taxes payable
   
(754,817
)
 
(8,194
)
Net cash provided by operating activities
   
10,476,441
   
4,385,524
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
             
Purchase of property and equipment
   
(14,180,053
)
 
(9,192,482
)
Purchase short term investments
   
(229,106
)
 
-
 
Additions to construction in progress
   
(519,309
)
 
(545,987
)
Prepayment on long term assets
   
(1,914,343
)
 
-
 
Payment for land use rights
   
(42,529
)
 
-
 
Net cash used in investing activities
   
(16,885,340
)
 
(9,738,469
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
             
Stock issued for cash
   
15,000,000
   
10,400,000
 
Proceeds from exercise of warrants
   
-
   
1,050,001
 
Payment for offering costs
   
(1,176,533
)
 
(1,557,147
)
Net cash provided by financing activities
   
13,823,467
   
9,892,854
 
               
Effect of exchange rate changes on cash and cash equivalents
   
582,948
   
78,680
 
               
NET INCREASE IN CASH & CASH EQUIVALENTS
   
7,997,516
   
4,618,589
 
               
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR
   
5,294,213
   
675,624
 
               
CASH & CASH EQUIVALENTS, END OF YEAR
 
$
13,291,729
 
$
5,294,213
 
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
             
Interest paid
 
$
-
 
$
-
 
Income taxes paid
 
$
2,387,487
 
$
-
 
 
See report of independent registered public accounting firm.
 
The accompanying notes are an integral part of these statements.
 
F-6

 
China Natural Gas, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007

Note 1 - Organization and Basis of Presentation

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

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 executed 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. 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.

However, this merger acquisition was not able to be approved under the certain laws of the People’s Republic of China (“PRC”). PRC law currently has limits on foreign ownership of companies in certain industries. To comply with these foreign ownership restrictions, the Company established its wholly owned subsidiary, Xilan Natural Gas Equipment Ltd. (“XNGE”), a limited liability company organized under the PRC law on February 21, 2006. The Company through XNGE entered into exclusive arrangements with XXNGC. Through these arrangements, the Company has the ability to substantially influence XXNGC’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. These arrangements were formalized on August 17, 2007, and made retroactive to March 8, 2006. As a result, XXNGC became a variable interest entity effective on March 8, 2006
 
See report of independent registered public accounting firm.
 
F-7


China Natural Gas, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007
 
Shaanxi Jingbian Liquefied Natural Gas Co., Ltd (“SJLNG”) was incorporated on October 24, 2006 with registered capital of $3,792,000 (RMB 30,000,000) in Jingbian District, Shaanxi province, People’s Republic of China (“PRC”). SJLNG was established for the purpose of constructing a liquefied natural gas (“LNG”) facility to be located in Jingbian, Shaanxi province and to administer the production and sales of LNG. SJLNG is 100% owned by XXNGC.

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