China Natural Gas Announces Previous Financial Statements Unreliable

China Natural Gas

Board of Directors has concluded that the Company's unaudited interim financial statements for the three months ended March 31, 2010, unaudited interim financial statements for the six months ended June 30, 2010, unaudited interim financial statements for the nine months ended September 30, 2010, and audited financial statements for the fiscal year ended December 31, 2010, should no longer be relied upon due to a failure to correctly disclose as a related party transaction the Wang Loan previously disclosed in the Subject Financial Statements. The Company's Board of Directors has concluded that the Wang Loan was made to parties related to the Company's Chief Executive Officer and Chairman of the Company's Board of Directors, Mr. Qinan Ji, or to benefit those related parties, and that the nature of the Wang Loan had not been properly disclosed to the Company's Board of Directors and Audit Committee, its Independent Registered Public Accounting Firm, Frazer Frost, LLP at the time the Wang Loan was made, and its current Independent Registered Public Accounting Firm, Friedman LLP at the time they were engaged as the Company's new Independent Registered Public Accounting Firm in December 2010. Furthermore, neither of the Loans were reported to or approved by the Company's Board of Directors. Xi'an Demaoxing Real Estate Co., Ltd. was formed in November 2007 by relatives of Mr. Qinan Ji, the Company's Chief Executive Officer and Chairman of the Company's Board of Directors. In January 2010, Shaanxi Xilan Natural Gas Equipment Co., Ltd., one of the Company's major subsidiaries, extended a loan of US$9,858,240 to Ms. Taoxiang Wang, who obtained a 40% ownership interest in Demaoxing on January 21, 2010. Ms. Taoxiang Wang used her 40% ownership interest in Demaoxing and its assets as collateral for the Wang Loan. On January 26, 2010, the Wang Loan funds were remitted by the Shaanxi Xilan to an account of Demaoxing. Also in January 2010, Xi'an Xilan Natural Gas Co., Ltd., the variable interest entity of Shaanxi Xilan, extended another loan of US$4,401,000 to Shaanxi Juntai Housing Purchase Ltd., which obtained a 30% ownership interest in Demaoxing on January 21, 2010. Juntai used an individual guarantee and its 30% ownership interest in Demaoxing and its assets as collateral for the Juntai Loan. Xi'an Xilan remitted the Juntai Loan funds to an account designated by Juntai on January 8, 2010 and January 11, 2010. Management of the Company believed that the Loans were adequately secured by collateral. On January 21, 2010, the Demaoxing Promoters also transferred 30% of their ownership interests in DeMaoxing to Shaanxi Rongxin Real Estate Co., Ltd.. The Board of Directors has determined that the Demaoxing Promoters retained indirect beneficial interests in Demaoxing after transferring their ownership interests and thus the Wang Loan was a related party transaction. The Company's Board of Directors was not notified of the extension of the Loans by the Company, and did not approve the Loans. Upon learning of the existence of the Loans in April 2010, the Board of Directors required that the Loans be immediately repaid. In April 2010, Demaoxing repaid the principal of the Wang Loan and made an interest payment of US$140,722, settling the Wang Loan in full. In May 2010, the principal of the Juntai Loan was repaid together with an interest payment of US$87,923, settling the Juntai Loan in full. The Company's Board of Directors and Audit Committee have discussed this matter with the Company's current and former Independent Registered Public Accounting Firms, Friedman LLP and Frazer Frost, LLP, respectively. The Company will file restated quarterly reports on Form 10-Q/A for the three months ended March 31, 2010, the six months ended June 30, 2010, and the nine months ended September 30, 2010, and a restated annual report on Form 10-K/A for the year ended December 31, 2010, to disclose the Wang Loan as a related party transaction, to disclose the additional material weaknesses in controls relating to the approval of the Loans, and to disclose the remediation efforts undertaken to address these material weaknesses.