UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  ———————
 FORM
10-K/A
 (Amendment
No. 1)
 ———————
 (Mark
One)
 þ
                    ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended: December 31, 2008oro
                    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from: _____________ to
  _____________
  ———————
 CHINA
CLEAN ENERGY INC.
 (Exact
Name of Registrant as Specified in Its Charter)
 ———————
  Delaware
                (State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              333-126900
                Commission
                file
      number
              87-0700927
                (I.R.S.  Employer
                Identification
      No.)
 20
Sterling Circle, Suite 204
 Wheaton,
Illinois 60187
 (Address
of Principal Executive Offices) (Zip Code)
  Registrant’s
telephone number, including area code: (224) 402-3270
  Securities
registered pursuant to Section 12(b) of the Act: None
 
 Securities
registered pursuant to Section 12(g) of the Act:
  Common
Stock, par value $0.001 per share
 (Title
of Class)
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
  Yes   ̈    No  þ
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
  Yes   ̈    No  þ
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
 Yes  þ    No   ̈
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
 þ
   
   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 definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  (Check
one):
  ̈
                  Large
      accelerated filer
                  
                   ̈
                  
                  Accelerated
      filer ̈
                  Non-accelerated
      filer (Do not check if a smaller reporting company)
                  
                  þ
                  
                  Smaller
      reporting company
  Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act).
 Yes   ̈    No  þ
  The
aggregate market value of the voting and non-voting Common Stock held by
nonaffiliates computed by reference to the closing sales price of the Common
Stock as of June 30, 2008 was $13,842,239. As of March 27, 2009 there were
31,512,269 shares of Common Stock outstanding.
   
  
  EXPLANATORY
NOTE
  This
Amendment No. 1 on Form 10-K/A (this “Amendment”) amends the China Clean Energy
Inc. (the “Company”) Annual Report on Form 10-K for the year ended December 31,
2008, previously filed with the Securities and Exchange Commission on March 27,
2009 (the “Original Filing”). This Amendment is being filed to correct certain
typographical errors and to amend Item 8 “Financial Statements and Supplementary
Data,” in order to include a signed copy of the audit report of Michael T.
Studer CPA P.C. with respect to the Company’s financial statement for the year
ended December 31, 2007, a copy of which was inadvertently omitted in the
Original Filing.
  Unless
otherwise indicated, this report speaks only as of the date that the original
report was filed. No attempt has been made in this Form 10-K/A to update other
disclosures presented in the Original Filing. This Form 10-K/A does not reflect
events occurring after the filing of the Original Filing or modify or update
those disclosures, including the exhibits to the Original Filing affected by
subsequent events; however, this Form 10-K/A includes as exhibits 31.1, 31.2,
32.1 and 32.2 new certifications by the Company’s Chief Executive Officer and
Chief Financial Officer as required by Rule 12b-15.
      
 
  TABLE
OF CONTENTS
   PART
    I
                
                1Item
    1.
                Business.
                1Item
    1A.
                Risk
      Factors
                10Item
    2.
                Properties.
                22Item
    3.
                Legal
      Proceedings.
                22Item
    4.
                Submission of
      Matters to a Vote of Security Holders.
                22PART
    II
                
                23Item
    5.
                Market for
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                23Item
    7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                24Item
    8.
                Financial Statements
      and Supplementary Data.
                29Item
    9.
                Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure.
                29Item
    9A.
                Controls and
      Procedures.
                29Item
      9A(T)
                Controls and
      Procedures.
                29Item
    9B.
                Other
      Information.
                30PART
    III
                
                31Item
    10.
                Directors, Executive
      Officers and Corporate Governance.
                31Item
    11.
                Executive
      Compensation.
                32Item
    12.
                Security Ownership
      of Certain Beneficial Owners and Management and Related Stockholder
      Matters.
                34Item
    13.
                Certain
      Relationships and Related Transactions, and Director
      Independence.
                35Item
    14.
                Principal Accountant
      Fees and Services.
                36PART
    IV
                
                37Item
    15.
                Exhibits and
      Financial Statement Schedules.
                37
  
  
  PART
I
  As used
in this Annual Report, unless otherwise indicated, the terms “we,” “us,” “our”
and “the Company” refer to China Clean Energy Inc.
  This
Annual Report on Form 10-K contains “forward-looking statements.” To the
extent that any statements made in this Annual Report of Form 10-K contain
information that is not historical, these statements are essentially
forward-looking. Forward-looking statements can be identified by the use of
words such as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,”
“should,” “intends,” “estimates” and other words of similar meaning. These
statements are subject to risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by these forward-looking statements. Forward-looking
statements involve risks and uncertainties. These uncertainties include factors
that affect all businesses as well as matters specific to us. We caution readers
not to place undue reliance on any forward-looking statement that speaks only as
of the date made and to recognize that forward-looking statements are
predictions of future results, which may not occur as anticipated. Actual
results could differ materially from those anticipated in the forward-looking
statements and from historical results, due to the risks and uncertainties
described below under the heading “Risk Factors,” as well as others that we may
consider immaterial or do not anticipate at this time. The risks and
uncertainties identified in this report are not exclusive and further
information concerning our business, including factors that potentially could
materially affect our financial results or condition, may emerge from time to
time. We assume no obligation to update forward-looking statements to reflect
actual results or changes in factors or assumptions affecting the
forward-looking statements. We advise you, however, to consult any further
disclosures we may make on related subjects in our quarterly reports on
Form 10-Q and current reports on Form 8-K we file with or furnish to
the Securities and Exchange Commission.
  Item
      1.
              Business.
  Company
Overview
  We,
through our wholly-owned subsidiary, Fujian Zhongde Technology Co., Ltd., are
engaged in the development, manufacturing, and distribution of biodiesel and
specialty chemical products made from renewable resources. Fujian Zhongde
Technology Co., Ltd. was incorporated in the Fujian Province of the People’s
Republic of China in 1995 and Fujian Zhongde Energy Co., Ltd. was incorporated
and officially granted a business license on November 5, 2007. Since
inception, we have been engaged in the manufacture of high-quality specialty
chemical products from renewable resources. Through cooperation with outside
experts at various research institutes and our research and development efforts,
we formulated a proprietary process for refining biodiesel from waste vegetable
oils and waste grease. Using this proprietary process, we began producing
biodiesel in 2005 and commenced selling biodiesel commercially in
December 2005.
  Recent
Developments
  In
March 2008, we temporarily halted the production of biodiesel and shifted
our focus to higher value-added specialty chemicals in an effort to mitigate
sharp increases in the cost of raw materials and stagnant wholesale diesel
pricing in the People’s Republic of China. However, due to a decline in raw
material costs in November 2008, we resumed the production of biodiesel at
our biodiesel and specialty chemical production facility. In the fourth quarter
of 2008, rapidly declining oil prices, along with a decline in demand for
petrochemical products linked to the international financial crisis, created a
challenging operating environment for biodiesel production. We continue to
closely monitor our feedstock raw material prices, wholesale diesel prices and
the conditions in the biodiesel industry in the People’s Republic of China in
order to reassess our biodiesel production on an ongoing basis.
  Products
  Biodiesel Segment.  In
November 2005 we filed an application with the State Intellectual Property
Office of the People’s Republic of China (“SIPO”) for patent protection for our
method of producing biodiesel from monomer acid. In December 2005, we
began producing biodiesel and currently sell our biodiesel to regional service
stations. On October 8, 2008, SIPO granted us a patent for our method of
producing biodiesel from monomer acid.
   1
  The term
“biodiesel” generally refers to methyl esters (sometimes called “fatty acid
methyl esters”) made by transesterification, a chemical process that reacts a
“feedstock” oil or fat with methanol and a potassium hydroxide catalyst. The
“feedstock” can be vegetable oil, such as that derived from oil-seed crops (e.g.
soy, sunflower, cottonseed, rapeseed, etc.), or used frying oil (e.g. yellow
grease from restaurants). In addition to biodiesel, our production process
typically yields co-products that can be turned into an array of valuable
specialty chemicals. We believe that this specialty chemical co-production
capability improves the economic viability of producing biodiesel.
  According
to the National Biodiesel Board (in the United States), “biodiesel” is a
clean-burning alternative fuel produced from domestic, renewable resources for
use in compression ignition (diesel) engines. Biodiesel is comprised of
mono-alkyl esters of long chain fatty acids derived from vegetable oils or
animal fats. Biodiesel is produced from feedstock, which comes from animal fats
or vegetable oils.
  According
to the National Biodiesel Board, biodiesel can be used in virtually any diesel
engine without modification. It can be used in its pure form (called B100) or as
a blend with petroleum diesel at any ratio. It can also be stored in the same
containers as petroleum diesel, which allows it to use the current fuel supply
infrastructure that is already in place. Biodiesel has a higher flash point (the
point at which fuel ignites) than petroleum diesel, according to the National
Biodiesel Board. This characteristic makes biodiesel safer than petroleum diesel
because it will not combust as easily.
  A
commonly used form of biodiesel is a 20% blend of biodiesel with 80% petroleum
diesel, known as B20. B20 provides many of the environmental and safety benefits
of biodiesel and generally avoids the cold weather and solvency considerations
associated with biodiesel. Biodiesel provides similar horsepower and fuel
economy as petroleum diesel with superior lubricity to reduce wear and tear on
engines.
  Chemicals
Segment.
  We
manufacture and sell a variety of industrial products using
environmentally-focused chemicals derived from renewable resources, such as
waste vegetable oils. Our product categories include polyamide hot-melt
adhesives, printing inks, alcohol and benzene-soluble polyamide resins and
various fatty acids, such as dimer acid. We believe that our vegetable oil-based
products will be viewed as an increasingly attractive alternative to products
made with petroleum-based chemicals as a result of recently volatile oil prices,
possible oil shortages and an increased awareness and concern for protecting the
environment.
  Hot- Melt Adhesives.We
manufacture dimer acid-based polyamide hot-melt adhesives and a wide variety of
high-performance polyamide hot-melt adhesives. We offer products with varying
softening points, tensile strengths, viscosities and adhesion strengths. These
products are used in a wide range of applications, from book-binding and
adhesion of fabrics, leather, plastic and wood to cementation of metal, ceramics
and electronic components.
  Polyamide Resins.We offer a
wide variety of alcohol-soluble and benzene-soluble polyamide resins for use in
printing inks. Our alcohol-soluble resins have good glossiness, adhesion, heat
stability and anti-freeze ability and are used primarily in various kinds of
bucked plate plastic-based inks such as polypropylene, polyethylene, terylene,
cellophane and paper. Our benzene-soluble polyamide resins are characterized by
good dissolving ability, leveling and liberation, excellent glossiness,
excellent anti-gelling properties and adhesion to plastic membranes. They are
used primarily in gravure printing inks and are compatible with gravure printers
that have varying rotating speed capabilities. In addition, we manufacture low
molecular weight liquid polyamide resin, a flexibilizer and curing agent for
epoxy resin. It is used in epoxy coating, epoxy adhesive, epoxy casting seal and
epoxy varnish.
  Dimer, Stearic and Monomer Acids.These are fatty acids that are used for a variety of lubricating,
flexibilizing, surfactant and emulsifying applications. Dimer acid is used in
the production of resins, lubricants, coatings and corrosion-resistant agents.
Stearic acid, produced by hydrolysis and rectification of various kinds of
vegetable oils, is widely used in plastic flexibilizers, stabilizers,
surfactants and soap bases. Monomer acid, a by-product from dimer and oleic acid
processing, is used in plastics, lubricants, leather agents, detergents, soaps
and alkyd resins.
  Printing Inks.We manufacture
a variety of printing inks for gravure surface printing, gravure inner printing
and flexible typographic printing on plastic, aluminum foil and
paper.
   2
  The
following table shows our total sales volume broken down by product category for
the twelve-month period from January 1, 2008 through December 31,
2008. As shown in the table, during the twelve-month period ending
December 31, 2008, dimer acid was our top selling product, accounting for
30.78% of total sales.
  Products
      Sold
                  
                  %
      of Total Sales for the Period1.
                  Dimer
      Acid
                  
                  30.78%2.
                  Polyamide
      Resin
                  
                  29.99%3.
                  Fatty
      Acid
                  
                  9.06%4.
                  Polyamide
      Hot Melt Adhesive
                  
                  7.78%5.
                  Biodiesel
                  
                  7.68%6.
                  High
      Performance Polyamide Hot Melt Adhesive
                  
                  6.85%7.
                  Printing
      Ink
                  
                  3.65%8.
                  Vegetable
      Asphaltum
                  
                  2.19%9.
                  Liquid
      Resin 651#
                  
                  1.72%10.
                  Trimer
      Acid
                  
                  0.19%
 
  The
following table shows our total sales volume broken down by product category for
the twelve-month period from January 1, 2007 through December 31,
2007. As shown in the table, during the twelve month period ended
December 31, 2007, dimer acid was our top selling product, accounting for
36.97% of total sales. However, biodiesel was our fastest growing product in
terms of sales volume in 2007.
  Products
      Sold
                  
                  %
      of Total Sales for the Period1.
                  Dimer
      Acid
                  
                  36.97%2.
                  Biodiesel
                  
                  26.54%3.
                  Polyamide
      Resin
                  
                  21.84%4.
                  Vegetable
      Asphaltum
                  
                  5.30%5.
                  Polyamide
      Hot Melt Adhesive
                  
                  3.36%6.
                  Printing
      Ink
                  
                  3.20%7.
                  Fatty
      Acid
                  
                  1.31%8.
                  Stearic
      Acid
                  
                  0.66%9.
                  Liquid
      Resin 651#
                  
                  0.36%10.
                  Gluewater
                  
                  0.29%
   3
  Biodiesel
Benefits
  Significant Reductions in Greenhouse
Gas and Other Emissions on a “Well-to-Wheels” Basis.We believe that the
main benefit derived from using biodiesel comes from the reduction in carbon
dioxide and other emissions generated when using this biodegradable, low
toxicity fuel.
  Petroleum
diesel, in contrast to biodiesel, produces high levels of carbon dioxide (CO2),
a greenhouse gas that is widely believed to be a significant contributor to
global warming. It also produces other harmful pollutants, namely:
  ·
              carbon
      monoxide (CO), a poisonous gas that causes
smog;
 ·
              particulates
      that contribute to respiratory infections, including
    asthma;
 ·
              sulfur,
      which contributes to the formation of acid rain;
  and
 ·
              unburned
      aromatic hydrocarbons that create smog and may be a contributing cause of
      cancer.
  By
comparison, whether used in its pure form or blended with petroleum diesel,
biodiesel produces significantly lower levels of harmful emissions of carbon
monoxide, particulates and unburned aromatic hydrocarbons. In addition, because
biodiesel is virtually free of sulfur, we believe that the use of biodiesel will
not contribute to acid-rain pollution.
  Moreover,
according to The Office of Renewable Fuels and Co-Products of the Iowa
Department of Agriculture and Land Stewardship, when comparing biodiesel and
petroleum diesel, a 100% biodiesel blend (B100) lowers carbon monoxide (CO)
emissions by 44%, particulate matter emissions by 40% and sulfate emissions by
100%. A blend of blend of 20% biodiesel and 80% petroleum diesel (B20), on the
other hand, lowers carbon monoxide (CO) emissions by 9%, particulate matter
emissions by 8% and sulfate emissions by 20%. When B20 is used along with an
oxidation catalyst, it reduces particulate matter by 45%, carbon monoxide by 41%
and total hydrocarbons by 65%.
  Biodegradability.According
to a study performed at the University of Idaho in 2004, biodiesel tends to
degrade more rapidly than petroleum diesel.
  Improved Safety.According to
the U.S. Department of Energy, the flash point, or temperature at which fuel
“autocombusts” under pressure, of biodiesel blends increases as
the percentage of biodiesel increases. Therefore, pure biodiesel or blends
of biodiesel with petroleum diesel are safer to store, handle, and use than
petroleum diesel.
  Better Lubricity. According
to the National Biodiesel Board, the addition of biodiesel, even in very small
quantities, has been shown to provide increases in fuel lubricity using a
variety of bench scale test methods.
  Alternative Fuel Performance.
According to a 1998 study jointly sponsored by the U.S. Department of
Agriculture and the U.S. Department of Energy, biodiesel and petroleum diesel
have very similar energy efficiencies.
  The
Specialty Chemical and Biodiesel Markets
  4
  We
believe that oil price volatility, global warming, and other environmental
sustainability issues are rapidly increasing the demand for chemicals and fuels
derived from renewable resources. Despite the sudden drop in oil prices in 2008,
we expect that global prices for gasoline, diesel fuels and chemicals will rise
in the next few years as supply concerns accelerate and oil prices resume their
historical upward trend. Elevated oil prices not only drive gasoline and diesel
fuel prices higher but also create pressure on a wide range of petrochemical
derivatives such as nylon (polyamides). In addition, technological innovations,
profit motive, and the desire to reduce reliance on oil have moved bio-based
chemistry and fuel production to the forefront of the global marketplace. As a
result, we believe the economic, social, and environmental benefits of a new
generation of bio-refinery products are rapidly becoming integrated into global
economies.
  The
People’s Republic of China Specialty Chemicals Market
  We view
the People’s Republic of China as the world’s most attractive market for
commodity and specialty chemicals. We believe that the long-term demand for
commodity and specialty chemicals is likely to grow at a faster rate in the
People’s Republic of China than in North America and Western Europe. As such, we
believe that the People’s Republic of China will be a very attractive market for
commodity and specialty chemicals for the foreseeable future. Demand comes from
both rising domestic consumption and the country’s thriving exporters. Demand
for our specialty chemical products (printing inks, adhesives, resins, and
intermediary substances) continues to accelerate with the rise in domestic
consumption, expansion of the People’s Republic of China’s exports and an
increasing global appetite for non-petroleum based, specialty chemical products.
Building and construction continues to grow in the People’s Republic of China
and domestic consumers with more disposable income are creating new and
increased demand for a wide range of products, many of which contain our
adhesives, inks, polyamides, resins and related products.
  In
addition, the People’s Republic of China’s export manufacturing base continues
to expand. The global chemical market is experiencing fundamental changes in how
it operates as economic, environmental, and political pressures force the
industry to rely less on petroleum products. A wave of renewable or biotech
products is already replacing petroleum-based raw materials in a wide array of
markets such as plastics, fibers, adhesives, resins and more. We believe the
main drivers behind the acceptance of chemicals derived from renewable resources
as replacements for petrochemicals are price, performance, and environmental
sustainability.
  Petroleum,
waste, regulatory, and environmental cost pressures are now evident throughout
the supply chain for chemical products. As oil prices remain volatile and
companies continue to disassociate themselves from any chemical in their supply
chain that is recognized as being hazardous or harmful to the environment, we
expect to see petrochemicals replaced by environmentally pleasing chemistry
alternatives.
  The
People’s Republic of China Biodiesel Market
  The
People’s Republic of China biodiesel industry is still very much in its infancy.
With volatile oil prices and worsening pollution, the People’s Republic of China
is expected to promote low-polluting alternatives to foreign oil and we
anticipate biodiesel being recognized as a leading near-term solution. Further,
we believe the integration of biodiesel into the fuel supply of the People’s
Republic of China can be swift and immediate, as biodiesel can be blended at any
level with petroleum diesel or used in its pure form (B100) and biodiesel also
make use of the existing petroleum infrastructure; i.e., tankers, storage
depots, and filling stations.
  The People’s Republic of China
Legislation. In 2005, the Standing Committee of the National People’s
Congress passed “The Renewable Energy Law of the People’s Republic of China”.
The legislation aims to “promote the development and utilization of renewable
energy, improve the energy structure, diversify energy supplies, safeguard
energy security, protect the environment and realize the sustainable development
of the economy and society.” This legislation states that fuel retail businesses
must begin to include “biological liquid fuel” in their enterprises or they will
suffer imposed fines. On April 20, 2006, Chinese premier Wen Jiabao
convened the Second National Leadership Conference on Energy to consider the
Medium and Long-term Development Plan for Renewable Energy, stating that equal
emphasis shall be placed on development and conservation, and that stronger
measures shall be taken to promote comprehensive energy conservation and to
vigorously develop renewable energy.
  Potential for Increase in Diesel
Engines.The People’s Republic of China central government introduced an
updated Auto Policy in 2004, which stipulates that gasoline consumption should
decline 15% by 2010. The People’s Republic of China’s recent gasoline shortages
and the enforcement of this new policy may be likely to increase the adoption of
diesel cars over the next several years.
  We
believe that in comparison to gasoline-powered cars, diesel-powered cars are
more fuel-efficient, more environmentally friendly, better suited for urban
driving, safer, and more durable.
  5
  Competition
  Renewable Resource
Chemicals.We have several major competitors that also produce
specialty chemicals from renewable resources. For instance, Jiangsu Yonglin Oil
& Grease Chemicals Co., Ltd., located in the northern part of Jiangsu
Province, produces polyamide resins from oleic acid. Shanghai Jiangqiao Chemical
Factory, a private company located in a suburb of Shanghai, produces dimer acid
from oleic acid. Zhejiang Henghua Huagong Co., Ltd., located in the Zhejiang
Province, manufactures alkyd resin and polyamide resin from oleic acid. Zhejiang
Huangyan Resin Chemical Industry Co., Ltd., located in Zhejiang Province,
manufactures polyamide resin from oleic acid.
  Biodiesel.  In the
area of biodiesel production, we are aware of the existence of at least three
main domestic competitors: Gushan Environmental Energy Ltd., with operations in
Handan, Hebei Province, Fuzhou, Fujian Province, Mianyang, Sichuan Province,
Beijing and Shanghai, China Biodiesel International Holding Co., Ltd., located
in Longyan and Fujian Province and Wuxi Huahong Bio-fuel Co., Ltd., located in
Wuxi, Jiangsu Province.
  In
addition, we may face competition from foreign competitors if such competitors
choose to export their biodiesel to the People’s Republic of China.
  Competitive
Advantages and Strategy
  Chemicals.We believe that
our product formulations, price points, relationships, infrastructure, quality
control standards, and reputation provide us with competitive advantages. We are
currently able to maintain a lower cost structure than competitors based in the
U.S. and Europe. Furthermore, we believe our competitive advantage in the
People’s Republic of China is protected by our knowledge of government
regulations, business practices, and strong relationships.
  In
comparison to our competitors in the People’s Republic of China, we believe we
possess greater technological expertise, marketing knowledge and global
relationships. We also view our proprietary line of multi-purpose hot-melt
adhesives as key technological advantages. In addition, we believe domestic
competitors typically lack the global marketing capability and reputation that
we currently enjoy and are continuing to strengthen.
  Biodiesel.We believe that we
enjoy a material presence in the biodiesel industry in Fuqing City, Fujian
Province, as there are only a handful of other companies currently in the
country and the markets are extremely local due to transportation costs. In
addition, we believe our industry relationships, contracts with feedstock
suppliers, cost efficient manufacturing methods and ability to sell diesel
co-products to our specialty chemical customers provide us with competitive
advantages.
  Growth
Strategy
  With
growing global demand for transport fuels and clean technologies, we are focused
on increasing our biodiesel and specialty chemical production capacity. We
expanded our existing 311,000 square-foot biodiesel and specialty chemical
production facility located in the Fujian Province, People’s Republic of China.
In addition, we are currently building a new biodiesel and specialty chemical
focused production facility in the new Fuqing Jiangyin Industrial Park (the
“Industrial Park”) in the Fujian Province, People’s Republic of China. The new
facility is located 20 miles from our existing facility and will have a land
area of 112,744 square meters. On December 25, 2006, we signed a contract
to purchase land usage rights for 50 years for the new production facility and
we broke ground on this facility on December 19, 2007. We expect
construction to be completed in the second quarter of 2009. The Industrial Park
at which the new facility will be located is equipped with a deep sea harbor
capable of 100,000 ton cargo ships, a container port, and railroad to be
connected to the People’s Republic of China’s national railroad network. Once
the plant is opened, it will have the flexibility to produce 100,000 tons of
biodiesel per year, or 30,000 tons of specialty chemicals per year, or a
combination of biodiesel and specialty chemicals for a total output of 70,000
tons per year. We expect that the new plant’s proximity to our existing plant
will help us to improve our efficiency and cost effectiveness. As we grow and
secure more customers, we plan to build more plants in strategic locations
throughout the People’s Republic of China, including in the Hebei Province
and/or the Xinjiang Province.
  Our
vision is to be the global market leader for the development and manufacturing
of energy products and specialty chemicals made from renewable resources.
Management intends to grow our business by pursuing the following
strategies:
  6
  ·
              grow
      capacity and capabilities in line with market demand
      increases;
 ·
              enhance
      our technology through innovation, research and study, and obtain global
      patent protection;
 ·
              continue
      to improve operational efficiencies and use of nearly all resource
      by-products;
 ·
              further
      expand into global markets and diverse industry sectors;
    and
 ·
              build
      a strong market reputation to foster and capture future growth in the
      People’s Republic of China and
abroad.
  We also
plan to expand our existing refining facilities and launch additional plants, in
addition to growing our specialty chemical business lines.
  Existing
Plant (Fulong Industrial Zone)
  Our
311,000 square-foot manufacturing facility was originally erected in 1995 with a
core focus on developing and manufacturing high-quality specialty chemical
products from renewable resources. This ISO9001-certified plant is located in
Fuzhou City’s technology and industrial zone in the Fulong Industrial Zone of
the People’s Republic of China. This facility is presently capable of producing
up to 10,000 tons, or approximately 3 million gallons, of biodiesel per
year and up to 18,000 tons, of specialty chemicals per year. In addition, in
2008, we invested approximately $1.5 million to install a high-performance
hot-melt adhesive production line using our proprietary technology in an effort
to improve production yields while maintaining quality standards.
  Sales
and Marketing
  Specialty
Chemicals.  To date, we have developed relationships with
current and future potential customers primarily through our participation and
use of seminars, trade shows, industry conferences, websites and direct sales
calls. We hope to continue to build on our success by expanding our sales force
in the People’s Republic of China and increasing our focus on international
markets. As our business expands, we intend to develop several sales channels,
such as direct sales, working with industry-specific manufacturer
representatives and through international strategic partnerships. Our sales
strategy is designed to capitalize on our reputation, current industry trends
and new market segments that have shown the most promise.
  Biodiesel.  We
currently plan on concentrating our sales efforts on the local market in the
People’s Republic of China, as demand is expected to increase steadily over the
next decade. However, as the business expands, we will evaluate global biodiesel
prices for opportunities abroad, depending upon shipping and export costs, as
biodiesel can sell for up to 50% to 100% more at the wholesale level overseas in
comparison to the price in the People’s Republic of China. While we do not plan
to rely on our ability to export biodiesel for our main growth and cannot
predict when the market for biodeisel will retun to its normal patterns, we view
the export opportunity as a potential enhancement to our business plan,
especially given the higher prices that biodiesel can be sold at markets
abroad.
  We
believe that manufacturing and feedstock cost differences create opportunities
for import/export markets and cross-border investments. Such activities could
substantially lower the cost and increase supplies to Europe and the U.S. A
number of documents published by the International Energy Agency (IEA) discuss
the development of international markets for biofuels, as there are fairly wide
ranges of feedstock availability and production costs among countries and
regions.
  Intellectual
Property
  On
November 9, 2005, our subsidiary, Fujian Zhongde Technology Co., Ltd.,
filed an application (Application No. 200510019790.9) with SIPO for its
propietory biodiesel production method to produce biodiesel from monomer acid.
SIPO granted the patent on October 8, 2008. The patent is valid for twenty
years, from October 8, 2008 to October 7, 2028
  We also
own a patent for Multi-purpose Polyamide Hot Melt Adhesive and its Production
Method, China Patent Registration Number ZL00132072.6 and International Patent
Category #C09J177/00. The patent is valid for twenty years, from
December 12, 2000 to December 11, 2020.
  7
  Customers
  During
the twelve-month period from January 1, 2008 through December 31,
2008, we had consolidated net sales of $18,169,835. During the same time period,
our top ten customers – ranked by the sales amount sold to each customer –
contributed $8,245,637 in revenues. Our top two customers were Air Products and
Chemicals (PTE) Ltd. and Cray Valley Resins PVT., Ltd. Air Products and
Chemicals (PTE) Ltd. contributed $1,064,241, or 5.86%, of our total revenues and
Cray Valley Resins PVT., Ltd contributed $1,063,545, or 5.85%, of our total
revenues.
  Biodiesel.  We
currently sell biodiesel to regional service stations in the People’s Republic
of China. We believe that the market for biodiesel will expand and can absorb an
increase in supply. Since we began selling biodiesel in December 2005 along
with specialty chemicals, our best-selling product has been biodiesel. In fact,
from January 2006 through December 2008, sales of biodiesel accounted
for approximately 35% of our total sales for that time period.
  Chemicals.  Our
specialty chemical products are sold to companies domestically and exported
globally to companies in Europe, the U.S. and Asia. We believe that high-quality
and low-production costs have allowed us to gain successful entry into the
global market and to diversify our customer base.
  The
following table depicts the top ten customers for the twelve-month period from
January 1, 2008 through December 31, 2008.
  Name
      of Customer
                  
                  Products
      Sold
                  
                  Sales
      for the
                    Period
      by
                    Customer
                  
                  %
      of Sales for
                    the
      Period1.
                  Air
      Products and Chemicals (PTE) Ltd.
                  
                  Specialty
      Chemicals
                  
                  
                  1,064,240.51
                  
                  5.86%2.
                  Cray
      Valley Resins PVT., Ltd.
                  
                  Specialty
      Chemicals
                  
                  
                  1,063,544.73
                  
                  5.85%3.
                  Fuzhou
      Baisheng Precision Chemical Co., Ltd.
                  
                  Specialty
      Chemicals
                  
                  
                  879,816.44
                  
                  4.84%4.
                  ABC
      Exports PVT, Ltd.
                  
                  Specialty
      Chemicals
                  
                  
                  876,697.22
                  
                  4.83%5.
                  New
      Power Internationals Co., Ltd.
                  
                  Specialty
      Chemicals
                  
                  
                  817,249.42
                  
                  4.50%6.
                  Fuqing
      Zhongdong Filling Station
                  
                  Biodiesel
                  
                  
                  763,785.55
                  
                  4.20%7.
                  Hangzhou
      Yangsheng Chemical Co. Ltd.
                  
                  Specialty
      Chemicals
                  
                  
                  739,000.37
                  
                  4.07%8.
                  HBG
      Exports Co., Ltd.
                  
                  Specialty
      Chemicals
                  
                  
                  737,560.85
                  
                  4.06%9.
                  Dachang
      Resins (Huizhou) Co. Ltd.
                  
                  Specialty
      Chemicals
                  
                  
                  672,709.85
                  
                  3.70%10.
                  Fuqing
      Risheng Filling Station
                  
                  Biodiesel
                  
                  
                  631,032.03
                  
                  3.47%Total
      (Top 10)
                  
                  
                  
                  
                  8,245,636.97
                  
                  45.38%Total
      (Company)
                  
                  
                  
                  
                  18,169,835.41
                  
                  100.00%
  For the
twelve-month period from January 1, 2007 through December 31, 2007, we achieved
consolidated net sales of $21,756,010. During the same time period, our top ten
customers - ranked by the sales amount sold to each customer - contributed
$14,701,065 in revenues. The following table depicts the top ten customers for
the twelve-month period from January 1, 2007 through December 31,
2007.
   8
  Name
      of Customer
                  
                  Products
      Sold
                  
                  Sales
      for the
                    Period
      by
                    Customer
                  
                  %
      of Sales for
                    the
      Period1.
                  Fuqing
      Zhongdong Filling Station
                  
                  Biodiesel
                  
                  $
                  3,168,720
                  
                  14.56%2.
                  Fuqing
      Risheng Filling Station
                  
                  Biodiesel
                  
                  $
                  2,604,989
                  
                  11.97%3.
                  Hangzhou
      Yangsheng Chemical Co. Ltd.
                  
                  Specialty
      Chemicals
                  
                  $
                  1,819,939
                  
                  8.37%4.
                  Dachang
      Resins (Huizhou) Co. Ltd.
                  
                  Specialty
      Chemicals
                  
                  $
                  1,647,038
                  
                  7.57%5.
                  Air
      Products and Chemicals (PTE) Ltd.
                  
                  Specialty
      Chemicals
                  
                  $
                  1,349,820
                  
                  6.20%6.
                  Micro
      Ink Co. Ltd.
                  
                  Specialty
      Chemicals
                  
                  $
                  1,196,054
                  
                  5.50%7.
                  Cray
      Valley Resins PVT., Ltd.
                  
                  Specialty
      Chemicals
                  
                  $
                  1,027,040
                  
                  4.72%8.
                  HBG
      Exports Co., Ltd.
                  
                  Specialty
      Chemicals
                  
                  $
                  669,240
                  
                  3.08%9.
                  Shanming
      Youcheng Trading Co., Sha County Branch Office
                  
                  Specialty
      Chemicals
                  
                  $
                  624,739
                  
                  2.87%10.
                  Fuzhou
      Baisheng Precision Chemical Co., Ltd.
                  
                  Specialty
      Chemicals
                  
                  $
                  593,486
                  
                  2.73%Total
      (Top 10)
                  
                  
                  
                  $
                  14,701,065
                  
                  67.57%Total
      (Company)
                  
                  
                  
                  $
                  21,756,010
                  
                  100.00%
  Principal
Suppliers
 
 We use
feedstock, which can be vegetable oil derived from either oil-seed crops or used
frying oil, as the primary raw materials for our manufacturing process. During
the twelve-month period from January 1, 2008 through December 31,
2008, the feedstock suppliers listed in the table below supplied more than 5% of
our feedstocks. To date, we have not experienced any shortages in the supply of
raw materials from our key suppliers.
  Name
      of Supplier
                
                %
      of Feedstock Supplied for the Period1.
                Xinjiang
      Dasen Chemicals Co., Ltd.
                
                8.46%2.
                Xinjiang
      Guansheng Technology Co., Ltd.
                
                8.42%3.
                Fuqing
      Zhongde Waste Oil Recycling Co. Ltd.
                
                7.30%4.
                Cangzhou
      Shuanyu Chemical Co., Ltd.
                
                7.21%
  
  9
  During
the twelve-month period from January 1, 2007 through December 31,
2007, we had four feedstock suppliers who supplied more than 5% of our
feedstocks.
  Name
      of Supplier
                
                %
      of Feedstock Supplied for the Period1.
                Fuqing
      Zhongde Waste Oil Recycling Co. Ltd.
                
                52.91%2.
                Fujian
      Quanzhou Zhongyuan Chemical Co., Ltd.
                
                20.45%3.
                Xinjiang
      Guansheng Technology Co., Ltd.
                
                12.16%4.
                Cangzhou
      Shuanyu Chemical Co., Ltd.
                
                6.98%
  Employees
  As of
March 27, 2009, we had 120 employees. Of our total employees, all are full
time employees.
  Regulation
  We are
subject to environmental regulation by both the central government of the
People’s Republic of China and by local government agencies. Since our
inception, we have been in compliance with all applicable
regulations.
  Under the
State Environmental Protection Administration of the People’s Republic of China,
all chemical and biodiesel manufacturing facilities are required to obtain a
Discharge Permit and a Safe Production Permit. These permits are valid for a
period of three years and may be renewed for additional periods of three years.
In order to renew the Safe Production Permit, the subject facility must not have
had any accidents during the previous three years. In addition, the local
environmental protection administration inspects waste-water, gas and solid
waste discharges and issues an examination report each calendar quarter. In
order to renew the Discharge Permit, the subject facility must have consistently
passed the local government inspections for the prior three years. We currently
own each of these permits for our existing plant in Fuzhou City. Neither of
these permits have been issued for the facility we are constructing in the
Fuqing Jiangyin Industrial Park. We applied for and received approval of the
Discharge Permit for this facility. We have not yet applied for the Safety
Permit for this facility as we can only do so after construction of the facility
is completed.
  In
addition, we expect the government of the People’s Republic of China to release
an official standard for biodiesel in the near future. We will seek to qualify
our products for the biodiesel standard when it is released. We believe that we
are well positioned to qualify due to our early production of biodiesel as well
as our longstanding history of being in operation since 1995, among other
things.
  Item
      1A.
              Risk
      Factors
  There are
numerous and varied risks, known and unknown, that may prevent us from achieving
our goals. You should carefully consider the risks described below and the other
information included in this Annual Report, including our financial statements
and related notes. Our business, financial condition and results of operations
could be harmed by any of the following risks. If any of the events or
circumstances described below were to occur, our business, financial condition
and results of operations could be materially adversely affected. As a result,
the trading price of our common stock could decline, and investors could lose
part or all of their investment.
  Risks
Related to Our Business
  We
have a limited history of producing biodiesel, which makes it difficult to
evaluate our business.
  Currently,
we have only one manufacturing facility, which began producing biodiesel in
2005. We began selling biodiesel in December 2005 and suspended production
for 8 months in 2008. Our limited operating history as a manufacturer and
distributor of biodiesel makes it difficult for prospective investors to
evaluate our business. Therefore, our proposed operations are subject to all of
the risks inherent in the initial expenses, challenges, complications and delays
frequently encountered in connection with the formation of any new business, as
well as those risks that are specific to the biodiesel industry. Investors
should evaluate us in light of the problems and uncertainties frequently
encountered by companies attempting to develop markets for new products,
services, and technologies. Despite best efforts, we may never overcome these
obstacles to financial success.
  10
  Our
business is speculative and dependent upon the implementation of our business
plan, as well as our ability to enter into agreements with third parties for the
provision of necessary feedstock sources and the sale and distribution of our
biodiesel on terms that will be commercially viable for us. There can be no
assurance that our efforts will be successful or result in revenue or profit.
There is no assurance that we will earn significant revenues or that investors
will not lose their entire investment.
  Unanticipated
problems in our engineering and construction operations may harm our business
and viability.
  Our
future cash flow depends on our ability to timely design, construct and complete
two or three new biodiesel refineries. If our engineering and construction
operations are disrupted and/or the economic integrity of these projects is
threatened for unexpected reasons (including, but not limited to, technical
difficulties, poor weather conditions, and business interruptions due to
terrorism or otherwise), our business may experience a substantial setback.
Because we are in the process of constructing a new facility, we are
particularly vulnerable to events such as these. Prolonged problems may threaten
the commercial viability of construction of our planned facilities. Moreover,
the occurrence of significant unforeseen conditions or events in connection with
construction of our new facility may require us to reexamine our business model.
Any change to our business model may adversely affect our business.
  Our
results of operations, financial position and business outlook will be highly
dependent on commodity prices, which are subject to significant volatility and
uncertainty, and the availability of supplies, so our results could fluctuate
substantially.
  Our
results are substantially dependent on commodity prices, especially prices for
feedstock, specialty chemicals, biodiesel, petroleum diesel and materials used
in the construction of our proposed refineries. As a result of the volatility of
the prices for these items, our results may fluctuate substantially and we may
experience periods of declining prices for our products and increasing costs for
our raw materials, which could result in operating losses. Although we may
attempt to offset a portion of the effects of fluctuations in prices by entering
into forward contracts to supply biodiesel or purchase feedstock or other items
or by engaging in transactions involving exchange-traded futures contracts, the
amount and duration of these hedging and other risk mitigation activities may
vary substantially over time and these activities also involve substantial
risks.
  The price
of feedstock is influenced by market demand, weather conditions, animal
processing and rendering plant decisions and factors affecting crop yields,
farmer planting decisions and general economic, market and regulatory factors.
These factors include government policies and subsidies with respect to
agriculture and international trade, and global and local demand and supply as
well as foreign currency exchange rates compared to Renminbi, which may affect
our specialty chemical exports and some feedstock imports. The significance and
relative effect of these factors on the price of feedstock is difficult to
predict. Any event that tends to negatively affect the supply of feedstock, such
as increased demand, foreign exchange rate fluctuation, adverse weather or crop
disease, could increase feedstock prices and potentially harm our business. In
addition, we may also have difficulty, from time to time, in physically sourcing
feedstock on economical terms due to supply shortages. Such a shortage could
require us to suspend operations until feedstock is available at economical
terms, which would have a material adverse effect on our business, results of
operations and financial position. The price we pay for feedstock at a facility
could increase if an additional multi-feedstock biodiesel production facility is
built in the same general vicinity or if alternative uses are found for lower
cost feedstock.
  Biodiesel
is a commodity whose price is determined based on the price of petroleum diesel,
governmental price controls, world demand, supply and other factors, all of
which are beyond our control. World prices for crude oil and biodiesel have
fluctuated widely in recent years. We expect that prices will continue to
fluctuate in the future. Price fluctuations will have a significant impact upon
our revenue, the return on our investment in biodiesel refineries and on our
general financial condition. Moreover, in the event the price of our feedstock
increases at a time when the price of biodiesel decreases, remains stagnant or
fails to increase accordingly, it could render the production of biodiesel
unprofitable. Price fluctuations for biodiesel may also impact the investment
market, and our ability to raise investor capital. Any future decreases in the
prices of biodiesel or petroleum diesel fuel may have a material adverse effect
on our financial condition and future results of operations.
  11
  We
may be unable to obtain the additional capital required to implement our
business plan, which will negatively impact our ability to grow our
business.
  We expect
that current capital and other existing resources will be sufficient only to
provide a limited amount of working capital. On their own, the revenue from
operations is not currently sufficient to fully fund operations and planned
growth. We will require an estimated $4.4 million of additional capital to
continue to expand our business beyond the initial phase. If we are unable to
obtain required additional financing, we may be forced to restrain our growth
plans or cut back existing operations.
  Future
construction and operation of biodiesel and specialty chemical refineries,
capital expenditures to build and operate our refineries, hiring qualified
management and key employees, complying with licensing, registration and other
requirements, maintaining compliance with applicable laws, production and
marketing activities, administrative requirements, such as salaries, insurance
expenses and general overhead expenses, legal compliance costs and accounting
expenses will all require a substantial amount of additional capital and cash
flow.
  We will
be required to pursue sources of additional capital through various means,
including joint venture projects, debt financing, equity financing or other
means. There is no assurance that we will be successful in locating a suitable
financing transaction in a timely fashion or at all. In addition, there is no
assurance that we will be successful in obtaining the capital we require by any
other means. Future financings through equity investments are likely to be
dilutive to the existing stockholders, as we issue additional shares of common
stock to investors in future financing transactions. Also, the terms of
securities we issue in future capital transactions may be more favorable for our
new investors. Newly issued securities may include preferences, superior voting
rights, the issuance of warrants or other derivative securities, and the
issuances of incentive awards under equity employee incentive plans, which may
have additional dilutive effects. Further, we may incur substantial costs in
pursuing future capital and/or financing, including investment banking fees,
legal fees, accounting fees, securities law compliance fees, printing and
distribution expenses and other costs. We may also be required to recognize
non-cash expenses in connection with certain securities we may issue, such as
convertible notes and warrants, which will adversely impact our financial
condition.
  Our
ability to obtain needed financing may be impaired by such factors as the
capital markets, both generally and specifically in the biodiesel and specialty
chemicals industries, the fact that we are a new enterprise without a proven
operating history, the location of our production facilities in the People’s
Republic of China, and the price of biodiesel, oil and specialty chemicals on
the commodities market, which will impact the amount of available asset-based
financing. Furthermore, if petroleum, biodiesel or specialty chemicals’ prices
on the commodities markets decrease, then our revenues will likely decrease and
decreased revenues may increase our requirements for capital. Some of the
contractual arrangements governing our operations may require us to maintain
minimum capital, and we may lose our contract rights if we do not have the
required minimum capital. If the amount of capital we are able to raise from
financing activities, together with our revenues from operations, is not
sufficient to satisfy our capital needs, even to the extent that we reduce our
operations accordingly, we may be required to cease operations.
  Our
reliance upon a limited number of feedstock suppliers may hinder our ability to
be profitable.
  Five
feedstock suppliers collectively provide us with approximately 38.58% of our
feedstock and our two largest suppliers, Xinjiang Dasen Chemicals Co., Ltd. and
Xinjiang Guansheng Technology Co., Ltd., each supplied approximately 8.46% and
8.42% of our feedstock, respectively, in 2008. Should any of these suppliers
terminate their supply relationships with us, sell to other buyers, or enter
into the biodiesel manufacturing business in competition with us, we may be
unable to procure sufficient feedstock to satisfy demand for our end products.
Moreover, there is presently a finite number of feedstock suppliers within the
People’s Republic of China. Thus, as demand for biodiesel products continues to
increase, feedstock supplies will likely decrease, causing the price of
feedstock to increase proportionally. If we are unable to obtain adequate
quantities of feedstock at economically viable prices, our business could become
unprofitable and investors could suffer a loss with respect to their investment
in us.
  Price
declines in petro-based diesel due to alternative energy discoveries or enhanced
supply of oil could negatively impact demand for our biodiesel.
  12
  Our
biodiesel product is currently sold in the People’s Republic of China as a
substitute to petro-based diesel. As a result, demand for our biodiesel could be
negatively impacted should the Chinese government lower the retail prices of
fuel, including diesel, due to the discovery of new oil fields or energy
technology inventions.
  Strategic
relationships upon which we may rely are subject to change, leading to
uncertainty and a negative impact on our business.
  Our
ability to identify and enter into commercial arrangements with feedstock
suppliers, construction contractors, equipment fabricators and customers will
depend on developing and maintaining close working relationships with industry
participants. Our success in this area will also depend on our ability to select
and evaluate suitable projects, as well as to consummate transactions in a
highly competitive environment. These realities are subject to change and may
impair our ability to grow.
  To
develop our business, we will use the business relationships of management in
order to form strategic relationships. These relationships may take the form of
joint ventures with other private parties or local government bodies,
contractual arrangements with other companies, including those that supply
feedstock that we will use in our business, or minority investments from third
parties. There can be no assurances that we will be able to establish these
strategic relationships, or, if established, that the relationships will be
maintained, particularly if members of the management team leave us. In
addition, the dynamics of our relationships with strategic partners may require
us to incur expenses or undertake activities we would not otherwise be inclined
to incur or undertake in order to fulfill our obligations to these partners or
maintain these relationships. If we do not successfully establish or maintain
strategic relationships, our business may be negatively impacted.
  A
large portion of our sales is concentrated in a few major customers; loss of any
of those customers would have a material adverse impact on our
revenues.
  Our five
largest customers accounted for approximately 48.67% of our sales in 2007 and
25.88% of our sales in 2008. Our two largest customers accounted for more than
26.53% of sales in 2007 and for more than 11.71% of sales in 2008. If not
replaced, the loss of any of these customers could significantly reduce our
revenues and adversely affect the value of an investment in us.
  We
are dependent on others for sales of a significant portion of our products,
which may place us at a competitive disadvantage and reduce
profitability.
  We have a
small sales force of our own to market our biodiesel and specialty chemical
products. As such, we expect to contract with third parties to market and
distribute some of our specialty chemical products. We have no definitive
agreements at this time. As a result, we will be somewhat dependent on whomever
we contract with to market our biodiesel and specialty chemical products. There
is no assurance that we will be able to enter into contracts with any specialty
chemical products brokers or distributors on acceptable terms. If any of our
distributors breaches its contract with us or does not have the ability, for
financial or other reasons, to market all of the specialty chemicals products we
produce, we will not have any other readily available means to sell our
products. Our lack of a sufficient sales force and reliance on third parties to
sell and market our products may place us at a competitive disadvantage. Our
failure to sell all of our biodiesel or specialty chemical products may result
in less income from sales.
  The
success of our business depends upon the continuing contributions of our Chief
Executive Officer and other key personnel and our ability to attract other
employees to expand our business.
  We rely
heavily on the services of Tai-ming Ou, our Chief Executive Officer, as well as
several other senior management personnel. Loss of the services of any of such
individuals would adversely impact our operations. In addition, we believe that
our technical personnel represent a significant asset and provide us with a
competitive advantage over many of our competitors. We believe that our future
success will depend upon our ability to retain these key employees and our
ability to attract and retain other skilled financial, engineering, technical
and managerial personnel. For example, we presently do not have any directors or
officers, other than Shannon Yan, our Interim Chief Financial Officer, who have
experience with preparing disclosure mandated by U.S. securities laws and we
will be required to engage such persons, and independent directors, in order to
satisfy the initial listing standards of the major exchanges on which we may
seek to list our common stock. In addition, if we fail to engage qualified
personnel, we may be unable to meet our responsibilities as a public reporting
company under the rules and regulations of the Securities and Exchange
Commission. We do not currently maintain any “key man” life insurance with
respect to any of such individuals.
  13
  We
plan to grow very rapidly, which will place strains on management and other
resources.
  We plan
to grow rapidly and significantly expand our operations. This growth will place
a significant strain on management systems and resources. We will not be able to
implement our business strategy in a rapidly evolving market without an
effective planning and management process, and, to date, we have not implemented
sophisticated managerial, operational and financial systems and controls. We are
required to manage multiple relationships with various strategic partners,
technology licensors, users, advertisers and other third parties. These
requirements will be strained in the event of rapid growth or in the number of
third party relationships, and our systems, procedures or controls may not be
adequate to support our operations and management may be unable to manage growth
effectively. To manage our expected growth, we will be required to significantly
improve or replace existing managerial, financial and operational systems,
procedures and controls, and to expand, train and manage our growing employee
base. We will be required to expand our finance, administrative and operations
staff. We may be unable to complete in a timely manner the improvements to our
systems, procedures and controls necessary to support future operations,
management may be unable to hire, train, retain, motivate and manage required
personnel and management may be unable to successfully identify, manage and
exploit existing and potential market opportunities.
  Increases
in our energy expenses will negatively impact operating results and financial
condition.
  Our
biodiesel and specialty chemical production costs will be dependent on the costs
of the energy sources used to run our refineries. These costs are subject to
fluctuations and variations in different locales in which we intend to operate,
and we may not be able to predict or control these costs. If these costs exceed
our expectations, this may adversely affect our results of
operations.
  We
may be unable to locate suitable properties and obtain the development rights
needed to build and expand our business.
  Our
business plan focuses on designing, building and operating specialty chemical
and biodiesel production facilities for our own account. Although we were able
to successfully enter into an agreement to purchase land use rights in Jiang
Yin, People’s Republic of China to construct our second specialty chemical and
biodiesel production facility for our own account, our ability to acquire
quality and reliable properties and facilities in the future may be
unpredictable and we may be required to delay construction of our facilities,
which will create unanticipated costs and delays. In the event that we are not
successful in identifying and obtaining development rights on suitable
properties for building and operating specialty chemical and biodiesel
production facilities, our future prospects for profitability will likely be
substantially limited, and our financial condition and resulting operations may
be adversely affected.
  The
production, sale and distribution of biodiesel are dependent on the sufficiency
of necessary infrastructure which may not occur on a timely basis, if at all,
and our operations could be adversely affected by infrastructure
disruptions.
  Substantial
development of infrastructure will be required by persons and entities outside
our control for our operations, and the biodiesel industry generally, to grow.
Areas requiring expansion include, but are not limited to:
  ·
              adequate
      highway or rail capacity, including sufficient numbers of dedicated tanker
      trucks or cars;
 ·
              sufficient
      storage facilities for feedstock and
biodiesel;
 ·
              increases
      in truck fleets capable of transporting biodiesel within localized
      markets; and
 ·
              expansion
      of independent filling stations.
  Substantial
investments required for these infrastructure changes and expansions may not be
made or they may not be made on a timely basis. Any delay or failure in making
the changes to or expansion of infrastructure could hurt the demand or prices
for our products, impede our delivery of products, impose additional costs on us
or otherwise have a material adverse effect on our results of operations or
financial position. Our business is dependent on the continuing availability of
infrastructure and any infrastructure disruptions could have a material adverse
effect on our business.
  14
  Our
commercial success will depend in part on our ability to obtain and maintain
protection of our intellectual property.
  Our
success will depend in part on our ability to maintain or obtain and enforce
patent and other intellectual property protection for our technologies and to
preserve our trade secrets, and to operate without infringing upon the
proprietary rights of third parties. We have obtained or developed rights to one
patent and one patent application in the People’s Republic of China, and may, in
the future, seek rights from third parties to other patent applications or
patented technology. Significant aspects of our technology are currently
protected as trade secrets, for which we intend to file patent applications when
appropriate. There can be no assurance that a patent will issue from the patent
application filed or that the scope of any claims granted in any patent will
provide us with proprietary protection or a competitive advantage. We cannot be
certain that the creators of our technology were the first inventors of
inventions covered by our patent and patent application or that they were the
first to file. Accordingly, there can be no assurance that our patent and patent
application are valid or will afford us with protection against competitors with
similar technology. The failure to obtain or maintain patent or other
intellectual property protection on the technologies underlying our biodiesel
refining and specialty chemical manufacturing processes may have a material
adverse effect on our competitive position and business prospects. It is also
possible that our technologies may infringe on patents or other intellectual
property rights owned by others. We may have to alter our products or processes,
pay licensing fees, defend an infringement action or challenge the validity of
the patents in court, or cease activities altogether because of patent rights of
third parties, thereby causing additional unexpected costs and delays to us.
There can be no assurance that a license will be available to us, if at all,
upon terms and conditions acceptable to us or that we will prevail in any
intellectual property litigation. Intellectual property litigation is costly and
time consuming, and there can be no assurance that we will have sufficient
resources to pursue such litigation. If we do not obtain a license under such
intellectual property rights, are found liable for infringement or are not able
to have such patents declared invalid, we may be liable for significant money
damages and may encounter significant delays in bringing products and services
to market.
  We
face significant competition, which may negatively impact our future
growth.
  We face
competition from other producers of biodiesel with respect to the procurement of
feedstock, obtaining suitable properties for the construction of biodiesel
refineries and selling biodiesel and related products. Such competition could be
intense thus driving up the cost of feedstock and driving down the price for our
products. Competition will likely increase as prices of energy on the
commodities market, including petroleum and biodiesel, rise, as they have in
recent years. Additionally, new companies are constantly entering the market,
thus increasing the competition. Increased competition could also have a
negative impact on our ability to obtain additional capital from investors.
Larger foreign owned and domestic companies that have been engaged in this
business for substantially longer periods of time may have access to greater
resources. These companies may have greater success in the recruitment and
retention of qualified employees, as well as in conducting their own refining
and fuel marketing operations, which may give them a competitive advantage. In
addition, actual or potential competitors may be strengthened through the
acquisition of additional assets and interests. If we are unable to compete
effectively or adequately respond to competitive pressures, this may materially
adversely affect our results of operation and financial condition.
  Our
business is subject to local legal, political, and economic factors that are
beyond our control.
  We
believe that the current political environment for construction of biodiesel and
specialty chemical facilities is sufficiently supportive to enable us to plan
and implement our operations. However, there are risks that conditions will
change in an adverse manner. These risks include, but are not limited to, laws
or policies affecting mandates or incentives to promote the use of biodiesel,
environmental issues, land use, air emissions, water use, zoning, workplace
safety, restrictions imposed on the biodiesel and specialty chemicals industry
such as restrictions on production, substantial changes in product quality
standards, restrictions on feedstock supply, price controls and export controls.
Any changes in biodiesel and specialty chemicals, financial incentives,
investment regulations, policies or a shift in political attitudes are beyond
our control and may adversely affect our business and future financial
results.
  Our
business will suffer if we cannot obtain or maintain necessary permits or
licenses.
  Our
operations require licenses, permits and in some cases renewals of these
licenses and permits from various governmental authorities within the People’s
Republic of China. We believe that we either hold or will be able to obtain all
necessary licenses and permits to carry on the activities that we contemplate,
and that we will be able to obtain the licenses and permits necessary for our
future biodiesel and specialty chemical operations.  However,
our ability to obtain, sustain, or renew such licenses and permits on acceptable
terms are subject to change, as, among other things, the regulations and
policies of applicable governmental authorities may change. Our inability to
obtain, loss of, or denial of, extension as to any of these licenses or permits
may have a material adverse effect on our operations and financial
condition.
  15
  Penalties
we may incur could impair our business.
  Failure
to comply with government regulations could subject us to civil and criminal
penalties, require us to forfeit property rights and may affect the value of our
assets. We may also be required to take corrective actions, including, but not
limited to, installing additional equipment, which could require us to make
substantial capital expenditures. We could also be required to indemnify our
employees in connection with any expenses or liabilities that they may incur
individually in connection with regulatory action against them. These could
result in a material adverse effect on our prospects, business, financial
condition and our results of operation.
  We
are subject to financial reporting and other requirements for which our
accounting, internal audit and other management systems and resources may not be
adequately prepared.
  We are
subject to reporting and other obligations under the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Under these rules, among other things, we
must evaluate the effectiveness of our internal controls over financial
reporting. These reporting and other obligations place significant demands on
our management, administrative, operational, internal audit and accounting
resources. We anticipate that as our business grows we will need to upgrade our
systems; implement additional financial and management controls, reporting
systems and procedures; implement an internal audit function; and hire
additional accounting, internal audit and finance staff. If we are unable to
accomplish these objectives in a timely and effective fashion, our ability to
comply with our financial reporting requirements and other rules that apply to
reporting companies could be impaired. Any failure to maintain effective
internal controls could have a material adverse effect on our business,
operating results and stock price.
  Our
operations are susceptible to interruption from natural disasters.
  Our
operations are located in Fuqing City, Fujian Province of the People’s Republic
of China. Historically, this region has suffered damage from typhoons or other
natural disasters. Should any of these natural events occur, it would likely
slow down development of our new production facility and construction plans,
thus adversely impacting current operations and future growth
plans.
  Risks
Related to Doing Business in the People’s Republic of China
  We
face the risk that changes in the policies of the government of the People’s
Republic of China could have a significant impact upon our business and
profitability.
  The
economy of the People’s Republic of China is in a transition from a planned
economy to a market oriented economy subject to five-year and annual plans
adopted by the government that set national economic development goals. Policies
of the People’s Republic of China can have significant effects on the economic
conditions of the People’s Republic of China. The government of the People’s
Republic of China has confirmed that economic development will follow the model
of a market economy. Under this direction, we believe that the People’s Republic
of China will continue to strengthen its economic and trading relationships with
foreign countries and business development in the People’s Republic of China
will follow market forces. While we believe that this trend will continue, there
can be no assurance that this will be the case. A change in policies by the
government of the People’s Republic of China could adversely affect our
interests by, among other factors:
  ·
              changes
      in laws,
 ·
              imposition
      of new regulations or the interpretations of such
    regulations,
 ·
              confiscatory
      taxation,
 ·
              restrictions
      on currency conversion, imports or sources of supplies,
  or
 ·
              the
      expropriation or nationalization of private
  enterprises.
   16
  Although
the government of the People’s Republic of China has been pursuing economic
reform policies for more than two decades, there is no assurance that the
government will continue to pursue such policies or that such policies may not
be significantly altered, especially in the event of a change in leadership,
social or political disruption, or other circumstances affecting political,
economic and social life in the People’s Republic of China.
  The
laws and regulations of the People’s Republic of China governing our current
business operations are sometimes vague and uncertain. Any changes in these laws
and regulations may have a material and adverse effect on our
business.
  There are
substantial uncertainties regarding the interpretation and application of laws
and regulations of the People’s Republic of China, including but not limited to,
the laws and regulations governing our business, or the enforcement and
performance of our arrangements with customers in the event of the imposition of
statutory liens, death, bankruptcy and criminal proceedings. We are considered a
foreign person or foreign funded enterprise under the laws of the People’s
Republic of China, and, as such, we are required to comply with the laws and
regulations of the People’s Republic of China. These laws and regulations are
sometimes vague and may be subject to future changes, 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. We cannot predict what effect the interpretation of existing or
new laws or regulations of the People’s Republic of China may have on our
businesses.
  A
slowdown or other adverse developments in the economy of the People’s Republic
of China may materially and adversely affect our customers, demand for our
products and our business.
  Much of
our operations are conducted in the People’s Republic of China. In the fiscal
year 2008, approximately 66.80% of our revenue was generated from sales in the
People’s Republic of China. Although the economy of the People’s Republic of
China has grown significantly in recent years, we cannot assure investors that
such growth will continue. The renewable energy and specialty chemicals
industries in the People’s Republic of China are relatively new and growing, and
we therefore do not know how sensitive they are to a slowdown in economic growth
or other adverse changes in the economy of the People’s Republic of China. A
slowdown in overall economic growth, an economic downturn or recession or other
adverse economic developments in the People’s Republic of China could materially
reduce the demand for our products and materially and adversely affect our
business.
  Inflation
in the People’s Republic of China could negatively affect our profitability and
growth.
  While the
People’s Republic of China economy has experienced rapid growth, such growth has
been uneven among various sectors of the economy and in different geographical
areas of the country. Rapid economic growth can lead to growth in the money
supply and rising inflation. If prices for our products rise at a rate that is
insufficient to compensate for the rise in the costs of supplies, it may have an
adverse effect on profitability. In order to control inflation in the past, the
People’s Republic of China has imposed controls on bank credits, limits on loans
for fixed assets and restrictions on state bank lending. Such an austere policy
can lead to a slowing of economic growth. On October 28, 2004, the People’s
Bank of China, the People’s Republic of China’s central bank, raised interest
rates for the first time in nearly a decade and indicated in a statement that
the measure was prompted by inflationary concerns. Repeated rises in interest
rates by the central bank would likely slow economic activity in the People’s
Republic of China, which could, in turn, materially increase our costs and also
reduce demand for our products.
  Governmental
control of currency conversion may affect the value of an investment in
us.
  The
government of the People’s Republic of China imposes controls on the
convertibility of Renminbi into foreign currencies and, in certain cases, the
remittance of currency out of the People’s Republic of China. In 2008,
approximately 66.80 % of our revenues was received in Renminbi, which is
currently not a freely convertible currency. Shortages in the availability of
foreign currency may restrict our ability to remit sufficient foreign currency
to pay dividends, or otherwise satisfy foreign currency dominated obligations.
Under existing People’s Republic of China foreign exchange regulations, payments
of current account items, including profit distributions, interest payments and
expenditures from the transaction, can be made in foreign currencies without
prior approval from the People’s Republic of China State Administration of
Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate governmental authorities is required whenever Renminbi
is to be converted into foreign currency and remitted out of the People’s
Republic of China to pay capital expenses, such as the repayment of bank loans
denominated in foreign currencies.
  17
  The
People’s Republic of China may also 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 certain of our
expenses as they come due.
  The
fluctuation of the Renminbi may materially and adversely affect investments in
us.
  The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in the political and economic
climate of the People’s Republic of China. As part of our business relies on
revenues earned in the People’s Republic of China, any significant revaluation
of the Renminbi may materially and adversely affect our cash flows, revenues and
financial condition. For example, to the extent that we need to convert U.S.
dollars we receive from an offering of our securities into Renminbi for our
operations, appreciation of the Renminbi against the U.S. dollar could have a
material adverse effect on our business, financial condition and results of
operations. Conversely, if we decide to convert our Renminbi into U.S. dollars
for the purpose of making payments for dividends on our common stock or for
other business purposes and the U.S. dollar appreciates against the Renminbi,
the U.S. dollar equivalent of the Renminbi that we convert would be reduced. In
addition, the depreciation of significant U.S. dollar denominated assets could
result in a charge to our income statement and a reduction in the value of these
assets.
  On
July 21, 2005, the People’s Republic of China changed its decade-old policy
of pegging the value of the Renminbi to the U.S. dollar. Under the new policy,
the Renminbi is permitted to fluctuate within a narrow and managed band against
a basket of certain foreign currencies. This change in policy has resulted in an
approximately 22% appreciation of the Renminbi against the U.S. dollar as of
December 31, 2008. While the international reaction to the Renminbi
revaluation has generally been positive, pressure remains on the People’s
Republic of China to adopt an even more flexible currency policy, which could
result in a further and more significant appreciation of the Renminbi against
the U.S. dollar.
  Recent
People’s Republic of China State Administration of Foreign Exchange (“SAFE”)
Regulations regarding offshore financing activities by residents of the People’s
Republic of China have undergone a number of changes that may increase the
administrative burden we face. The failure by our stockholders who are residents
of the People’s Republic of China to make any required applications and filings
pursuant to such regulations may prevent us from being able to distribute
profits and could expose us and our People’s Republic of China resident
stockholders to liability under the laws of the People’s Republic of
China.
  SAFE
issued a public notice (the “October Notice”) effective November 1,
2005 that requires registration with SAFE by the People’s Republic of China
resident stockholders of any foreign holding company of a People’s Republic of
China entity. Without registration, the People’s Republic of China entity cannot
remit any of its profits out of the People’s Republic of China as dividends or
otherwise. However, it is uncertain how the October Notice will be
interpreted or implemented regarding specific documentation requirements for a
foreign holding company formed prior to the effective date of the
October Notice, such as in our case. While our local counsel has advised us
that only the People’s Republic of China resident stockholders who receive the
ownership of the foreign holding company in exchange for ownership in the
People’s Republic of China operating company are subject to the
October Notice, there can be no assurance that SAFE will not require our
other People’s Republic of China resident stockholders to make disclosure. In
addition, the October Notice requires that any monies remitted to residents
of the People’s Republic of China outside of the People’s Republic of China be
returned within 180 days. However, there is no indication of what the penalty
will be for failure to comply or if stockholder non-compliance will be
considered to be a violation of the October Notice by us or otherwise
affect us.
  In the
event that the proper procedures are not followed under the SAFE
October Notice, we could lose the ability to remit monies outside of the
People’s Republic of China and would therefore be unable to pay dividends or
make other distributions. Our People’s Republic of China resident stockholders
could be subject to fines, other sanctions and even criminal liabilities under
the People’s Republic of China Foreign Exchange Administrative Regulations
promulgated January 29, 1996, as amended.
  18
  Our
current tax status is uncertain, exposing us to potential
liability.
  Pursuant
to the relevant laws and regulations in the People’s Republic of China, Fujian
Zhongde Technology Co., Ltd., as a wholly-owned foreign enterprise (“WOFE”) in
the People’s Republic of China, is entitled to 50% relief from the People’s
Republic of China enterprise income tax in each of 2008, 2009 and 2010. However,
since our new subsidiary, Fujian Zhongde Energy Co., Ltd., is a newly registered
WOFE, the corporate income tax status for this new subsidiary is not clear at
this point.
  Further,
there can be no assurance that the central government will not audit our
previous tax returns and payments and require that we pay additional taxes and
penalties in the future that could materially and adversely affect our business
and financial condition.
  Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our operations.
  A renewed
outbreak of SARS or another widespread public health problem in the People’s
Republic of China, where much of our revenue is derived, could have an adverse
effect on our operations. Our operations may be impacted by a number of
health-related factors, including quarantines or closures of some of our offices
that would adversely disrupt our operations. Any of the foregoing events or
other unforeseen consequences of public health problems could adversely affect
our operations.
  Because
our principal assets are located outside of the U.S. and all of our directors
and officers, except for Shannon Yan, reside outside of the U.S., it may be
difficult for investors to enforce their rights based on U.S. federal securities
laws against us and our officers and directors in the U.S. or to enforce a U.S.
court judgment against us or them in the People’s Republic of
China.
  All of
our directors and officers, except for Shannon Yan, reside outside of the U.S.
In addition, Fujian Zhongde Technology Co., Ltd. and Fujian Zhongde Energy Co.,
Ltd., our operating subsidiaries, are located in the People’s Republic of China
and substantially all of their assets are located outside of the U.S. It may
therefore be difficult or impossible for investors in the U.S. to enforce their
legal rights based on the civil liability provisions of the U.S. federal
securities laws against us in the courts of either the U.S. or the People’s
Republic of China and, even if civil judgments are obtained in U.S. courts, to
enforce such judgments in the People’s Republic of China courts. Further, it is
unclear if extradition treaties now in effect between the U.S. and the People’s
Republic of China would permit effective enforcement against us or our officers
and directors of criminal penalties, under the U.S. federal securities laws or
otherwise.
  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 not adopted a western style of
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.
  Risks
Relating to Our Organization
  Our
executive officers beneficially own a substantial percentage of our
outstanding common stock, which gives them significant influence over certain
major decisions on which our stockholders may vote, which may discourage an
acquisition of us.
  Tai-ming
Ou, our Chief Executive Officer, beneficially owns, in the aggregate,
approximately 12.43% of our outstanding common stock and our directors and
executive officers as a group collectively own approximately 46.22% of our
outstanding shares. The interests of management may differ from the interests of
other stockholders. As a result, our executive management will have the right
and ability to exert significant influence over all corporate actions requiring
stockholder approval, irrespective of how our other stockholders may vote,
including the following actions:
  19
  ·
                electing
      or defeating the election of
directors;
 ·
              amending
      or preventing amendment of our Certificate of Incorporation or
      By-laws;
 ·
              effecting
      or preventing a merger, sale of assets or other corporate transaction;
      and
 ·
              the
      outcome of any other matter submitted to the stockholders for
      vote.
  Our
management’s stock ownership may discourage a potential acquirer from seeking to
acquire shares of our common stock or otherwise attempting to obtain control of
us, which in turn could reduce our stock price or prevent our stockholders from
realizing a premium over our stock price.
  Because
we became public by means of a reverse merger, we may not be able to attract the
attention of major brokerage firms.
  There may
be risks associated with us becoming public through a reverse merger.
Specifically, securities analysts of major brokerage firms may not provide
coverage of us because there is no incentive to brokerage firms to recommend the
purchase of our common stock. No assurance can be given that brokerage firms
will, in the future, want to conduct any secondary offerings on our
behalf.
  Risks
Relating to Our Common Stock
  Our
stock price may be volatile, so investors could lose their
investment.
  The
market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including the following:
  ·
              technological
      innovations or new products and services by us or our
      competitors;
 ·
              additions
      or departures of key personnel;
 ·
              limited
      “public float” in the hands of a small number of persons whose sales or
      lack of sales could result in positive or negative pricing pressure on the
      market price for the common stock;
 ·
              sales
      of the common stock;
 ·
              our
      ability to execute our business
plan;
 ·
              operating
      results that fall below
expectations;
 ·
              industry
      developments;
 ·
              economic
      and other external factors; and
 ·
              period-to-period
      fluctuations in our financial
results.
  In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
  There
may be a limited market for our securities and we may fail to qualify for a
listing on a national securities exchange such as the NASDAQ Stock Market or the
NYSE Amex.
  Although
we plan on applying for listing of our common stock on a national stock exchange
such as the NASDAQ Stock Market or the NYSE Amex once we meet the
qualifications, there can be no assurance that our initial listing application
will be granted, when the required listing criteria will be met or when, or if,
our application will be granted. Thereafter, there can be no assurance that
trading of our common stock on such a market will be sustained or desirable. In
the event that our common stock fails to qualify for initial or continued
inclusion, our common stock could thereafter only be quoted on the OTC Bulletin
Board or in what are commonly referred to as the “pink sheets.” Under such
circumstances, a stockholder may find it more difficult to dispose of, or to
obtain accurate quotations, for our common stock, and our common stock would
become substantially less attractive to certain purchasers, such as financial
institutions, hedge funds, and large investors.
  Furthermore,
for companies whose securities are quoted on the OTC Bulletin Board, it is more
difficult to obtain coverage for significant news events because major wire
services generally do not publish press releases about such companies, and to
obtain needed capital.
  20
  Our
common stock is currently deemed a “penny stock,” which could make it more
difficult for investors to sell their shares.
  Our
common stock is currently subject to the “penny stock” rules adopted under
section 15(g) of the Exchange Act. The penny stock rules apply to companies
whose common stock is not listed on a national securities exchange and trades at
less than $5.00 per share or that have tangible net worth of less than
$5,000,000 ($2,000,000 if the company has been operating for three or more
years). These rules require, among other things, that brokers who trade penny
stock to persons other than “established customers” complete certain
documentation, make suitability inquiries of investors and provide investors
with certain information concerning trading in the security, including a risk
disclosure document and quote information under certain circumstances. Many
brokers have decided not to trade penny stocks because of the requirements of
the penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited. If we remain subject to the
penny stock rules for any significant period, it could have an adverse effect on
the market, if any, for our securities. Because our securities are currently
subject to the penny stock rules, stockholders will find it more difficult to
dispose of our securities.
  Provisions
of our Certificate of Incorporation and Delaware law could deter a change of
control, which could discourage or delay offers to acquire us.
  Provisions
of our Certificate of Incorporation and Delaware law may make it more difficult
for someone to acquire control of us or for our stockholders to remove existing
management, and might discourage a third party from offering to acquire us, even
if a change in control or in management would be beneficial to stockholders. For
example, our Certificate of Incorporation allows us to issue shares of preferred
stock without any vote or further action by stockholders.
  Our
Certificate of Incorporation authorizes the board to create new series of
preferred stock without further approval by stockholders, which could adversely
affect the rights of the holders of common stock.
  Pursuant
to our Certificate of Incorporation, our Board of Directors has the authority to
fix and determine the relative rights and preferences of our preferred stock.
The Board of Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, the Board of Directors could
authorize the issuance of a series of preferred stock that grants holders a
liquidation preference, the right to receive dividend payments before dividends
are distributed to the holders of common stock and the right to have their
shares redeemed by us, together with a premium, prior to the any redemption of
our common stock. In addition, our Board of Directors could authorize the
issuance of a series of preferred stock that has greater voting power than the
common stock or that is convertible into common stock, which could decrease the
relative voting power of our common stock or result in dilution to our existing
stockholders.
  Volatility
in our common stock price may subject us to securities litigation.
  The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers. We expect that our share price will continue
to be more volatile than a seasoned issuer for the indefinite future. In the
past, plaintiffs have often initiated securities class action litigation against
a company following periods of volatility in the market price of its securities.
We may, in the future, be the target of similar litigation. Securities
litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.
  The
elimination of monetary liability against our directors under Delaware law and
the existence of indemnification rights to our directors may result in
substantial expenditures by us and may discourage lawsuits against our
directors.
  Our
Certificate of Incorporation provides that, to the fullest extent that the
General Corporation Law of the State of Delaware permits, none of our directors
shall be personally liable to either us or our stockholders for any breach in
his or her fiduciary duties as a director. This provision creates an
indemnification obligation by us that could ultimately cause us to incur
substantial expenditures to cover the cost of settlement or damage awards
against our directors. This provision and resultant costs may also discourage us
from bringing a lawsuit against directors for breaches of their fiduciary duties
and may similarly discourage the filing of derivative litigation by our
stockholders against our directors even though such actions, if successful,
might otherwise benefit us and our stockholders.
  21
  Item
      2.
              Properties.
  Our
Chinese headquarters are currently located in approximately 573 square meters of
office space at Fulong Industry Zone, Longtian Town, Fuqing City, Fujian, China
35013. We own a 311,000 square-foot manufacturing facility located at the same
location. In the People’s Republic of China, the ownership of land belongs to
the government of the People’s Republic of China, and private entities and
individuals can only acquire land use rights for a certain period of time. Our
land use rights for our facility started on June 1, 1998 and expire on
May 31, 2047.
  On
December 25, 2006, we signed a contract with Fuzhou City Jiangyin Industry
District Management Committee to purchase land usage rights with respect to
112,744 square meters of land for 50 years at a purchase price of 18,549,000
Renminbi, or approximately $2.5 million, for the construction of a new
biodiesel and specialty chemicals plant (Fujian Zhongde Energy Co., Ltd.). We
plan to use this land usage right to construct a new biodiesel factory located
in the new Fuqing Jiangyin Industrial Park in the Fujian Province of the
People’s Republic of China. The new factory site is approximately 50 miles from
Fuzhou, the Capital City of Fujian Province, and 20 miles from our existing
facility. We broke ground on the facility on December 19, 2007 and expect
construction to be completed in the second quarter of 2009. Once constructed,
this facility will have the flexibility to produce 100,000 tons of biodiesel per
year, equivalent to 30 million gallons, or 30,000 tons of specialty
chemicals per year, or a combination of biodiesel and specialty chemicals for a
total output of 70,000 tons per year. As of December 31, 2008, we had spent
$19.2 million to construct this facility. We estimate that the total
capital expenditure for this facility will be $22.2 million, including the
$2.5 million we paid in 2006 to acquire the land usage rights. After the
facility commences production, we anticipate that we will require an additional
$3 million for working capital uses.
  Item
      3.
              Legal
      Proceedings.
  We are
not presently a party to any pending litigation nor, to the knowledge of our
management, is any litigation threatened against us.
  Item
      4.
              Submission
      of Matters to a Vote of Security
Holders.
  No
matters were submitted during the fourth quarter of 2008 to a vote of our
stockholders through the solicitation of proxies or otherwise.
     22
  PART
II
  Item
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
  Market
Information
  Our
common stock has been quoted on the OTC Bulletin Board since July 6, 2006.
From July 6, 2006 through October 22, 2006, our trading symbol was
HXPL.OB and since October 23, 2006 our trading symbol has been CCGY.OB.
Prior to October 23, 2006, there was no active market for our common stock.
The following table sets forth the high and low bid prices for our common stock
for the periods indicated, as reported by the OTC Bulletin Board. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
  High
                    
                    
                    LowFiscal
      Year 2007First
      Quarter
                    
                    $
                    3.10
                    
                    
                    $
                    1.85Second
      Quarter
                    
                    $
                    2.74
                    
                    
                    $
                    1.35Third
      Quarter
                    
                    $
                    2.25
                    
                    
                    $
                    1.10Fourth
      Quarter
                    
                    $
                    2.81
                    
                    
                    $
                    1.60Fiscal
      Year 2008First
      Quarter
                    
                    $
                    2.29
                    
                    
                    $
                    1.29Second
      Quarter
                    
                    $
                    1.69
                    
                    
                    $
                    0.73Third
      Quarter
                    
                    $
                    0.80
                    
                    
                    $
                    0.31Fourth
      Quarter
                    
                    $
                    0.51
                    
                    
                    $
                    0.14Fiscal
      Year 2009First
      Quarter (through March 18, 2009)
                    
                    $
                    0.18
                    
                    
                    $
                    0.10
  The last
reported sales price of our common stock on the OTC Bulletin Board on
March 18, 2009 was $0.17 per share.
  Holders
  As of
March 27th, 2009, there were approximately 101 holders of record of our
common stock.
  Dividends
  We have
not declared or paid any cash dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future. We
currently expect to retain future earnings, if any, for the development of our
business. Dividends may be paid on our common stock only if and when declared by
our Board of Directors.
  23
  Item 7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
  The
following discussion should be read together with the information contained in
the consolidated financial statements, pro forma financial statements and the
related notes included elsewhere in this annual report. The following discussion
highlights the principal factors that have affected our financial condition and
results of operations as well as our liquidity and capital resources for the
periods described. This discussion contains forward-looking statements. Please
see “Forward-Looking Statements” and “Risk factors” for a discussion of the
uncertainties, risks and assumptions associated with these forward-looking
statements. The operating results for the periods presented were not
significantly affected by inflation.
  Company
Overview
  We were
originally incorporated in Delaware under the name “Hurley Exploration Inc.” on
November 12, 2004 in order to conduct mineral exploration activities. On
October 13, 2006, in anticipation of our acquisition of China Clean Energy
Resources, Ltd., we abandoned this enterprise and changed our name to China
Clean Energy Inc. On October 24, 2006, we acquired China Clean Energy
Resources, Ltd., pursuant to the terms of a Share Exchange Agreement. This
transaction was accounted for as a reverse acquisition (recapitalization), with
China Clean Energy Resources, Ltd. deemed to be the accounting acquirer and us
as the legal acquirer. Accordingly, the financial statements are those of China
Clean Energy Resources, Ltd. and its subsidiary up until October 24, 2006.
The basis of the assets, liabilities and retained earnings of China Clean Energy
Resources, Ltd., were carried over in the recapitalization. Upon the closing of
this transaction, we became a Chinese renewable resource-based biodiesel and
specialty chemicals manufacturer/distributor.
  China
Clean Energy Resources, Ltd. was incorporated in the British Virgin Islands on
February 13, 2006, for the purpose of holding a 100% interest in Fujian
Zhongde Technology Co., Ltd. As such, China Clean Energy Resources, Ltd. does
not conduct any substantive operations of its own, but rather conducts its
primary business operations through Fujian Zhongde Technology Co., Ltd., a
Chinese company that was incorporated in the Province of Fujian, China on
July 10, 1995. On November 5, 2007, Fujian Zhongde Energy Co., Ltd.,
was incorporated in the Province of Fujian, China as a 100% owned subsidiary of
China Clean Energy Resources, Ltd. for the development and operation of our new
100,000 tons per year biodiesel refinery in Jiangyin Industrial Park, Fuqing
City, Fujian Province, China.
  Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007
  Revenues. During the year
ended December 31, 2008, we had net sales of $18,169,835 (7.68% from
biodiesel sales and 92.32% from specialty chemicals sales), as compared to net
sales of $21,756,010 (26.54% from biodiesel sales and 73.46% from specialty
chemicals sales) during the year ended December 31, 2007. This decrease of
approximately 16.48% was attributable (i) to a decrease in sales volume and
selling prices of specialty chemicals, particularly in the second half of the
year, primarily driven by declining demand in the specialty chemicals market
caused by the international financial crisis and lower perceived growth in the
Chinese and global economies, and (ii) to the significant decrease in our
biodiesel production. In March 2008, we temporarily halted the production
of biodiesel and shifted our focus to higher value-added specialty chemicals in
an effort to mitigate sharp increases in the cost of raw materials and stagnant
wholesale diesel pricing in the People’s Republic of China. Due to a decline in
raw material costs in November 2008, we resumed the production of
biodiesel. However, the rapidly declining crude oil prices in the fourth quarter
have depressed the selling prices of biodiesel. We will continue to closely
monitor the prices of our feedstock raw material, wholesale diesel prices and
the conditions in the biodiesel industry in the People’s Republic of China in
order to reassess our biodiesel production on an ongoing basis.
  Gross Profit. The cost of
goods sold, which consists of direct labor, feedstock, direct materials,
overhead and product costs, and depreciation of production facilities, was
$14,310,907 for the year ended December 31, 2008, as compared to cost of
goods sold of $15,882,799 for the year ended December 31, 2007. We had a
gross profit of $3,858,928 for the year ended December 31, 2008, as
compared to a gross profit of $5,873,211for the year ended December 31,
2007, representing gross margins of approximately 21.24% and 27.00%,
respectively. The decrease in gross profit is the result of a significant
decrease in sales volume of our biodiesel and specialty chemical export
business, along with higher raw material costs. Falling selling prices
contributed to a loss on carried inventory of $93,838. The decrease in our gross
margin percentage is a result of higher commodities costs, lower margins in
biodiesel production, and, effective July 1, 2007, a decrease in Chinese
government export tax rebates on our exported specialty chemical products from
13% to 5%.
  24
  Selling Expenses. Selling
expenses, which include advertising and promotion, freight charges, exporting
expenses, wages and salaries, totaled $249,583 for the year ended
December 31, 2008, as compared to $695,007 for the year ended
December 31, 2007. This was a decrease of approximately 64.09%. This
decrease is primarily due to our lower specialty chemical product exports
(approximately $6,032,472 and $17,352,323 in the year ended December 31,
2008 and the year ended December 31, 2007, respectively), related export
and freight charges and wages and salaries.
  General and Administrative and Other
Operating Expenses. General and administrative and other operating
expenses totaled $2,482,971 for the year ended December 31, 2008, as
compared to $1,713,438 for the year ended December 31, 2007. This was an
increase of approximately 44.91%. This increase is primarily attributable to
$903,769 of stock based compensation costs incurred in connection with employee
stock options granted in January 2008. The fair value of the option is
amortized on a quarterly basis over three years.
  Net Income. We had a net
income of $596,816 for the year ended December 31, 2008, as compared to a
net income of $3,359,894 for the year ended December 31, 2007. This was a
decrease of approximately 82.24%. This decrease in net income was due primarily
to the $3,586,175 decrease in revenues caused by decline in sales volume and
selling prices, the $324,109 increase in total operating expense primarily
driven by stock based compensation costs, the $177,905 loss on disposal of
assets and the $369,640 increase in income taxes. The decrease in net income was
partially offset by a reduction in selling expenses associated with lower
specialty chemicals exports and a decrease in cost of goods sold of $1,571,892.
We received a full income tax exemption in 2007 and are subject to a 12% income
tax rate in 2008, 2009 and 2010.
  Liquidity
and Capital Resources
  Private
Placement.On January 9, 2008, we completed a private
placement, pursuant to which we issued 10,000,000 shares of common stock and
five-year warrants to purchase 5,000,000 shares of common stock at an initial
exercise price of $2.00 per share, for aggregate gross proceeds of $15,000,000.
In connection with this private placement, we incurred placement agent fees of
approximately $1,200,000, and issued the placement agent five-year warrants to
purchase an aggregate of 1,200,000 shares of common stock at an initial exercise
price of $2.00 per share. In addition, we incurred other professional fees and
expenses totaling approximately $90,000. The proceeds from the above financing
were used, in part, to construct our second biodiesel facility, as well as for
working capital purposes.
  General.  As of
December 31, 2008 and December 31, 2007, we had cash and cash
equivalents of $2,913,711 and $1,133,555, respectively. The increase in cash and
cash equivalents was primarily due to the net proceeds of $13,627,403 we
received from the $15,000,000 private placement. We incurred a $16,503,785
capital expenditure on our Jiangyin plant and a $2,159,868 decrease in our
accounts receivables. The decrease in account receivables was primarily
attributable to our reduced specialty chemical exports.
  The
$16,503,785 capital expenditure on our new Jiangyin plant includes $13,835,889
used for construction related activities and purchases and $2,667,896 used for
prepaid equipment purchases. As of December 31, 2008, we paid 86% of the
total capital required to finish the plant including $2.5 million we paid
in 2006 to acquire the land use rights. After the facility commences production,
we anticipate that we will require an additional $3 million for working
capital uses. We commenced construction on December 19, 2007 and expect to
complete construction in June 2009. The new facility is expected to have a
production capacity of 100,000 tons of biodiesel per year or 30,000 tons of
specialty chemicals per year or a combination of biodiesel and specialty
chemicals for a total output of 70,000 tons per year.
  The
$5,116,806 net cash proceeds provided by operating activities during the year
ended December 31, 2008 was primarily due to $596,816 in net income,
$932,908 of depreciation and amortization expenses, $903,769 of stock based
compensation costs and a $2,696,479 decrease in accounts receivable and
inventories.
  The
$12,332,965 of net cash provided by financing activities during the year ended
December 31, 2008 was primarily due to the net proceeds of $13,627,403 we
received from our January 2008 $15,000,000 private placement, partially
offset by payments on bank loans. We are currently in active negotiations to
secure a $4.4 million loan, of which we intend to allocate $3 million
for the working capital expenses for our new Jiangyin Plant.
  25
  We
have historically met our liquidity and capital requirements from a variety of
sources. These included internally generated cash, short-term borrowings from
both related parties and financial institutions, and sales of common
stock.
  At the
moment, we have only one refinery which produces both specialty chemicals and
biodiesel products. The production capacities for specialty chemicals and
biodiesel are at 18,000 tons per annum and 10,000 tons per annum,
respectively.
  Obligations under Material
Contracts.We had a capital commitment of approximately
$3.0 million for the acquisition of plant equipment and machinery as of
December 31, 2008. We had no material capital commitments as of
December 31, 2007.
  Other
than any of the contractual obligations and commercial commitments set forth
above, we did not have any other long-term debt obligations, capital
commitments, purchase obligations or other long-term liabilities as of
December 31, 2008.
  Critical
Accounting Policies and Estimates
  The
discussion and analysis of our financial condition presented in this section is
based upon the consolidated financial statements of ours and our subsidiaries.
These have been prepared in accordance with accounting principles generally
accepted in the United States. During the preparation of the financial
statements we are required to make estimates and judgment that affect the
reported amount of assets, liabilities, revenues, expenses and the related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to sales, returns, pricing
concessions, bad debts, inventories, investments, fixed assets, intangible
assets, income taxes and other contingencies. We based our estimates on
historical experience and various other assumptions that we believe are
reasonable under the set of current conditions. Actual results may differ from
these estimates under a different set of assumptions or set of
conditions.
  In
response to the Securities and Exchange Commission’s Release No. 33-8040,
“Cautionary Advice Regarding Disclosure About Critical Accounting Policy,” we
identified the most critical accounting principals upon which our financial
status depends. We determined that those critical accounting principles are
related to the use of estimates, inventory valuation, revenue recognition,
income tax , impairment of intangibles and other long-lived assets. We present
these accounting policies in the relevant sections in this management’s
discussion and analysis, including the Recently Issued Accounting Pronouncements
discussed below.
  Revenue Recognition. We
recognize a sale when the revenue has been realized or realizable and has been
earned, in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 104, “Revenue Recognition in Financial Statements”. Our sales
are related to the sale of a product. Revenue for a product sale is recognized
as risk and title to the product transfer to the customer, which usually occurs
at the time shipment is made. Substantially all of our products are sold FOB
(“free on board”) shipping point. Title to the product passes when the product
is delivered to the freight carrier.
  Sales
revenue represents the invoiced value of goods, net of a value-added tax (VAT).
All products that are sold in the People’s Republic of China are subject to a
local value-added tax at a rate of 17% of the gross sales price, or at a rate
that is approved by the local government. This VAT may be offset by a VAT paid
on raw materials and other materials included in the cost of producing the
finished product.
  Accounts Receivable, Trade and
Allowance for Doubtful Accounts. Substantial portions on our business
operations are conducted in the People’s Republic of China. During the normal
course of business, we extend unsecured credit to our customers. Accounts
receivable and trades outstanding on December 31, 2008 and
December 31, 2007 totaled $1,092,768and $2,795,363,
respectively. Management reviews our accounts receivable on a regular basis to
determine if the allowance for doubtful accounts is adequate. An estimate for
doubtful accounts is recorded when collection of the full amount is no longer
likely. As of December 31, 2008 and December 31, 2007, allowances for
doubtful accounts totaled $136,389 and $407,593, respectively.
  Inventories. Inventories are
stated at the lesser of cost (first in, first out method) or market. We review
our inventory on a regular basis or determine if any reserves are necessary for
potential obsolescence. As of December 31, 2008, our management determined
that the carrying amount of raw materials exceeded the prices currently
available. Therefore, we wrote down $92,113 and included this amount in the cost
of goods sold for 2008.
  26
  Impairment of Long-Lived
Assets. Management reviews the long-lived tangible and intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may no longer be recoverable. When these events
occur, we measure impairment by comparing the carrying value of the long-lived
assets to the estimated undiscounted future cash flows expected to result from
the use of the assets and their eventual disposition. If the sum of the expected
discounted cash flows is less than the carrying amount of the assets, we would
recognize an impairment loss based on the fair value of the assets. As of
December 31, 2008, we recorded an impairment loss totaling
$74,817.
  Income Taxes. We adopted
Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes” (“SFAS 109”). SFAS 109 requires the recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between income tax basis and financial reporting basis of assets and
liabilities. Provision for income taxes consist of taxes currently due plus
deferred taxes. Since we had no operations in the U.S., there is no provision
for U.S. income tax and there were no deferred tax amounts as of
December 31, 2008 and December 31, 2007.
  Deferred
tax is accounted for by using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principal, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated at the tax rate that is expected to
apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it
relates to items credited or charged directly to equity, in which case the
deferred tax is also dealt with as equity. Deferred tax assets and liabilities
are offset when they relate to income taxes levied by the same taxation
authority and we intend to settle current tax assets and liabilities on a net
basis.
  Our
subsidiaries, Fujian Zhongde Technology Co., Ltd. and Fujian Zhongde Energy Co.,
Ltd., are governed by the Income Tax Law of the People’s Republic of China
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (the “Income Tax Laws”). Under the Income Tax Laws, WOFEs
generally are subject to an income tax rate of 25% on income as reported in
their statutory financial statements after appropriate tax adjustments, unless
the enterprise is located in specially designated regions of cities for which
more favorable tax rates apply.
  Upon
approval by the People’s Republic of China tax authorities, WOFEs scheduled to
operate for a period of 10 years or more and engage in manufacturing and
production may be exempt from income tax for two years, commencing with their
first profitable year of operations, after taking into account any losses
brought forward from prior years, and thereafter with a 50% exemption for the
next three years.
  As Fujian
Zhongde Technology Co., Ltd. became a WOFE starting February 20, 2006 at
the time it merged with China Clean Energy Resources, Ltd., it received the
above described WOFE tax benefit upon approval from the People’s Republic of
China. Fujian Zhongde Technology Co., Ltd. was exempt from income taxes in 2007
and thereafter 50% exempt for the next three years beginning in
2008.
  Value Added Tax (VAT).
Enterprises or individuals who sell commodities, engage in repair and
maintenance or import/export goods in the People’s Republic of China are subject
to a value added tax in accordance with People’s Republic of China laws. The
value added tax standard rate is 17% of the gross sales price. A credit is
available whereby VAT paid on the purchases of semi-finished products or raw
materials used in the production of our finished products can be used to offset
the VAT due on sales of the finished product.
  Recently
Issued Accounting Pronouncements
  In
March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS
161, “Disclosures About Derivative Instruments and Hedging Activities – an
Amendment of FASB Statement No. 133” (“SFAS 161”), which changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities” and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. We are currently evaluating the impact that adopting
SFAS 161 will have on our financial statements.
  27
  In
April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”), which amends the factors a company should
consider when developing renewal assumptions used to determine the useful life
of an intangible asset under SFAS 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”). FSP 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. SFAS 142 requires companies to consider whether renewal can
be completed without substantial cost or material modification of the existing
terms and conditions associated with the asset. FSP 142-3 replaces the previous
useful life criteria with a new requirement—that we consider its own historical
experience in renewing similar arrangements. If historical experience does not
exist then an entity would consider market participant assumptions regarding
renewal, including 1) highest and best use of the asset by a market participant,
and 2) adjustments for other entity-specific factors included in SFAS 142. We
are currently evaluating the impact that adopting FSP 142-3 will have on our
financial statements.
  In
May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The adoption of SFAS 162 is not expected to have a material effect
on our financial statements.
  In
June 2008, the FASB issued FSP Emerging Issues Task Force 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 concludes that
unvested share-based payment awards that contain rights to receive
non-forfeitable dividends or dividend equivalents are participating securities,
and thus, should be included in the two-class method of computing earnings per
share, or EPS. FSP EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years. Early
application of EITF 03-6-1 is prohibited. It also requires that all prior-period
EPS data be adjusted retrospectively. The adoption of this statement is not
expected to have a material effect on our financial statements.
  In
June 2008, the FASB issued EITF 07-5, “Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF
07-5 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years.
Early application is not permitted. Paragraph 11(a) of SFAS 133 specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in
stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument. EITF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
SFAS 133 paragraph 11(a) scope exception. We believe adopting this statement
will have a material impact on the financial statements because among other
things, any option or warrant previously issued and all new issuances
denominated is U.S. dollars will be required to be carried as a liability and
marked to market each reporting period.
  On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”)
which clarifies the application of SFAS 157, “Fair Value Measurements” in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157-3 became effective on
October 10, 2008, and its adoption did not have a material impact on our
financial position or results for the year ended December 31,
2008.
  In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP
FAS 140-4 and FIN 46(R)-8 amends FAS 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities” and FIN 46(R),
“Consolidation of Variable Interest Entities” to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN
46(R)-8 will not have a material impact on our consolidated financial statements
because we do not have any variable interest entities.
  28
  In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20, Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the impairment
model included within EITF 99-20, “Recognition of Interest Income and Impairment
of Purchased Beneficial Interests and Beneficial Interests that Continue to be
Held by a Transferor in Securitized Financial Assets” (“EITF 99-20”) to be more
consistent with the impairment model of SFAS 115,“Accounting for Certain
Investments in Debt and Equity”. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our
consolidated financial statements because all of our investments in debt
securities are classified as trading securities.
  Item
      8.
              Financial
      Statements and Supplementary Data.
  See our
Financial Statements beginning on page F-1.
  Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
  None.
  Item
      9A.
              Controls
      and Procedures.
  As a
smaller reporting company, we are not required to provide the information
requested by this item.
  Item
      9A(T)
              Controls
      and Procedures.
  Evaluation
of Disclosure Controls and Procedures
  As
required by Rule 15d-15(b) of the Exchange Act, our Chief Executive Officer
and Interim Chief Financial Officer carried out an evaluation under the
supervision and with the participation of our management, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant
to Exchange Act Rule 15d-14 as of the end of the period covered by this
report. Based on the foregoing evaluation, we have concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic filings with the Securities
and Exchange Commission and to ensure that information required to be disclosed
in our periodic filings with the Securities and Exchange Commission is
accumulated and communicated to our management, including our Chief Executive
Officer and Interim Chief Financial Officer, to allow timely decisions regarding
required disclosures.
  There
have not been any changes in our internal control over financial reporting
during the quarter ended December 31, 2008 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
  Management’s
Annual Report on Internal Control Over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting in accordance with as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over
financial reporting is designed to provide reasonable assurance regarding the
(i) effectiveness and efficiency of operations, (ii) reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles, and (iii) compliance
with applicable laws and regulations. Our internal controls framework is based
on the criteria set forth in the Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  29
  Management’s
assessment of the effectiveness of the smaller reporting company’s internal
control over financial reporting is as of the year ended December 31, 2008.
We believe that internal control over financial reporting is effective. We have
not identified any, current material weaknesses considering the nature and
extent of our current operations and any risks or errors in financial reporting
under current operations.
  This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permits us to provide only management’s report in this
Annual Report.
  Item
      9B.
              Other
      Information.
  None.
    30
  PART
III
  Item
      10.
              Directors,
      Executive Officers and Corporate
Governance.
  The
following table sets forth information regarding the members of our board of
directors and our executive officers. All directors hold office for one-year
terms until the election and qualification of their successors. Officers are
elected by our board of directors and serve at their discretion.
  Name
                
                Age
                
                PositionTai-ming
      Ou
                
                54
                
                Chief
      Executive Officer and Chairman of the BoardRi-wen
      Xue
                
                44
                
                Chief
      Operating Officer and DirectorYun
      He
                
                41
                
                Vice
      President of SalesShannon
      Yan
                
                33
                
                Interim
      Chief Financial OfficerQin
      Yang
                
                49
                
                Director
 
  Biographies
  Tai-ming Ou, Chief Executive Officer
and Chairman of the Board.Mr. Ou is one of our co-founders and has
been our Chief Executive Officer since inception in 1995. Prior to our founding,
Mr. Ou was the Director of General and Administrative Office of Fuqing
First Secondary School and was responsible for building construction, repair and
maintenance and purchases of teaching instruments, property, plant and
equipment, and office stationery. Mr. Ou was also in charge of operating
and managing a factory run by the school. Mr. Ou is a certified senior
economist in the People’s Republic of China. Mr. Ou graduated from Fujian
Normal University in 1981 with a Bachelor’s degree in mathematics.
  Ri-wen Xue, Chief Operating Officer
and Director.Mr. Xue joined us in early 2000 as Executive Secretary
to the General Manager. In this capacity, Mr. Xue was in charge of
assisting the General Manager in dealing with daily affairs, planning and
implementing our business management system, adjusting our organizational chart,
establishing employee job descriptions and functional department duties. In
October 2002, Mr. Xue was promoted to Production Manager and became
responsible for improving production processes and technology. In
December 2003, Mr. Xue was promoted to the position of Vice President
- Production and Engineering, and Chairperson of the Board of Supervisors, where
he was in charge of planning and carrying out new project development,
streamlining production and engineering processes, and undertaking research and
development, technology applications and improvements. In October 2006,
Mr. Xue became our Chief Operating Officer and a Director. Prior to joining
us, Mr. Xue was a Pipelining Operator, Quality Control, and Local Assistant
Manager at the Chip Copperize Corporation in Japan from April 1995 to
April 1999. Mr. Xue is a certified senior economist and a certified
senior engineer in the People’s Republic of China and graduated from Fujian
Finance College in 1985 with a Bachelor’s degree in finance.
  Yun He, Vice President of
Sales.Mr. He is one of
our co-founders and became Sales Manager in 1995, promoting sales of our resins
and printing inks in the domestic People’s Republic of China market. Mr. He
has been our Vice President of Sales since 1997. Prior to our formation,
Mr. He established an export business in 1992 and engaged in international
trade and exporting local garments, food, toys, ornaments and handicrafts to
Russia, the Czech Republic and Germany. Mr. He graduated from Fujian Normal
University in 1989 with a Bachelor’s degree in Chinese literature.
  Shannon Yan, Interim Chief Financial
Officer.Ms. Yan joined us on July 31, 2008 and has served as
our Interim Chief Financial Officer since that date. From January 2007
through July 2008, Ms. Yan served as a senior financial analyst for
Sara Lee Corporation. Prior thereto, from June 2005 through
December 2006, Ms. Yan served as a financial analyst and project
leader, and from May 2003 through May 2005, as a senior accountant,
for World Richman Manufacturing Corporation, an international manufacturer of
leather, Koskin and nylon bags. Ms. Yan is completing her MBA degree at the
University of Chicago with concentrations in accounting, finance and strategic
management in 2009. Ms. Yan holds a B.A. in English from Sichuan
International Studies University in China.
  31
  Qin Yang, Director.Ms. Yang is one of our co-founders and has been a director since
inception in 1995. Ms. Yang had previously founded the Fuqing Welfare
Garment Factory in 1984 and served as its Chief Designer and director.
Ms. Yang graduated from Fujian Industrial Arts School in the Fujian
province of the People’s Republic of China.  Mr. Ou and
Ms. Yang and are husband and wife.
  Board
Committees
  Audit Committee.We intend to
establish an audit committee of the board of directors, which will consist of
independent directors of which at least one will qualify as a qualified
financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. The
audit committee’s duties will be to recommend to our Board of Directors the
engagement of independent auditors to audit our financial statements and to
review our accounting and auditing principles. The audit committee will review
the scope, timing and fees for the annual audit and the results of audit
examinations performed by the internal auditors and independent public
accountants, including their recommendations to improve the system of accounting
and internal controls. The audit committee would at all times be composed
exclusively of directors who are, in the opinion of our Board of Directors, free
from any relationship that would interfere with the exercise of independent
judgment as a committee member and who possess an understanding of financial
statements and generally accepted accounting principles.
  Compensation Committee.We
intend to establish a compensation committee of the Board of Directors. The
compensation committee would review and approve our salary and benefits
policies, including compensation of executive officers.
  Code
of Ethics
  The Board
of Directors has adopted a Code of Ethics that is applicable to all of our
directors, officers and employees, including our Chief Executive Officer,
Interim Chief Financial Officer and principal accounting officer. We will
provide our Code of Ethics without charge upon request. Requests should be made
in writing and addressed to Shannon Yan, 20 Sterling Circle, Suite 204, Wheaton,
Illinois 60187.
  Item
      11.
              Executive
      Compensation.
  Summary
Compensation Table
  The
following table summarizes the annual and long-term compensation paid to
Tai-ming Ou, our Chief Executive Officer, who we refer to in this annual report
as the “named executive officer.” During 2008, no executive officer received
annual remuneration in excess of $100,000.
  Summary
Compensation Table
  Name
      and Principal Position
                
                Year
                
                Salary
                
                Option
      Awards(1)
                
                TotalTai-ming
      Ou
                  President
      and Chief Executive Officer
                  (principal
      executive officer)
                
                2008
                
                $31,136
                
                $78,501
                
                $109,6372007
                
                $18,462
                
                ––
                
                $ 18,462
 ———————
  (1)
              The
      dollar amounts in this column reflect the dollar amounts recognized for
      financial statement reporting purposes with respect to the year ended
      December 31, 2008, in accordance with SFAS
  123R.
  Employment
Agreement
  On
January 9, 2008, we entered into a two-year employment agreement with
Tai-ming Ou, which agreement shall be automatically renewed for additional
one-year periods until either we or Mr. Ou, as the case may be, gives the
other written notice of its intent not to renew the agreement at least 90 days
prior to the end of the then current term. Pursuant to this agreement,
Mr. Ou shall serve as our Chief Executive Officer and received a salary of
approximately $2,595 per month during the first year of the agreement. We
increased Mr. Ou’s salary by 10% to approximately $2,854 per month
following the one year anniversary of the agreement. In addition, under this
agreement, we granted Mr. Ou options to purchase 65,000 shares of common
stock with an exercise price of $2.50 per share and 65,000 shares of common
stock with an exercise price of $3.00 per share, with all options vesting
quarterly over three years. If Mr. Ou’s employment is terminated without
cause or he resigns for good reason, all unvested options shall vest and
Mr. Ou will be entitled to the continuation of benefits and the payment of
his salary for 12 months.
  32
  Outstanding
Equity Awards at Fiscal Year-End
  The
following table shows information concerning unexercised options outstanding as
of December 31, 2008 for our named executive officer.
  Outstanding
Equity Awards at Fiscal Year-End Table
  Name
                    
                    Shares
      Subject to Options
                    
                    Exercise
      Price
                    
                    Vesting
      Schedule
                    
                    Expiration
                    
                    Vested
      Amount of Shares 12/31/2008Tai-ming
      Ou
                    
                    65,000(1)
                    
                    $2.50
                    
                    1/12
      every three months following the grant date
                    
                    10
      years from date of grant
                    
                    21,66765,000(1)
                    
                    $3.00
                    
                    1/12
      every three months following the grant date
                    
                    10
      years from date of grant
                    
                    21,667
 ———————
  (1)
              Vests
      in 12 equal installments every three months following the grant
      date.
  Equity
Compensation Plan Information
  The
following table provides information as of December 31, 2008 about our 2008
Equity Incentive Plan under which shares of our common stock may be issued to
directors, officers, consultants, advisors and employees whose services are
considered valuable.
  Plan category
                
                (a)
                  Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                
                (b)
                  Weighted-average
      exercise price of  outstanding options, warrants and
      rights
                
                (c)
                  Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity compensation plans approved by security holders
                
                1,680,000
                
                2.75
                
                320,000Equity compensation plans not approved by security holders
                
                ––
                
                ––
                
                ––All
      plans
                
                1,680,000
                
                2.75
                
                320,000
 
  33
  2008
Equity Incentive Plan
  Our board
of directors and stockholders adopted the 2008 Equity Incentive Plan on
January 9, 2008. The purpose of the 2008 Equity Incentive Plan is to
provide an incentive to attract and retain directors, officers, consultants,
advisors and employees whose services are considered valuable, to encourage a
sense of proprietorship and to stimulate an active interest of such persons in
our development and financial success. Under the 2008 Equity Incentive Plan, we
are authorized to issue up to 2,000,000 stock options, 1,000,000 of which shall
have an exercise price per share equal to the greater of (i) $2.50 or (ii) 100%
of the fair market value of a share of common stock on the date of grant and
1,000,000 of which shall have an exercise price per share equal to the greater
of (i) $3.00 or (ii) 100% of the fair market value of a share of common stock on
the date of grant. Under the 2008 Equity Incentive Plan, we are authorized to
issue incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended, and non-qualified stock options and
all options under the plan shall vest quarterly over three years. The 2008
Equity Incentive Plan is administered by our board of directors.
  Compensation
of Directors
  The
following table sets forth director compensation for the year ended
December 31, 2008.
  Director
Compensation
  Name
                
                Fee
      Earned or
                  Paid
      in Cash
                
                All
      Other
                  Compensation
                
                TotalQin
      Yang
                
                $17,298
                
                $12,077
                
                $29,375
 
  Narrative to Director Compensation
Table.  Ms. Qin Yang, the wife of Tai-ming Ou, was one of
our original founders in 1995 and has been one of our directors since that time.
In addition, since June 2006, Ms. Yang has been an independent
contractor, and for such services received $1,442 per month or $17,298per annum during the
year ended December 31, 2008. In 2009, Ms. Yang’s monthly compensation
as an independent contractor is anticipated to be at $1,442 per month or $17,298
per annum.
  Compensation Committee Interlocks and Insider
Participation
  During the period between
January 1, 2008 and January 31, 2008, each director participated in
any deliberations of our Board of Directors concerning executive officer
compensation.
 
 Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
 Principal
Stockholders and Shareholding of Management
  The
following table sets forth information with respect to the beneficial ownership
of our common stock as of March 18, 2009 by:
  ·
              each
      person known by us to beneficially own more than 5.0% of our common
      stock;
 ·
              each
      of our directors;
 ·
              our
      named executive officer; and
 ·
              all
      of our directors and executive officers as a
  group.
  The percentages
of common stock beneficially owned are reported on the basis of regulations of
the Securities and Exchange Commission governing the determination of beneficial
ownership of securities. Under the rules of the Securities and Exchange
Commission, a person is deemed to be a beneficial owner of a security if that
person has or shares voting power, which includes the power to vote or to direct
the voting of the security, or investment power, which includes the power to
dispose of or to direct the disposition of the security. Except as indicated in
the footnotes to this table, each beneficial owner named in the table below has
sole voting and sole investment power with respect to all shares beneficially
owned and each person’s address is c/o China Clean Energy Inc., 20 Sterling
Circle, Suite 204, Wheaton, Illinois 60187.
  34
  As of
March 27th, 2009, we had 31,512,269shares outstanding.
  Name
      and Address of Beneficial Owner
                    
                    Number
      of Shares
                      Beneficially
      Owned(1)
                    
                    
                    Percentage
      of Shares
                      Beneficially
      Owned(1)Tai-ming
      Ou
                    
                    
                    7,632,005
                    (2)
                    
                    
                    13
                    %Qin
      Yang
                    
                    
                    3,585,567
                    (3)
                    
                    
                    11
                    %Nai-ming
      Yu
                    
                    
                    2,399,250
                    
                    
                    
                    8
                    %Ri-wen
      Xue
                    
                    
                    908,020All
      officers and directors as a group (5 persons)
                    
                    
                    12,125,592
                    
                    
                    
                    27
                    %
 ———————
  *
              Less
      than 1%
  (1)
              Shares
      of common stock beneficially owned and the respective percentages of
      beneficial ownership of common stock assume the exercise of all options,
      warrants and other securities convertible into common stock beneficially
      owned by such person or entity currently exercisable or exercisable within
      60 days of March 27, 2008. Shares issuable pursuant to the exercise
      of stock options and warrants exercisable within 60 days are deemed
      outstanding and held by the holder of such options or warrants for
      computing the percentage of outstanding common stock beneficially
      owned by such person, but are not deemed outstanding for computing
      the percentage of outstanding common stock beneficially owned by any
      other person.
  (2)
              Includes
      (i) 65,000 shares of common stock issuable upon the exercise of options,
      (ii) 3,518,900 shares of common stock held directly by Qin Yang and (iii)
      1,667 shares of common stock issuable upon the exercise of options held by
      Qin Yang. Tai-ming Ou and Qin Yang are husband and
  wife.
  (3)
              Includes
      (i) 1,667 shares of common stock issuable upon the exercise of options,
      (ii) 3,916,438 shares of common stock held directly by Tai-ming Ou and
      (iii) 65,000 shares of common stock issuable upon the exercise of options
      held by Tai-ming Ou. Tai-ming Ou and Qin Yang are husband and
      wife.
  Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence.
  We review
all relationships and transactions in which the company and our directors and
executive officers or their immediate family members are participants to
determine whether such persons have a direct or indirect material interest.
Transactions that we have determined to be directly or indirectly material to us
or a related person are disclosed below. We believe each transaction is on terms
no less favorable to us than the terms generally available to an unaffiliated
third-party under the same or similar circumstances.
  In
connection with our January 9, 2008 private placement, Tai-ming Ou, our
Chief Executive Officer and Chairman, agreed to place 1,042,012 shares of common
stock held by him into an escrow account, with such shares to be released to the
investors in such private placement should we fail to either (i) commence the
production of biodiesel at our production facility in Jiang Yin, People’s
Republic of China on or before January 1, 2009 or (ii) record at least
$14,000,000 of adjusted net income for the fiscal year ending December 31,
2009. As a result of construction delays, we failed to commence the production
of biodiesel at our production facility in Jian Yin on or before January 1,
2009 and on January 30, 2009 these 1,042,012 shares of common stock held by
Mr. Ou were disbursed, pro rata, among the private placement
investors.
  In
connection with our January 9, 2008 private placement, Yun He, our Vice
President of Sales, agreed to place 235,293 shares of common stock held by him
into an escrow account, with such shares to be released to the investors in such
private placement should we fail to either (i) commence the production of
biodiesel at our production facility in Jiang Yin, People’s Republic of China on
or before January 1, 2009 or (ii) record at least $14,000,000 of adjusted
net income for the fiscal year ending December 31, 2009. As a result of
construction delays, we failed to commence the production of biodiesel at our
production facility in Jian Yin on or before January 1, 2009 and on
January 30, 2009 these 235,293 shares of common stock held by Mr. He
were disbursed, pro rata, among the private placement investors.
  35
  In
connection with our January 9, 2008 private placement, Ri-wen Xue, our
Chief Operating Officer and Director, agreed to place 201,680 shares of common
stock held by him into an escrow account, with such shares to be released to the
investors in such private placement should we fail to either (i) commence the
production of biodiesel at our production facility in Jiang Yin, People’s
Republic of China on or before January 1, 2009 or (ii) record at least
$14,000,000 of adjusted net income for the fiscal year ending December 31,
2009. As a result of construction delays, we failed to commence the production
of biodiesel at our production facility in Jian Yin on or before January 1,
2009 and on January 30, 2009 these 201,680 shares of common stock held by
Mr. Xue were disbursed, pro rata, among the private placement
investors.
  In
connection with our January 9, 2008 private placement, Gary Zhao, our
former Chief Financial Officer and a former Director, agreed to place 21,015
shares of common stock held by him into an escrow account, with such shares to
be released to the investors in such private placement should we fail to either
(i) commence the production of biodiesel at our production facility in Jiang
Yin, People’s Republic of China on or before January 1, 2009 or (ii) record
at least $14,000,000 of adjusted net income for the fiscal year ending
December 31, 2009. As a result of construction delays, we failed to
commence the production of biodiesel at our production facility in Jian Yin on
or before January 1, 2009 and on January 30, 2009 these 21,015 shares
of common stock held by Mr. Zhao were disbursed, pro rata, among the
private placement investors.
  Fujian
Zhongde Technology Co., Ltd., our wholly owned subsidiary, purchases certain raw
materials from Fujian Zhongde Waste Oil Co. Ltd. Yang Fan, a shareholder of
Fujian Zhongde Waste Oil Co. Ltd., is the niece of Yang Qin, our director and an
11% shareholder. In the years ended December 31, 2008 and 2007, such
purchases from Fujian Zhongde Waste Oil Co. Ltd. totaled $869,553 and
$5,668,371, respectively. As of December 31, 2008 and 2007, there were no
outstanding payables due to Fujian Zhongde Waste Oil Co. Ltd.
  Director
Independence
  We do not
currently have any independent directors.
  Item
      14.
              Principal
      Accountant Fees and Services.
  We
appointed Moore Stephens Wurth Frazer and Torbet, LLP on April 9, 2008 to
serve as our principal accountant and audit our consolidated financial
statements for the year ended December 31, 2008. Fees billed for
professional services provided to our Company by this firm for the fiscal year
ended December 31, 2008 were:
  2008Audit
      Fees
                  $
                  160,000Audit-Related
      Fees
                  $
                  0Tax
      Fees
                  $
                  0All
      Other Fees
                  $
                  0
  Michael
T. Studer CPA P.C. served as our principal accountant from October 30, 2006
through April 9, 2008 and audited our consolidated financial statements for
the year ended December 31, 2007. Fees billed for professional services
provided to our Company by this firm for the fiscal years ended
December 31, 2007 and 2008 were:
 2008
                    
                    2007Audit
      Fees
                    $
                    0
                    
                    $
                    102,000Audit-Related
      Fees
                    $
                    0
                    
                    $
                    0Tax
      Fees
                    $
                    0
                    
                    $
                    0All
      Other Fees
                    $
                    0
                    
                    $
                    0
  
 36
  PART
IV
  Item
      15.
              Exhibits
      and Financial Statement Schedules.
  Exhibits
 Exhibit
                  Number
                
                Description3.1
                
                Composite
      Certificate of Incorporation of China Clean Energy Inc. (incorporated by
      reference to Exhibit 3.1 to the Registration Statement on
      Form SB-2 of China Clean Energy Inc. filed with the Securities and
      Exchange Commission on February 1, 2008)3.2
                
                Bylaws
      of China Clean Energy Inc. (incorporated by reference to Exhibit 3.3
      to the Current Report on Form 8-K of China Clean Energy Inc. filed
      with the Securities and Exchange Commission on October 30,
      2006)10.1
                
                Amended
      and Restated Consulting Agreement, dated January 18, 2007, between
      Fujian Zhongde Technology Co., Ltd. and Allstar Capital Inc. (incorporated
      by reference to Exhibit 10.6 to our Registration Statement on
      Form SB-2 filed with the Securities and Exchange Commission on
      January 22, 2007)10.2
                
                Engagement
      Letter, dated September 19, 2006, between China Clean Energy
      Resources, Ltd. and Westminster Securities Corporation (incorporated by
      reference to Exhibit 10.7 to our Registration Statement on
      Form SB-2 filed with the Securities and Exchange Commission on
      January 22, 2007)10.3
                
                Credit
      Facility, dated February 1, 2005, between DBS Bank Ltd. and Fujian
      Zhongde Technology Co., Ltd. (incorporated by reference to
      Exhibit 10.8 to our Registration Statement on Form SB-2 filed
      with the Securities and Exchange Commission on January 22,
      2007)10.4
                
                Land
      Investment Agreement, dated December 25, 2006, between Fujian Zhongde
      Technology Co., Ltd and Fuzhou City Jiangyin Industry District Management
      Committee (incorporated by reference to Exhibit 10.11 to our
      Registration Statement on Form SB-2 filed with the Securities and
      Exchange Commission on January 22, 2007)10.5
                
                Supplier
      Agreement, dated March 5, 2007 between China Clean Energy Inc. and
      Fujian Quanzhou Zhong Yuan Long Chemistry Industry Co., Ltd. (incorporated
      by reference to Exhibit 10.13 of Amendment Number 2 to the
      Registration Statement on form SB-2/A of China Clean Energy Inc. filed
      with the Securities and Exchange Commission on May 25,
      2007)10.6
                
                Supplier
      Agreement, dated March. 06, 2007 between China Clean Energy, Inc. and
      Meiweike (Shaxian) Linchan Chemistry Co., Ltd. (incorporated by reference
      to Exhibit 10.14 of to Amendment Number 2 to the Registration
      Statement on form SB-2/A of China Clean Energy Inc. filed with the
      Securities and Exchange Commission on May 25, 2007)10.7
                
                Supplier
      Agreement, dated March. 05, 2007 between China Clean Energy, Inc. and
      Xinjiang Guansheng Technology Chemistry Co., Ltd. (incorporated by
      reference to Exhibit 10.15 of to Amendment Number 2 to the
      Registration Statement on form SB-2 of China Clean Energy Inc. filed with
      the Securities and Exchange Commission on May 25, 2007)10.8
                
                Form of
      Securities Purchase Agreement, dated January 9, 2008 (incorporated by
      reference to Exhibit 10.1 to the Current Report on Form 8-K of
      China Clean Energy Inc. filed with the Securities and Exchange Commission
      on January 10, 2008).
   37
   10.9
                
                Form of
      Registration Rights Agreement, dated January 9, 2008 (incorporated by
      reference to Exhibit 10.2 to the Current Report on Form 8-K of
      China Clean Energy Inc. filed with the Securities and Exchange Commission
      on January 10, 2008)10.10
                
                Form of
      Class A Common Stock Purchase Warrant (incorporated by reference to
      Exhibit 10.3 to the Current Report on Form 8-K of China Clean
      Energy Inc. filed with the Securities and Exchange Commission on
      January 10, 2008)10.11
                
                Form of
      Lock-up Letter Agreement (incorporated by reference to Exhibit 10.4
      to the Current Report on Form 8-K of China Clean Energy Inc. filed
      with the Securities and Exchange Commission on January 10,
      2008)10.12
                
                2008
      Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to
      the Current Report on Form 8-K of China Clean Energy Inc. filed with
      the Securities and Exchange Commission on January 10,
      2008)10.13
                
                Form of
      2008 Incentive Stock Option Agreement (incorporated by reference to
      Exhibit 10.6 to the Current Report on Form 8-K of China Clean
      Energy Inc. filed with the Securities and Exchange Commission on
      January 10, 2008)10.14
                
                Form of
      2008 Non-Qualified Stock Option Agreement (incorporated by reference to
      Exhibit 10.7 to the Current Report on Form 8-K of China Clean
      Energy Inc. filed with the Securities and Exchange Commission on
      January 10, 2008)10.15
                
                Employment
      Agreement, dated as of January 9, 2008, by and between China Clean
      Energy Inc. and Tai-ming Ou (incorporated by reference to
      Exhibit 10.8 to the Current Report on Form 8-K of China Clean
      Energy Inc. filed with the Securities and Exchange Commission on
      January 10, 2008)10.16
                
                Employment
      Agreement, dated as of January 9, 2008, by and between China Clean
      Energy Inc. and Ri-wen Xue (incorporated by reference to
      Exhibit 10.10 to the Current Report on Form 8-K of China Clean
      Energy Inc. filed with the Securities and Exchange Commission on
      January 10, 2008)10.17
                
                Employment
      Agreement, dated as of January 9, 2008, by and between China Clean
      Energy Inc. and Yun He (incorporated by reference to Exhibit 10.11 to
      the Current Report on Form 8-K of China Clean Energy Inc. filed with
      the Securities and Exchange Commission on January 10,
      2008)14.1
                
                Code
      of Ethics (incorporated by reference to Exhibit 14.1 to the Annual
      Report on Form 10-KSB of China Clean Energy Inc. filed with the
      Securities and Exchange Commission on March 11, 2008)21.1
                
                List
      of Subsidiaries (incorporated by reference to Exhibit 21.1 to the
      Registration Statement on Form SB-2 of China Clean Energy Inc. filed
      with the Securities and Exchange Commission on February 1,
      2008)31.1
                
                Section 302
      Certification of Principal Executive Officer31.2
                
                Section 302
      Certification of Principal Financial Officer32.1
                
                Section 906
      Certification of Principal Executive Officer32.2
                
                Section 906
      Certification of Principal Financial
Officer
   38
  SIGNATURES
  In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  Dated:
August 18, 2009
  CHINA
      CLEAN ENERGY INC./s/ 
      Tai-ming OuTai-ming
      OuPresident
      and Chief Executive Officer and Chairman of the Board of
      Directors(Principal
      Executive Officer)
  Pursuant
to the requirements of the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant on August 18, 2009 in the
capacities indicated.
  Name
              
              Title/s/ 
      Tai-ming Ou
              
              President
      and Chief Executive Officer and ChairmanTai-ming
      Ou
              
              of
      the Board of Directors (Principal Executive Officer)/s/ 
      Shannon Yan
              
              Interim
      Chief Financial Officer (Principal FinancialShannon
      Yan
              
              Officer
      and Principal Accounting Officer)/s/ 
      Ri-wen Xue
              
              Chief
      Operating Officer and DirectorRi-wen
      Xue/s/ 
      Qin Yang
              
              DirectorQin
      Yang
 
  
 39
  CHINA CLEAN ENERGY INC.
  INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2008 AND 2007
  Report
      of Independent Registered Public Accounting Firm
              F-2Report
      of Independent Registered Public Accounting Firm
              F-3Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              F-4Consolidated
      Statements of Income and Other Comprehensive Income for the Years ended
      December 31, 2008 and 2007
              F-5Consolidated
      Statements of Shareholders’ Equity and Comprehensive Income
              F-6Consolidated
      Statements of Cash Flows for the Years ended December 31, 2008 and
      2007
              F-7Notes
      to Consolidated Financial Statements
              F-8
 
   F-1
   REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders
 of China
Clean Energy Inc.
  We have
audited the accompanying consolidated balance sheet of China Clean Energy Inc.
and subsidiaries as of December 31, 2008 and the related statements of income,
stockholders’ equity and comprehensive income, and cash flows for the year then
ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of China
Clean Energy Inc. and subsidiaries as of December 31, 2007 in the accompanying
consolidated financial statements were audited by other auditors whose report
dated March 7, 2008 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 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 Clean Energy Inc. and
subsidiaries as of December 31, 2008 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
  
  /s/ Moore
Stephens Wurth Frazer and Torbet, LLP
  
  Walnut,
California
  March 26,
2009
   F-2
    REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders of
 China
Clean Energy Inc.
 
 I have
audited the accompanying consolidated balance sheets of China Clean Energy Inc.
and subsidiaries (the “Company”) as of December 31, 2007 and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company’s management. My responsibility is to express an opinion on these
financial statements based on my audits.
 
 I
conducted my audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audit to obtain reasonable assurance about whether the 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
financial statement presentation. I believe that my audit provides a reasonable
basis for my opinion.
 
 In my
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Clean Energy Inc. and
subsidiaries as of December 31, 2007 and the results of their operations and
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.
  
 
 /s/
Michael T. Studer CPA P.C.
 Michael
T. Studer CPA P.C.
 
 Freeport,
New York
 March 7,
2008
      
 F-3
  CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 AS
OF DECEMBER 31, 2008 AND 2007
  December
      31,2008
                    
                    
                    2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                    
                    $
                    2,913,711
                    
                    
                    $
                    1,133,555Accounts
      receivable, net of allowance for doubtful accounts of $136,389
                      and
      $407,593 as of December 31, 2008 and December 31, 2007,
      respectively
                    
                    
                    1,092,768
                    
                    
                    
                    2,795,363Inventories
                    
                    
                    815,210
                    
                    
                    
                    1,361,478Advances
      for inventory and other current assets
                    
                    
                    310,773
                    
                    
                    
                    179,815Total
      current assets
                    
                    
                    5,132,462
                    
                    
                    
                    5,470,211PLANT
      AND EQUIPMENT, NET
                    
                    
                    19,167,624
                    
                    
                    
                    5,820,045INTANGIBLE
      ASSETS, NET
                    
                    
                    5,072,626
                    
                    
                    
                    4,879,635ADVANCES
      ON EQUIPMENT PURCHASES
                    
                    
                    3,649,192
                    
                    
                    
                    872,974TOTAL
      ASSETS
                    
                    $
                    33,021,904
                    
                    
                    $
                    17,042,865LIABILITIES AND SHAREHOLDERS’
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    350,618
                    
                    
                    $
                    150,557Customer
      deposits
                    
                    
                    31,422
                    
                    
                    
                    181,825Accrued
      liabilities
                    
                    
                    349,435
                    
                    
                    
                    115,249Taxes
      payable
                    
                    
                    156,965
                    
                    
                    
                    334,049Short-term
      bank loans
                    
                    
                    ––
                    
                    
                    
                    1,028,228Long-term
      bank loans – current portion
                    
                    
                    236,308
                    
                    
                    
                    202,792Total
      current liabilities
                    
                    
                    1,124,748
                    
                    
                    
                    2,012,700LONG-TERM
      BANK LOANS
                    
                    
                    21,553
                    
                    
                    
                    241,097COMMITMENTS
      AND CONTINGENCIES
                    
                    
                    ––
                    
                    
                    
                    ––Total
      liabilities
                    
                    
                    1,146,301
                    
                    
                    
                    2,253,797SHAREHOLDERS’
      EQUITYPreferred
      stock, par value $0.001 per share, authorized 10,000,000 shares,
                      no
      shares issued and outstanding as of December 31, 2008 and
    2007
                    
                    
                    ––
                    
                    
                    
                    ––Common
      stock, par value $0.001 per share, authorized 90,000,000 shares,
                      31,512,269
      and 21,512,269 shares issued and outstanding as ofDecember
      31, 2008 and 2007, respectively
                    
                    
                    3,151
                    
                    
                    
                    2,151Additional
      paid-in capital
                    
                    
                    21,584,006
                    
                    
                    
                    7,053,834Statutory
      reserves
                    
                    
                    1,457,432
                    
                    
                    
                    1,195,744Retained
      earnings
                    
                    
                    5,661,025
                    
                    
                    
                    5,325,897Accumulated
      other comprehensive income
                    
                    
                    3,169,989
                    
                    
                    
                    1,211,442Total
      shareholders’ equity
                    
                    
                    31,875,603
                    
                    
                    
                    14,789,068Total
      liabilities and shareholders’ equity
                    
                    $
                    33,021,904
                    
                    
                    $
                    17,042,865
 
 See
report of independent registered public accounting firm.
  The
accompanying notes are an integral part of these statements.
  F-4
 
  CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 Years
      Ended December 31,2008
                        
                        
                        2007REVENUES
                        
                        $
                        18,169,835
                        
                        
                        $
                        21,756,010Less:
      Cost of goods sold
                        
                        
                        14,310,907
                        
                        
                        
                        15,882,799GROSS
      PROFIT
                        
                        
                        3,858,928
                        
                        
                        
                        5,873,211OPERATING
      EXPENSESelling and marketing
                        
                        
                        249,583
                        
                        
                        
                        695,007General and administrative
                        
                        
                        2,328,472
                        
                        
                        
                        1,556,599Research and development
                        
                        
                        154,499
                        
                        
                        
                        156,839Total
      operating expense
                        
                        
                        2,732,554
                        
                        
                        
                        2,408,445INCOME
      FROM OPERATIONS
                        
                        
                        1,126,374
                        
                        
                        
                        3,464,766OTHER
      INCOME (EXPENSE)Interest income (expense), net
                        
                        
                        24,707
                        
                        
                        
                        (104,872
                        )Other incomes (expenses)
                        
                        
                        (184,625
                        )
                        
                        
                        ––Total
      other income (expense)
                        
                        
                        (159,918
                        )
                        
                        
                        (104,872
                        )INCOME
      BEFORE  INCOME TAXES
                        
                        
                        966,456
                        
                        
                        
                        3,359,894PROVISION
      FOR INCOME TAXES
                        
                        
                        369,640
                        
                        
                        
                        ––NET
      INCOME
                        
                        
                        596,816
                        
                        
                        
                        3,359,894OTHER
      COMPREHENSIVE INCOMEForeign currency translation adjustment
                        
                        
                        1,958,547
                        
                        
                        
                        796,353COMPREHENSIVE
      INCOME
                        
                        $
                        2,555,363
                        
                        
                        $
                        4,156,247BASIC
      AND DILUTED EARNINGS PER SHAREWeighted average number of shares
                        
                        
                        31,293,091
                        
                        
                        
                        21,512,269Earnings per share
                        
                        $
                        0.0191
                        
                        
                        $
                        0.1562
  See
report of independent registered public accounting firm.
  The
accompanying notes are an integral part of these statements.
  F-5
  CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
 
 Additional
                      
                      
                      Retained
      Earnings
                      
                      
                      Accumulated
                        OtherCommon
      Stock
                      
                      
                      Paid-in
                      
                      
                      Statutory
                      
                      
                      Unrestricted
                      
                      
                      ComprehensiveShares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Reserves
                      
                      
                      Earnings
                      
                      
                      Income
                      
                      
                      TotalBalance,
      December 31, 2006
                      
                      
                      21,512,269
                      
                      
                      $
                      2,151
                      
                      
                      $
                      7,053,834
                      
                      
                      $
                      785,536
                      
                      
                      $
                      2,376,211
                      
                      
                      $
                      415,089
                      
                      
                      $
                      10,632,821Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,359,894
                      
                      
                      
                      
                      
                      
                      
                      3,359,894Adjustment
      to statutory reserve
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      410,208
                      
                      
                      
                      (410,208
                      )Foreign
      currencytranslation
      adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      796,353
                      
                      
                      
                      796,353Balance
      at December 31, 2007
                      
                      
                      21,512,269
                      
                      
                      
                      2,151
                      
                      
                      
                      7,053,834
                      
                      
                      
                      1,195,744
                      
                      
                      
                      5,325,897
                      
                      
                      
                      1,211,442
                      
                      
                      
                      14,789,068Common
      stock and warrants for cash
                      
                      
                      10,000,000
                      
                      
                      
                      1,000
                      
                      
                      
                      13,626,403
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,627,403Stock
      based compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      903,769
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      903,769Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      596,816
                      
                      
                      
                      
                      
                      
                      
                      596,816Adjustment
      to statutory reserve
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      261,688
                      
                      
                      
                      (261,688
                      )
                      
                      
                      
                      
                      
                      
                      ––Foreign
      currencytranslation
      adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,958,547
                      
                      
                      
                      1,958,547Balance
      at December 31, 2008
                      
                      
                      31,512,269
                      
                      
                      $
                      3,151
                      
                      
                      $
                      21,584,006
                      
                      
                      $
                      1,457,432
                      
                      
                      $
                      5,661,025
                      
                      
                      $
                      3,169,989
                      
                      
                      $
                      31,875,603
    See
report of independent registered public accounting firm.
  The
accompanying notes are an integral part of these
statements.
  F-6
  CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
  2008
                  
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet income
                  
                  $
                  596,816
                  
                  
                  $
                  3,359,894Adjusted to reconcile net income to cash provided by operating
      activities:Depreciation
                  
                  
                  707,177
                  
                  
                  
                  542,875Change
      in allowance for uncollectible accounts
                  
                  
                  (294,534
                  )
                  
                  
                  174,767Amortization of
      intangible assets
                  
                  
                  225,731
                  
                  
                  
                  178,635Stock-based
      compensation
                  
                  
                  903,769
                  
                  
                  
                  ––Writedown on
      inventory
                  
                  
                  93,838
                  
                  
                  
                  ––Loss on
      disposal of assets
                  
                  
                  177,905
                  
                  
                  
                  ––Impairment on
      fixed assets
                  
                  
                  74,817
                  
                  
                  
                  ––Changes in operating assets and liabilitiesAccounts
      receivable
                  
                  
                  2,159,868
                  
                  
                  
                  (729,952
                  )Inventories
                  
                  
                  536,611
                  
                  
                  
                  (340,505
                  )Advances for
      inventory and other current assets
                  
                  
                  (116,310
                  )
                  
                  
                  (135,505
                  )Accounts
      payable
                  
                  
                  186,224
                  
                  
                  
                  (211,552
                  )Customer
      deposit
                  
                  
                  (160,299
                  )
                  
                  
                  174,628Other
      payables and accrued liabilities
                  
                  
                  222,185
                  
                  
                  
                  69,353Taxes
      payables
                  
                  
                  (196,992
                  )
                  
                  
                  225,283Net
      cash provided by operating activities
                  
                  
                  5,116,806
                  
                  
                  
                  3,307,921CASH
      FLOWS FROM INVESTING ACTIVITIESAddition to construction in progress
                  
                  
                  (11,653,579
                  )
                  
                  
                  (1,162,047
                  )Purchase of equipment
                  
                  
                  (2,182,310
                  )
                  
                  
                  (614,343
                  )Proceeds from sale of equipment
                  
                  
                  160,871
                  
                  
                  
                  ––Deposit on purchase of land use rights
                  
                  
                  ––
                  
                  
                  
                  (2,467,388
                  )Advances for equipment purchases
                  
                  
                  (2,667,896
                  )
                  
                  
                  (838,422
                  )Net
      cash used in investing activities
                  
                  
                  (16,342,914
                  )
                  
                  
                  (5,082,200
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESNet proceeds from issuance of  common stock
                  
                  
                  13,627,403
                  
                  
                  
                  ––Payment on short-term bank loans
                  
                  
                  (1,081,102
                  )
                  
                  
                  (329,177
                  )Proceeds from long-term bank loans
                  
                  
                  ––
                  
                  
                  
                  426,319Payment on long-term bank loans
                  
                  
                  (213,336
                  )
                  
                  
                  ––Net
      cash provided by financing activities
                  
                  
                  12,332,965
                  
                  
                  
                  97,142EFFECT
      OF EXCHANGE RATE ON CASH
                  
                  
                  673,299
                  
                  
                  
                  568,980INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                  
                  
                  1,780,156
                  
                  
                  
                  (1,108,157
                  )CASH
      AND CASH EQUIVALENTS, beginning
                  
                  
                  1,133,555
                  
                  
                  
                  2,241,712CASH
      AND CASH EQUIVALENTS, ending
                  
                  $
                  2,913,711
                  
                  
                  $
                  1,133,555SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for:Interest expense
                  
                  $
                  50,672
                  
                  
                  $
                  114,227Income
      taxes
                  
                  $
                  298,024
                  
                  
                  $
                  ––
  See
report of independent registered public accounting firm.
  The
accompanying notes are an integral part of these
statements.
  F-7
  CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  For
The Years Ended December 31, 2008 and 2007
 NOTE
1 – ORGANIZATION AND BUSINESS
  China
Clean Energy, Inc. (“CCE” or the “Company”) was incorporated in the State of
Delaware on November 12, 2004. The Company originally through its direct
and indirect wholly-owned subsidiaries, China Clean Energy Resources Limited
(“CCER”), Fujian Zhongde Technology Co., Ltd. (“Fujian Zhongde”), synthesizes
and distributes renewable fuel products and specialty chemicals to customers in
both the People’s Republic of China (“PRC”) and abroad.
  On
November 5, 2007, CCER established a new wholly-owned subsidiary, Fujian
Zhongde Energy Co., Ltd. (“Zhongde Energy”), in Jiangyin Industrial Zone, Fuqing
City, Fujian Province, PRC. Zhongde Energy plans to build a biodiesel and
specialty chemicals refinery in the Jiangyin Industrial Park and produce and
sell biodiesel and specialty chemicals products. The construction of its
production plant is currently in progress.
  NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of
Consolidation
  The
accompanying consolidated financial statements of China Clean Energy Inc.
reflect the activities of CCE and its 100% owned subsidiaries CCER, Fujian
Zhongde and Zhongde Energy (collectively the “Company”). All inter-company
balances and transactions have been eliminated in consolidation.
  Basis of
Presentation
  The
financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States and are expressed
in US dollars.
  Use of
Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States 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. For example, the Company estimates the fair value of share
based compensation granted to its employees and estimates its potential losses
on uncollectible receivables. Management believes that the estimates utilized in
preparing its financial statements are reasonable and prudent. Actual results
could differ from those estimates.
  Fair Value of Financial
Instruments
  On
January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements,”
which defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. Current assets and current liabilities qualified as
financial instruments and management believes their carrying amounts are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and if
applicable, their current interest rate is equivalent to interest rates
currently available. The three levels are defined as follow:
  ·
              Level
      1 -- inputs to the valuation methodology are quoted prices (unadjusted)
      for identical assets or liabilities in active
  markets.
  ·
              Level
      2 -- inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
   F-8
  ·
              Level
      3 -- inputs to the valuation methodology are unobservable and significant
      to the fair value.
  As of
December 31, 2008 and 2007, the short term and long term bank loans
amounted to $236,308 and $21,553, and $1,231,020 and $241,097, respectively. In
accordance with SFAS 157, the Company determined that the carrying value of
these loans approximated the fair value using the level 2 inputs by comparing
the stated loan interest rate to the rate charged by the Bank of China to
similar loans.
  The
Company did not identify any assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
157.
  Foreign Currency
Translation
  The
functional currency of CCE and CCER is the United States dollar. The functional
currency of Fujian Zhongde and Zhongde Energy is the Chinese Renminbi (“RMB”).
The reporting currency of the Company is the United States dollar.
  Fujian
Zhongde and Zhongde Energy assets and liabilities are translated into United
States dollars at period-end exchange rates ($0.14670 and $0.13710 at
December 31, 2008 and 2007, respectively). Fujian Zhongde and Zhongde
Energy revenues and expenses are translated into United States dollars at
weighted average exchange rates for the periods ($0.14415 and $0.13710 for the
years ended December 31, 2008 and 2007, respectively). Resulting
translation adjustments are recorded as a component of accumulated other
comprehensive income (loss) within stockholders’ equity. The resulting
translation gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred. Items in the cash flow
statement are translated at the average exchange rate for the period. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
  As of
December 31, 2008 and 2007, translation adjustments resulting from this
process included in accumulated other comprehensive income in the consolidated
statement of stockholders’ equity amounted to $3,169,989 and $1,211,442,
respectively.
  Cash and Cash
Equivalents
  The
Company considers all highly liquid instruments with original maturities of
three months or less at the time of purchase to be cash
equivalents.
  Accounts
Receivable
  The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An estimate for doubtful accounts is made
when collection of the full amount is no longer probable. Known bad debts are
written off against allowance for doubtful accounts when
identified.
  Inventories
  Inventories
are stated at the lower of cost or market using weighted average method.
Management reviews inventories for obsolescence or cost in excess of net
realizable value periodically and records an inventory writedown and additional
cost of goods sold when the carrying value exceeds net realizable
value.
  Plant and
Equipment
  Plant and
equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When assets are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations. Depreciation of plant and equipment is
provided using the straight-line method for substantially all assets with
estimated lives as follows:
  F-9
  Estimated
      Useful LifeBuildings
                10-20
      yearsVehicle
                5
      yearsOffice
      equipment
                5
      yearsProduction
      equipment
                10
      years
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and placed into service. Maintenance, repairs and minor renewals are
charged directly to expense as incurred. Major additions and betterment to
buildings and equipment are capitalized. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred.
  Intangibles
  Under the
SFAS 142, "Goodwill and Other Intangible Assets", all goodwill and certain
intangible assets determined to have indefinite lives will not be amortized but
will be tested for impairment at least annually. Intangible assets other than
goodwill will be amortized over their useful lives and reviewed for impairment
in accordance with SFAS 144, "Accounting for Impairment or Disposal of
Long-Lived Assets".
  Intangible
assets consist of land use right and patents. All land in the People’s Republic
of China is owned by government, however, the government grants “land use
rights”. China Clean Energy, through its 100% owned subsidiaries, owns three
land use rights with usable life ranging from 42 to 50 years which will expire
ranging from 2048 to 2058. The Company amortizes the cost of land use right over
their usable life.
  Patents,
which have legal life of 10 years in PRC, are being amortized over 10 years as
management believes that ten years is the estimated useful life of the ptaents
currently owned by the Company.
  Impairment of Long-Lived
Assets
  The
Company reviews its long-lived tangible and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may no longer be recoverable. When these events occur, the Company
measures impairment by comparing the carrying value of the long-lived assets to
the estimated undiscounted future cash flows expected to result from the use of
the assets and their eventual disposition. If the sum of the expected discounted
cash flows is less than the carrying amount of the assets, the Company would
recognize an impairment loss based on the fair value of the assets. As of
December 31, 2008 and 2007, the Company recorded an impairment loss
totaling $74,817 and $0, respectively.
  Revenue
Recognition
  F-10
  Sales are
recognized when the revenue is realized or realizable, and has been earned, in
accordance with the U.S. Securities and Exchange Commission’s Staff Accounting
Bulletin No. 104, “Revenue Recognition in Financial Statements.” The
Company’s sales are related to sales of product. Revenue for product sales is
recognized as risk and title to the product transfer to the customer, which
usually occurs at the time when shipment is made, provided that: there are no
uncertainties regarding customer acceptance; persuasive evidence of an
arrangement exists; the sales price is fixed or determinable; and collectibility
is deemed probable. Substantially all of the Company’s products are sold FOB
(“free on board”) shipping point. Title to the product passes when the product
is delivered to the freight carrier.
  Transportation
and unloading charges and product inspection charges are included in selling
expenses and totaled $189,703 and $645,171 for the years ended December 31,
2008 and 2007, respectively.
  Research and Development
Costs
  Research
and development (or “R&D”) expenses include salaries, material, contract and
other outside service fees, and facilities and overhead costs. Under the
guidance of paragraphs 8 to 11 of SFAS 2 “Accounting for Research and
Development Costs”, the Company expenses the costs associated with the research
and development activities when incurred.
  The
research and development expenses are included in general and administrative
expenses and totaled $154,499 and $156,839 for the years ended December 31,
2008 and 2007, respectively.
  Stock-based
Compensation
  The
Company accounts for equity instruments issued in exchange for the receipt of
goods or services from other than employees in accordance with SFAS 123R,
“Accounting for Stock-Based Compensation,” and the conclusions reached by EITF
96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services.” Costs
are measured at the estimated fair market value of the consideration received or
the estimated fair value of the equity instruments issued, whichever is more
reliably determinable. The value of equity instruments issued for consideration
other than employee services is determined on the earlier of a performance
commitment or completion of performance by the provider of goods or services as
defined by EITF 96-18. In the case of equity instruments issued to consultants,
the fair value of the equity instrument is recognized over the term of the
consulting agreement.
  Income
Taxes
  The
Company records income taxes pursuant to SFAS 109, "Accounting for Income
Taxes". SFAS 109 requires the recognition of deferred income tax liabilities and
assets for the expected future tax consequences of temporary differences between
income tax basis and financial reporting basis of assets and liabilities.
Provision for income taxes consist of taxes currently due plus deferred
taxes.
  The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantially enacted by the balance sheet
date.
  Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated at the tax rates that are expected
to apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it is
related to items credited or charged directly to equity, in which case the
deferred tax is also dealt with in equity. Deferred tax assets and liabilities
are offset when they relate to income taxes levied by the same taxation
authority and the Company intends to settle its current tax assets and
liabilities on a net basis. Because there is no material difference between
income reported under Generally Accepted Accounting Principles in the United
States and income reported under Chinese tax regulation, there are no deferred
tax amounts at December 31, 2008 and 2007.
  F-11
  The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”) as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption had no
effect on the Company’s financial statements.
  China Income
Taxes
  The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax
Laws).
  Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the
old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).
  The key
changes are:
  a.
              The
      new standard EIT rate of 25% replaces the 33% rate applicable to both DES
      and FIEs, except for High Tech companies that pay a reduced rate of
      15%;
  b.
              Companies
      established before March 16, 2007 continue to enjoy tax holiday
      treatment approved by local government for a grace period of either for
      the next 5 years or until the tax holiday term is completed, whichever is
      sooner.
  Earnings Per
Share
  Basic
earnings per common share are computed on the basis of the weighted average
number of common shares outstanding during the period.
  Diluted
earnings per share are computed on the basis of the weighted average number of
common shares and dilutive securities (such as stock options and convertible
securities) outstanding. Dilutive securities having an anti-dilutive effect on
diluted earnings per share are excluded from the calculation.
  Reclassifications
  Retained
Earnings in the amount of $410,208 had been reclassified to Statutory Reserves
as of December 31 to conform to the 2008 financial statement presentation.
These reclassifications had no effect on net income or cash flows as previously
reported.
  Recent Accounting
Pronouncements
  In
March 2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133”, which changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company is currently evaluating the impact that
adopting SFAS 161 will have on its financial statements.
  F-12
  In
April 2008, the FASB issued FSP 142-3 “Determination of the useful life of
Intangible Assets”, which amends the factors a company should consider when
developing renewal assumptions used to determine the useful life of an
intangible asset under SFAS 142. This Issue is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. SFAS 142 requires companies to
consider whether renewal can be completed without substantial cost or material
modification of the existing terms and conditions associated with the asset. FSP
142-3 replaces the previous useful life criteria with a new requirement—that an
entity consider its own historical experience in renewing similar arrangements.
If historical experience does not exist then the Company would consider market
participant assumptions regarding renewal, including 1) highest and best use of
the asset by a market participant, and 2) adjustments for other entity-specific
factors included in SFAS 142. The Company is currently evaluating the impact
that adopting FSP 142-3 will have on its financial statements.
  In
May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The adoption of this statement is not expected to have a material
effect on the Company’s financial statements.
  In
May 2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee
Insurance Contracts – An interpretation of FASB Statement No. 60”. SFAS 163
requires that an insurance enterprise recognize a claim liability prior to an
event of default when there is evidence that credit deterioration has occurred
in an insured financial obligation. It also clarifies how Statement 60 applies
to financial guarantee insurance contracts, including the recognition and
measurement to be used to account for premium revenue and claim liabilities, and
requires expanded disclosures about financial guarantee insurance contracts. It
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, except for some disclosures about the insurance
enterprise’s risk-management activities. SFAS 163 requires that disclosures
about the risk-management activities of the insurance enterprise be effective
for the first period beginning after issuance. Except for those disclosures,
earlier application is not permitted. The adoption of this statement is not
expected to have a material effect on the Company’s financial
statements.
  In
June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities. FSP
EITF 03-6-1 concludes that unvested share-based payment awards that contain
rights to receive non-forfeitable dividends or dividend equivalents are
participating securities, and thus, should be included in the two-class method
of computing earnings per share (“EPS”). FSP EITF 03-6-1 is effective for fiscal
years beginning after December 15, 2008, and interim periods within those
years. Early application of EITF 03-6-1 is prohibited. It also requires that all
prior-period EPS data be adjusted retrospectively. The adoption of this
statement is not expected to have a material effect on the Company’s financial
statements.
  In
June 2008, the FASB issued Emerging Issues Task Force Issue 07-5
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock” (“EITF 07-5”). This Issue is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of Statement of Financial Accounting Standard 133 “Accounting
for Derivatives and Hedging Activities” (“SFAS 133”) specifies that a contract
that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in
stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument. EITF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
SFAS 133 paragraph 11(a) scope exception. The Company believes adopting this
statement will have a material impact on the financial statements because among
other things, any option or warrant previously issued and all new issuances
denominated is US dollars will be required to be carried as a liability and
marked to market each reporting period.
  F-13
  On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on our financial position or results for the year ended
December 31, 2008.
  In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP
FAS 140-4 and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional
disclosures regarding transfers of financial assets and interest in variable
interest entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or
annual reporting periods ending after December 15, 2008. FSP FAS 140-4 and
FIN 46(R)-8, will not have a material impact on our consolidated financial
statements because we do not have any variable interest entities.
  In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP
EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more
consistent with the impairment model of SFAS No. 115. FSP EITF 99-20-1
achieves this by amending the impairment model in EITF 99-20 to remove its
exclusive reliance on “market participant” estimates of future cash flows used
in determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1
did not have a material impact on our consolidated financial statements because
all of our investments in debt securities are classified as trading
securities.
  NOTE
3–ACCOUNTS
RECEIVABLE
  Accounts
receivable consisted of the following:
  December
      31,
                      2008
                    
                    
                    December
      31,
                      2007Accounts
      receivable
                    
                    $
                    1,229,157
                    
                    
                    $
                    3,202,956Less:
      allowance for doubtful accounts
                    
                    
                    (136,389
                    )
                    
                    
                    (407,593
                    )Accounts
      receivable, net
                    
                    $
                    1,092,768
                    
                    
                    $
                    2,795,363
  The
following table consists of allowance for doubtful accounts at December 31,
2008 and December 31, 2007.
  F-14
  December
      31,
                      2008
                    
                    
                    December
      31,
                      2007Beginning
      allowance for doubtful accounts
                    
                    $
                    407,593
                    
                    
                    
                    228,604Additions
      to bad debt expense
                    
                    
                    ––
                    
                    
                    
                    163,119Recovery
      of amount previously reserved
                    
                    
                    (294,543
                    )
                    
                    
                    ––Effect
      of foreign currency translation gain
                    
                    
                    23,339
                    
                    
                    
                    15,870Ending
      allowance for doubtful accounts
                    
                    $
                    136,389
                    
                    
                    
                    407,593
  NOTE
4 – INVENTORIES
  Inventories
consist of the following:
  December
      31,
                      2008
                    
                    
                    December
      31,
                      2007Raw
      materials
                    
                    $
                    353,438
                    
                    
                    $
                    564,993Work
      in process and packaging material
                    
                    
                    70,360
                    
                    
                    
                    11,728Finished
      goods on shipment
                    
                    
                    38,856
                    
                    
                    
                    ––Finished
      goods
                    
                    
                    352,556
                    
                    
                    
                    784,757Total
                    
                    $
                    815,210
                    
                    
                    $
                    1,361,478
  As of
December 31, 2008,and 2007,management determined the carrying amount of raw
materials exceeded prices currently available; therefore, $92,113 and $0 was
written down and the amount had been included in cost of goods sold for 2008 and
2007 respectively.
  NOTE
5 – PLANT AND EQUIPMENT
  Plant and
equipment, net consist of:
  December
      31,
                      2008
                    
                    
                    December
      31,
                      2007Buildings
                    
                    $
                    2,456,981
                    
                    
                    $
                    2,227,928Equipment
      and machinery
                    
                    
                    6,620,068
                    
                    
                    
                    5,309,511Office
      equipment and vehicles
                    
                    
                    51,380
                    
                    
                    
                    55,998Construction
      in progress
                    
                    
                    13,079,606
                    
                    
                    
                    1,209,953Total
                    
                    
                    22,208,035
                    
                    
                    
                    8,803,390Less
      accumulated depreciation
                    
                    
                    (3,040,411
                    )
                    
                    
                    (2,983,345
                    )Plant
      and equipment, net
                    
                    $
                    19,167,624
                    
                    
                    $
                    5,820,045Advances
      on equipment purchases
                    
                    $
                    3,649,192
                    
                    
                    $
                    872,974
  
 F-15
  Construction
in progress represents material, labor costs, and capitalized interest incurred
to construct the Zhongde Energy Co., Ltd in Jiangyin, Fujian. Management expects
construction will be completed by the 2nd quarter
of 2009. No depreciation is provided for construction in progress until such
time until construction is complete and assets are placed into service. As of
December 31, 2008, the construction in progress totaled
$13.1 million.
  Depreciation
expense for years ended December 31, 2008 and 2007 was $707,177 and
$542,875, respectively. During the years ended December 31, 2008 and 2007,
interest expense of $50,672 and $114,227 was capitalized into construction in
progress, respectively.
  NOTE
6 – INTANGIBLE ASSETS
  Intangible
assets, net consist of:
  December
      31,
                      2008
                    
                    
                    December
      31,
                      2007Land
      use rights
                    
                    $
                    4,950,538
                    
                    
                    $
                    4,550,853Patents
      and licenses
                    
                    
                    1,349,640
                    
                    
                    
                    1,261,292Total
                    
                    
                    6,300,178
                    
                    
                    
                    5,812,145Less
      accumulated amortization
                    
                    
                    (1,227,552
                    )
                    
                    
                    (932,510
                    )Total
      intangible assets, net
                    
                    $
                    5,072,626
                    
                    
                    $
                    4,879,635
  Amortization
expense for the years ended December 31, 2008 and 2007 amounted to $225,731
and $178,635, respectively. The estimated aggregate amortization expense for
each of the five succeeding fiscal years are as the following:
  Years
                  
                  Estimated
                    Amortization
      Expense2009
                  
                  
                  216,3802010
                  
                  
                  197,1612011
                  
                  
                  194,2782012
                  
                  
                  194,2782013
                  
                  
                  194,278
 
  F-16
  NOTE
7 – BANK INDEBTEDNESS
  Bank
indebtedness consists of:
  December
      31,
                  2008
                
                
                December
      31,
                  2007Due
      bank under revolving credit agreement, interest at 115% of PRC prime rate,
      secured by  certain buildings and land use rights owned by
      Fujian Zhongde, repaid January 2008.
                
                $
                ––
                
                
                $
                1,028,219Due
      bank, interest at 115% of PRC prime rate, due in monthly installments of
      principal  and interest of $18,170 through January 2010, secured
      by certain buildings and land use rights
                
                
                257,861
                
                
                
                443,898Total
                
                
                257,861
                
                
                
                1,472,117Less
      current portion
                
                
                (236,308
                )
                
                
                (1,231,020
                )Noncurrent
      portion of bank indebtedness
                
                $
                21,553
                
                
                $
                241,097
 
  Total
interest expense on the bank loans for the years ended December 31, 2008
and 2007 amounted to $50,672, which was fully capitalized into construction in
progress, and $114,227, respectively.
  NOTE
8 – RETIREMENT AND EMPLOYMENT LIABILITIES
  The full
time employees of the Company are entitled to employee benefits including
medical care, welfare subsidies, unemployment insurance and retirement benefits
through a Chinese government mandated multi-employer defined contribution plan.
The Company is required to accrue for those benefits based on
certain percentages of the employees’ salaries and make contributions to
the plans out of the amounts accrued for medical and pension benefits. The total
provisions and contributions made for such employee benefits was $16,681 and
$14,263 for the years ended December 31, 2008 and 2007, respectively. The
Chinese government is responsible for the medical benefits and the pension
liability to be paid to these employees.
  As of
December 31, 2008 and 2007, the Company had no liability for pension or
post-employment benefits. The Company does not have a pension or other
retirement plan.
  NOTE
9 – $15,000,000 PRIVATE PLACEMENT
  On
January 9, 2008, CCE completed a private placement, pursuant to which CCE
issued 10,000,000 shares of common stock and 5,000,000 five-year warrants at an
initial exercise price of $2.00 per share for aggregate gross proceeds of
$15,000,000. In connection with this private placement, CCE incurred placement
agent cash fees of approximately $1,200,000, and issued the placement agent
1,200,000 five-year warrants at an initial exercise price of $2.00 per share.
The net proceeds of $13.6 million were recorded as equity. The fair value
of the warrants issued to the placement agent, was determined to be part of the
cost of raising capital and therefore netted against the additional paid-in
capital.
  F-17
  In
connection with the private placement, four shareholders and officers placed a
total of 1,500,000 shares of their personally owned CCE common stock into an
escrow account, to be released to the investors of this offering if the Company
fails to (1) commence the production of biodiesel at its currently proposed
production facility in Jiangyin, PRC on or before January 1, 2009, or (2)
record at least $14,000,000 of adjusted net income for the fiscal year ending
December 31, 2009. Should the Company successfully satisfy each of these
two milestones, these shares of CCE common stock will be returned to the four
shareholders and officers.
  As of
January 1, 2009, the Company did not successfully commence production of
biodiesel at the Jiangyin location, and the 1,500,000 shares of Company’s common
stock held in escrow account that was previously owned by those four
shareholders and officers had been transferred to investors. The transfer of the
1,500,000 shares of Company’s common stock will not affect the Company’s
financial results.
  In
connection with the private placement, CCE entered into a registration rights
agreement with the purchasers and agreed to file a registration statement with
the Securities and Exchange Commission covering the resale of the common stock
issued and underlying the warrants on or before February 23, 2008 and to
cause such registration statement to be declared effective by the Securities and
Exchange Commission on or before May 8, 2008. On February 1, 2008, the
Company filed the registration statement. On February 8, 2008, the
registration statement was declared effective by the Securities and Exchange
Commission.
  On
January 11, 2008, CCER made a capital contribution of $10,000,000 to
Zhongde Energy to fulfill the registered capital investment requirements
stipulated by the Fuqing City Foreign Trading and Economy Cooperation
Bureau.
  NOTE
10 – OPTIONS AND WARRANTS
  On
January 9, 2008, the Company adopted the 2008 Equity Incentive Plan. Under
the 2008 Equity Incentive Plan, CCE is authorized to issue up to 2,000,000
options, 1,000,000 will have an exercise price equal to the greater of (i) $2.50
or (ii) the fair market value of the common stock on the date of grant (“Tranche
1 Options”) and 1,000,000 will have an exercise price equal to the greater of
(i) $3.00 or (ii) 100% of the fair market value of the common stock on the date
of grant (“Tranche 2 Options”). Under the 2008 Equity Incentive Plan, CCE is
authorized to issue incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended, and
non-qualified stock options and all options under the Plan shall vest quarterly
over three years. The 2008 Equity Incentive Plan is administered by CCE’S board
of directors.
  On
January 9, 2008, CCE granted options to purchase a total of 1,680,000
shares of common stock under the 2008 Equity Incentive Plan, including 1,350,000
granted to Company officers and directors. 840,000 options are exercisable at a
price of $2.50 per share and 840,000 options are exercisable at a price of $3.00
per share; all 1,680,000 options expire 10 years from the date of grant. The
$3,043,429 fair value of the 1,680,000 stock options will be expensed ratably
over the three year requisite service period of the respective personnel. The
fair value of the stock options was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: exercise
prices of $2.50 (for 840,000 stock options) and $3.00 (for 840,000 stock
options), expected life of options of 10 years, expected volatility of 98%,
expected dividend yield of 0%, and risk-free interest rate of 3.82%. For the
year ended December 31, 2008, $903,769 was amortized and recorded as
compensation expense.
  Following
is a summary of stock option activity:
  F-18
  Options
                  Outstanding
                
                
                Weighted
                  Average
                  Exercise
      Price
                
                
                Aggregate
                  Intrinsic
      ValueOutstanding
      as of December 31, 2006
                
                
                ––
                
                
                $
                ––
                
                
                $
                ––Granted
                
                
                ––
                
                
                
                ––
                
                
                
                ––Forfeited
                
                
                ––
                
                
                
                ––
                
                
                
                ––Exercised
                
                
                ––
                
                
                
                ––
                
                
                
                ––Outstanding
      as of December 31, 2007
                
                
                ––
                
                
                $
                ––
                
                
                $
                ––Granted
                
                
                1,680,000
                
                
                
                2.75
                
                
                
                3,043,429Forfeited
                
                
                (1,070,000
                )
                
                
                2.75
                
                
                
                (1,902,143
                )Exercised
                
                
                ––
                
                
                
                ––
                
                
                
                ––Outstanding
      as of December 31, 2008
                
                
                610,000
                
                
                $
                2.75
                
                
                $
                1,141,286
  Following
is a summary of the status of options outstanding at December 31,
2008:
  Outstanding
      Options
                
                
                Exercisable
      OptionsExercise
                  Price
                
                
                Number
                
                
                Average
      Remaining
                  Contractual
      Life
                
                
                Average
                  Exercise
      Price
                
                
                Number
                
                
                Average
      Remaining
                  Contractual
      Life$
                2.50
                
                
                
                305,000
                
                
                
                9.00
                
                
                $
                2.50
                
                
                
                264,444
                
                
                
                9.00$
                3.00
                
                
                
                305,000
                
                
                
                9.00
                
                
                $
                3.00
                
                
                
                264,444
                
                
                
                9.00Total
                
                
                
                610,000
                
                
                
                
                
                
                
                
                
                
                
                528.888
  Following
is a summary of warrant activity:
  Outstanding
      as of December 31, 2006
                
                
                ––Granted
                
                
                ––Forfeited
                
                
                ––Exercised
                
                
                ––Outstanding
      as of December 31, 2007
                
                
                ––Granted
                
                
                6,200,000Forfeited
                
                
                ––Exercised
                
                
                ––Outstanding
      as of December 31, 2008
                
                
                6,200,000
   F-19
  Following
is a summary of the status of warrants outstanding at December 31,
2008:
  Outstanding
      Options
                
                
                Exercisable
      OptionsExercise
                  Price
                
                
                Number
                
                
                Average
      Remaining
                  Contractual
      Life
                
                
                Average
                  Exercise
      Price
                
                
                Number
                
                
                Average
      Remaining
                  Contractual
      Life$
                2.00
                
                
                
                6,200,000
                
                
                
                4.00
                
                
                $
                2.00
                
                
                
                6,200,000
                
                
                
                4.00
 
  NOTE
11 - EARNINGS PER SHARE
  For the
year ended December 31, 2008, all warrants and options were excluded from
the calculation of diluted earnings per share because the exercise prices of
$2.00, $2.50, and $3.00 were higher than the average trading price of the
Company’s stock, making these warrants anti-dilutive. There were no options or
warrants outstanding as of December 31, 2007. The basic and diluted
earnings per share for the year ended December 31, 2008 and 2007 were $0.02
and $0.16, respectively.
  NOTE
12 – STATUTORY RESERVES
  The Company’s PRC subsidiaries are
required to make appropriations to reserve funds, comprising the statutory
surplus reserve, statutory public welfare fund and discretionary surplus
reserve, based on after-tax net income determined in accordance with generally
accepted accounting principles of the People’s Republic of China (the “PRC
GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of
the after tax net income determined in accordance with PRC GAAP until the
reserve is equal to 50% of the entities’ registered capital. Appropriations to
the statutory public welfare fund are at 10% of the after tax net income
determined in accordance with PRC GAAP. The statutory public welfare fund is
established for the purpose of providing employee facilities and other
collective benefits to the employees and is non-distributable other than in
liquidation. Appropriations to the discretionary surplus reserve are made at the
discretion of the Board of Directors. Effective January 1, 2006, the
Company is only required to contribute to one statutory reserve fund at 10% of
net income after tax per annum. This contribution will be made to meet 50% of
the respective companies’ registered capital.
  As of December 31, 2008 and 2007,
the Company allocated $1,457,432 and $1,195,744, respectively, to the statutory
reserves. The additional amount that still needs to be allocated to statutory
reserves to meet the 50% of registered capital as of December 31, 2008 is
approximately $6,348,811.
  NOTE
13 – TAXES
  Income
Taxes
  Income
taxes expenses (credit) consist of:
  Year
      ended December 31,2008
                        
                        
                        2007Current:PRC
                        
                        $
                        369,640
                        
                        
                        $
                        ––United
      States
                        
                        
                        ––
                        
                        
                        
                        ––Total
      current
                        
                        
                        369,640
                        
                        
                        
                        ––Deferred
                        
                        
                        ––
                        
                        
                        
                        ––Total
                        
                        $
                        369,640
                        
                        
                        $
                        ––
 
  F-20
  Fujian
Zhongde has been subject to a PRC 33% standard enterprise income tax. In 2006,
Fujian Zhongde became a wholly-owned foreign enterprise (“WOFE”). PRC income tax
laws provide that certain WOFEs may be exempt from income taxes for two years,
commencing with their first profitable year of operations, after taking into
account any losses brought forward from prior years, and thereafter 50% exempt
for the next three years. In December 2006, Fujian Zhongde applied for PRC
approval of these income tax exemptions. In March 31, 2007, the PRC tax
authorities approved a full income tax exemption for the year 2007 and a 12%
income tax rate for years 2008, 2009 and 2010.
  Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the
old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% replaces the 33% rate applicable to
both DES and FIEs, except for High Tech companies that pay a reduced rate of
15%. For companies established before March 16, 2007 continue to enjoy tax
holiday treatment approved by local government for a grace period of either for
the next 5 years or until the tax holiday term is completed, whichever is
sooner.
  The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2008 and 2007:
  December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007U.S.
      Statutory rates
                      
                      
                      35
                      %
                      
                      
                      35
                      %Foreign
      income not recognized in USA
                      
                      
                      (35
                      )
                      
                      
                      (35
                      )China
      income taxes
                      
                      
                      25
                      
                      
                      
                      33Tax
      exemption
                      
                      
                      (13
                      )
                      
                      
                      (33
                      )Total
      provision for income taxes
                      
                      
                      12
                      %
                      
                      
                      ––
                      %
 
  The
estimated tax savings for the years ended December 31, 2008 and 2007
amounted to $376,984 and $1,175,963. The net effect on earnings per share had
the income tax been applied would decrease earnings per share from $0.02 to
$0.01 in 2008 and $0.16 to $0.10 in 2007.
  As of
December 31, 2008 CCE had an unrecognized deferred United States income tax
liability relating to undistributed earnings of Fujian Zhongde. These earnings
are considered to be permanently invested in operations outside the United
States. Generally, such earnings become subject to United States income tax upon
the remittance of dividends and under certain other circumstances. Determination
of the amount of the unrecognized deferred United States income tax liability
with respect to such earnings is not practicable because the amount of PRC
foreign tax credits available to offset United States income taxes will depend
on the timing of future remittances, if any, and such timing is not known or
predictable. China Clean Energy Inc. was incorporated in the United States and
has incurred net operating losses for income tax purposes.for the periods ended
December 31, 2008. The net operating loss carry forwards for United States
income taxes, which may be available to reduce future years’ taxable income,
amounted to $2,467,591 and $744,850 for the years ended December 31, 2008
and 2007, respectively. These carry forwards will expire, if not utilized,
through 2024 and 2028. Management believes that the realization of the benefits
from these losses appears uncertain due to the Company’s limited operating
history and continuing losses for United States income tax purposes.
Accordingly, the Company has provided a 100% valuation allowance on the deferred
tax asset benefit to reduce the asset to zero. The valuation allowance as of
December 31, 2008 was $902,246 and the valuation allowance was increased by
$602,959 for the year ended December 31, 2008. Management will review this
valuation allowance periodically and make adjustments as warranted.
  F-21
  Value Added
Tax
  Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax, VAT, in accordance
with Chinese laws. The VAT standard rate is 17% of the gross sales price. A
credit is available whereby VAT paid on the purchases of semi-finished products
or raw materials used in the production of the Company’s finished products can
be used to offset the VAT due on sales of the finished product. A preferential
rate is also applied for exporting products.
  VAT on
sales and VAT on purchases amounted to $2,063,352 and $1,837,530 for the year
ended December 31, 2008 and $2,601,059 and $1,001,619 for the year ended
December 31, 2007, respectively. Sales and purchases are recorded net of
VAT collected and paid as the Company acts as an agent because the VAT taxes are
not impacted by the income tax holiday. As of December 31, 2008 and 2007,
the VAT payable amounted to $72,729 and $320,397, respectively.
  NOTE
14 – RELATED PARTY TRANSACTIONS
  Fujian
Zhongde purchases raw materials from companies affiliated with the Company’s
majority stockholder. Yang Fan, one of the shareholders of this “affiliated”
company, Fujian Zhongde Waste Oil Co. Ltd., is the niece of Ms. Yang Qin,
director of China Clean Energy Inc. and a major shareholder of the company. In
the year ended December 31, 2008 and 2007, such purchases totaled $869,553
and $5,668,371, respectively. As of December 31, 2008 and 2007, there were
no outstanding payables due to these companies.
  NOTE
15 – SEGMENT INFORMATION
  The
Company operates in one industry segment – the synthesis and distribution of
renewable fuel products and specialty chemicals to customers in both the PRC and
abroad. Substantially all of the Company’s identifiable assets at
December 31, 2008 were located in the PRC.
  Net sales
for the years ended December 31, 2008 and 2007 consist of:
  2008
                  
                  
                  
                  
                  
                  2007Sales
                  
                  
                  GP%
                  
                  
                  Sales
                  
                  
                  GP%Domestic
      Sale
                  
                  $
                  12,137,363
                  
                  
                  
                  22
                  %
                  
                  $
                  4,403,686
                  
                  
                  
                  29
                  %International
      Sale
                  
                  
                  6,032,472
                  
                  
                  
                  22
                  %
                  
                  
                  17,352,323
                  
                  
                  
                  26
                  %Total
      Sales
                  
                  $
                  18,169,835
                  
                  
                  
                  22
                  %
                  
                  $
                  21,756,010
                  
                  
                  
                  27
                  %
  
 F-22
  NOTE
16 – CONCENTRATIONS AND RISKS
  The
Company’s demand deposits are in accounts maintained with stateowned banks within the
People’s Republic of China. Total cash deposited with these banks at
December 31, 2008 and 2007 amounted to $2,902,707 and $1,133,555,
respectively, of which no deposits are covered by insurance. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
risks on its cash in bank accounts.
  For the
year ended December 31, 2008, no customer (for specialty chemical products)
accounted for over 10% of net sales. In 2007, two customers (for biodiesel
products) accounted for 14.56% and 11.97%, respectively, of net sales. The
accounts receivable due from these customers amounted to $0 and $1,000,922,
respectively, as of December 31, 2008 and 2007.
  For the
year ended December 31, 2008, no supplier for feedstock and raw materials
accounted for over 10% of the total raw material purchase. In 2007, two
suppliers for feedstock and raw materials accounted for 38.06% and 14.99%,
respectively, of the total raw material purchase. The accounts payable due to
these suppliers amounted to $0 and $19,959, respectively, as of
December 31, 2008 and 2007.
  The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the economy in the regions where the Company’s customers are located. The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
  The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the PRC. Under existing
PRC foreign exchange regulations, payment of current account items, including
profit distributions, interest payments and expenditures from the transaction,
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 governmental authorities is
required where RMB 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 may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.