UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON D.C. 20549
 
 FORM 10-K
  
 R           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the fiscal year ended: December 31, 2009
 
 OR
 
 £           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 COMMISSION FILE NUMBER: 333-126900
 
 CHINA CLEAN ENERGY INC.
  (Exact name of Registrant as specified in its charter)
 
 Delaware

87-0700927(State or other jurisdiction of incorporation)

(I.R.S. Employer Identification Number)Jiangyin Industrial Zone, Jiangyin Town

Fuqing City, Fujian Province

People’s Republic of China

350309(Address of principal executive office)

(Zip Code)
 
 Registrant’s telephone number, including area code: (347) 235-0258
  
 Securities registered pursuant to Section 12(b) of the Exchange Act:  None
 
 Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value
 
 ________________
 
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £  No R
 
 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 R
 
 Indicate by check 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 R No £
 
 Indicate by check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such filed). Yes £ No £
 
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. o
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer £  Accelerated filer £  Non-accelerated filer  £ Smaller reporting company R
 
 Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes £  No R
 
 The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, based on the average bid and asked price of such common equity on the OTC Bulletin Board on such date was approximately $6,186,459.
 
 Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
 
 Class

Outstanding at March 30, 2010Common Stock, $0.001 par value

31,512,269
 
 Documents incorporated by reference:
 
 None
 
  
  
 TABLE OF CONTENTS
  
  PART I
1Item 1.
Business.
1Item 1A.
Risk Factors.
9Item 1B.
Unresolved Staff Comments.
21Item 2.
Properties.
21Item 3.
Legal Proceedings.
21Item 4.
Reserved.
21PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
21Item 6.
Selected Financial Data.
22Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
22Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
29Item 8.
Financial Statements and Supplementary Data.
29Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
50Item 9A(T).
Controls and Procedures.
50Item 9B.
Other Information.
51PART III
49Item 10.
Directors, Executive Officers and Corporate Governance.
51Item 11.
Executive Compensation.
53Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
54Item 13.
Certain Relationships and Related Transactions, and Director Independence.
55Item 14.
Principal Accountant Fees and Services.
57PART IV

57Item 15.
Exhibits and Financial Statement Schedules.
57
   
 
 
 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
  We completed construction of a new biodiesel and specialty chemical focused production facility in the new Fuqing Jiangyin Industrial Park in the Fujian Province, People’s Republic of China in October 2009.  We successfully completed the trial production phase at our new facility at the end of 2009 and, as of January 2010, the new plant is fully operational. We have moved our administrative headquarters to the new plant.
  The Fuqing Jiangyin Industrial Park is equipped with a deep sea harbor capable of servicing 100,000 ton cargo ships, a container port and railroad that will be connected to the People’s Republic of China’s national railroad network. The facility has 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 believe our expansion of both biodiesel and specialty chemical production capacity will help us to increase our competitiveness and profitability in the future.  The new plant increases our specialty-chemicals capacity by 30,000 tons per year to a total of 40,000 tons per year.
 1
  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.
  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.
  Biodiesel Benefits.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%.
 2
  Other benefits of biodiesel include:
  ·
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.
 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.
  Sales
  The following table sets forth our sales by product category for the twelve-month period from January 1, 2009 through December 31, 2009. As shown in the table, during the twelve-month period ending December 31, 2009, dimmer acid was our top selling product, accounting for 30.30% of total sales.
 3
  Products Sold

% of Total Sales for the Year1.

Dimer Acid

30.30%2.

Polyamide Hot Melt Adhesive

21.09%3.

Polyamide Resin

15.41%4.

Biodiesel

14.84%5.

Fatty Acid

9.73%6.

Printing Ink

4.49%7.

Liquid Resin 651#

1.90%8.

Vegetable Asphaltum

1.88%9.

High Performance Polyamide Hot Melt Adhesive

0.30%10.

Purity Dimer Acid

0.06%
  The following table sets forth our sales 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 ended December 31, 2008, dimer acid was our top selling product, accounting for 30.78% of total sales.
  Products Sold

% of Total Sales for the Year1.

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%11.

Glue

0.11%
  The Biodiesel and Specialty Chemicals Markets
  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. 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 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.
 4
  Potential for Increase in Diesel Engines.The People’s Republic of China's 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.
  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.
  Competition
  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.
  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.
  5
  In addition, we may face competition from foreign competitors if such competitors choose to export their biodiesel to the People’s Republic of China.
  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.
  We believe that our product formulations, price points, relationships, infrastructure, quality control standards, and reputation provide us with competitive advantages with respect to the production and sale of specialty chemicals. 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.
  Growth Strategy
  In response to 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, in October 2009 we completed construction of a new biodiesel and specialty chemical focused production facility in the new Fuqing Jiangyin Industrial Park in the Fujian Province, People’s Republic of China. The new facility is located 20 miles from our existing facility and is 20,000 square meters in size . The Fuquing Jiangyin Industrial Park 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. The plant has the flexibility to produce up to 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:
  ·
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.
  Sales and Marketing
  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 return 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.
  6
  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.
  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.
  Intellectual Property
  Through our subsidiary, Fujian Zhongde Technology Co., Ltd., we own a patent for our proprietary biodiesel production method to produce biodiesel from monomer acid, China Patent Registration Number ZL200510019790.9. 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.
  Customers
  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 2009, sales of biodiesel accounted for approximately 30% 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.
  During the twelve-month period from January 1, 2009 through December 31, 2009, we had consolidated net sales of $15,933,351. The two customers listed in the table below each contributed over 5% of our total revenues for the year ended December 31, 2009.
  Name of Customer

Products Sold

Sales for the

Year by

Customer

% of Sales for

the Year1.

Air Products Chemicals PTE Ltd.

Specialty Chemicals


1,642,523

10.31%2.

Cray Valley Resins PVT., Ltd.

Specialty Chemicals


1,295,258

8.13%Total (top two)




2,937,781

18.44%Total (all customers)




15,933,351

100.00%
  During the twelve-month period from January 1, 2008 through December 31, 2008, we had consolidated net sales of $18,169,835. The two customers listed in the table below each contributed over 5% of our total revenues for the year ended December 31, 2008.
 7
  Name of Customer
Products Sold

Sales for the

Year by

Customer

% of Sales for

the Year1.

Air Products and Chemicals (PTE) Ltd.
Specialty Chemicals


1,064,241

5.86%2.

Cray Valley Resins PVT., Ltd.
Specialty Chemicals


1,063,545

5.85%Total (top two)



2,127,786

11.71%Total (all customers)



18,169,835

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, 2009 through December 31, 2009, the feedstock suppliers listed in the table below supplied more than 5% of our feedstock. 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 Year1.

Fujian Zhongmin Chemical Co., Ltd.


16.81%2.

Xinjiang Guansheng Technology Co., Ltd.


11.53%3.

Fujian QuanZhou Zhongyuan Chemical Co., Ltd.


9.77%4.

Dongying Haifutong Chemical Co., Ltd.


5.11%
  During the twelve-month period from January 1, 2008 through December 31, 2008, we had four feedstock suppliers who supplied more than 5% of our feedstocks.
  Name of Supplier

% of Feedstock Supplied for the Year1.

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 Shuanya Chemical Co., Ltd.


7.21%
  Employees
  As of March 26, 2010, we had196 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.
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  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 two manufacturing facilities, which began producing biodiesel in 2005 and 2010, respectively. 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.
  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.
  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.
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  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. Currently, we have sufficient working capital to operate for the first half of 2010 at 50% of total capacity. We expect that we will require approximately an additional $10,000,000 of working 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.
  Four feedstock suppliers collectively provide us with approximately 43.22% of our feedstock and our two largest suppliers, Fujian Zhongmin Chemical Co., Ltd. and  Xinjiang Guansheng Technology Co., Ltd., each supplied approximately 16.81% and 11.53% of our feedstock, respectively, in 2009. 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.
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  Price declines in petro-based diesel due to alternative energy discoveries or enhanced supply of oil could negatively impact demand for our biodiesel.
  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 top five customers accounted for approximately 31.21% of our sales in 2009 and 25.88% of our sales in 2008. Our two largest customers accounted for more than 18.44% of sales in 2009 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 William Chen, our 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.
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  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.
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  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.
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   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.
  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 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.
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  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.
  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 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.
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  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 2009, approximately 56.96% 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 2009, approximately  56.96% 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.
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  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 approximately no appreciation of the Renminbi against the U.S. dollar as of December 31, 2009. 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.  The Ministry of Commerce has expressed that it would continue to pursue a course of “stability” with respect to fluctuation of the Renminbi in 2010.
  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.
 17
  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, it is subject to the regular corporate income tax rate of 25%.
  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 William Chen, 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 William Chen, 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 23.62% of our outstanding common stock and our directors and executive officers as a group collectively own approximately 26.31% 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:
 18
  ·
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 Equities.
  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 Equities 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.
 19
  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.
  20
  Item 1B.
Unresolved Staff Comments.
  None.
  Item 2.
Properties.
  Our headquarters are located at our new biodiesel and specialty chemical focused production manufacturing facility in the Jiangyin Industrial Zone, Jiangyin Town, Fuqing City, in the Fujian Province in the People’s Republic of China. The facility is approximately 20,000 square meters in size and is located approximately 50 miles from Fuzhou, the Capital City of Fujian Province. We completed construction in October 2009 and completed the trial production phase in December 2009.  As of January 2010, the plant is fully operational and has 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. 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.  We own certain rights with respect to the land on which the facility is located pursuant to a contract we entered into with Fuzhou City Jiangyin Industry District Management Committee on December 25, 2006 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.  The total capital expenditure for this facility was $22.3 million, including the $2.6 million we paid in 2006 to acquire the land usage rights. We anticipate that we will require an additional $3 million for working capital uses annually.
  We own an additional 311,000 square-foot manufacturing facility located 20 miles from our headquarters at Fulu Industrial District, Long Tian Town, Fuqing City, Fujian Province, People’s Republic of China.  This 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 presently capable of producing up to 10,000 tons, or approximately 3 million gallons, of biodiesel per year and up to 10,000 tons of specialty chemicals per year. 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.
  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.
Reserved.
  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.
  Fiscal Year 2010

High


LowFirst Quarter (through March 26, 2010)

$
0.72


$
0.44Fiscal Year 2009First Quarter

$
0.22


$
0.14Second Quarter

$
0.38


$
0.16Third Quarter

$
0.75


$
0.29Fourth Quarter

$
0.90


$
0.39Fiscal Year 2008First Quarter

$
2.29


$
1.29Second Quarter

$
1.69


$
0.73Third Quarter

$
0.80


$
0.31Fourth Quarter

$
0.51


$
0.14
  21
  The last reported sales price of our common stock on the OTC Bulletin Board on March 30, 2010 was $0.64 per share.
  Holders
  As of March 30, 2010, there were approximately 88 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.
  Securities Authorized for Issuance Under Equity Compensation Plan
 
 The following table sets forth information as of December 31, 2009 with respect to compensation plans under which shares of our common stock may be issued.
  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

590,000

2.75

1,410,000Equity compensation plans not approved by security holders

––

––

––All plans

590,000

2.75

1,410,000
 
  Item 6.
Selected Financial Data.
  Not applicable.
  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.
  22
  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 biodiesel and specialty chemicals refinery in Jiangyin Industrial Park, Fuqing City, Fujian Province, China.  The construction of the production plant was completed in October 2009 and trial production was completed at the end of 2009.  We commenced regular production at this facility in January 2010.
  Results of Operations
  Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
  Revenue.For the year ended December 31, 2009, we had net sales of $15,933,351 (14.84% from biodiesel sales and 85.16% from specialty chemicals sales), as compared to net sales of $18,169,835 (7.68% from biodiesel sales and 92.32% from specialty chemicals sales) for the year ended December 31, 2008. The decrease of approximately 12.31% was attributable to (i) the slowdown in the global economy adversely affected our specialty chemicals sales in late 2008, which significantly impacted our revenue for the first quarter of 2009 and (ii) lower selling prices for specialty chemical products and biodiesel due to the decline in demand and decreased raw material costs caused by the global economic slowdown.
  Our revenue for the first quarter of 2009 decreased approximately $1,900,000, or 40.25%, to approximately $2,800,000 as compared to approximately $4,700,000 in the first quarter of 2008 due to the slowdown of the global economy. However, starting in the second quarter of 2009, as the global economy slowly recovered, our sales, especially international sales, recovered. International sales as percentage of total sales increased to 42% for the year ended December 31, 2009 as compared to 33% for the year ended December 31, 2008. Due to lukewarm market demand and fierce competition for specialty chemicals in the People’s Republic of China, we changed our sales strategy to increase our focus on sales to international customers. Additionally, due to the economic recovery and changes in export tax rebate for daimer acid and hot-melt adhesives, we deemed it more profitable to export chemicals. As we added new international customers, international sales significantly increased in 2009 as compared to 2008, which has helped boost our overall sales volume in 2009. Our total sales volume increased by approximately 2,400,000 kilograms, or 19.78%, from approximately 11,900,000 kilograms in 2008 to approximately 14,300,000 kilograms in 2009. However, the increase in sales volume could not offset the decrease in selling prices in 2009, thus overall revenue decreased 12.31% for the year ended December 31, 2009 as compared to the year ended December 31, 2008.
  Gross Profit.  The cost of revenues, which consists of direct labor, direct materials, overhead and depreciation of production facilities, was $12,993,260 for the year ended December 31, 2009, as compared to $14,310,907 for the year ended December 31, 2008. We had a gross profit of $2,940,091 for the year ended December 31, 2009, as compared to a gross profit of $3,858,928 for the year ended December 31, 2008, representing gross margins of approximately 18.45% and 21.24%, respectively. The decrease in gross profit is the result of a decrease in selling prices of our specialty chemicals as global commodity prices declined in late 2008 and 2009. Also, due to increased customer demand, we sold approximately 2,000 tons more biodiesel in 2009 as compared to 2008. Because biodiesel has a low profit margin, selling additional biodiesel in 2009 has resulted in reducing our overall gross profit percentage. The decreased average selling price of our specialty chemicals coupled with increased sales of low margin biodiesel decreased our gross profit margin in 2009 as compared to 2008.
 23
  Selling Expenses.  Selling expenses, which include advertising and promotion, freight charges, exporting expenses and wages and salaries, totaled $286,055 for the year ended December 31, 2009, as compared to $249,583 for the year ended December 31, 2008. This increase of approximately 14.61% is primarily due to higher export freight charges, domestic shipping fees and commission fees.
  General and Administrative and Other Operating Expense.General and administrative and other operating expense totaled $1,785,479 for the year ended December 31, 2009, as compared to $2,482,971 for the year ended December 31, 2008, which was a decrease of approximately 28.09%. The decrease is primarily attributable to a decrease in stock compensation cost of $499,188 and a $217,909 decrease in legal, investor relationship and financial advisory fees related to our 2008 $15 million private placement.
  Other Income (Expense).The strike price of the warrants issued in 2008 is denominated in U.S. dollars and the Company’s functional currency is the Remnibi.  The warrants are now classified as a derivative liability carried at fair value, with periodic changes in the fair value charged or credited to income each period. For the year ended December 31, 2009, we recognized a loss on the change in the fair value of derivative liabilities of $964,391. The recognized loss on the change in the fair value is mainly due to the Company’s stock price increase from $0.18 as of December 31, 2008 to $0.51 as of December 31, 2009.
  Net Income.We had a net loss of $324,450 for the year ended December 31, 2009, as compared to a net income of $596,816 for the year ended December 31, 2008. There was a decrease of $921,266 compared to the year ended December 31, 2008. The decrease in net income was due primarily to the decrease in revenue driven by declines in selling prices of our products in 2009 and a $964,391 non-cash expense related to the change on fair value of warrant-liability in 2009.
  Liquidity and Capital Resources
  As of December, 2009, the trial production phase at our new plant has been successfully completed and as of January 2010 the new plant was operating on a commercial basis. As previously disclosed, the new plant has 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 new plant increases our specialty-chemicals capacity by 30,000 tons to a total of 40,000 tons annually.
  General.As of December 31, 2009 and 2008, we had cash and cash equivalents of $4,154,814 and $2,913,711, respectively. The increase in cash and cash equivalents was primarily due to $1,434,448 in net cash provided by operating activities and net proceeds from bank loans of $2,821,108 for working capital uses after the net cash used in purchasing of equipments in the amount of $3,010,857 for the year ended December 31, 2009.
  The $1,434,448 net cash proceeds provided by operating activities during the year ended December 31, 2009 was primarily due to $1,854,399 net income after adjustments for $964,391 non-cash items including charges in warrant-liability revaluation, $921,902 of depreciation and amortization expenses and $404,582 of stock based compensation costs.
  The $2,821,108 of net cash provided by financing activities during the year ended December 31, 2009 was primarily due to the net proceeds of $3,078,810 we received from new short-term bank loans, offset by payments on long-term bank loans of $257,702. In February 2010, we secured a line of credit for approximately $4,800,000 from Fujian Haixia Bank, formerly Fuzhou City Commercial Bank, for use in working capital at our new plant.
  We have historically met our liquidity and capital requirements from a variety of sources. These include internally generated cash flow, short-term borrowings from related parties and financial institutions, and sales of common stock.
 24
  Obligations under Material Contracts.  We had no material commitments as of December 31, 2009. We had a capital commitment of approximately $3,000,000 for the acquisition of plant equipment and machinery as of December 31, 2008.
  Private Placement.On January 9, 2008, we completed a private placement, pursuant to which we issued 10,000,000 shares of common stock at the price of $1.50 per share 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 the 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 net proceeds of $13.6 million from the above financing were used to construct our new plant.
  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 (“U.S. GAAP”. 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 principles 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 the accounting standard of 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 when shipment is made. Main of our products is 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. The 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, net of allowance for doubtful accounts outstanding on December 31, 2009 and 2008 totaled $1,766,952and $1,092,768, 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, 2009 and 2008, allowances for doubtful accounts totaled $93,761 and $136,389, 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, 2009, we determined that no reserves were necessary.
  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, 2009, we determined that there was no impairment of our long-lived assets.
 25
  Income Taxes.  We adopted the accounting statement of Accounting for Income Taxes, which 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 $69,424 deferred tax benefit was recognized as of December 31, 2009 for the operation loss incurred in Zhongde Energy.
  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 June 2009, the Financial Accounting Standards Board issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (“QSPE”). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. We adopted this standard as of December 31, 2009; however, the standard does not have material effect on our consolidated financial statements.
  In June 2009, the Financial Accounting Standards Board also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts our financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. We adopted this standard as of December 31, 2009; however, the standard does not have material effect on our consolidated financial statements.
 26
 
 In June 2009, the Financial Accounting Standards Board issued an accounting standard which establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. All current and subsequent public filings will reference the Codification as the sole source of authoritative literature.
 In August 2009, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. We adopted this standard and has determined the standard does not have material effect on our consolidated financial statements.
 
 In October 2009, the Financial Accounting Standards Board issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing.  This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation.  This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. We adopted this standard and have determined the standard does not have material effect on our consolidated financial statements.
  In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. We do not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
  In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Rep orting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
 27
  In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. We adopted this standard and have determined the standard does not have material effect on our consolidated financial statements.
  In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary.  Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary.  Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value.  In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction.  This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets.  This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements In January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity.  The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements
  In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  2)  Activity in Level 3 fair value measurements.  In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
  28
  Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
  Not applicable.
  Item 8.
Financial Statements and Supplementary Data.
 
 Index to Financial Statements
PageReport of Frazer Frost, LLP, Independent Registered Public Accounting Firm
30Consolidated Balance Sheets as of December 31, 2009 and 2008
31Consolidated Statements of Operations and Other Comprehensive (Loss) Income for the Years Ended December 31, 2009 and 2008
32Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended December 31, 2009 and 2008
33Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008
34Notes to Consolidated Financial Statements
35


29









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 sheets of China Clean Energy Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations and other comprehensive (loss) income, statements of equity, and cash flows for each of the years in the two-year period ended December 31, 2009. China Clean Energy Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audits provide a reasonable basis for our opinion.
  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Clean Energy Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
   /S/ Frazer Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and Torbet, LLP, see Form 8-K filed on January 7, 2010)Brea, CaliforniaMarch 31, 2010


30






CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 AS OF DECEMBER 31, 2009 AND 2008
  ASSETSDecember 31,2009


2008CURRENT ASSETSCash

$
4,154,814


$
2,913,711Accounts receivable, net of allowance for doubtful accounts of $93,761 and$136,389 as of December 31, 2009 and 2008, respectively


1,766,952



1,092,768Inventories


464,842



815,210Advances for inventory purchase


188,659



310,773Other current assets


11,000



-Deferred tax assets


69,466



-Total current assets


6,655,733



5,132,462PLANT AND EQUIPMENT, NET


25,119,034



19,167,624INTANGIBLE ASSETS, NET


4,860,645



5,072,626ADVANCES ON EQUIPMENT PURCHASES


-



3,649,192Total assets

$
36,635,412


$
33,021,904LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
157,433


$
350,618Accrued liabilities


279,516



349,435Customer deposits


71,090



31,422Taxes payable


130,287



156,965Short-term bank loans


3,080,700



-Long-term bank loan - current portion


-



236,308Total current liabilities


3,719,026



1,124,748WARRANT LIABILITIES


1,259,774



-LONG-TERM BANK LOAN - NET OF CURRENT PORTION


-



21,553Total liabilities


4,978,800



1,146,301COMMITMENTS AND CONTINGENCIESSHAREHOLDERS' EQUITYPreferred stock, par value $0.001 per share, authorized 10,000,000 shares, no sharesissued and outstanding as of December 31, 2009 and 2008, respectively


-



-Common stock, par value $0.001 per share, authorized 90,000,000 shares, 31,512,269 and31,512,269 shares issued and outstanding as of December 31, 2009 and 2008, respectively


31,512



31,512Additional paid-in capital


12,420,523



21,555,645Statutory reserves


1,630,882



1,457,432Retained earnings


14,407,448



5,661,025Accumulated other comprehensive income


3,166,247



3,169,989Total shareholders' equity


31,656,612



31,875,603Total liabilities and shareholders' equity

$
36,635,412


$
33,021,904
  The accompanying notes are an integral part of these consolidated financial statements.
 See report of independent registered public accounting firm.
  31
 
  CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE (LOSS) INCOME FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
 Years Ended December 31,2009


2008REVENUES

$
15,933,351


$
18,169,835COST OF REVENUES


12,993,260



14,310,907GROSS PROFIT


2,940,091



3,858,928OPERATING EXPENSESSelling and marketing expenses


286,055



249,583General and administrative expenses


1,641,535



2,328,472Research and development expenses


143,944



154,499Total operating expenses


2,071,534



2,732,554INCOME FROM OPERATIONS


868,557



1,126,374OTHER INCOME (EXPENSE)Other income (expense), net


7,997



(159,918
)Change in fair value of warrant liabilities


(964,391
)


-Total other expense, net


(956,394
)


(159,918
)(LOSS) INCOME BEFORE  INCOME TAXES


(87,837
)


966,456PROVISION (BENEFIT) FOR INCOME TAXESCurrent


306,037



369,640Deferred


(69,424
)


-Total provision for income tax


236,613



369,640NET (LOSS) INCOME


(324,450
)


596,816OTHER COMPREHENSIVE (LOSS) INCOMEForeign currency translation adjustment


(3,742
)


1,958,547COMPREHENSIVE (LOSS) INCOME

$
(328,192
)

$
2,555,363BASIC AND DILUTED (LOSS) EARNINGS PER SHAREWeighted average number of shares


31,512,269



31,293,091(Loss) earnings per share

$
(0.01
)

$
0.02
  The accompanying notes are an integral part of these consolidated financial statements.
 See report of independent registered public accounting firm.
  32
  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 at December 31, 2007


21,512,269


$
21,512


$
7,034,473


$
1,195,744


$
5,325,897


$
1,211,442


$
14,789,068Common stocks and warrants issued cash


10,000,000



10,000



13,617,403















13,627,403Stock-based compensation










903,769















903,769Net income


















596,816







596,816Adjustment to statutory reserve














261,688



(261,688
)






-Foreign currency translation adjustment






















1,958,547



1,958,547Balance at December 31, 2008, as previously reported


31,512,269



31,512



21,555,645



1,457,432



5,661,025



3,169,989



31,875,603Cumulative effect of reclassification of warrants










(9,539,704
)






9,244,323







(295,381
)Balance, January 1, 2009, as adjusted


31,512,269



31,512



12,015,941



1,457,432



14,905,348



3,169,989



31,580,222Stock-based compensation










404,582















404,582Net loss


















(324,450
)






(324,450
)Adjustment to statutory reserve














173,450



(173,450
)






-Foreign currency translation adjustment






















(3,742
)


(3,742
)Balance at December 31, 2009


31,512,269


$
31,512


$
12,420,523


$
1,630,882


$
14,407,448


$
3,166,247


$
31,656,612
  The accompanying notes are an integral part of these consolidated financial statements.
 See report of independent registered public accounting firm.
   33
 CHINA CLEAN ENERGY INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2009 AND 20082009


2008CASH FLOWS FROM OPERATING ACTIVITIESNet (loss) income

$
(324,450
)

$
596,816Adjusted to reconcile net (loss) income to cash providedby operating activities:Depreciation


710,051



707,177Change in allowance for uncollectible accounts


(42,602
)


(294,534
)Change in warrant liabilities


964,391



-Amortization of intangible assets


211,851



225,731Stock-based compensation


404,582



903,769Writedown on inventory


-



93,838Loss on disposal of assets


-



177,905Deferred tax assets


(69,424
)


-Impairment on fixed assets


-



74,817Changes in operating assets and liabilitiesAccounts receivable


(631,169
)


2,159,868Inventories


350,154



536,611Advances for inventory purchase


122,038



(116,310
)Other current assets


(11,000
)


-Accounts payable


(193,068
)


186,224Customer deposit


39,644



(160,299
)Other payables and accrued liabilities


(69,890
)


222,185Taxes payables


(26,660
)


(196,992
)Net cash provided by operating activities


1,434,448



5,116,806CASH FLOWS FROM INVESTING ACTIVITIESAddition to construction in progress


-



(11,635,579
)Purchase of equipment


(3,010,857
)


(2,182,310
)Proceeds from sale of equipment


-



160,871Advances for equipment purchases


-



(2,667,896
)Net cash (used in) investing activities


(3,010,857
)


(16,324,914
)CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds from issuance of  common stock


-



13,627,403Payment on short-term bank loans


-



(1,081,102
)Proceeds from short-term bank loans


3,078,810



-Payment on long-term bank loans


(257,702
)


(213,336
)Net cash provided by financing activities


2,821,108



12,332,965EFFECT OF EXCHANGE RATE ON CASH


(3,596
)


673,299INCREASE IN CASH AND CASH EQUIVALENTS


1,241,103



1,780,156CASH, beginning of year


2,913,711



1,133,555CASH, ending of year

$
4,154,814


$
2,913,711SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for:Interest expense

$
114,717


$
50,672Income taxes

$
283,103


$
298,024Non-cash investing and financing activities:Advances for equipment purchases transferred to fixed assets

$
3,646,953


$
-
  The accompanying notes are an integral part of these consolidated financial statements.
 See report of independent registered public accounting firm.
 
 34


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” or “China”) 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 builds a biodiesel and specialty chemicals refinery in the Jiangyin Industrial Park to produce and sell biodiesel and specialty chemicals products. The construction of its production plant was completed in October 2009 and trial production was completed at the end of 2009 and commenced to regular production in January 2010.
 
 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Presentation and 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”).
 
 The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and are expressed in US dollars.  All significant intercompany balances and transactions have been eliminated in consolidation. The Company has reclassified certain prior year amounts to conform to the current year presentation.
 
 Use of Estimates and Assumptions
 
 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 consolidated financial statements are reasonable and prudent. Actual results could differ from those estimates.
 
 Fair Value of Financial Instruments
 
 The accounting standards regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires fair value disclosures of those financial instruments.  This accounting standard 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.
 ·
Level 3 -- inputs to the valuation methodology are unobservable and significant to the fair value.
  Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates the hierarchy disclosures each quarter. Liabilities measured at fair value on a recurring basis are summarized as follows:
  35
 
 Carrying Value as of December 31, 2009
Fair Value Measurements at December 31, 2009Level 1
Level 2
Level 3Warrant liabilities
$1,259,774


$1,259,774
 
 The following is a reconciliation of the beginning and ending balances of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period ended December 31, 2009:
 Warrant liabilitiesBeginning balance*

$
295,381Total gains or losses:Included in earnings


964,393Included in other comprehensive income


-Purchases, issuances, and settlements


-Transfer in and/or out of Level 3


-Ending balance

$
1,259,774
  * Effective January 1, 2009, the Company adopted the provisions of an accounting standard regarding whether an instrument (or embedded feature) is indexed to an entity’s own stock. As the result of the adoption, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $9.2 million to beginning retained earnings and $295,381 to a long-term warrant liability to recognize the fair value of such warrants.  Refer to Note 9 for additional information.
  A discussion of the valuation techniques used to measure fair value for the liability listed above and activity for this liability for the year ended December 31, 2009 is provided elsewhere in the notes.
  In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record assets and liabilities at fair value on a non-recurring basis.  Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges.  For the year ended December 31, 2009, there were no impairment charges.
 
 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 $0.14670 at December 31, 2009 and 2008, respectively). Fujian Zhongde and Zhongde Energy revenues and expenses are translated into United States dollars at weighted average exchange rates for the periods ($0.14661 and $0.14415 for the years ended December 31, 2009 and 2008, 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 consolidated 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 statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
 
 As of December 31, 2009 and 2008, translation adjustments resulting from this process included in accumulated other comprehensive income in the consolidated statement of stockholders’ equity amounted to $3,166, 247 and $3,169,989, 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.
  36
  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 allowance for doubtful account is established and recorded based on managements’ assessment of potential losses based on the credit history and relationship with the customers. Management reviews its receivable on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
 
 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 write-down 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:
 
 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.
 
 Intangible Assets
 
 Under the accounting standard regarding 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 the accounting standard for accounting for impairment or disposal of long-lived assets.
 
 Intangible assets consist of land use right and patents. All land in China is owned by government: however, the government grants “land use rights”. The Company 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 contract period.
 
 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 patents 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, 2009 and 2008, the Company recorded an impairment loss totaling $0 and $74,817, respectively.
   37
 Revenue Recognition
 
 The Company follows the accounting standard regarding revenue recognition which specifies that revenue should be realized or realizable and earned when four criteria are met:
 
 •
Persuasive evidence of an arrangement exists. (The Company considers its sales contracts to be persuasive evidence of an arrangement.)•
Product is shipped or services have been rendered.•
The seller’s price to the buyer is fixed or determinable.•
Collectability of payment is reasonably assured.
 
 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 collectability 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.
 
 Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT may be offset by the VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.
 
 Transportation and unloading charges and product inspection charges are included in selling expenses and totaled $211,538 and $189,703 for the year ended December 31, 2009 and 2008, respectively.
 
 Research and Development Costs
 
 Research and development (or “R&D”) expenses include salaries, material, contract and other outside service fees, facilities and overhead costs.  In accordance to the FASB’s accounting standards 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 $143,944 and $154,499 for the years ended December 31, 2009 and 2008, respectively.
 
 Stock-based Compensation
 
 The Company accounts for equity instruments issued to employees and in exchange for the receipt of goods or services from other than employees in accordance with the FASB’s accounting standards regarding accounting for stock based compensation and 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. 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 the FASB’s accounting standard for income taxes.  The accounting standard 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.
 
  38
  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. The Company had $69,466 deferred tax assets as of December 31, 2009 due to the temporary operation loss of Zhongde Energy, one operating subsidiary in China.
 
 The Company adopted the FASB’s accounting standard for accounting for uncertainty income taxes 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 consolidated 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 years.
 
 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.
 
 Recent Accounting Pronouncements
 
 In June 2009, the Financial Accounting Standards Board issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (“QSPE”). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company adopted this standard as of December 31, 2009; however, the standard does not have material effect on the Company’s consolidated financial statements.
 
 In June 2009, the Financial Accounting Standards Board also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the company’s financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company adopted this standard as of December 31, 2009; however, the standard does not have material effect on the Company’s consolidated financial statements.
   39
 
 In June 2009, the Financial Accounting Standards Board issued an accounting standard which establishes the FASB Accounting Standards CodificationTM (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. All current and subsequent public filings will reference the Codification as the sole source of authoritative literature.
 
 In August 2009, the Financial Accounting Standards Board issued an Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The Company adopted this standard and has determined the standard does not have material effect on the Company’s consolidated financial statements.
 
 In October 2009, the Financial Accounting Standards Board issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing.  This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation.  This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company adopted this standard and has determined the standard does not have material effect on the Company’s consolidated financial statements.
 
 In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
 
 In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
   40
 
 In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company adopted this standard and has determined the standard does not have material effect on the Company’s consolidated financial statements.
 
 In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary.  Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary.  Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value.  In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction.  This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets.  This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements In January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity.  The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements
 
 In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  2)  Activity in Level 3 fair value measurements.  In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements
 
 NOTE 3 - ACCOUNTS RECEIVABLE
 
 Accounts receivable, net consisted of the following as of December 31:
 
 2009


2008Accounts receivable

$
1,860,713


$
1,229,157Less: allowance for doubtful accounts


(93,761
)


(136,389
)Accounts receivable, net

$
1,766,952


$
1,092,768
 
 The following table consists of allowance for doubtful accounts at:
   41
 
 2009


2008Beginning allowance for doubtful accounts

$
136,389


$
407,593Additions to bad debt expense


24,028



-Recovery of amount previously reserved


(66,656
)


(294,543
)Effect of foreign currency translation gain


-



23,339Ending allowance for doubtful accounts

$
93,761


$
136,389
 
 NOTE 4 – INVENTORIES
 
 Inventories consist of the following as of December 31:
  2009


2008Raw materials

$
349,800


$
353,438Work in process and packaging materials


4,471



70,360Finished goods on shipment


-



38,856Finished goods


110,571



444,669Subtotal


464,842



907,323Minus: inventory written-off


-



(92,113
)Total

$
464,842


$
815,210
 
 As of December 31, 2009 and 2008, the Company recorded reserve $0 and $92,113 for obsolete and slow-moving inventories, respectively. The amount had been included in the cost of goods sold for the years ended December 31 2009 and 2008, respectively.
 
 NOTE 5 – PLANT AND EQUIPMENT
 
 Plant and equipment, net consist of the following as of December 31:
 2009


2008Buildings

$
12,032,983


$
2,456,981Equipment and machinery


16,744,242



6,620,068Office equipment and vehicles


92,708



51,380Construction in progress


-



13,079,606Total


28,869,933



22,208,035Less accumulated depreciation


(3,750,899
)


(3,040,411
)Plant and equipment, net

$
25,119,034


$
19,167,624Advances on equipment purchases

$
-


$
3,649,192
 
 Construction in progress represents materials, labor costs, and capitalized interest incurred to construct the production plant of Zhongde Energy Co., Ltd in Jiangyin, Fujian. Construction of the production plant was completed in October 2009.
 
 Depreciation expense was $710,051 and $707,177 for the years ended December 31, 2009 and 2008, respectively. For the years ended December 31, 2009 and 2008, interest expense of $114,718 and $50,672 was capitalized into construction in progress, respectively.
 
 NOTE 6 – INTANGIBLE ASSETS
 
 Intangible assets, net consist of the following as of December 31:
   42
 
 2009


2008Land use rights

$
4,950,538


$
4,950,538Patents and licenses


1,349,640



1,349,640Total


6,300,178



6,300,178Less accumulated amortization


(1,439,533
)


(1,227,552
)Total intangible assets, net

$
4,860,645


$
5,072,626
 
 Amortization expenses were $211,851 and $225,731 for the years ended December 31, 2009 and 2008, respectively. The estimated aggregate amortization expenses for the five succeeding fiscal years are as the following:
 
 Years

Estimated Amortization Expense2010

192,3032011

189,3712012

189,3712013

189,3712014

189,371
 
 NOTE 7 – BANK LOANS
 
 Bank loans consist of the following as of December 31:
 2009


2008Long-term bank loanInterest at 115% of PRC prime rate, secured by certain buildings and land use rights, repaid  in 2009

$
-


$
257,861Less current portion


-



(236,308
)Short-term bank loans5.841% annum interest rate, due on April 2010, secured by the buildings and the land use rights of both Zhongde Energy and Fujian Zhongde. (1)


1,467,000



-5.841% annum interest rate, due on April 2010, secured by the buildings and land use rights of both Zhongde Energy and Fujian Zhongde. (1)


1,613,700



-Total

$
3,080,700


$
21,553
 
 (1)
The Company’s CEO also provided personally irrevocable guarantee to the short-term bank loans. Zhongde Technology paid $1,907,100 (RMB13 million) bank loans back to the bank on Feb 20, 2010.
 
 Total interest expense of the bank loans for the years ended December 31, 2009 and 2008 amounted to $114,718 and $50,672, respectively.  Interest expenses incurred for both years were fully capitalized into construction in progress.
 
 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 were amounted to $13,669 and $16,681 for the years ended December 31, 2009 and 2008, respectively. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.
  43
 
 As of December 31, 2009 and 2008, 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 AND WARRANTS
 
 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 was 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.
 
 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 failed 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.
 
 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.
 
 Effective January 1, 2009, the Company adopted the provisions of an accounting standard regarding whether an instrument (or embedded feature) is indexed to an entity’s own stock. This accounting standard 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.  It 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 scope exception within the standards.  As a result of adopting this accounting standard, 6,200,000 of issued and outstanding warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment, because these warrants are denominated in US dollars and the Company’s functional currency is Renminbi and the warrants are effectively “dual-indexed”. As such, effective January 1, 2009, the Company reclassified the fair value of these warrants, which have the “dual-indexed” feature, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in January 2008.  All future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expired.
  On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $9.2 million to beginning retained earnings and $295,381 to a long-term warrant liability to recognize the fair value of such warrants on such date. The fair value increased to $1, 259,774 as of December 31, 2009. As such, the Company recognized a $964,391 loss from the change in fair value for the year ended December 31, 2009.
  These warrants do not trade in an active securities market, and as such, the Company estimates the fair value using the Black-Scholes Option Pricing Model using the following assumptions:
  
 December 31,

January 1,2009

2009Annual dividend yield


—



—Expected life (years)


3.00



4.00Risk-free interest rate


1.70
%


1.55
%Expected volatility


117
%


99
%
   44
  Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for the recent three years.  The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the warrants.
 
 Following is a summary of warrant activity and status:
 Warrants

Outstanding
Warrants

Exercisable
Weighted average

Exercise price
Average remaining

Contractual lifeBalance, at December 31, 2007

-
-
-
-Granted

6,200,000
6,200,000
$2.00
5.0Forfeited

-
-
-
-Exercised

-
-
-
-Balance, at December 31, 2008

6,200,000
6,200,000
$2.00
4.0Granted

-
-
-
-Forfeited

-
-
-
-Exercised

-
-
-
-Balance, at December 31, 2009

6,200,000
6,200,000
$2.00
3.0
 
  NOTE 10 – OPTIONS
 
 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 years ended December 31, 2009 and 2008, $404,582 and $903,769 was amortized and recorded as compensation expense, respectively.
 
 Following is a summary of stock option activity:
  Options Outstanding


Weighted Average Exercise Price


Aggregate Intrinsic ValueOutstanding as of December 31, 2007


-


$
-


$
-Granted


1,680,000



2.75Forfeited


(1,070,000
)Exercised


-



-Outstanding as of December 31, 2008


610,000



2.75


$
-Granted


-



-Forfeited


(20,000
)


-Exercised


-



-Outstanding as of December 31, 2009


590,000


$
2.75


$
-
   45
 
 Following is a summary of the status of options outstanding at December 31, 2009:
  Exercise Price


Outstanding Options Number


Average Remaining Contractual Life


Average Exercise Price


Exercisable Options Number


Average Remaining Contractual Life$
2.50



295,000



8.0


$
2.50



196,667



8.0$
3.00



295,000



8.0


$
3.00



196,667



8.0590,000



8.0


$
2.75



393,334



8.0
 
 NOTE 11 - EARNINGS PER SHARE
 
 For the years ended December 31, 2009 and 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 which were higher than the average trading price of the Company’s stock. Thus, these warrants were anti-dilutive. The basic and diluted (loss) earnings per share for the years ended December 31, 2009 and 2008 were ($0.01) and $0.02, 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.
 
 The Company has total registered capital $15,612,485.  As of December 31, 2009 and 2008, the Company allocated $1,630,882 and $1,457,432, 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, 2009 is approximately $6,175,361.
  NOTE 13 – TAXES
 
 Income Taxes
 
 Provision for income taxes for the years ended December 31 is as follows:
 2009


2008Current:PRC



$
306,037


$
369,640United States




-



-Total current




306,037



369,640Deferred




(69,424
)


-Total



$
236,613


$
369,640
   46
 
 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. Pursuant to the PRC tax law, net operating loss can be carried forward 5 years to offset future taxable income.
 
 In 2006, Fujian Zhongde became a wholly-owned foreign enterprise (“WOFE”). The 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 March 31, 2007, the PRC tax authorities approved a full income tax exemption to Fujian Zhongde for the year of 2007 and a 12.5% income tax rate for years of 2008, 2009 and 2010. Zhongde Energy is levied on a 25.0% income tax rate.
 
 The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2009 and 2008:
 
 2009

2008U.S. Statutory rates

35
%
35
%Foreign income not recognized in USA

(35)

(35)China income taxes

25

25Tax exemption

(13)

(13)Other items (1)

(281)

26Total effective income tax rate

269
%
38
%
 
 (1)  These rates differ from the stated effective tax rate in China mainly due to losses incurred by US Company that was not deductible in the PRC.
 
 The estimated tax savings for the years ended December 31, 2009 and 2008 amounted to $306,037 and $376,984. The net effect on earnings per share had the income tax been applied would decrease earnings per share from ($0.01) to ($0.02) in 2009 and $0.02 to $0.01 in 2008, respectively.
 
 Deferred income taxes
 
 Since Zhongde Energy had an operating loss for the year ended December 31, 2009, the loss can be carried forward to offset income for the next five years.  The Company recorded deferred tax assets of 69,424 as of December 31, 2009.  Based on the foregoing information, the Company believes that a valuation allowance is not deemed necessary for the deferred assets for the following reasons: (i) there will be sufficient operating income generated in future years based on the fact that the Company’s wholly owned subsidiary, Zhongde Energy, is expected to generate profits after the new plant put into production, and (ii) the current operating loss of Zhongde Energy can be carried forward for five years to offset future operating income under PRC tax regulations.
 
 The Company has cumulative undistributed earnings of foreign subsidiaries of $ 9,409,861 as of December 31, 2009, which is included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations.  Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
 
 CCE was incorporated in the United States and has incurred net operating losses for income tax purposes for the year ended December 31, 2009. The estimated net operating loss carry forwards for United States income taxes amounted to approximately $1,948,570 and $1,563,786 as of December 31, 2009 and 2008, which may be available to reduce future years’ taxable income.  These carry forwards will expire, if not utilized, through 2024 and 2029.  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, 2009 was $682,000 and the valuation allowance was increased by $136,546 for the year ended December 31, 2009. Management will review this valuation allowance periodically and make adjustments as warranted.
  47
  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 $1,562,277 and $1,900,888 for the year ended December 31, 2009 and $2,063,352 and $1,837,530 for the year ended December 31, 2008, 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, 2009 and 2008, VAT payable amounted to $22,191 and $72,729, 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 years ended December 31, 2009 and 2008, the aforesaid purchases totaled $0 and $869,553, respectively. As of December 31, 2009 and 2008, there were no outstanding payable due to these companies.
  NOTE 15 – SEGMENT INFORMATION
  The Company operates in one industry segment – the synthesization 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, 2009 were located in the PRC.
 
 In accordance with the enterprise-wide disclosure requirements of the accounting standard, the Company's net revenue from external customers by main product categories and by geographic areas for the years ended December 31, 2009 and 2008 are as follows:
  2009


2008Revenues
GP%

Revenues
GP%Domestic revenues
$9,075,128
7%

$ 12,137,363
21%International revenues
6,858,223
34%

6,032,472
22%Total Revenues
$ 15,933,351
18%

$ 18,169,835
21%
  2009


2008Revenues
GP%

Revenues
GP%Biodiesel
2,364,971
3%

1,394,818
16%Specialty chemicals
13,568,380
21%

16,775,017
22%Total Revenues
$ 15,933,351
18%

$ 18,169,835
21%
  NOTE 16 – CONCENTRATIONS AND RISKS
 
 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.
  48
 
 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.
 
 The Company’s demand deposits are in accounts maintained with stateowned banks within the People’s Republic of China and an offshore account in United States of America. Total cash deposited with banks within the People’s Republic of China, as of December 31, 2009 and 2008 amounted to $4,146,250 and $2,902,707, respectively. 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, 2009, one customer for specialty chemical products (no customer for biodiesel product) accounted for 10.3% of net sales. The customer had $132,436 accounts receivable as of December 31, 2009. In 2008, no customer (for both biodiesel and specialty chemical products) accounted for over 10% of net sales.
 
 For the year ended December 31, 2009, three major suppliers for feedstock and raw materials accounted for 16.8%, 11.5% and 9.8%, respectively, of the total purchase. In 2008, no suppliers for feedstock and raw materials accounted over 10%, of the total raw material purchase. There were no accounts payables due to these suppliers as of December 31, 2009.
 
 NOTE 17 – COMMITMENTS AND CONTINGENCIES
 
 From time to time, the Company is involved in legal matters arising in the ordinary course of business.  Management currently is not aware of any legal matters or pending litigation, which would have a significant effect on the Company’s consolidated financial statements as of December 31, 2009.
 
 NOTE 18 – SUBSEQUENT EVENTS
 
 On February 1, 2010, the Company granted options to the Company’s CFO to purchase a total of 300,000 shares of common stock under the 2008 Equity Incentive Plan, including 150,000 shares at an exercise price of $2.50 per share and 150,000 options at an exercise price of $3.00 per share; all 300,000 options expire 10 years from the date of grant. The option shares will be vested quarterly in three years started on May 1, 2010.
 
 On February 20, 2010, Zhongde Energy entered into a line of credit agreement with Fujian Haixia bank Co., Ltd for the total amount of $5,809,320 (RMB39.6 million). Zhongde Energy borrowed the loan amount of $4,841,100 (RMB 33 million) with 5.94% annum interest rate on February 24, 2010. Pursuant to the loan agreement, Zhongde Energy will pay a principal payment of $733,500 (RMB 5 million) to the bank by February 24, 2011 and the remaining balance of $4,107,600 (RMB 28 million) no later than January 5, 2012. The loan is secured by the buildings and the land use rights owned by Zhongde Energy with co-guaranty provided by Zhongde Technology. CEO of the Company also personally guaranteed the loan.
 
 The Company has performed an evaluation of subsequent events till the date the financial statements were issued.
 49




Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  We were notified that, effective January 1, 2010, certain partners of Moore Stephens Wurth Frazer and Torbet, LLP (“MSWFT”) and Frost, PLLC (“Frost”) formed Frazer Frost, LLP (“Frazer Frost”), a new partnership. Pursuant to the terms of a combination agreement by and among MSWFT, Frazer Frost and Frost (the “Combination Agreement”), MSWFT and Frost each contributed substantially all of their assets and certain of their liabilities to Frazer Frost, resulting in Frazer Frost assuming MSWFT’s engagement letter with us and becoming our new independent accounting firm.  Frazer Frost is registered with the Public Company Accounting and Oversight Board (PCAOB).
  Item 9A(T).
Controls and Procedures.
  Disclosure Controls and Procedures
  We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
  As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer, Mr. Tai-ming Ou, and our Chief Financial Officer, Mr. William Chen, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009. Based on their assessment, Mr. Ou and Mr. Chen determined that, as of December 31, 2009, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, because of the significant deficiencies in our internal control over financial reporting described below, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.
  Notwithstanding management’s assessment that our internal control over financial reporting was ineffective as of December 31, 2009 due to the significant deficiency described below under Management’s Annual Report on Internal Control over Financial Reporting, we believe that the consolidated financial statements included in this Annual Report on Form 10-K correctly present our financial condition, results of operations and cash flows for the fiscal years covered thereby in all material respects.
  Management’s Annual Report on Internal Control over Financial Reporting
  Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:
  1.
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
  2.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
  3.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
  Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009.  In making this assessment, our management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that, as of December 31, 2009, our internal control over financial reporting was not effective because of the significant deficiencies in our internal control over financial reporting described below.
  During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2009, our management concluded that, after adding additional qualified accountants, we still need to increase our qualified accounting personnel and enhance the supervision, monitoring and review of our financial statements preparation. We have already taken measures to remediate these significant deficiencies by seeking additional financial reporting and accounting personnel with relevant accounting experience, skills and knowledge in the preparation of financial statements pursuant to the requirements of US GAAP and SEC disclosure rules.
 50
 This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only the management’s report in this annual report.
 
 Changes in Internal Controls over Financial Reporting
 
 Except for the addition of qualified accountants and enhancing internal control procedures in the fourth quarter of 2009, during the fiscal year ended December 31, 2009 there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
  Item 9B.
Other Information.
  Not applicable.
  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

55

Chief Executive Officer and Chairman of the BoardRi-wen Xue

45

Chief Operating Officer and DirectorWilliam Chen

24

Chief Financial OfficerQin Yang

50

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’s extensive knowledge of our business and his leadership, management and quantitative skills, honed during his fifteen years as our Chief Executive Officer, provide valuable insights to the Board. Mr. Ou graduated from Fujian Normal University in 1981 with a Bachelor’s degree in mathematics.  Mr. Ou and Ms. Yang are husband and wife.
  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 positions 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. Mr. Xue’s leadership skills, experience managing our day to day operations and his training as an economist and engineer provide valuable insights to the Board. Mr. Xue graduated from Fujian Finance College in 1985 with a Bachelor’s degree in finance.
  51
  William Chen, Chief Financial Officer.Mr. Chen joined us in December 2009 as our vice president of investor relations and was appointed our Chief Financial Officer in February 2010. Prior to joining us Mr. Chen worked as a financial analyst at Wealth Transition Planning LLC, a comprehensive financial services firm, from April 2009 through September 2009. Mr. Chen served as a director assistant at EKN Financial Service from January 2009 through April 2009. His earlier work experiences were as an accounting intern at Colgate Palmolive Company from January 2006 through August 2006 and as a marketing and business development intern at Duane Reade Corporation from September 2004 through April 2005. Mr. Chen holds a Bachelors degree in Finance and Investment from Baruch College and is working towards an MBA degree.
  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’s long tenure with us, her entrepreneurial experience and her leadership and management skills provide valuable insights to the Board. 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.
  Section 16(a) Beneficial Ownership Reporting Compliance
  Section 16(a) of the Exchange Act requires our directors and officers, and persons who own more than ten percent of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Directors, officers and persons who own more than ten percent of our common stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
  To our knowledge, based solely on a review of the copies of such reports furnished to us, during the year ended December 31, 2009, each of our directors, officers and ten percent stockholders complied with all Section 16(a) filing requirements applicable to our directors, officers and ten percent stockholders except: Mr. Tai-ming Ou (1 late filing/1 late transaction), Mr. Ri-wen Xue (1 late transaction), Mr. Yun He (1 late transaction), Ms. Shannon Yan (1 late filing) and Ms. Qin Yang (1 late filing/1 late transaction).
  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 and our Chief Financial Officer and principal accounting officer. We will provide our Code of Ethics without charge upon request. Requests should be made by email and addressed to William Chen at william.chen@chinacleanenergy.com.
  52
  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 2009, 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)

2009

$31,622

$78,501

$110,1232008

$31,136

$ 78,501

$109,637
 ———————
 (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, 2009, in accordance with FASB ASC Topic 718.   Please see Note 10 to our financial statements for a discussion of assumptions made in the valuation.
  Employment Agreement
  On January 9, 2008, we entered into a two-year employment agreement with Tai-ming Ou, which automatically renews 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 serves 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 commencing on March 31, 2008. 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.
  Outstanding Equity Awards at Fiscal Year-End
  The following table shows information concerning unexercised options outstanding as of December 31, 2009 for our named executive officer.
  Name

Number of securities underlying unexercised options (#) exercisable

Number of securities underlying unexercised options (#) unexercisable

Option exercise price

Option expiration dateTai-ming Ou

43,333(1)

21,667

$2.50

January 9, 201843,333(1)

21,667

$3.00

January 9, 2018
 __________
 (1)
We granted Mr. Ou options to purchase 65,000 shares of our common stock at $2.50 per share pursuant to our 2008 Equity Incentive Plan.  The options vest quarterly over a three year period commencing March 31, 2008.
 (2)
We granted Mr. Ou options to purchase 65,000 shares of our common stock at $3.00 per share pursuant to our 2008 Equity Incentive Plan.  The options vest quarterly over a three year period commencing March 31, 2008.
  53
  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, 2009.
  Name

Fees earned or paid in cash

($)

Option awards

($)(1)

Total

($)Qin Yang

$17,579

$12,077

$29,656
 __________
 (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, 2009, in accordance with FASB ASC Topic 718.   Please see Note 10 to our financial statements for a discussion of assumptions made in the valuation.
  Ms. Qin Yang 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 $1,465 per month or $17,579 per annum during the year ended December 31, 2009.  We granted Ms. Yang options to purchase 10,000 shares of our common stock at $2.50 per share and 10,000 shares of our common stock at $3.00 per share pursuant to our 2008 Equity Incentive Plan.  The options vest quarterly over a three year period commencing March 31, 2008.    As of December 31, 2009, options to purchase 6,667 shares of our common stock at $2.50 per share and 6,667 shares of our common stock at $3.00 were exercisable.  Ms. Yang and Mr. Ou, our chief executive officer, president and chairman of the board of directors, are husband and wife.
  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 26, 2010 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., Jiangyin Industrial Zone, Jiangyin Town, Fuqing City, Fujian Province, People’s Republic of China, 350309.
  54
  As of March 30, 2010, 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

7,547,838 (2)

23.62%Qin Yang

7,547,838 (3)

23.62%William Chen

25,000 (4)

*Nai-ming Yu

2,399,250

7.51%Ri-wen Xue

833,020(5)

2.61%All officers and directors as a group (4 persons)

8,405,858

26.31%
 ———————
  *
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 31, 2010. 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) 97,500 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) 15,000 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) 15,000 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) 97,500 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.
  (4)
Includes 25,000 shares of common stock issuable upon exercise of options.
  (5)
Includes 75,000 shares of common stock issuable upon exercise of options.
  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.
  55
 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 a beneficial owner of 23.75% of our outstanding common stock. In the years ended December 31, 2009 and 2008, such purchases from Fujian Zhongde Waste Oil Co. Ltd. totaled $0 and $869,553, respectively. As of December 31, 2009 and 2008, there were no outstanding payables due to Fujian Zhongde Waste Oil Co. Ltd.
  Mr. Ou agreed to personally guarantee Fujian Zhongde Technology Co. Ltd.’s obligations under its April 14, 2009 RMB 10 million, or approximately $1.43 million, loan agreement with Fuzhou City Commercial Bank at an annual interest rate of 5.84%.  This loan was outstanding as of December 31, 2009. In addition to Mr. Ou’s guarantee, Fujian Zhongde Technology Co. Ltd.’s obligations under this loan agreement are secured by, among other things, the land, bank accounts and real property of Fujian Zhongde Technology Co. Ltd. and the land of Fujian Zhongde Energy Co., Ltd.   On February 20, 2010, Fujian Zhongde Technology Co., Ltd has paid the full loan principal back to the bank.
  Mr. Ou agreed to personally guarantee Fujian Zhongde Technology Co. Ltd.’s obligations under its April 14, 2009 RMB 11 million, or approximately $1.57 million revolving line of credit with Fuzhou City Commercial Bank. All advances under the revolving line of credit shall be evidenced by a promissory note with a floating interest rate based on the face value and maturity period of such note. In addition to Mr. Ou’s guarantee, Fujian Zhongde Technology Co. Ltd.’s obligations under this revolving line of credit are secured by, among other things, the land, bank accounts and real property of Fujian Zhongde Technology Co. Ltd and the land of Fujian Zhongde Energy Co., Ltd. As of December 31, 2009, Fujian Zhongde Technology Co. Ltd. had received advances of RMB 11 million, or approximately $1.57 million under the revolving line of credit.  On February 20, 2010, Fujian Zhongde Technology Co., Ltd repaid RMB 3 million, or approximately $440,100, of the loan principal.
  Mr. Ou agreed to personally guarantee Fujian Zhongde Energy Co. Ltd.’s obligation under its February 24, 2010 RMB 33 million, or approximately $4,800,000, loan agreement with Fujian Haixia Bank, formerly Fuzhou City Commercial Bank, at an annual interest rate of 5.94%. The proceeds from the loan shall be used for working capital.  Fujian Zhongde Energy Co. Ltd must repay RMB 5 million by February 24, 2011 and RMB 28 million by January 5, 2012. Repayment is secured by, among other things, the land of Fujian Zhongde Energy Co. Ltd and the land, and real property of Fujian Zhongde Technology Co., Ltd.
  Director Independence
  We do not currently have any independent directors.
  56
  Item 14.
Principal Accountant Fees and Services.
  Fees billed for professional services provided to us by Frazer Frost, LLP for the fiscal years ended December 31, 2009 and 2008 were:
  2009


2008Audit Fees

$
180,000


$
160,000Audit-Related Fees

$
-


$
-Tax Fees

$
-


$
-All Other Fees

$
-


$
-
  PART IV
  Item 15.
Exhibits and Financial Statement Schedules.
  (a)
The following financial statements and financial statement schedule are included in Item 8 herein:
 
 1.
Financial Statements
 
 Report of Frazer Frost, LLP, Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2009 and 2008Consolidated Statements of Operations and Other Comprehensive (Loss) Income for the Years Ended December 31, 2009 and 2008Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended December 31, 2009 and 2008Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008Notes to Consolidated Financial Statements
 
 
 2.
Financial Statement Schedule
 
 None
 
 3.
Exhibits
 
 See Index to Exhibits
  57
 
 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: March 31, 2010
  CHINA CLEAN ENERGY INC./s/ Tai-ming OuTai-ming OuPresident and Chief Executive Officer andChairman 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 March 31, 2010 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/ William Chen

Chief Financial Officer (Principal FinancialWilliam Chen

Officer and Principal Accounting Officer)/s/ Ri-wen Xue

Chief Operating Officer and DirectorRi-wen Xue/s/ Qin Yang

DirectorQin Yang
 
 58
  Index to Exhibits
  Exhibit  No.

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 the 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 the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on January 22, 2007)10.3

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 the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on January 22, 2007)10.4

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 No. 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)10.5

Supplier Agreement, dated March 5, 2007 between China Clean Energy, Inc. and Xinjiang Guansheng Technology Chemistry Co., Ltd. (incorporated by reference to Exhibit 10.15 to Amendment No. 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)10.6

Supplier Agreement, dated March 6, 2007 between China Clean Energy, Inc. and Meiweike (Shaxian) Linchan Chemistry Co., Ltd. (incorporated by reference to Exhibit 10.14 to Amendment No. 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)10.7

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).10.8

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)10.9

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)  59
  10.10

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)10.11

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)10.12

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)10.13

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)10.14

Employment Agreement, dated January 9, 2008 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)10.15

Employment Agreement, dated January 9, 2008, 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)10.16

Employment Agreement, dated January 9, 2008, 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)10.17

Loan Agreement, dated April 14, 2009 between Fujian Zhongde Technology Co., Ltd. and Fuzhou City Commercial Bank Co., Ltd., Longtian Branch (incorporated by reference to Exhibit 10.13 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 of China Clean Energy Inc. filed with the Securities and Exchange Commission on May 1, 2009)10.18

Bank Draft and Acceptance Limit Agreement, dated April 14, 2009 between Fujian Zhongde Technology Co., Ltd. and Fuzhou City Commercial Bank Co., Ltd., Longtian Branch  (incorporated by reference to Exhibit 10.14 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 of China Clean Energy Inc. filed with the Securities and Exchange Commission on May 1, 2009)10.19

Loan Agreement, dated February 24, 2010 between Fujian Zhongde Energy Co., Ltd. and Fujian Haixia Bank Co., Ltd. Longtian Branch (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 March 12, 2010)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