SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q




þ           Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
quarterly period ended March 31, 2010




or




q           Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
transition period from ________________ to ________________.




Commission
File Number 000-51753




SINO
CLEAN ENERGY INC.


(Exact
name of registrant as specified in its charter)





Nevada
            75-2882833(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (I.R.S.
      Employer
              Identification
      No.)





Room
1605, Suite B, Zhengxin Building


No. 5 Gaoxin 1st Road, Gao Xin
District


Xi’an, Shaanxi Province,
People’s Republic of China


(Address
of Principal Executive Offices including zip code)





+86 29
8406-7376


(Registrant’s
Telephone Number, Including Area Code)




Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 þNo q




Indicate
by check mark 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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


*Yes
qNo q *The
registrant has not yet been phased into the interactive data
requirements.




Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company





Large
      Accelerated Filer q
            Accelerated
      Filer q
            Non-Accelerated
      Filer q
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company þ




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act).


Yes oNo þ




As of May
14, 2010, 16,556,250 shares of the issuer’s common stock, par value $0.001, were
outstanding.










Table of
Contents





PagePART I FINANCIAL
      INFORMATIONITEM
      1
            FINANCIAL
      STATEMENTS
            
            3ITEM
      2
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            
            14ITEM
      3
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            19ITEM
      4(T).
            CONTROLS
      AND PROCEDURES
            
            19PART II OTHER
      INFORMATIONITEM
      1
            LEGAL
      PROCEEDINGS
            
            20ITEM
      1A.
            RISK
      FACTORS
            
            20ITEM
      2
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            
            20ITEM
      3
            DEFAULTS
      UPON SENIOR SECURITIES
            
            20ITEM
      4
            REMOVED
      AND RESERVED
            
            20ITEM
      5
            OTHER
      INFORMATION
            
            20ITEM
      6
            EXHIBITS
            
            20SIGNATURES
            
            21





2




PART
I





FINANCIAL
INFORMATION


Item
1. Financial Statements





Sino Clean Energy Inc. and
    SubsidiariesCondensed
      Consolidated Balance Sheets





March
      31,
              
              
              December
      31,2010
              
              
              2009ASSETS
              
              (Unaudited)Current
      assetsCash
      and cash equivalents
              
              $
              25,760,626
              
              
              $
              18,302,558Accounts
      receivable , net
              
              
              2,791,092
              
              
              
              3,655,473Inventories
              
              
              809,277
              
              
              
              892,609Prepaid
      inventories
              
              
              4,254,320
              
              
              
              5,453,095Prepaid
      expenses
              
              
              22,084
              
              
              
              259,627Tax
      recoverable
              
              
              —
              
              
              
              138,495Other
      receivables
              
              
              18,469
              
              
              
              65,584Land
      use right - current portion
              
              
              38,750
              
              
              
              38,739Total
      current assets
              
              
              33,694,618
              
              
              
              28,806,180Property,
      plant and equipment , net
              
              
              15,634,747
              
              
              
              12,557,691Land
      use right - non current portion
              
              
              1,769,369
              
              
              
              1,778,562Goodwill
              
              
              762,018
              
              
              
              762,018Prepayments
      and deposits
              
              
              1,228,390
              
              
              
              729,328Total
      assets
              
              $
              53,089,142
              
              
              $
              44,633,779LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIENCY)Current
      liabilitiesAccounts
      payable and accrued expenses
              
              $
              3,605,237
              
              
              $
              2,672,211Taxes
      payable
              
              
              2,132,203
              
              
              
              1,577,249Amount
      due to directors
              
              
              73,466
              
              
              
              73,466Derivative
      liabilities
              
              
              20,992,787
              
              
              
              16,752,858Total
      current liabilities
              
              
              26,803,693
              
              
              
              21,075,784Convertible
      notes, net of discount
              
              
              —
              
              
              
              1,615,025Derivative
      liabilities
              
              
              —
              
              
              
              28,404,181Total
      liabilities
              
              
              26,803,693
              
              
              
              51,094,990Commitments
      and ContingenciesShareholders'
      Equity (Deficiency)Preferred stock, $0.001 par
      value,50,000,000 shares
      authorized,none issued and
      outstanding
              
              
              -
              
              
              
              -Common stock, $0.001 par
      value,30,000,000 shares authorized,
      16,556,250 and 10,849,863 issuedand outstanding as of March 31,
      2010and December 31, 2009
      respectively
              
              
              16,557
              
              
              
              10,850Additional
      paid-in capital
              
              
              37,700,930
              
              
              
              25,432,804Accumulated
      deficit
              
              
              (15,342,366
              )
              
              
              (35,802,987
              )Statutory
      reserves
              
              
              1,758,553
              
              
              
              1,758,553Accumulated
      other comprehensive income
              
              
              2,151,775
              
              
              
              2,139,569Total
      Shareholders' equity (deficiency)
              
              
              26,285,449
              
              
              
              (6,461,211
              )Total
      liabilities and shareholders' equity (deficiency)
              
              $
              53,089,142
              
              
              $
              44,633,779


See
accompanying notes to condensed consolidated financial statements.





3




Sino
      Clean Energy Inc. and SubsidiariesCondensed
      Consolidated Statements of Income and Other Comprehensive
      Income(Unaudited)




Three
      months ended
                March
      31,2010
              
              
              2009Revenue
              
              $
              24,509,004
              
              
              $
              7,778,277Cost
      of goods sold
              
              
              (14,400,177
              )
              
              
              (5,348,107
              )Gross
      profit
              
              
              10,108,827
              
              
              
              2,430,170Selling
      expenses
              
              
              911,079
              
              
              
              3,559General
      and administrative expenses
              
              
              719,182
              
              
              
              548,899Income
      from operations
              
              
              8,478,566
              
              
              
              1,877,712Other
      income (expense)Interest
      and finance costs
              
              
              (10,444,563
              )
              
              
              (485,747
              )Expense
      related to escrow shares
              
              
              —
              
              
              
              (120,167
              )Interest
      income
              
              
              12,871
              
              
              
              3,986Change
      in fair value of derivative liabilities
              
              
              (4,239,929
              )
              
              
              578,978Gain
      on extinguishment of derivative liability
              
              
              28,404,181
              
              
              
              —Total
      other income (expense)
              
              
              13,732,560
              
              
              
              (22,950
              )Income
      before provision for income taxes
              
              
              22,211,126
              
              
              
              1,854,762Provision
      for income taxes
              
              
              1,750,505
              
              
              
              289,286Net
      income
              
              
              20,460,621
              
              
              
              1,565,476Other
      comprehensive income (loss)Foreign
      currency translation adjustment
              
              
              12,206
              
              
              
              (3,316
              )Comprehensive
      income
              
              $
              20,472,827
              
              
              $
              1,562,160Weight
      average number of shares-
      Basic
              
              
              12,851,265
              
              
              
              9,219,471-
      Diluted
              
              
              14,933,797
              
              
              
              9,275,123Income
      per common share-
      Basic
              
              $
              1.59
              
              
              $
              0.17-
      Diluted
              
              $
              1.37
              
              
              $
              0.17


See
accompanying notes to condensed consolidated financial statements.





4




Sino-Clean
      Energy Inc. and SubsidiariesCondensed
      Consolidated Statements of Changes in Shareholders’
  EquityFor
      the three months ended March 31, 2010(Unaudited)




Retained
            
            
            AccumulatedCommon
      stock
            
            
            Additional
            
            
            
            
            earnings
            
            
            otherpaid-in
            
            
            Statutory
            
            (Accumulated
            
            
            comprehensiveShares
            
            
            Amount
            
            
            capital
            
            
            reserves
            
            
            Deficit)
            
            
            income
            
            
            TotalBalance,
      January 1, 2010
            
            
            10,849,863
            
            
            $
            10,850
            
            
            $
            25,432,804
            
            
            $
            1,758,553
            
            
            $
            (35,802,987)
            
            
            $
            2,139,569
            
            
            $
            (6,461,211)Shares
      issued for exercise of warrants and options
            
            
            62,632
            
            
            
            63
            
            
            
            173,917
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            173,980Fair
      value of options granted
            
            
            —
            
            
            
            —
            
            
            
            18,152
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            18,152Shares
      issued upon conversion of notes payable
            
            
            5,643,755
            
            
            
            5,644
            
            
            
            12,076,057
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            12,081,701Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            20,460,621
            
            
            
            —
            
            
            
            20,460,621E
      Foreign currency translation gain
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            12,206
            
            
            
            12,206Balance,
      March 31, 2010
            
            
            16,556,250
            
            
            $
            16,557
            
            
            $
            37,700,930
            
            
            $
            1,758,553
            
            
            $
            (15,342,366)
            
            
            $
            2,151,775
            
            
            $
            26,285,449




See
accompanying notes to condensed consolidated financial statements.





5




Sino Clean Energy Inc. and
    SubsidiariesCondensed
      Consolidated Statements of Cash Flows(Unaudited)




Three
      months ended
              March
      31,2010
            
            
            2009Cash
      flows from operating activities:Net
      income
            
            $
            20,460,621
            
            
            $
            1,565,476Adjustments
      to reconcile net income to cashprovided
      by operating activities:Depreciation
      and amortization
            
            
            469,002
            
            
            
            356,063Amortization
      of deferred debt issuance costs
            
            
            —
            
            
            
            97,128Amortization
      of discount on convertible notes
            
            
            8,601,975
            
            
            
            329,338Fair
      value of common stock issued for payment of interest
    expense
            
            
            1,864,701
            
            
            
            —Expense
      related to escrow shares
            
            
            —
            
            
            
            120,167Fair
      value of common stock issued for services
            
            
            —
            
            
            
            233,300Fair
      value of vested options
            
            
            18,152
            
            
            
            —Change
      in fair value of derivative liabilities
            
            
            4,239,929
            
            
            
            (578,978)Gain
      on extinguishment of derivative liabilities
            
            
            (28,404,181)
            
            
            
            —Change
      in operating assets and liabilities :Accounts
      receivable
            
            
            864,382
            
            
            
            (874,993
            )Other
      receivables
            
            
            47,115
            
            
            
            820Prepaid
      expenses
            
            
            237,543
            
            
            
            68,313Inventories
            
            
            83,332
            
            
            
            (97,682
            )Prepaid
      inventories
            
            
            1,198,775
            
            
            
            —Tax
      recoverable
            
            
            138,495
            
            
            
            —Refundable
      advance
            
            
            —
            
            
            
            731,771Accounts
      payable and accrued expenses
            
            
            933,026
            
            
            
            178,809Taxes
      payables
            
            
            554,955
            
            
            
            261,239Net
      cash provided by operating activities
            
            
            11,307,822
            
            
            
            2,390,771Cash
      flows from investing activities :Prepayments
      and deposits
            
            
            (499,062)
            
            
            
            48,313Purchase
      of property, plant and equipment
            
            
            (3,532,523)
            
            
            
            —Net
      cash (used in) provided by investing activities
            
            
            (4,031,585)
            
            
            
            48,313Cash
      flows from financing activities:Payment
      of advances from director
            
            
            —
            
            
            
            (394,956
            )Cash
      received from exercise of warrants and options
            
            
            173,980
            
            
            
            —Net
      cash provided by (used in) financing activities
            
            
            173,980
            
            
            
            (394,956)Effect
      of foreign currency translation
            
            
            7,851
            
            
            
            (523)Net
      increase in cash and cash equivalents
            
            
            7,458,068
            
            
            
            2,043,605Cash
      and cash equivalents, beginning of period
            
            
            18,302,558
            
            
            
            3,914,306Cash
      and cash equivalents, end of period
            
            $
            25,760,626
            
            
            $
            5,957,911Supplemental
      disclosure informationInterest
      paid
            
            $
            —
            
            
            $
            —Income
      taxes paid
            
            $
            1,616,656
            
            
            $
            542,632Supplemental
      non-cash investing and financing activitiesIssuance
      of shares upon conversion of convertible notes
            
            $
            10,217,000
            
            
            $
            —Issuance
      of shares to consultant
            
            $
            —
            
            
            $
            233,300Cumulative
      effect of change in accounting principle on convertible notes and
      warrants
            
            $
            —
            
            
            $
            4,589,792





See
accompanying notes to the condensed consolidated financial
statements.





6


Sino
Clean Energy Inc. and Subsidiaries


Notes to
Condensed Consolidated Financial Statements


For the
Three Months Ended March 31, 2010 (Unaudited)





1. ORGANIZATION AND BUSINESS
ACTIVITIES





Overview




Sino
Clean Energy Inc. (the “Company”, “we” or “our”) is a holding company that,
through its subsidiaries, is a leading commercial producer and distributor
of coal-water slurry fuel (“CWSF”) in China. CWSF is a clean fuel that consists
of fine coal particles suspended in water.  Our CWSF products are
mainly used to fuel boilers and furnaces to generate steam and heat for
residential and industrial applications.  We sell our products in
China and our customers include industrial, commercial, residential and
government organizations. Our strong reputation in the CWSF industry in China,
together with our established track record for consistently delivering products
in large quantities, has enabled us to expand our customer base.  We
primarily use washed coal to produce CWSF. We acquire the raw materials for each
of our production facilities primarily from three nearby coal
mines.  We have established strong relationships with our suppliers
and our ability to purchase large quantities of raw materials has allowed us to
achieve favorable pricing and delivery terms.







Corporate
Organization and History




We were
originally incorporated in Texas as “Discount Mortgage Services, Inc.” on July
11, 2000. In September 2001, we purchased Endo Networks, Inc., a Canadian
software developer, and changed our name to “Endo Networks, Inc.” on November 5,
2001. We re-domiciled to the State of Nevada on December 13, 2001.




On
October 20, 2006 we consummated a share exchange transaction with Hangson, a
British Virgin Islands company, the stockholders of Hangson and a majority of
our stockholders.  We issued a total of 26,000,000 shares of our
common stock to the Hangson Stockholders and a consultant in the transaction, in
exchange for 100% of the common stock of Hangson.  As a result of the
transaction we became engaged in the CWSF business, through the operations of
Suo’ang BST and Suo’ang New Energy.  On January 4, 2007, we changed
our name from “Endo Networks, Inc.” to “China West Coal Energy Inc.”, and then
on August 15, 2007, we changed our name again to our present name, Sino Clean
Energy Inc.




Hangson
did not conduct any substantive business operations of its own, but from August
2006 to June 30, 2009, controlled Suo’ang BST, a PRC company and Suo’ang BST’s
80%-owned subsidiary Suo’ang New Energy.  From June 30, 2008 to
November 12, 2009 Hangson owned 20% of Suo’ang New Energy.  Hangson
controlled Suo’ang BST through a series of contractual arrangement. Beginning
in June 2009, we effected a reorganization of our corporate structure in order
to make Suo’ang New Energy a wholly-owned subsidiary.




On
December 31, 2009, we entered into a series of termination agreements to
terminate the contractual arrangements by and among Suoke Clean Energy, Suo’ang
BST and certain stockholders of Suo’ang BST.  We no longer needed to
keep such contractual arrangements in place due to the fact that Suo’ang BST was
no longer engaged in any substantial business operations. In connection with the
termination agreements, certain assets held by Suo’ang BST, such as, office
equipment, vehicles, bank deposits, accounts receivable, were transferred to
Suoke Clean Energy. Employees of Suo’ang BST signed new employment contracts
with Suoke Clean Energy. All rights and obligations under certain business
operation agreements and research and development contracts between Suo’ang BST
and third parties were assigned to Suo’ang New Energy.




7




On
December 31, 2009, Hangson transferred all of its equity interests in Wiscon to
us.  Since Hangson had no substantive operations of its own after the
transfer and termination of the contractual arrangements, we decided to dissolve
Hangson on December 31, 2009.





Effective
May 7, 2010, the Company announced a reverse stock split pursuant to which each
ten shares of Company's common stock then issued and outstanding was
automatically converted into one share of the Company’s common
stock.  All share and per share amounts in the accompanying condensed
consolidated financial statements have been adjusted to reflect the reverse
stock split as if it had occurred at the beginning of the earliest period
presented.





2. SUMMARY OF SIGNIFICANY ACCOUNTING
POLICIES





Basis of presentation and
consolidation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the United States Securities and Exchange Commission
(“SEC”). Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company’s 2009 Annual Report on Form 10-K for the fiscal year
ended December 31, 2009, filed with the SEC. The results of operations for
interim periods are not necessarily indicative of the results expected for a
full year or for any future period.





The
consolidated condensed financial statements include the financial statements of
the Company, its wholly owned subsidiaries Wiscon, Tongchuan Suoke Clean
Energy, Shaanxi Suo’ang New Energy and Shenyang Suo’ang New Energy.
 Intercompany accounts and transactions have been eliminated in
consolidation.





Use of
estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.





Revenue
recognition





Revenues
of the Company are from sales of CWSF.





Sales are
recognized when the following four revenue criteria are met: persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectibility is reasonably assured.  Revenues are
presented net of value added tax (“VAT”). In our revenue arrangements, physical
delivery is the point in time when customer acceptance occurs since title and
risk of loss are transferred to the customer.  No return allowance is
made as products are normally not returnable upon acceptance by the
customers.




Fair value of financial
instruments





Fair
value measurements are determined using authoritative guidance issued by the
FASB, with the exception of the application of the statement to non-recurring,
non-financial assets and liabilities as permitted. Fair value is defined in the
authoritative guidance as the price that would be received to sell an asset or
paid to transfer a liability in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants at
the measurement date. A fair value hierarchy was established, which prioritizes
the inputs used in measuring fair value into three broad levels as Follows
:





Level 1—Quoted
prices in active markets for identical assets or liabilities.




8





Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly
or indirectly.





Level 3—Unobservable
inputs based on the Company's assumptions.





The
Company is required to use observable market data if such data is available
without undue cost and effort.





The
following table presents certain investments and liabilities of the Company’s
financial assets measured and recorded at fair value on the Company’s
consolidated balance sheets on a recurring basis and their level within the fair
value hierarchy as of March 31, 2010.





Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalFair
      value of warrants
            
            $
            —
            
            
            $
            —
            
            
            $
            20,992,787
            
            
            $
            20,992,787





Derivative financial
instruments





The
Company evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair
value and is then re-valued at each reporting date, with changes in the fair
value reported in the consolidated statements of operations. For stock-based
derivative financial instruments, the Company uses both the Black-Scholes-Merton
and Binomial option pricing models to value the derivative instruments at
inception and on subsequent valuation dates. The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting
period.  Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.





Stock based
compensation





The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs.  Stock-based compensation is measured at the grant date, based on
the fair value of the award, and is recognized as expense over the requisite
service period.  Options vest and expire according to terms established at
the grant date.





Income per common
share





Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. The diluted earnings per share calculation give effect to all
potentially dilutive common shares outstanding during the period using the
treasury stock method for warrants and options and the if-converted method for
convertible debentures.





As of
March 31, 2010, common stock equivalents were composed of warrants convertible
into 4,063,981 shares of the Company's common stock, and options convertible
into 10,000 shares of the Company’s common stock.  As of March 31, 2009,
common stock equivalents were composed of warrants convertible into 926,143
shares of the Company's common stock, debentures convertible into 890,433 shares
of the Company's common stock and options convertible into 10,000 shares of the
Company’s common stock.  At March 31, 2009, the conversion of the
debentures into 890,433 shares of common stock was excluded from the calculation
of diluted earnings per share as the effects of such conversion would have been
anti-dilutive.




9





The
following is a reconciliation of the numerator and denominator used in the
calculation of basic and diluted earnings per share.





Three
      months ended
              March
      31 ,2010
            
            
            2009Numerator
            
            (unaudited)
            
            
            (unaudited)Net
      income
            
            $
            20,460,621
            
            
            $
            1,565,476DenominatorWeighted
      average shares outstanding-basic
            
            
            12,851,265
            
            
            
            9,219,471Effect
      of dilutive instruments:Warrants
            
            
            2,082,532
            
            
            
            55,652Weighted
      average shares outstanding-diluted
            
            
            14,933,797
            
            
            
            9,275,123





Foreign currency
translation





The accompanying condensed consolidated
financial statements are presented in United States dollars. The functional
currency of the Company is the Renminbi (RMB). Capital accounts of the condensed
consolidated financial statements are translated into United States dollars from
RMB at their historical exchange rates when the capital transactions occurred.
Assets and liabilities are translated at the exchange rate as of balance sheet
date. Income and expenditures are translated at the average exchange rate of the
period




March
      31,
              2010
            
            
            December
      31,2009
            
            
            March
      31,
              2009Period
      end RMB : US$ exchange rate
            
            
            6.8263
            
            
            
            6.8172
            
            
            
            6.8359Average
      period RMB : US$ exchange rate
            
            
            6.8272
            
            
            
            6.8259
            
            
            
            6.8363





The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation.





Income
taxes





The
Company uses asset and liability approach for financial accounting and reporting
for income taxes that allows recognition and measurement of deferred tax assets
based upon the likelihood of realization of tax benefits in future
years.  Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.  A valuation allowance is
provided for deferred tax assets if it is more likely than not these items will
either expire before the Company is able to realize their benefits, or that
future deductibility is uncertain.





Research and
Development





Research
and development costs are expensed as incurred.  For the three months
ended March 31, 2010 and 2009, research and   development
expenses totaled $146,473 and $0, respectively.




10





Concentrations





Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and unsecured trade accounts
receivable.





For the
quarter ended March 31, 2010, one customer accounted for 51% of
sales.   For the quarter ended March 31, 2009, there were no
customers who accounted for 10% or more of sales.





At March
31, 2010, one customer represented 36% of the total balance of the accounts
receivable.  At March 31, 2009, one customer represented 10% of the
total balance of the accounts receivable.





For the
quarter ended March 31, 2010, three vendors accounted for 100% of total
purchases (50%, 40% and 10% respectively).  At March 31, 2010, one
vendor accounted for 70% of accounts payable and one vendor accounted for 85% of
prepaid coal.  For the quarter ended March 31, 2009, two vendors
accounted for 100% of total purchases (85% and 15% respectively).  At
March 31, 2009, one vendor accounted for 100% of prepaid coal.





Reclassifications





In
presenting the Company’s statement of cash flows for the quarter ended March 31,
2009, the Company presented $48,313 of prepayments and deposits as operating
cash flows.  In presenting the Company’s statement of cash flows for
the quarter ended March 31, 2010, the Company has reclassified the prepayments
and deposits as investing cash flows in the accompanying March 31, 2009
financial statements.





In
presenting the Company’s consolidated statement of operations for the quarter
ending March 31, 2009, the Company presented $38,694 of commission income as
part of Other Income (Expense).  In presenting the Company’s
consolidated statement of operations for the quarter ending March 31, 2010, the
Company has reclassified the $38,694 to revenue in the accompanying consolidated
statement of operations for the quarter ending March 31, 2009.




Recently issued Accounting
Pronouncements





In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective in fiscal years beginning on or after June 15, 2010, with
earlier adoption permitted. Under the new guidance on arrangements that include
software elements, tangible products that have software components that are
essential to the functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance, and software-enabled
products will now be subject to other relevant revenue recognition guidance.
Additionally, the FASB issued authoritative guidance on revenue arrangements
with multiple deliverables that are outside the scope of the software revenue
recognition guidance. Under the new guidance, when vendor specific objective
evidence or third party evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to separate
deliverables and allocate arrangement consideration using the relative selling
price method. The new guidance includes new disclosure requirements on how the
application of the relative selling price method affects the timing and amount
of revenue recognition.   We believe the adoption of this new
guidance will not have a material impact on our financial
statements.





In
January 2010, the FASB issued guidance on improving disclosures about fair value
measurements to add new disclosure requirements for significant transfers in and
out of Level 1 and 2 measurements and to provide a gross presentation of the
activities within the Level 3 roll forward.   The guidance also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value.  The
disclosure requirements are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the requirement to present
the Level 3 rollforward on a gross basis, which is effective for fiscal years
beginning after December 15, 2010.  The adoption of this guidance was
limited to the form and content of disclosures, and will not have a material
impact on our consolidated results of operations and financial
condition.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.





3. INVENTORIES





Inventories
consist of the following at





March
      31,
            
            
            December
      31,2010
            
            
            2009(unaudited)Raw
      materials
            
            $
            571,689
            
            
            $
            634,751Packing
      materials
            
            
            785
            
            
            
            785Finished
      goods
            
            
            236,803
            
            
            
            257,073$
            809,277
            
            
            $
            892,609




11




The
Company has a contract with a coal mine to deliver coal for use in the
production of CWSF. At times, the Company may make payments in advance of
delivery and accounts for these prepayments as prepaid inventory. The prepaid
inventory is usually received within 48 hours of any prepayment. At March 31,
2010 and December 31, 2009, prepaid inventories totaled $4,254,320 and
$5,453,095, respectively.





4  PROPERTY, PLANT AND
EQUIPMENT




Property,
plant and equipment consist of the following at March 31, 2010 and December 31,
2009:





March
      31,2010
            
            
            December
      31,2009(unaudited)Buildings
            
            $
            2,565,351
            
            
            $
            2,564,638Plant
      and machinery
            
            
            15,185,157
            
            
            
            11,762,449Office
      equipment
            
            
            76,842
            
            
            
            76,639Motor
      vehicles
            
            
            260,967
            
            
            
            148,02018,088,317
            
            
            
            14,551,746Less:
      Accumulated depreciation and amortization
            
            
            (2,453,570
            )
            
            
            (1,994,055
            )$
            15,634,747
            
            
            $
            12,557,691





Depreciation
expense on  the quarter ended March 31, 2010 and 2009 were $459,515
and $346,390, respectively.





5. CONVERTIBLE NOTES





Convertible
notes consist of the following at:




March
      31,
            
            
            December
      31,2010
            
            
            2009(unaudited)10%
      convertible notes
            
            $
            —
            
            
            $
            10,217,000Valuation
      discount
            
            
            —
            
            
            
            (8,601,975
            )Convertible
      notes, net
            
            
            —
            
            
            
            1,615,025Less
      current portion
            
            
            —
            
            
            
            —Long
      term portion
            
            $
            —
            
            
            $
            1,615,025





In July
2009, the Company issued $11,592,000 of 10% senior secured convertible notes
(the “Notes”) and issued warrants (the “Warrants”) to purchase up to 6,101,054
shares of common stock of the Company in a private placement.  The
Notes bore interest at 10% per annum, were due in 2012, were unsecured, and were
personally guaranteed by the Company’s Chief Executive Officer and certain
shareholders.  The holders of the Notes had the right at any time to
convert all or part of the outstanding principal amount of the Notes and any
accrued and unpaid interest into common shares of the Company at the then
effective conversion price, initially set at $1.90 per share.  In
2009, $1,375,000 of the convertible notes was converted at the stated conversion
price of $1.90 per share in to 723,684 shares of the Company’s common
stock.  During the quarter ended March 31, 2010, the balance of the
notes of $10,217,000 was converted at the stated conversion price of $1.90 per
share into 5,377,368 shares of the Company’s common stock.  For some
of the conversions made in 2010, note holders received an additional 266,387
shares of the Company’s stock representing additional interest
consideration.  The fair value of the additional 266,387 shares of
common stock was $1,864,701 on the date the shares were issued, and is included
in interest expense in the accompanying March 31, 2010 condensed consolidate
financial statements.




12





At
December 31, 2009, the Company had recorded a derivative liability of
$28,404,181 related to the conversion feature of the convertible
notes.   When the notes converted, the derivative liability was
extinguished and a gain on extinguishment of the derivative was
recorded.  Also upon conversion, the unamortized balance of the note
discount of $8,601,975 was fully amortized and included in interest expense in
the accompanying March 31, 2010 condensed consolidated financial
statements.





At March
31, 2009, $1,335,650 of convertible debentures were outstanding that were paid
off or converted into shares of the Company’s common stock in mid-2009. For the
three month period ended March 31, 2009, $329,328 of discount amortization,
$97,128 of amortization of loan fees, and $120,167 of expense for performance
related compensatory escrow shares, was recorded related to the
debentures.




6. DERIVATIVE
LIABILITIY





At March
31, 2010 and December 31, 2009, derivative liabilities were made up of the
following valued based on the Black-Scholes-Merton and bi-nominal valuation
techniques with the following assumptions:




March
      31,
              2010
            
            
            December
      31,
              2009(Unaudited)Conversion feature:Risk-free
      interest rate
            
            
            —
            
            
            
            1.4
            %Expected
      volatility
            
            
            —
            
            
            
            139.96
            %Expected
      life (in years)
            
            —
            
            
            2.5
      yearsExpected
      dividend yield
            
            
            —
            
            
            
            —Warrants:Risk-free
      interest rate
            
            
            0.67%
      to 1.32
            %
            
            
            0.93%
      to 1.43
            %Expected
      volatility
            
            
            108.09%
      to 150.04
            %
            
            
            139.96%
      to 148.16
            %Expected
      life (in years)
            
            0.46
      to 2.6 years
            
            
            0.71
      to 2.8 yearsExpected
      dividend yield
            
            
            0
            
            
            
            0Fair Value:Conversion
      feature
            
            $
            —
            
            
            $
            28,404,181Warrants
            
            
            20,992,787
            
            
            
            16,752,858$
            20,992,787
            
            
            $
            45,157,039





The
risk-free interest rate was based on rates established by the Federal Reserve
Bank, the Company uses the historical volatility of its common stock, and the
expected life of the instruments is determined by the expiration date of the
instrument.  The expected dividend yield was based on the fact that
the Company has not paid dividends to common shareholders in the past and does
not expect to pay dividends to common shareholders in the future.





At
December 31, 2009, the Company had recorded a derivative liability of
$28,404,181 related to the conversion feature of the convertible
notes.   When the notes converted, the derivative liability was
extinguished and a gain on extinguishment of the derivative was recorded. For
the quarters ended March 31, 2010 and 2009, change in derivative liability was
$(4,239,929) and $578,978, respectively.





7. COMMON STOCK





During
the quarter ended March 31, 2010, the Company issued 5,643,755 shares of common
stock upon conversion of $12,081,701 of convertibles notes and related
interest.




13





During
the quarter ended March 31, 2010, the Company issued 62,632 shares of common
stock upon exercise of options and warrants for total proceeds of
$173,980.





8.  WARRANTS AND
OPTIONS





At
March 31, 2010 and December 31, 2009, outstanding warrants and options were
as follows:




Number of
              Shares under
              Warrants
              and Options
            
            
            Weighted
              Average
              Exercise PriceWarrants
      and options outstanding at January 1, 2010
            
            
            4,413,744
            
            
            $
            2.51Warrants
      and options granted
            
            
            10,000
            
            
            $
            4.4Warrants
      and options exercised
            
            
            (62,632)
            
            
            $
            1.5Warrants
      and options expired
            
            
            (287,130)
            
            
            $
            1.5Warrants
      and options outstanding at March 31, 2010
            
            
            4,073,982
            
            
            $
            2.24





The
following table summarizes information about warrants and options outstanding at
March 31, 2010:




Outstanding
      Warrants and Options
            
            
            Exercisable
      Warrants and OptionsExercise
      price
            
            
            Number
      of shares
              under
      warrants and
              options
            
            
            Weighted
              average
              remaining
              contractual
      life
              (years)
            
            
            Number
      of shares
              under
      warrants and
              options
      exercisable
            
            
            Weighted
              average
              exercise
      price$
            1.50
            
            
            
            603,304
            
            
            
            1.71
            
            
            
            603,304
            
            
            $
            1.50$
            2.28
            
            
            
            427,074
            
            
            
            2.75
            
            
            
            427,074
            
            
            $
            2.28$
            2.50
            
            
            
            35,710
            
            
            
            0.45
            
            
            
            35,710
            
            
            $
            2.50$
            2.85
            
            
            
            2,997,894
            
            
            
            2.17
            
            
            
            2,997,894
            
            
            $
            2.85$
            4.35
            
            
            
            10,000
            
            
            
            1.93
            
            
            
            10,000
            
            
            $
            4.35$
            2.24
            
            
            
            4,073,982
            
            
            
            
            
            
            
            4,073,982
            
            
            $
            2.59





At March
31, 2010, the aggregate intrinsic value of the warrants and options outstanding
and exercisable was $16,740,218.





9.  RELATED PARTY
TRANSACTIONS





Amounts
due to related parties at March 31, 2010 and December 31, 2009 consisted of the
following:




March
      31,
              2010
            
            
            December
      31,
              2009Due
      to director :
            
            (unaudited)Mr.
      Baowen Ren
            
            
            73,466
            
            
            
            73,466$
            73,466
            
            
            $
            73,466





Amounts
due to directors are non-interest bearing, unsecured, and due on
demand.





Item
2.  Management’s Discussion and Analysis or Plan of Operation.





The
following management’s discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto and the other
financial information appearing elsewhere in this item. In addition to
historical information, the following discussion contains certain
forward-looking statements within the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as “may”, “will”, “could”, “expect”,
“anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar
terms or terminology, or the negative of such terms or other comparable
terminology. Although we believe the expectations expressed in these
forward-looking statements are based on reasonable assumptions within the bound
of our knowledge of our business, our actual results could differ materially
from those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed in the “Risk
Factors” section of the Company's Annual Report on Form 10-K filed with the
SEC on April 9, 2010.  We undertake no obligation to update publicly
any forward-looking statements for any reason even if new information becomes
available or other events occur in the future.




14




Our
financial statements are prepared in U.S. Dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange
Rates” below for information concerning the exchanges rates at which Renminbi
were translated into U.S. Dollars at various pertinent dates and for pertinent
periods.





In
this Quarterly Report on Form 10-Q, references to “we”, “our”, “us”, the
“Company” or the “Registrant” refer to Sino Clean Energy Inc., a Nevada
corporation, and its subsidiaries and affiliated companies.




Overview




Sino
Clean Energy Inc. (sometimes referred to in this annual report as “Company”,
“we” or “our”) is a holding company that, through its subsidiaries, is a
leading commercial producer and distributor of coal-water slurry fuel (“CWSF”)
in China. CWSF is a clean fuel that consists of fine coal particles suspended in
water.  Our CWSF products are mainly used to fuel boilers and furnaces
to generate steam and heat for residential and industrial
applications.  We sell our products in China and our customers include
industrial, commercial, residential and government organizations. Our strong
reputation in the CWSF industry in China, together with our established track
record for consistently delivering products in large quantities, has enabled us
to expand our customer base.  We primarily use washed coal to produce
CWSF. We acquire the raw materials for each of our production facilities
primarily from three nearby coal mines.  We have established strong
relationships with our suppliers and our ability to purchase large quantities of
raw materials has allowed us to achieve favorable pricing and delivery
terms.





Until
November 12, 2009, all of our business operations were conducted through Shaanxi
Suo’ang Biological Science & Technology Co., Ltd., a PRC company (“Suo’ang
BST”), which we controlled through contractual arrangements designed to comply
with the law of The People’s Republic of China (“PRC” or “China”) and Suo’ang
BST’s PRC subsidiary, Shaanxi Suo’ang New Energy Enterprise Co., Ltd. (“Suo’ang
New Energy”).  Beginning in June 2009, we effected a reorganization of
our corporate structure in order to make Suo’ang New Energy wholly
owned.  Pursuant to such reorganization, our business is now operated
by Suo’ang New Energy through our indirect wholly-owned subsidiary Tongchuan
Suoke Clean Energy Co., Ltd., a PRC limited liability company(“Suoke Clean Energy”),
which is incorporated under PRC law and wholly owned by Wiscon Holdings Limited,
a Hong Kong company(“Wiscon”), our directly owned Hong Kong subsidiary/holding company,
which was incorporated in 2006 and acquired by us in June 2009.  On
September 27, 2009, we received approval from the Tongchuan Bureau of Commerce
for the transfer of all of Suo’ang New Energy’s equity interests to Suoke Clean
Energy.  With the approval, Suo’ang New Energy has become a “domestic
PRC enterprise wholly-owned by a wholly-foreign owned
enterprise.”  Registration of the approval with the Tongchuan
Administration of Industry and Commerce, the final step in completing this
reorganization, was completed on November 12, 2009.  On October 12,
2009, Suo’ang New Energy established Shenyang Sou’ang Energy Co., Ltd., a
wholly-owned PRC subsidiary(“Shenyang Energy”), to
conduct the CWSF business in Shenyang, Liaoning province.





Reverse
Stock Split





On May 7,
2010, we effected a reverse stock split pursuant to which every ten shares of
Company's common stock then issued and outstanding was automatically converted
into one share of the Company’s common stock.  All share and per share
amounts in the accompanying condensed consolidated financial statements have
been adjusted to reflect the reverse stock split as if it had occurred at the
beginning of the earliest period presented.





Corporate
Organization and History




We were
originally incorporated in Texas as “Discount Mortgage Services, Inc.” on July
11, 2000. In September 2001, we purchased Endo Networks, Inc., a Canadian
software developer, and changed our name to “Endo Networks, Inc.” on November 5,
2001. We re-domiciled to the State of Nevada on December 13, 2001.




15


On
October 20, 2006 we consummated a share exchange transaction with Hangson, a
British Virgin Islands company, the stockholders of Hangson and a majority of
our stockholders.  We issued a total of 260,000 shares of our common
stock (reflects 10-for-one reverse split) to the Hangson Stockholders and a
consultant in the transaction, in exchange for 100% of the common stock of
Hangson.  As a result of the transaction we became engaged in the CWSF
business, through the operations of Suo’ang BST and Suo’ang New
Energy.  On January 4, 2007, we changed our name from “Endo Networks,
Inc.” to “China West Coal Energy Inc.”, and then on August 15, 2007, we changed
our name again to our present name, “Sino Clean Energy Inc.” to better reflect
the direction and business of the Company Hangson
did not conduct any substantive business operations of its own, but from August
2006 to June 30, 2009, controlled Suo’ang BST, a PRC company and Suo’ang BST’s
80%-owned subsidiary Suo’ang New Energy.  From June 30, 2008 to
November 12, 2009 Hangson owned 20% of Suo’ang New Energy.  Hangson
controlled Suo’ang BST through a series of contractual arrangement.




Beginning
in June 2009, we effected a reorganization of our corporate structure in order
to make Suo’ang New Energy a wholly-owned subsidiary (the “2009
Reorganization”).  On June 30, 2009, we were a party to a series of
agreements (collectively the “Transfer Agreements”) transferring the contractual
arrangements, through which Hangson controlled Suo’ang BST, to Suoke Clean
Energy.





On
September 15, 2009, Suo’ang BST and Hangson entered into a share transfer
agreement with Suoke Clean Energy pursuant to which Suo’ang BST and Hangson
transferred 100% of the equity interests in Suo’ang New Energy to Suoke Clean
Energy.  On September 27, 2009, the Tongchuan Bureau of Commerce
approved the transfer of all of Suo’ang New Energy’s equity interests to Suoke
Clean Energy.  Registration of the approval of the equity transfer
with the Tongchuan Administration of Industry and Commerce, which was a
condition to the closing of the Share Transfer, was completed on November 12,
2009.  As a result of receiving the required approval and registration
the share transfer transaction was closed and we were able, through Suoke Clean
Energy to own 100%of the equity interests of  Suo’ang New
Energy.  On October 12, 2009, Suo’ang New Energy established a
wholly-owned subsidiary to conduct the CWSF business in Shenyang, Liaoning
province.




On
December 31, 2009, we entered into a series of termination agreements to
terminate the contractual arrangements by and among Suoke Clean Energy, Suo’ang
BST and certain stockholders of Suo’ang BST.  We no longer needed to
keep such contractual arrangements in place due to the fact that Suo’ang BST was
no longer engaged in any substantial business operations. In connection with the
termination agreements, certain assets held by Suo’ang BST, such as, office
equipment, vehicles, bank deposits, accounts receivable, were transferred to
Suoke Clean Energy. Employees of Suo’ang BST signed new employment contracts
with Suoke Clean Energy. All rights and obligations under certain business
operation agreements and research and development contracts between Suo’ang BST
and third parties were assigned to Suo’ang New Energy.




On
December 31, 2009, Hangson transferred all of its equity interests in Wiscon to
us.  Since Hangson had no substantive operations of its own after the
transfer and termination of the contractual arrangements, we decided to dissolve
Hangson on December 31, 2009.




Wiscon Holdings
Limited




Wiscon is
a limited liability company incorporated in Hong Kong under the Companies
Ordinance on September 4, 2006 and Hangson acquired all of its issued and
outstanding equity interests on June 30, 2009. On December 31, 2009, Hangson
transferred all of its equity interests in Wiscon to Sino Clean Energy Inc. As a
result, Wiscon became a direct wholly-owned subsidiary of Sino Clean Energy
Inc.





Critical
Accounting Policies and Estimates





Use of
Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.




Revenue
Recognition





Sales are
recognized in when the following four revenue criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the selling price is
fixed or determinable, and collectibility is reasonably
assured.  Revenues are presented net of value added tax (“VAT”). In
our revenue arrangements, physical delivery is the point in time when customer
acceptance occurs since title and risk of loss are transferred to the
customer.  No return allowance is made as products are normally not
returnable upon acceptance by the customers.





16


Accounts
receivable





Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for any uncollectible accounts. The Company uses the aging method to
estimate the valuation allowance for anticipated uncollectible receivable
balances.  Under the aging method, bad debts determined by management
are based on historical experience as well as the current economic climate and
are applied to customers' balances categorized by the number of months the
underlying invoices have remained outstanding.  The
valuation allowance balance is adjusted to the amount computed as a result
of the aging method.  When facts subsequently become available to
indicate that an adjustment to the allowance should be made, this is recorded as
a change in estimate in the current year. As of March 31, 2010 and December 31,
2009, accounts receivable were net of allowances of zero and zero,
respectively.





Derivative
Financial Instruments





The
Company evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date, with changes in the fair value
reported in the condensed consolidated statements of operations. For stock-based
derivative financial instruments, the Company uses both the Black-Scholes-Merton
and Binomial option pricing models to value the derivative instruments at
inception and on subsequent valuation dates. The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting
period.  Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.




Stock
based Compensation





The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs. Stock-based compensation is measured at the grant date, based on the fair
value of the award, and is recognized as expense over the requisite service
period. Options vest and expire according to terms established at the grant
date.





We
estimate the fair value of stock options and warrants using the Black-Scholes
option-pricing model, which was developed for use in estimating the fair value
of options that have no vesting restrictions and are fully transferable. This
model requires the input of subjective assumptions, including the expected price
volatility of the underlying stock and the expected life of stock options.
Projected data related to the expected volatility of stock options is based on
the average volatility of the trading prices of comparable companies and the
expected life of stock options is based upon the average term and vesting
schedules of the options. Changes in these subjective assumptions can materially
affect the fair value of the estimate, and therefore the existing valuation
models do not provide a precise measure of the fair value of our employee stock
options.




We
estimate the fair value of shares of common stock issued for services based on
the closing price of our common stock on the date shares are
granted.  For periods prior to the consummation of the Merger
Transaction, there was no readily available market quotations for our shares of
common stock and, as such, we used alternative methods to value shares of our
common stock including valuations based upon the conversion price per share of
common stock of our convertible notes and the sale price of units consisting of
one share of our common stock and warrants to purchase one share of common
stock, which management believes were the best indicators of the fair value of
our common stock.





Recent
accounting pronouncements





In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective in fiscal years beginning on or after June 15, 2010, with
earlier adoption permitted. Under the new guidance on arrangements that include
software elements, tangible products that have software components that are
essential to the functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance, and software-enabled
products will now be subject to other relevant revenue recognition guidance.
Additionally, the FASB issued authoritative guidance on revenue arrangements
with multiple deliverables that are outside the scope of the software revenue
recognition guidance. Under the new guidance, when vendor specific objective
evidence or third party evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to separate
deliverables and allocate arrangement consideration using the relative selling
price method. The new guidance includes new disclosure requirements on how
the application of the relative selling price method affects the timing and
amount of revenue recognition.   We believe the adoption of this
new guidance will not have a material impact on our financial
statements.





17


In
January 2010, the FASB issued guidance on improving disclosures about fair value
measurements to add new disclosure requirements for significant transfers in and
out of Level 1 and 2 measurements and to provide a gross presentation of the
activities within the Level 3 rollforward.   The guidance also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value.  The
disclosure requirements are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the requirement to present
the Level 3 rollforward on a gross basis, which is effective for fiscal years
beginning after December 15, 2010.  The adoption of this guidance was
limited to the form and content of disclosures, and will not have a material
impact on our consolidated results of operations and financial
condition.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.





Results
of Operations





Three
month period ended March 31, 2010 as compared to three month period ended March
31, 2009





Revenue. During the
three-month period ended March 31, 2010, we had revenues from sales of our
coal-water slurry fuel of $24,509,004 as compared to revenues of $7,778,277
during the three-month period ended March 31, 2009, an increase of
215%. This significant increase is primarily attributable to the increased
production from the production line added in late 2009, which led to an increase
in sales to existing customers.  The annual production capacity as at
March 31, 2010 was 850,000 tonnes after the commencement of our new CWSF
production plant in Shenyang with annual output capacity of 300,000 tonnes and
200,000 production line added in Tongcuan , as compared to 350,000 tones as at
March 31 2009 . At March 31 , 2010 we had 30 customers under CWSF supply
agreements totaling approximately 600,000 tonnes per year , as compared to 27
customers totaling approximately 400,000 tonnes of CWSF per year as at March 31
, 2009. We believe that our sales and number of customers in 2010 as compared to
2009 are indicative of the growing market acceptance of CWSF.





Cost of Goods Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing
overhead, depreciation of plant and machinery, was $14,400,177 for the
three-month period ended March 31, 2010, as compared to $5,348,107 for the same
period of 2009, an increase of 169%. The increase in cost of goods sold is in
line with our increase in sales. However, gross profit margin improved from 31%
in 2009 to 41% in 2010 mainly as a result of better pricing of CWSF in
Shenyang





Selling Expenses. Selling
expenses totaled $911,079 for the three-month period ended March 31, 2010, as
compared to $3,559 for the three-month period ended March 31, 2009, an increase
of 25,499%. This increase is mainly in transportation cost as a result of the
growth of our business in 2010.





General and Administrative Expenses.General and administrative expenses totaled $719,182 for the three-month
period ended March 31, 2010, as compared to $548,899 for the three-month period
ended March 31, 2009, an increase of 31%. This increase was primarily
caused by our expansion in operation and the increased expenses related to our
company being a public company.





Other Income.
Other income totaled $13,732,560 for the three-month period ended March 31,
2010, as compared to other expense of $22,950 for the three-month period ended
March 31, 2009, primarily caused by the gain on extinguishment of derivative
liability of $28,404,181 which was partially set off by the interest expense of
$10,444,563 in 2010 which included $8,601,975 relating to the amortization of
discount on our notes payable and $1,864,701 related to value of shares of our
stock issued as additional interest.





Net Income. We had net
incomeof
$20,460,621 for the three-month period ended March 31, 2010, as compared to net
income of$1,565,476 for the same
period in 2009.  The increase in net income is primarily attributable
to the increase in sales in the first three months of 2010 and the gain on
extinguishment of derivative liability as mentioned above.





Liquidity
and Capital Resources





For the
three-month period ended March 31, 2010, we generated $11,307,822 from operating
activities, as compared to $1,590,687 that we generated from operating
activities for the three-month period ended March 31, 2009.  This
increaseis
primarily due to the increase in sales proceeds.





18


For the
three-month period ended March 31, 2010, we used $4,031,585 in investing
activities, of which $3,532,523 was used in the purchase of property, plant and
equipment , as compared to $ nil for the three-month period ended March 31,
2009.





For the
three-month period ended March 31, 2010, we provided $173,980 from financing
activities, primarily cash received from exercise of warrants and
options.





As of
March 31, 2010, we had cash and cash equivalents of $25,760,626.  Our
total current assets were $33,694,618 and our total current liabilities were
$26,803,693 which resulted in a net working capital of $6,890,925.





We had no
capital expenditure commitments outstanding as of March 31, 2010 in relation to
the purchase of machinery.





During
the quarter ended March 31, 2010, convertible notes aggregating $10,217,000 were
converted at the stated conversion price of $1.90 per share into 5,377,368
shares of the Company’s common stock.  For some of the conversions,
note holders received an additional 266,387 restricted shares of the Company’s
stock representing additional interest consideration.  The fair value
of the additional 266,387 shares of common stock was $1,864,701 on the date the
shares were issued, and is included in interest expense for the quarter ended
March 31, 2010.





We
believe that we have sufficient cash flow to meet our obligations on a
timely basis in the foreseeable future.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our
investors.





Inflation





We
believe that inflation has not had a material effect on our operations to
date.





Item 3.  Quantitative and Qualitative Disclosures about
Market Risk





As a
smaller reporting company, we are not required to provide the information
required by this Item.





Item
4.  Controls and Procedures





We
maintain “disclosure controls and procedures,” as such term is defined under
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation as required by Rule 13a-15(d) under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2010.





Based
upon their evaluation and subject to the foregoing, the Chief Executive Officer
and Chief Financial Officer concluded that as of March 31, 2010 our disclosure
controls and procedures were not effective because of the material weaknesses
described below.  A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the
registrant's annual or interim financial statements will not be prevented or
detected on a timely basis.  In its assessment of the Company’s
internal control over financial reporting during the period covered by this
report, our management concluded that our internal control over financial
reporting was subject to the following material weaknesses:





1.           Although
we have hired additional accounting and operations personnel, we are still in
the progress of developing proper financial reporting procedures and policies
for (i) accounting for complex and non-routine transactions; (ii) closing our
financial statements at the end of a period; (iii) disclosure requirements and
process for SEC reporting.





19


2.           As
a small company, we do not have sufficient personnel to set up adequate review
function at each reporting level.





3.           As
of March 31, 2010, we have not kept a complete set of ledgers for our
parent company. The parent company has no physical operations and has been
mainly functioning as a pass-through legal entity for financing our
subsidiary companies that are operating overseas.




In April
2010, we engaged Ernst and Young Shanghai to carry out a review of our existing
internal control system with an aim to rectify any material internal control
weakness identified by the evaluation.




There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation that occurred during the quarter ended March 31,
2010 that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.




PART
II




OTHER
INFORMATION




ITEM
1 LEGAL PROCEEDINGS




None.




ITEM
1A. RISK FACTORS




As a
smaller reporting company, we are not required to provide the information
required by this Item.




ITEM
2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




None.




ITEM
3 DEFAULTS UPON SENIOR SECURITIES




None.




ITEM 4 REMOVED
AND RESERVED




ITEM 5 OTHER
INFORMATION
  None.




ITEM 6 EXHIBITS




The
exhibits listed on the Exhibit Index are filed as part of this
report.




(a)
            Exhibits:




31.1
            Certification
      by Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.




31.2
            Certification
      by Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.




32.1
              Certification
      by Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.




20




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




SINO
      CLEAN ENERGY INC.Dated:
      May 17, 2010
              By:
              /s/ Baowen RenName:
      Baowen RenTitle:
      Chief Executive Officer




21




EXHIBIT
INDEX





Exhibit
      No.
            
            Description31.1
            
            Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
            
            Certification
      by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
            
            Certification
      by Chief Executive Officers and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.




22