UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


[X]
            Quarterly
      Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
      1934





For the
quarterly period ended:March
31, 2009





Or




[__]
            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 of origination)
            
            (I.R.S.
      Employer Identification Number)





Room
      2205, Suite A, Zhengxin Building
              No. 5 Gaoxin1st Road, Gao Xin
      District
              Xi’an,
      Shaanxi Province
              People’s Republic of China
            
            N/A(Address
      of principal executive offices)
            
            (Zip
      code)(029) 8209-1099(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 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 [X] No [__]





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 [__] No
[__]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer [   ]
              Accelerated
      filer [  ]Non-accelerated
      filer   [   ] (Do not check if a smaller
      reporting company)
              Smaller
      reporting company [X]


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


Yes
[   ] No [X]





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each issuer’s classes of common stock, as of
the latest practicable date: 94,514,750issued and outstanding as ofMay 13, 2009.





Transitional
Small Business Disclosure Form (Check one): Yes [   ] No
[X]





TABLE OF CONTENTS


TO
QUARTERLY REPORT ON FORM 10-Q


FOR
QUARTER ENDED MARCH 31, 2009








PART
      I
            FINANCIAL
      INFORMATION
            PageItem
      1.
            Consolidated
      Financial Statements (unaudited)
            4Condensed
      Consolidated Balance Sheets
            4Condensed
      Consolidated Statements of Income and Other Comprehensive
      Income
            5Condensed
      Consolidated Statements of Changes in Shareholders’ Equity
            6Condensed
      Consolidated Statements of Cash Flows
            7Notes
      to the Condensed Consolidated Financial Statements
            8Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            16Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            18Item
      4T.
            Controls
      and Procedures
            18





PART
      II
            OTHER
      INFORMATIONItem
      1.
            Legal
      ProceedingsItem
      1A.
            Risk
      Factors
            19Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            19Item
      3.
            Defaults
      Upon Senior Securities
            29Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            30Item
      5.
            Other
      Information
            30Item
      6.
            Exhibits
            30Signatures
            
            32






2


CAUTION
REGARDING FORWARD-LOOKING INFORMATION





All
statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q”) for
Sino Clean Energy Inc., other than statements of historical facts, that address
future activities, events or developments are forward-looking statements,
including, but not limited to, statements containing the words “believe,”
“anticipate,” “expect” and words of similar import.  These statements
are based on certain assumptions and analyses made by us in light of our
experience and our assessment of historical trends, current conditions and
expected future developments as well as other factors we believe are appropriate
under the circumstances.  However, whether actual results will conform
to the expectations and predictions of management is subject to a number of
risks and uncertainties that may cause actual results to differ
materially.





Such
risks include, among others, the following: national and local general economic
and market conditions: our ability to sustain, manage or forecast our growth;
raw material costs and availability; new product development and introduction;
existing government regulations and changes in, or the failure to comply with,
government regulations; adverse publicity; competition; the loss of significant
customers or suppliers; fluctuations and difficulty in forecasting operating
results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other factors referenced in this and previous
filings.





Consequently,
all of the forward-looking statements made in this Form 10-Q are qualified by
these cautionary statements and there can be no assurance that the actual
results anticipated by management will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on our
business operations.  As used in this Form 10-Q, unless the context
requires otherwise, “we” or “us” or “Registrant” or the “Company” means Sino
Clean Energy Inc. and its subsidiaries.




3


PART
I - FINANCIAL INFORMATION





Item
1.                      Financial
Statements


Sino Clean Energy Inc. and
    SubsidiariesCondensed
      Consolidated Balance SheetsASSETSMarch
      31,
            
            
            December
      31,2009
            
            
            2008(Unaudited)Current
      assetsCash
      and cash equivalents
            
            $
            5,957,911
            
            
            $
            3,914,306Accounts
      receivable
            
            
            1,774,502
            
            
            
            899,629Inventories
            
            
            142,746
            
            
            
            45,068Prepaid
      inventories
            
            
            1,996,046
            
            
            
            1,996,584Deposits
      and prepayments
            
            
            964,595
            
            
            
            1,813,214Government
      grant receivable
            
            
            146,287
            
            
            
            146,314Other
      receivables
            
            
            16,162
            
            
            
            16,986Land
      use right - current portion
            
            
            38,696
            
            
            
            38,703Total
      current assets
            
            
            11,036,945
            
            
            
            8,870,804Property,
      plant and equipment, net of accumulated depreciation
              and
      amortization of $837,564 and $491,247, respectively
            
            
            9,046,219
            
            
            
            9,394,416Land
      use right - non current portion
            
            
            1,794,260
            
            
            
            1,804,277Goodwill
            
            
            762,018
            
            
            
            762,018Deferred
      debt issuance costs, net of accumulated amortization of
              $211,361
      and $114,233, respectively
            
            
            177,150
            
            
            
            274,278Total
      assets
            
            $
            22,816,592
            
            
            $
            21,105,793LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilitiesConvertible
      notes, net
            
            $
            712,828
            
            
            $
            383,490Accounts
      payable and accrued expenses
            
            
            1,183,663
            
            
            
            1,004,999Taxes
      payable
            
            
            567,100
            
            
            
            305,903Advances
      from directors
            
            
            70,000
            
            
            
            465,049Fair
      value of warrants and embedded conversion feature
            
            
            4,010,814
            
            
            
            -Total
      current liabilities
            
            
            6,544,405
            
            
            
            2,159,441Commitments
      and ContingenciesShareholders'
      EquityPreferred
      stock, $0.001 par value,50,000,000
      shares authorized,none
      issued and outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.001 par value, 200,000,000 shares authorized,93,348,250
      and 92,181,750 issued and outstanding
              as
      of March 31, 2009 and December 31, 2008 respectively93,349
            
            
            
            92,182Additional
      paid-in capital
            
            
            11,713,199
            
            
            
            12,696,549Retained
      earnings
            
            
            1,997,421
            
            
            
            3,686,087Statutory
      reserves
            
            
            348,309
            
            
            
            348,309Accumulated
      other comprehensive income
            
            
            2,119,909
            
            
            
            2,123,225Total
      shareholders' equity
            
            
            16,272,187
            
            
            
            18,946,352Total
      liabilities and shareholders' equity
            
            $
            22,816,592
            
            
            $
            21,105,793





See
accompanying notes to condensed consolidated financial statements.





4





Sino
      Clean Energy, Inc. and SubsidiariesCondensed
      Consolidated Statements of Income and Other Comprehensive
      Income(Unaudited)Three
      Months ended March 31,2009
            
            
            2008Revenue
            
            $
            7,739,583
            
            
            $
            2,485,128Cost
      of goods sold
            
            
            (5,348,107
            )
            
            
            (1,684,679
            )Gross
      profit
            
            
            2,391,476
            
            
            
            800,449Selling
      expenses
            
            
            3,559
            
            
            
            2,405General
      and administrative expenses
            
            
            548,899
            
            
            
            163,498Income
      from operations
            
            
            1,839,018
            
            
            
            634,546Other
      income (expense)Interest
      expense
            
            
            (485,747
            )Expense
      related to escrow shares
            
            
            (120,167
            )Commission
      income
            
            
            38,694
            
            
            
            -Rental
      income, net
            
            
            -
            
            
            
            53,719Interest
      income
            
            
            3,986
            
            
            
            -Change
      in fair value of warrantsand
      embedded conversion feature
            
            
            578,978
            
            
            
            -Other
      income
            
            
            -
            
            
            
            37,060Total
      other income (expense)
            
            
            15,744
            
            
            
            90,779Income
      before income taxes and minority interest
            
            
            1,854,762
            
            
            
            725,325Provision
      for income taxes
            
            
            289,286
            
            
            
            46,083Income
      before minority interest
            
            
            1,565,476
            
            
            
            679,242Minority
      interest
            
            
            -
            
            
            
            (155,743
            )Net
      income
            
            
            1,565,476
            
            
            
            523,499Other
      comprehensive incomeForeign
      currency translation adjustment
            
            
            (3,316
            )
            
            
            488,058Comprehensive
      income
            
            $
            1,562,160
            
            
            $
            1,011,557Weight
      average number of shares-
      Basic
            
            
            92,194,711
            
            
            
            84,681,750-
      Diluted
            
            
            92,751,232
            
            
            
            84,681,750Income
      per common share-
      Basic
            
            $
            0.02
            
            
            $
            0.01-
      Diluted
            
            $
            0.02
            
            
            $
            0.01





See
accompanying notes to condensed consolidated financial statements.





5





Sino-Clean
      Energy, Inc. and SubsidiariesCondensed
      Consolidated Statements of Changes in Shareholders’
  EquityFor
      the three months ended March 31, 2009(Unaudited)AccumulatedCommon
      stock
            
            
            Additional
            
            
            
            
            
            
            
            otherpaid-in
            
            
            Statutory
            
            Retained
            
            
            comprehensiveShares
            
            
            Amount
            
            
            capital
            
            
            reserves
            
            
            earnings
            
            
            income
            
            
            TotalBalance,
      December 31, 2008
            
            
            92,181,750
            
            
            $
            92,182
            
            
            $
            12,696,549
            
            
            $
            348,309
            
            
            $
            3,686,087
            
            
            $
            2,123,225
            
            
            $
            18,946,352Cumulative
      effect of change in accounting principle-January 1, 2009 reclassification
      of embedded feature of equity based financial instruments to derivative
      liabilities
            
            
            -
            
            
            
            -
            
            
            
            (1,335,650
            )
            
            
            -
            
            
            
            (3,254,142
            )
            
            
            -
            
            
            
            (4,589,792
            )Fair
      value of shares issued to consultant
            
            
            1,166,500
            
            
            
            1,167
            
            
            
            232,133
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            233,300Expense
      related to escrow shares
            
            
            -
            
            
            
            -
            
            
            
            120,167
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            120,167Foreign
      currency translation gain
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,316
            )
            
            
            (3,316
            )Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,565,476
            
            
            
            -
            
            
            
            1,565,476Balance,
      March 31, 2009
            
            
            93,348,250
            
            
            $
            93,349
            
            
            $
            11,713,199
            
            
            $
            348,309
            
            
            $
            1,997,421
            
            
            $
            2,119,909
            
            
            $
            16,272,187







See
accompanying notes to condensed consolidated financial statements.





6





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




Three
      months ended March 31,2009
              
              
              2008Cash
      flows from operating activities:Net
      income
              
              $
              1,565,476
              
              
              $
              523,499Adjustments
      to reconcile net income to cashprovided
      by operating activities:Minority
      interest
              
              
              -
              
              
              
              155,743Depreciation
      and amortization
              
              
              356,063
              
              
              
              72,443Amortization
      of deferred debt issuance costs
              
              
              97,128
              
              
              
              -Amortization
      of convertible bonds
              
              
              329,338
              
              
              
              -Expense
      related to escrow shares
              
              
              120,167
              
              
              
              -Fair
      value of common stock issued for services
              
              
              233,300
              
              
              
              -Gain
      from change in fair value of warrants and embedded conversion
      feature
              
              
              (578,978
              )
              
              
              -Change
      in operating assets and liabilitiesAccounts
      receivable
              
              
              (874,993
              )
              
              
              (1,165,463
              )Deposits
      and prepayments
              
              
              848,397
              
              
              
              1,345,638Other
      receivables
              
              
              820
              
              
              
              (52,454
              )Assets
      on discontinued operationOther
      receivables
              
              
              -
              
              
              
              141,795Inventories
              
              
              (97,682
              )
              
              
              (32,049
              )Accounts
      payable and accrued expenses
              
              
              178,809
              
              
              
              (97,704
              )Taxes
      payables
              
              
              261,239
              
              
              
              26,372Net
      cash provided from operating activities
              
              
              2,439,084
              
              
              
              917,820Cash
      flows from investing activities:Purchase
      of property, plant and equipment
              
              
              -
              
              
              
              (40,962
              )Net
      cash used in investing activities
              
              
              -
              
              
              
              (40,962
              )Cash
      flows from financing activities:Payment
      of advances from director
              
              
              (394,956
              )
              
              
              (8,527
              )Receipt
      of government grant
              
              
              -
              
              
              
              411,000Net
      cash provided (used in) by financing activities
              
              
              (394,956
              )
              
              
              402,473Effect
      of foreign currency translation
              
              
              (523
              )
              
              
              155,690Net
      increase in cash and cash equivalents
              
              
              2,043,605
              
              
              
              1,435,021Cash
      and cash equivalents, beginning of period
              
              
              3,914,306
              
              
              
              2,832,132Cash
      and cash equivalents, end of period
              
              $
              5,957,911
              
              
              $
              4,267,153Supplemental
      noncash investing and financing activitiesInterest
      paid
              
              $
              -
              
              
              $
              -Income
      taxes paid
              
              $
              -
              
              
              $
              -Supplemental
      noncash investment and financing activitiesIssuance
      of shares to consultant
              
              $
              233,300
              
              
              $
              -Cumulative
      effect of change in accounting principle on convertible notes and
      warrants
              
              $
              4,589,792
              
              
              $
              -




See
accompanying notes to the consolidated financial statements.





7


Sino
Clean Energy, Inc. and Subsidiaries


Notes to
Condensed Consolidated Financial Statements
 For the
Three Months Ended March 31, 2009
 
 1.       
     ORGANZATION AND BUSINESS
ACTIVITIES
 
 Sino
Clean Energy, Inc. (the “Company”) was originally incorporated in Texas as
“Discount Mortgage Services, Inc.” on July 11, 2000. In November 2001, the
Company changed its name to Endo Networks, Inc. and was redomiciled to the State
of Nevada in December 2002. On January 4, 2007, the Company changed its name to
“China West Coal Energy Inc.” Further on August 15, 2007, the Company changed
its name to “Sino Clean Energy Inc.” The Company engages in research,
development, production, marketing and sales of coal-water mixture (“CWM”), a
coal-based fuel substitute for coal, oil and gas. All current operations of the
Company are in Shaanxi Province, People’s Republic of China (the “PRC” or
“China”).
 
 The
Company’s operations are carried out by Shaanxi Suo’ang Biological Science &
Technology Co., Ltd. (“Suo’ang BST”), a PRC company which the Company controls,
and Suo’ang BST’s subsidiary, Shaanxi Suo’ang New Energy Enterprise Co., Ltd.
(“Suo’ang New Energy”). Suo’ang New Energy was formed with 80% of the registered
capital, representing 80% of its equity interests, from Suo’ang BST, and the
remaining 20% from a member of the Company’s board of directors. On June 30,
2008, the Company entered into a securities purchase agreement with the director
and Suo’ang New Energy, pursuant to which the Company issued 7,500,000 common
shares to the director in exchange for transferring his 20% equity interests of
Suo’ang Energy to Hangson Limited (“Hangson”), a British Virgin Island company
and the wholly-owned subsidiary of the Company (see Note 3).
 
 The
Company controls Suo’ang BST through a series of contractual arrangements
between Suo’ang BST and Hangson. The contractual arrangements between Hangson
and Suo’ang BST enables the Company to substantially influence the daily
operations and financial affairs of Suo’ang BST, appoint its senior executives
and approve all matters requiring shareholder approval. As a result of these
contractual arrangements, which obligates Hangson to absorb a majority of
the risk of loss from the activities of Suo’ang BST and enables Hangson to
receive a majority of its expected residual returns, the Company accounts for
Suo’ang BST as a variable interest entity (“VIE”) under FASB Interpretation No.
46R (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51”. Accordingly, the Company consolidates the results, assets and
liabilities of Suo’ang BST.
  2.            
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Change in accounting
principle
 
 On
      January 1, 2009, the Company adopted Emerging Issues Task Force Issue No.
      07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed
      to an Entity’s Own Stock” (EITF 07-5).  The adoption of EITF
      07-5’s requirements can affect the accounting for warrants and many
      convertible instruments.  Under EITF 07-5, the Company
      determined the warrants and convertible debt issued on September 16, 2008
      and September 19, 2008 contained re-set provisions that preclude them from
      being indexed to the Company’s own stock.  As a result, the
      warrants and embedded conversion feature previously classified in equity
      were reclassified to derivative liabilities (see Note
  5).
  Basis of presentation and
consolidation
 The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 2008 Annual Report on Form 10-K for the fiscal
year ended December 31, 2008, 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 financial statements include the financial statements of the
Company, its wholly subsidiary Hangson, its VIE Suo’ang BST and Suo’ang BST’s
subsidiary, Suo’ang New Energy.  Intercompany accounts and
transactions have been eliminated in consolidation.
  8
 
 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 CWM.
 
 Sales are recognized in accordance with
SEC Staff Accounting Bulletin("SAB")No.104, 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”).  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 by the Company's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 157, “Fair Value Measurements”
("SFAS 157") as of January 1, 2008, with the exception of the
application of the statement to non-recurring, non-financial assets and
liabilities as permitted. The adoption of SFAS 157 did not have a material
impact on the Company's fair value measurements. SFAS 157 defines fair
value 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. SFAS 157 establishes a fair value hierarchy, 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.
 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.
 
 SFAS 157
requires the use of 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 condensed
consolidated balance sheets on a recurring basis and their level within the fair
value hierarchy as of March 31, 2009 (unaudited):
 
 Level 1
              
              
              Level 2
              
              
              Level 3
              
              
              TotalFair
      value of warrants and embedded derivatives
              
              
              -
              
              
              
              -
              
              
              $
              4,010,814
              
              
              $
              4,010,814-
              
              
              
              -
              
              
              $
              4,010,814
              
              
              $
              4,010,814
 
 See Notes 4 and 5 for more
information on these financial instruments.
 
 Derivative
      financial instruments
 
 The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. 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.
  9
 
 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. The Company adopted SFAS No. 123R effective January 1, 2006, and is using
the modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No. 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of SFAS No. 123R for all awards granted to employees prior to
the effective date of SFAS No. 123R that remain unvested on the effective date.
The Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with EITF No. 96-18: “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF No. 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees” whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.
 
 Income per common
      share
 
 SFAS No.
128, “Earnings Per Share”, requires presentation of basic earnings per share
(“Basic EPS”) and diluted earnings per share (“Diluted EPS”). 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, 2009, common stock equivalents were composed of options convertible
into 100,000 shares of the Company's common stock, warrants convertible into
9,261,434 shares of the Company's common stock, and debentures convertible into
8,904,334 shares of the Company’s common stock. The conversion of the debentures
into 8,904,344 shares of common stock has been excluded from the calculation of
dilutive earnings per share, as the effects of such conversion would be
anti-dilutive.  At March 31, 2008, the Company had no common stock
equivalents outstanding.
 
 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 31,2009
              
              
              2008(unaudited)
              
              
              (unaudited)NumeratorNet
      income
              
              $
              1,565,476
              
              
              $
              523,499DenominatorWeighted
      average shares outstanding-basic
              
              
              92,194,711
              
              
              
              84,681,750Effect
      of dilutive instruments:Warrants
              
              
              556,521
              
              
              
              -Weighted
      average shares outstanding-diluted
              
              
              92,751,232
              
              
              
              84,681,750
  
 Foreign
      currencytranslation
 
 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 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 for the period.
  March
      31, 2009
              
              December
      31, 2008
              
              March
      31, 2008Period
      end RMB : US$ exchange rate
              6.8359
              
              
              6.8346
              
              7.0175Average
      period RMB : US$ exchange rate
              6.8363
              
              
              7.0671
              
              7.1429
 
  10
  
 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.
 
 Recently issued
      accounting pronouncements
 
 In
December 2007, Financial Accounting Standards Board (FASB) Statement 141R,
“Business Combinations (revised 2007)” (SFAS 141R”) was issued.  SFAS
141R replaces SFAS 141 “Business Combinations”.  SFAS 141R requires
the acquirer of a business to recognize and measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transactions costs related to
the business combination to be expensed as incurred. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The effective date, as well as the adoption date
for the Company was January 1, 2009.  Although SFAS 141R may impact
our reporting in future financial periods, we have determined that the standard
did not have any impact on our historical consolidated financial statements at
the time of adoption.
 
 In April
2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
142.  This pronouncement requires enhanced disclosures concerning a
company’s treatment of costs incurred to renew or extend the term of a
recognized intangible asset. FST 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008.  The
effective date, as well as the adoption date for the Company was January 1,
2009.  Although FSP 142-3 may impact our reporting in future financial
periods, we have determined that the standard did not have any impact on our
historical consolidated financial statements at the time of
adoption.
 
 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
      31,2009
              
              
              2008(unaudited)Raw
      materials
              
              $
              119,023
              
              
              $
              18,290Packing
      materials
              
              
              2,746
              
              
              
              2,193Finished
      goods
              
              
              20,977
              
              
              
              24,585$
              142,746
              
              
              $
              45,068
 
  11
  
 Prepaid
inventories
 
 Buo'ang
BST has a contract with a coal mine to deliver coal for use in the production of
coal-water mixture. At times, Suo'ang BST 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,
2009 and December 31, 2008, prepaid inventories totaled $1,996,046 and
$1,996,584, respectively.
 
 Commitments to purchase
coal
 
 In2008, Suo'ang BST entered intoa contract to purchasecoal inventorywith asupplier.At March 31, 2009, Suo'ang
BST’scommitmenttopurchasecoal related to this contactisapproximately $4,140,640.
 
 4.
              CONVERTIBLE
      NOTES
 
 Convertible
notes consist of the following at:
 March
      31,
              
              
              December
      31,2009
              
              
              2008(unaudited)Convertible
      notes payable
              
              $
              1,335,650
              
              
              $
              1,335,650Valuation
      discount
              
              
              (622,822
              )
              
              
              (952,160
              )Convertible
      notes, net
              
              $
              712,828
              
              
              $
              383,490
 On
September 16, 2008 and September 19, 2008, the Company issued an aggregate of
$1,335,650 of 18% convertible debentures (the “Debentures”) and issued warrants
(the “Warrants”) to purchase up to 8,904,334 shares of common stock of the
Company in a private placement. The Debentures bear interest at 18% per annum,
mature in one year, are unsecured, and are personally guaranteed by the
Company’s Chief Executive Officer. The holders of the Debentures have the right
at any time to convert all or part of the outstanding principal amount of the
Debentures and any accrued and unpaid interest into common shares of the Company
at the then effective conversion price, initially set at $0.15 per
share.
 
 The
initial conversion price is subject to adjustments should the Company issue more
shares of common stock or securities convertible into common stock, including
rights, options or warrants for common shares, for less than the initial
conversion price and without offering the same to the investors in the
transaction. In the case of adjustments, the conversion price shall be adjusted
to the consideration received or receivable by the Company for each share of
common stock issued or issuable, and is limited to a floor of $0.05 per share.
If the Company completes a qualifying financing transaction (as defined in the
Debentures) or listing of its common stock on a subsequent market (as defined in
the Debentures) before the Debentures mature, all interests due under the
Debentures will be waived and all outstanding principal will automatically
convert into common shares (see Note 6).
 
 The
Warrants entitle the investors to purchase up to 8,904,334 shares of common
stock (the “Warrant Shares”) in the aggregate. The Warrants have an initial
exercise price of $0.15 per share, subject to adjustments and limited to no
lower than $0.05 per share. The Warrants are exercisable three years from the
date issued. 25% of the Warrant Shares vested immediately, and 5% of the Warrant
Shares vest monthly beginning on October 31, 2008 until the earlier of the
completion of a qualifying financing transaction, the listing of the Company’s
common stock on a subsequent market, or 100% vesting of the
Warrants.
  The
8,904,334 warrants were valued at $1,501,555 using the Black-Scholes option
valuation model with the following assumptions: risk-free interest rate of 1.6%
to 2%; dividend yield of 0%; volatility factors of 86.6% to 91.7%; and an
expected life of three years (statutory term). The Company also determined that
the Debentures contained a beneficial conversion feature of $1,667,752. The
value of the Debentures and conversion option are considered as debt discount.
Pursuant to EITF 98-5 “Accounting for Convertible Securities with Beneficial
Conversion Features”, total recorded debt discount cannot be greater than the
face amount of the notes issued. Accordingly, the Company recorded a discount of
$1,335,650 which is being amortized over the life of the Debentures on the
effective interest method. At December 31, 2008, the unamortized balance of the
discount is $952,160 and is offset against the Debentures’ aggregate principal
balance of $1,335,650. For the three month period ended March 31, 2009, $333,913
of discount amortization is included in interest expense. At March 31, 2009, the
unamortized balance of the discount is $622,828 and is offset against the
Debentures’ aggregate principal balance of $1,335,650. At March 31, 2008, there
was no debt discount recorded.
 
 The
Company incurred cost of $357,753 directly associated with the issuance of the
Debentures. The Company also issued warrants to purchase 357,100 shares of
common stock as finder’s fee, exercisable
for two years at $0.25 per share, which vested immediately on the issuance date.
The 357,100 warrants were valued at $30,759 using the Black-Scholes option
valuation model with the following assumptions: risk-free interest rate of 1.6%
to 2%; dividend yield of 0%; volatility factors of 86.6% to 91.7%; and an
expected life of two years (statutory term). The costs directly associated with
the issuance of the Debentures and the fair value of the warrants issued for
finder’s fee total $388,512 and have been recorded by the Company asdebt issuance costs.
These costs are capitalized and are being amortized over the term of the
Debentures. The unamortized balance at December 31, 2008 was $274,278. For the
period ended March 31, 2009, amortization charged to interest expense was
$97,128, and the unamortized balance at March 31, 2009 was $177,150. At March
31, 2008, there were no debt issuance costs recorded.
 As
further described in Note 6, EITF 07-05 became effective January 1,
2009.  In connection with its implementation, the Company was required
to classify the conversion feature of the Debentures and the related warrants to
liabilities.
  Escrow shares related to
convertible note transaction
 
 In
connection with the issuance of the Debentures and Warrants, the Company’s Chief
Executive Officer entered into an escrow agreement pursuant to which he
transferred 4,452,168 shares of the Company’s common stock owned by him into an
escrow account for the benefit of the investors as a guarantee of the Company
meeting certain performance targets. Pursuant to the escrow agreement, the Chief
Executive Officer agreed to transfer 50% of the escrowed shares to the holders
of the Debentures if the Company did not meet its performance targets for the
year ended December 31, 2008. The remaining 50% of the escrowed shares will be
transferred to the holders of the Debentures if the Company does not meet its
performance targets for the year ended December 31, 2009. The performance target
for 2008 was the achievement of net income and cash flow (as defined in the
Debentures) of at least $3,500,000. The performance target for the 2009 is the
achievement of net income and cash flow (as defined in the Debentures) of at
least $6,000,000. The escrowed shares revert back to the Chief Executive Officer
if the Company meets its performance targets.
  12
  
 
 The
Company considered the guidance in paragraph 11 of SFAS 123(R) and SAB Topic 5:T
in determining whether the escrow agreement represents a compensatory
arrangement that is, in substance, a capital contribution of common shares by
the Chief Executive Officer and then a share-based payment to him for services
rendered. The agreement to release the shares from escrow upon the achievement
of certain criteria was presumed to be a separate compensatory arrangement
between the Company and the Chief Executive Officer. As such, the Company valued
the escrowed shares as if the Chief Executive Officer had provided the Company
an option to acquire these shares. The aggregate value of the 4,452,168 shares
was valued at $1,157,132 using the Black-Scholes option valuation model with the
following assumptions: risk-free interest rate of 1.6% to 2%; dividend yield of
0%; volatility factors of 86.6% to 91.7%; and an expected life of 3 months (for
2008) and 15 months (for 2009).  For the three months ended March 31,
2009, the Company recognized $120,167 of expense related to the escrow
shares.  For the three months ended March 31, 2008, there was no
escrow share expense recorded.
 
 5.
              DERIVATIVE
      LIABILITY
 
 In June
2008, the FASB finalized Emerging Issues Task Force (“EITF”) 07-05, “Determining
Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own
Stock.” Under EITF 07-05, instruments which do not have fixed settlement
provisions are deemed to be derivative instruments.  The conversion
feature of the Company’s Debentures (described in Note 5), and the related
warrants, do not have fixed settlement provisions because their conversion and
exercise prices, respectively, may be lowered if the Company issues securities
at lower prices in the future.  The Company was required to include
the reset provisions in order to protect the note holders from the potential
dilution associated with future financings.  In accordance with EITF
07-05, the conversion feature of the notes was separated from the host contract
(i.e., the notes) and recognized as an embedded derivative
instrument.  Both the conversion feature of the notes and the warrants
have been re-characterized as derivative liabilities.  SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities,” requires that
the fair value of these liabilities be re-measured at the end of every reporting
period with the change in value reported in the statement of
operations.
  The
derivative liabilities were valued using both the Black-Scholes-Merton and
Binomial valuation techniques with the following assumptions:
  March
      31,
                    2009
                  
                  
                  December
      31,
                    2008
                  
                  
                  September
      16,
                    2008
      and
                    September
      19,
                    2008Conversion
      feature:Risk-free interest
      rate
                  
                  
                  1.58
                  %
                  
                  
                  0.33
                  %
                  
                  
                  1.61
                  %Expected volatility
                  
                  
                  147.84
                  %
                  
                  
                  152.26
                  %
                  
                  
                  91.68
                  %Expected life (in
      years)
                  
                  0.5
      years
                  
                  
                  0.7year
                  
                  
                  1.0
      yearExpected dividend
      yield
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0Warrants:Risk-free interest
      rate
                  
                  
                  1.58
                  %
                  
                  
                  0.33
                  %
                  
                  
                  2.21
                  %Expected
      volatility
                  
                  
                  147.84
                  %
                  
                  
                  152.26
                  %
                  
                  
                  91.68
                  %Expected life (in
      years)
                  
                  2.2
      years
                  
                  
                  2.7years
                  
                  
                  3.0
      yearsExpected dividend
      yield
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0Fair Value:Conversion
      feature
                  
                  $
                  2,668,843
                  
                  
                  $
                  2,899,790
                  
                  
                  $
                  2,878,739Warrants
                  
                  $
                  1,341,971
                  
                  
                  $
                  1,690,002
                  
                  
                  $
                  1,501,555$
                  4,010,814
                  
                  
                  $
                  4,589,792
                  
                  
                  $
                  4,380,294
 
 The
risk-free interest rate was based on rates established by the Federal
Reserve.  The company uses the volatility of five comparable guideline
companies to estimate volatility for its common stock.  The expected
life of the conversion feature of the notes was based on the term of the notes
and the expected life of the warrants was determined by the expiration date of
the warrants.  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.
   13
  EITF
07-05 was implemented in the first quarter of 2009 and is reported as a
cumulative change in accounting principles.  The cumulative effect on
the accounting for the conversion feature of the notes and the warrants at
January 1, 2009 is as follows:
  Derivative
      Instrument:
              
              Additional
      Paid-in Capital
              
              
              Retained
      Earnings
              
              
              Derivative
      LiabilityConversion
      feature
              
              $
              1,335,650
              
              
              
              -
              
              
              $
              1,335,650Warrants
              
              
              -
              
              
              $
              3,254,142
              
              
              $
              3,254,142$
              1,335,650
              
              
              $
              3,254,142
              
              
              $
              4,589,792
 The
warrants were originally recorded at their relative fair value as an increase in
additional paid-in capital.  The change in the accumulated deficit
includes gains resulting from decreases in the fair value of the derivative
liabilities through December 31, 2008.  The derivative liability
amounts reflect the fair value of each derivative instrument as of the January
1, 2009 date of implementation.
  On March
31, 2009, the Company measured the fair value of the warrants and conversion
feature and recorded $578,978 as a change in fair value of the liabilities in
the accompanying condensed consolidated financial statements for the three
months ended March 31, 2009.  At March 31, 2008, no derivative
instruments were recorded.
 
 6.
              COMMON
      STOCK
 
 During
the three months ended March 31, 2009, the Company issued 1,166,500 shares of
common stock in exchange for services valued at $233,300, based on the closing
price of the Company’s stock on the date of issuance.
 
 7.
              WARRANTS AND
  OPTIONS
  At March
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, 2009
              
              
              9,361,434
              
              
              $
              0.15Warrants
      and options granted
              
              
              -
              
              
              
              -Warrants
      and options expired
              
              
              -
              
              
              
              -Warrants
      and options outstanding at March 31, 2009
              
              
              9,361,434
              
              
              $
              0.15
 
 The following table summarizes
information about warrants and options outstanding at March 31,
2009:
 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$0.15
                    
                    8,904,334
                    
                    2.6
                    
                    3,561,734
                    
                    $0.15$0.25
                    
                    357,100
                    
                    1.6
                    
                    357,100
                    
                    $0.25$0.24
                    
                    100,000
                    
                    1.7
                    
                    100,000
                    
                    $0.24$0.15
                    
                    9,361,434
                    
                    
                    
                    4,018,834
                    
                    $0.15
 
 At March
31, 2009, the aggregate intrinsic value of the warrants and options outstanding
and exercisable was $1,481,851 and $621,692, respectively.
  14
  
 8.            
RELATED PARTY
TRANSACTIONS
 
 Due to
directors
  Amounts
due to directors at March 31, 2009 and December 31, 2008 consisted of the
following:
 March
      31,
                
                
                December
      31,2009
                
                
                2008Due
      to:
                
                (unaudited)Mr.
      Peng Zhou
                
                $
                -
                
                
                $
                395,049Mr.
      Baowen Ren
                
                
                70,000
                
                
                
                70,000$
                70,000
                
                
                $
                465,049
 
 Amounts
due to directors are non-interest bearing, unsecured, and due on
demand.
 
 9.
              SUBSEQUENT
      EVENTS
 
 Subsequent
to March 31, 2009, the Company issued 1,166,500 shares of its common stock to an
independent consultant for consulting and advisory services. The fair value of
these shares of $221,635 will be recognized as expense in the second quarter of
2009.
 
 On May 6,
2009, $200,000 of convertible notes that the Company issued in September
2008 were converted into 1,333,333 shares of the Company’s common
stock.
  15


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-KSB filed with
the SEC on April 15, 2008.  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.





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 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. is a holding company incorporated in Nevada that,
through its wholly owned subsidiary Hangson Limited (“Hangson”), a British
Virgin Islands company, and its variable interest entity (“VIE”) Shaanxi
Suo’ang Biological Science & Technology Co., Ltd. (“Suo’ang BST”)
researches, develops, produces and sells coal water mixture (“CWM”), a fuel
substitute for oil, gas and coal in the People’s Republic of China (“PRC” or
“China”).  Suo’ang BST operates the CWM business through its
subsidiary, Shaanxi Suo’ang New Energy Enterprise Co., Ltd. (“Suo’ang New
Energy”). We control Suo’ang BST and Suo’ang New Energy through contractual
arrangements between Hangson and Suo’ang BST. These contractual arrangements
enable Hangson to control and receive the profits of Suo’ang BST. Other than our
interests in the contractual arrangements with Suo’ang BST, neither we nor our
subsidiary have any equity interests in Suo’ang BST. Hangson does own a 20%
minority interest in Suo'ang New Energy.





Our CWM
production plant is located in the city of Tongchuan, north of Xi’an, the
ancient capital of China and the provincial capital of Shaanxi Province. The
plant presently has an annual production capacity of 350,000 metric tons
(“tonnes”). CWM is sold and distributed directly to our customers, all of whom
are in Shaanxi Province. Suo’ang New Energy also acts as an agent for Qingdao
Haizhong Industry Inc., an unrelated third-party manufacturer of boilers that
are compatible with our CWM, and receives commission for sales of such
boilers.





Critical
Accounting Policies and Estimates





Our
management's discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. While our significant accounting policies are more fully
described in Note 2 to our consolidated financial statements, we believe that
the following accounting policies are the most critical to aid you in fully
understanding and evaluating this management discussion and
analysis.





Revenue
recognition





Sales are
recognized in accordance with SEC Staff Accounting Bulletin ("SAB") No. 104,
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”).  No return allowance is made as
products are normally not returnable upon acceptance by the
customers.





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.








16


Recently
issued accounting pronouncements





On
January 1, 2009, the Company adopted Emerging Issues Task Force Issue No. 07-5,
“Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock” (EITF 07-5).  The adoption of EITF 07-5’s
requirements can affect the accounting for warrants and many convertible
instruments.  Under EITF 07-5, the Company determined the warrants and
convertible debt issued on September 16, 2008 and September 19, 2008 contained
re-set provisions that preclude them from being indexed to the Company’s own
stock.  As a result, the warrants and embedded conversion feature
previously classified in equity were reclassified to derivative
liabilities.





In
December 2007, Financial Accounting Standards Board (FASB) Statement 141R,
“Business Combinations (revised 2007)” (SFAS 141R”) was issued.  SFAS
141R replaces SFAS 141 “Business Combinations”.  SFAS 141R requires
the acquirer of a business to recognize and measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transactions costs related to
the business combination to be expensed as incurred. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The effective date, as well as the adoption date
for the Company was January 1, 2009.  Although SFAS 141R may impact
our reporting in future financial periods, we have determined that the standard
did not have any impact on our historical consolidated financial statements at
the time of adoption.





In April
2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
142.  This pronouncement requires enhanced disclosures concerning a
company’s treatment of costs incurred to renew or extend the term of a
recognized intangible asset. FST 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008.  The
effective date, as well as the adoption date for the Company was January 1,
2009.  Although FSP 142-3 may impact our reporting in future financial
periods, we have determined that the standard did not have any impact on our
historical consolidated financial statements at the time of
adoption.





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, 2009 as compared to three month period ended March 31, 2008





Revenue. During the
three-month period ended March
31, 2009, we had revenues from sales of our coal water mixture of
$7,739,583 as compared to revenues of $2,485,128 during the three-month period
ended March 31, 2008, an
increase of 212%.   This increase is mainly attributable to an
increase in revenues and the number of customers, from 5 customers for the three
months ended March 31, 2008, to 16 customers for the same period in 2009.





Cost of Goods Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing
overhead, depreciation of plant and machinery, was $5,348,107 for the
three-month period ended March 31, 2009, as compared to $1,684,679 for the same
period of 2008, an increase of 217%. The increase in cost of sales sold is in
line with our increase in sales.





Selling Expenses. Selling
expenses totaled $3,559 for the three-month period ended March 31, 2009, as compared to
$2,405 for the three-month period ended March 31, 2008, an increase of
48%.  This increase in selling expenses is mainly due to increase in
salary expenses.





General and Administrative Expenses.General and administrative expenses totaled $548,899 for the three-month
period ended March 31,
2009, as compared to $163,498 for the three-month period ended March 31, 2008.  This
increase was primarily caused by expenses associated with stock issuance to a
consultant of the Company.





Other Income.
Other income totaled $15,744 for the three-month period ended March 31, 2009, as compared to
other income $90,779 for the three-month period ended March 31, 2008, primarily caused
by interest expenses and change in fair value of derivative liabilities
associated with our financing transaction in September 2008. On
January 1, 2009, the Company adopted Emerging Issues Task Force Issue No. 07-5,
“Determining Whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock” (EITF 07-5). As a result, warrants and embedded conversion
feature previously classified in equity were reclassified to derivative
liabilities. During the three months ended March 31, 2009, the Company recorded
a gain from change in the fair value of warrants and embedded conversion feature
derivative liabilities of $578,978, which was included in other
income.





Net Income. We had net
incomeof
$1,565,476 for the three-month period ended March 31, 2009, as compared to
net income of$523,499 for the same
period in 2008.  The increase in net income is primarily attributable
to the increase in sales in the first three months of 2009.





Liquidity
and Capital Resources





17


For the
three-month period ended March
31, 2009, we generated $2,439,084 from operating activities, as compared
to $917,820 that we generated from operating activities for the three-month
period ended March 31,
2008.  This increaseis primarily due to the
increase in sales proceeds.





For the
three-month period ended March 31, 2009, we did not use any cash in investing
activities, as we did not make any property, plant or equipment purchase during
the period, compared to $40,962 that we used in investing activities for the
three-month period ended March 31, 2008.





For the
three-month period ended March
31, 2009, we used $394,956 in financing activities, primarily to pay back
advances from one of our directors for our operations, as compared to $402,473that wegeneratedfromfinancing activities
during the three-month period ended March 31, 2008, mainly from a
government grant that we received.





As of
March 31, 2009, we had cash
and cash equivalents of $5,957,911.  Our total current assets were
$11,036,945 and our total current liabilities were $6,544,405, which resulted in
a net working capital of $4,492,540.





In
September 2008, we sold to several institutional and accredited investors $1.3
million in aggregate principal amount of 18% convertible debentures due
September 2009, and warrants to purchase up to 8,904,334 shares of common stock,
in a private placement pursuant to Regulation D and Regulation S under the
Securities Act of 1933.





We had
capital expenditure commitments outstanding as of March 31, 2009 in the amount
of $279,193 in relation to the purchase of machinery.





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





Contractual
Obligations





We have
certain commitments that include future payments. We have presented below a
summary in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.




Payments
      Due by PeriodTotal
            
            Less
      than 1 year
            
            1-3
      Years
            
            3-5
      Years
            
            5
      Years +Contractual
      obligations:Operating
      Leases
            
            $
            37,051
            
            $        32,662
            
            $
            4,389
            
            -
            
            
            -Coal
      inventory purchase agreement
            
            $
            4,140,640
            
            4,140,640
            
            
            -
            
            -
            
            
            -Debt
      repayment and interest on debt
            
            $
            1,335,650
            
            1,335,650
            
            
            -
            
            -
            
            
            -Total
      contractual obligations:
            
            $
            5,513,341
            
            $   5,508,952
            
            $
            4,389
            
            -
            
            
            -




Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for office premises.  The amounts presented are consistent with
contractual terms and are not expected to differ significantly, unless a
substantial change in our headcount needs requires us to exit an office facility
early or expand our occupied space.





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





Not
applicable





Item
4.  Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





18




We
maintain disclosure controls and procedures 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
Securities and Exchange Commission’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 for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Our disclosure controls and procedures were
designed to provide reasonable assurance that the controls and procedures would
meet their objectives.




As of the
end of the period covered by this report, we carried out an evaluation, 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 defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended.  Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the applicable period to ensure that the
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act (i) is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms, and (ii) 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.





Changes
in Internal Control Over Financial Reporting




There
were no changes in our internal controls over financial reporting that occurred
during the
three-month period ended March
31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





PART
II - OTHER INFORMATION




Item 1.  Legal Proceedings.





None.





Item 1A. Risk Factors.





You should carefully consider the risks described below
together with all of the other information included in this report before making
an investment decision with regard to our securities. The statements contained
in or incorporated into this offering that are not historic facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements. If any of the following risks actually
occurs, our business, financial condition or results of operations could be
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.





Risks
Associated With Our Business




Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.




We have a
relatively limited operating history.   Suo’ang BST commenced
operations in 2002 and first achieved profitability in the year ended
2004.  Accordingly, you should consider our future prospects in light
of the risks and uncertainties experienced by early stage companies in evolving
industries such as the coal products and alternative energy industry in China.
An investor in our securities must consider the risks, uncertainties and
difficulties frequently encountered by companies in new and rapidly evolving
markets. The risks and difficulties we face include challenges in accurate
financial planning as a result of limited historical data and the uncertainties
resulting from having had a relatively limited time period in which to implement
and evaluate our business strategies as compared to older companies with longer
operating histories.





We
have a very brief operating history as a CWM producer.





In
December 2006, we decided to solely focus on the research, development,
production, marketing and sale of CWM and accordingly phased out our COPO resin
products business in January 2007.  We signed our first sales
contracts for CWM in early 2007, completed our first CWM production line in June
2007, and commenced production and distribution of CWM in July
2007.  While we have also recently increased our annual production
capacity to 350,000 tonnes, our operating history as a CWM producer is fairly
brief, and we cannot assure you that our operations will be able to generate
sufficient revenue to continue our operations or that the CWM business will be
profitable.




We
may require additional financing to execute our business plan.





The
revenues from the sales of CWM may not be adequate to support the expansion of
our business. We will need substantial additional funds to build and maintain
new production facilities, pursue research and development activities, obtain
necessary regulatory approvals and market our business. While we may seek
additional funds through public or private equity or debt financing, strategic
transactions and/or from other sources, there are no assurances that future
funding will be available on favorable terms or at all. If additional funding is
not obtained, we may need to reduce, defer or cancel any plans of expansion,
including overhead expenditures, to the extent necessary. The failure to fund
our capital requirements as they arise would have a material adverse effect on
our business, financial condition and results of operations.




Our
business and results of operations are dependent on the PRC coal markets, which
may be cyclical.





19


As the
majority of our revenue is derived from sales of CWM, our business and
operating results are substantially dependent on the domestic supply of coal,
especially washed coal. The PRC coal market is cyclical and exhibits fluctuation
in supply and demand from year to year and is subject to numerous factors beyond
our control, including, but not limited to, the economic conditions in the PRC,
the global economic conditions and fluctuations in industries with high demand
for coal, such as the power and steel industries. Fluctuations in supply and
demand for coal have effects on coal prices which, in turn, affect our operating
and financial performance. The demand for coal is primarily affected by the
overall economic development and the demand for coal from the electricity
generation, steel and construction industries. The supply of coal, on the other
hand, is primarily affected by the geographical location of the coal supplies,
the volume of coal produced by domestic and international coal suppliers, and
the quality and price of competing sources of coal. Alternative fuels such as
natural gas, oil and nuclear power, alternative energy sources such as
hydroelectric power, and international shipping costs also have effects on the
market demand for coal. Excess demand for coal may have an adverse effect on
coal prices which would, in turn, cause a decline in our profitability. A
significant increase in domestic coal prices could also materially and adversely
affect our business and result of operations.





Our
business is currently dependent on a relatively limited number of
customers.




While
only one customer accounted for 10% or more of our total sales for the three
months ended March 31, 2009, our total number of customers is still relatively
limited, and any adverse developments to any one of their business operations
could have an adverse impact on our results of operations.





Our
business and prospects will be adversely affected if we are not able to compete
effectively.





We face
competition in all areas of our business. While we have no direct competitor for
CWM in Shaanxi Province where we are based, there are other CWM producers in
other areas of China that may look to expand their business into our market.
Additionally, we must compete against producers of other forms of energy such as
coal, gas and oil, which may have broader market acceptance. Some of our
competitors may have greater financial, marketing, distribution
and technological resources than we have, and they may have more
well-known brand names in the marketplace.  If we are unable to
compete effectively against our competitors, this may have a material adverse
impact on our results of operations.





We
may suffer losses resulting from industry-related accidents and lack of
insurance.





Our
manufacturing facilities may be affected by water, gas, fire or structural
problems. As a result, we, like other coal-based products companies, may
experience accidents that will cause property damage and personal injuries.
Although we have implemented safety measures for our production facilities and
provided on-the-job training for our employees, there can be no assurance that
industry-related accidents will not occur in the future. Additionally, the risk
of accidental contamination or injury from handling and disposing of our product
cannot be completely eliminated. In the event of an accident, we could be held
liable for resulting damages.





We do not
currently maintain fire, casualty or other property insurance covering our
properties, equipment or inventories, other than with respect to vehicles. In
addition, we do not maintain any business interruption insurance or any third
party liability insurance to cover claims related to personal injury,
property or environmental damage arising from accidents on our properties, other
than third party liability insurance with respect to vehicles. Any uninsured
losses and liabilities incurred by us could exceed our resources and have a
material adverse effect on our financial condition and results of operations.
Additionally, we could incur significant costs to comply with PRC environmental
laws and regulations in the future.




Our
operations are subject to a number of risks relating to the PRC.





We are
also subject to a number of risks relating to the PRC, including the
following:





·
            The
      PRC government currently supports the development and operation of clean
      coal technology such as CWM. If the PRC government changes its current
      policies that are currently beneficial to us, we may face significant
      constraints on our flexibility and ability to expand our business
      operations or to maximize our
  profitability.





·
            Under
      current PRC regulatory requirements, projects for the development of CWM
      require approval of the PRC government. If we are required to undertake
      any such projects for our growth or for cost reduction and we do not
      obtain the necessary approval on a timely basis or at all, our financial
      condition and operating performances could be adversely
      affected.





·
            The
      PRC government has been reforming, and is expected to continue to reform
      its economic system. Many of the reforms are unprecedented or
      experimental, and are expected to be refined and improved. Other
      political, economic and social factors can also lead to further
      readjustment of the reform measures. This refining and readjustment
      process may not always have a positive effect on our operations. Our
      operating results may be adversely affected by changes in China’s economic
      and social conditions and by changes in policies of the PRC government
      such as changes in laws and regulations (or the interpretation thereof),
      imposition of additional restrictions on currency conversion and reduction
      in tariff protection and other import
  restrictions.





20


·
            Since
      1994, the conversion of RMB into foreign currencies, including Hong Kong
      and U.S. dollars, has been based on rates set by the People’s Bank of
      China, or PBOC, which are set daily based on the previous day’s PRC
      interbank foreign exchange market rate and current exchange rates on the
      world financial markets. Since 1994, the official exchange rate for the
      conversion of RMB to U.S. dollars has generally been stable. On July
      21, 2005, however, PBOC announced a reform of its exchange rate system.
      Under the reform, RMB is no longer effectively linked to US dollars but
      instead is allowed to trade in a tight 0.3% band against a basket of
      foreign currencies. Any devaluation of the RMB may adversely affect
      the value of, and dividends payable on our shares as we receive our
      revenues and denominate our profits in RMB. Our financial condition and
      operating performance may also be affected by changes in the value of
      certain currencies other than RMB in which our earnings and obligations
      are denominated. In particular, a devaluation of the RMB is likely to
      increase the portion of our cash flow required to satisfy our foreign
      currency-denominated obligations.





·
            Since
      1997, many new laws and regulations covering general economic matters have
      been promulgated in the PRC. Despite this activity to develop the legal
      system, PRC’s system of laws is not yet complete. Even where adequate law
      exists, enforcement of existing laws or contracts based on existing law
      may be uncertain and sporadic, and it may be difficult to obtain swift and
      equitable enforcement or to obtain enforcement of a judgment by a court of
      another jurisdiction. The relative inexperience of PRC’s judiciary in many
      cases creates additional uncertainty as to the outcome of any litigation.
      In addition, interpretation of statutes and regulations may be subject to
      government policies reflecting domestic political
  changes.




Competitors
may develop and market products that are less expensive, more effective or
safer, making CWM obsolete or uncompetitive.





Some of
our competitors and potential competitors may have greater product development
capabilities and financial, scientific, marketing and human resources than we
do. Technological competition from other alternative energy companies is intense
and is expected to increase.  Other companies have developed
technologies that could be the basis for competitive products. Some of these
products may be more effective and are less costly than CWM. Over time, CWM may
become obsolete or uncompetitive.





CWM
may not gain wide market acceptance.




Despite
the central government’s push for clean-coal technology and the support for CWM
amongst a number of municipal governments, CWM may ultimately not gain wide
market acceptance in the PRC. The degree of market acceptance of any product
depends on a number of factors, including establishment and demonstration of its
efficacy and safety, cost-effectiveness, advantages over alternative products,
and marketing and distribution support for the product. Limited information
regarding these factors is available in connection with CWM or competitive
products.




To
establish wide market acceptance of CWM, we will require a marketing and sales
force with appropriate technical expertise and supporting distribution
capabilities, as well as continuing governmental support for the use of CWM. We
may not be able to establish sales, marketing and distribution capabilities or
enter into arrangements with third parties on acceptable terms, and our ability
to influence governmental support is limited. If CWM does not gain wide market
acceptance, our ability to continue to generate or increase revenue may be
limited.




If
we were successfully sued for product liability, we could face substantial
liabilities that may exceed our resources.




We may be
held liable if our product causes injury or is found unsuitable during product
testing, manufacturing, marketing, sale or use. We currently do not have product
liability insurance. We are not insured with respect to this liability. If we
choose to obtain product liability insurance but cannot obtain sufficient
insurance coverage at an acceptable cost or otherwise protect against potential
product liability claims, the commercialization of our product may be prevented
or inhibited. If we are sued for any injury caused by our product, our
liability could exceed our total assets.





We
have no business insurance coverage.




The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.





Our
success depends on attracting and retaining qualified personnel.




We depend
on a core team of management and operational personnel. The loss of any of these
individuals could prevent us from achieving our business objectives. Our future
success will depend in large part on our continued ability to attract and retain
other highly qualified management and operational personnel, as well as
personnel with expertise in our field and industry. We face competition for
personnel from other companies, universities, public and private research
institutions, government entities and other organizations. If our recruitment
and retention efforts are unsuccessful, our business operations could
suffer.





21


Downturn
in the global economy may slow domestic growth in China, which, in turn, may
effect our business.





Due to
the global downturn in the financial markets, China may not be able to maintain
its recent growth rates mainly due to the decreased demand for China’s
exported good in countries that are in recessions. Although we do not
presently export any of our products, our earnings may become unstable if
China’s domestic growth slows significantly and the domestic demand for energy
declines.





Risk
Related to the Alternative Energy Industry





A
drop in the retail price of conventional energy or other alternative energy may
have a negative effect on our business.




A
customer's decision to purchase CWM will be primarily driven by the return on
investment resulting from the energy savings from CWM. Any fluctuations in
economic and market conditions that impact the viability of conventional and
other alternative energy sources, such as decreases in the prices of oil and
other fossil fuels could cause the demand for CWM to decline. Although we
believe that current levels of retail energy prices support a reasonable return
on investment for CWM, there can be no assurance that future retail pricing of
conventional energy and other alternative energy will remain at such
levels.





Existing
regulations and changes to such regulations may present technical, regulatory
and economic barriers to the purchase and use of CWM, which may significantly
affect the demand for our products.




CWM is
subject to oversight and regulations in accordance with national and local
ordinances and regulations relating to safety, environmental protection, and
related matters. We are responsible for knowing such ordinances and regulations,
and must comply with these varying standards. Any new government regulations or
utility policies pertaining to our product may result in significant additional
expenses to us and our customers and, as a result, could cause a significant
reduction in demand for our product.





The
market for CWM is emerging and rapidly evolving, and its future success remains
uncertain. If CWM is not suitable for widespread adoption or sufficient demand
for CWM does not develop or takes longer to develop than we anticipate, our
sales would not significantly increase and we would be unable to achieve or
sustain profitability. In addition, demand for CWM in the markets and geographic
regions where we operate may not develop or may develop more slowly than we
anticipate. Many factors will influence the widespread adoption of CWM and
demand for our products, including:





·
            cost-effectiveness
      of CWM as compared with conventional and other alternative energy products
      and technologies;





·
            performance
      and reliability of CWM as compared with conventional and other alternative
      energy products and technologies;





·
            capital
      expenditures by customers that tend to decrease if the PRC or global
      economy slows down; and





·
            availability
      of government subsidies and
incentives.




Risks
Related to Our Corporate Structure




PRC
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation, we
could be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our business.




There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our affiliated Chinese entity, Suo’ang BST, and its
stockholders. We are considered a foreign person under PRC law. As a result, we
are subject to PRC law limitations on foreign ownership of certain Chinese
companies. These laws and regulations are relatively new and may be subject to
change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively.





The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.





22


We
may be adversely affected by complexity, uncertainties and changes in PRC
regulation of our business and industry, including limitations on our ability to
own key assets.




The PRC
government regulates the energy industries including foreign ownership of, and
the licensing and permit requirements pertaining to, companies in these
industries. These laws and regulations are relatively new and evolving, and
their interpretation and enforcement involve significant uncertainty. As a
result, in certain circumstances it may be difficult to determine what
actions or omissions may be deemed to be a violation of applicable laws and
regulations. Issues, risks and uncertainties relating to PRC government
regulation of our industry include the following:





·
            We
      only have contractual control over Suo’ang BST. Neither we nor our
      subsidiary own any equity interests in Suo’ang BST due to restriction of
      foreign investment in certain Chinese businesses;
  and





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




The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, alternative energy businesses in
China, including our business.




In
order to comply with PRC laws limiting foreign ownership of certain Chinese
companies, we conduct our business through Suo’ang BST by means of contractual
arrangements. If the PRC government determines that these contractual
arrangements do not comply with applicable regulations, our business could be
adversely affected.




The PRC
government restricts foreign investment in certain industries in China.
Accordingly, we operate our business in China through contractual arrangements
with Suo’ang BST. Suo’ang BST holds the licenses and approvals necessary to
operate the CWM business in China. We have contractual arrangements with Suo’ang
BST and its stockholders through our wholly owned subsidiary, Hangson, that
allow us to substantially control Suo’ang BST. We cannot assure you, however,
that we will be able to enforce these contracts.




Although
we believe we comply with current Chinese regulations, and have been advised by
our PRC counsel that, in their opinion, the structure for operating our business
in China (including our corporate structure and contractual arrangements with
Suo’ang BST) complies with all applicable PRC laws, rules and regulations, and
does not violate, breach, contravene or otherwise conflict with any applicable
PRC laws, rules or regulations, we cannot assure you that the Chinese government
would agree that these operating arrangements comply with Chinese licensing,
registration or other regulatory requirements, with existing policies or with
requirements or policies that may be adopted in the future. If the Chinese
government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we may
not be able to comply, impose restrictions on our business operations or on our
customers, or take other regulatory or enforcement actions against us that could
be harmful to our business.




Our
contractual arrangements with Suo’ang BST may not be as effective in providing
control over it as direct ownership.




Since PRC
law limits foreign equity ownership in certain industries in China, we operate
our business through contractual arrangements with Suo’ang BST. Neither we nor
our wholly owned subsidiary, Hangson, have equity ownership interest in Suo’ang
BST, and we rely on contractual arrangements to control and operate its
business. These contractual arrangements may not be as effective in providing
control over Suo’ang BST as direct ownership. For example, Suo’ang BST could
fail to take actions required for our business despite its contractual
obligation to do so. If Suo’ang BST fails to perform under the contractual
arrangements, we may have to rely on legal remedies under PRC law, which may not
be effective. In addition, we cannot assure you that Suo’ang BST’s
stockholders will always act in our best interests.





Because
we rely on the consulting services agreement with Suo’ang BST for our revenue,
the termination of this agreement will severely and detrimentally affect our
continuing business viability under our current corporate
structure.





We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between Hangson and Suo’ang BST and the
minority interest in Suo’ang New Energy through Hangson. As a result, we
currently rely entirely for our revenues on dividends payments from Hangson
after it receives payments from Suo’ang BST pursuant to the consulting services
agreement which forms a part of the contractual arrangements between Hangson and
Suo’ang BST. The consulting services agreement may be terminated by written
notice of Hangson or Suo’ang BST in the event that: (a) one party causes a
material breach of the agreement, provided that if the breach does not relate to
a financial obligation of the breaching party, that party may attempt to remedy
the breach within 14 days following the receipt of the written notice; (b) one
party becomes bankrupt, insolvent, is the subject of proceedings or arrangements
for liquidation or dissolution, ceases to carry on business, or becomes unable
to pay its debts as they become due; (c) Hangson terminates its operations; (d)
Suo’ang BST’s business license or any other license or approval for its business
operations is terminated, cancelled or revoked; or (e) circumstances arise which
would materially and adversely affect the performance or the objectives of the
agreement.


23





Additionally,
Hangson may terminate the consulting services agreement without cause. Because
neither we nor Hangson own equity interests of Suo’ang BST, the termination of
the consulting services agreement would sever our ability to continue receiving
payments from Suo’ang BST under our current holding company structure. While we
are currently not aware of any event or reason that may cause the consulting
services agreement to terminate, we cannot assure you that such an event or
reason will not occur in the future. In the event that the consulting services
agreement is terminated, this may have a severe and detrimental effect on our
continuing business viability under our current corporate structure, which, in
turn, may affect the value of your investment.





Members
of Suo’ang BST’s management have potential conflicts of interest with us, which
may adversely affect our business and your ability for recourse.





Mr.
Baowen Ren, our Chief Executive Officer, is also the Chairman of Suo’ang BST and
Suo’ang New Energy. Mr. Peng Zhou, who is Suo’ang New Energy’s director, is a
member of our board of directors. Conflicts of interests between their
respective duties to our Company and Suo’ang BST may arise. As our directors and
executive officer (in the case of Mr. Ren), they have a duty of loyalty and care
to us under U.S. and British Virgin Islands laws when there are any potential
conflicts of interests between our company and Suo’ang BST. We cannot assure
you, however, that when conflicts of interest arise, each of them will act
completely in our interests or that conflicts of interests will be resolved in
our favor. For example, they may determine that it is in Suo’ang BST’s interests
to sever the contractual arrangements with Hangson, irrespective of the effect
such action may have on us. In addition, any one of them could violate his legal
duties by diverting business opportunities from us to others, thereby affecting
the amount of payment Suo’ang BST is obligated to remit to us under the
consulting services agreement.





Our board
of directors is comprised of a majority of independent directors (including one
based in the United States). These independent directors may be in a position to
deter and counteract the actions of our officers or non-independent directors
that are against our interests, as the independent directors do not have any
position with, or interests in, our affiliate entities, and should therefore not
have any conflicts of interests such as those potential conflicts of
interest of our officers and directors who are also management members
of our affiliated companies in the PRC. Additionally, the independent directors
have fiduciary duties to act in our best interests, and failure on their part to
do so may subject them to personal liabilities for breach of such duties. We
cannot, however, give any assurance as to how the independent directors will
act. Further, if we or the independent directors cannot resolve any conflicts of
interest between us and those of our officers and directors who are management
members of our affiliated companies in the PRC, we would have to rely on legal
proceedings, which could result in the disruption of our business.





In the
event that you believe that your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against Suo’ang BST
or our officers or directors who are members of its management, all of whom
reside within China. Even if you are successful in bringing an action, the laws
of China may render you unable to enforce a judgment against the assets of
Suo’ang BST and its management, all of which are located in China.





Risks
Related to Doing Business in China




Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.




Substantially
all of our business operations are conducted
in China.  Accordingly, our results of operations, financial
condition and prospects are subject to a significant degree to economic,
political and legal developments in China.  China’s economy differs
from the economies of most developed countries in many respects, including with
respect to the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources.  While
the PRC economy has experienced significant growth in the past 20 years, growth
has been uneven across different regions and among various economic sectors
of China.  The PRC government has implemented various measures to
encourage economic development and guide the allocation of resources. Some of
these measures benefit the overall PRC economy, but may also have a negative
effect on us.  For example, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to
us.  Since early 2004, the PRC government has implemented certain
measures to control the pace of economic growth.  Such measures may
cause a decrease in the level of economic activity in China, which, in turn,
could adversely affect our results of operations and financial
condition.





If
Suo’ang New Energy loses its existing preferential tax benefits, we would have
to pay more taxes, which could have a material and adverse effect on our
financial condition and results of operations.




24


Under PRC
laws and regulations, an enterprise may enjoy preferential tax benefits if it is
registered in a high-tech zone and also qualifies as “new or high-technology
enterprise”.  As a certified “new or high-technology enterprise”
located in a high-technology zone in X’ian, Suo’ang New Energy enjoyed a
two-year exemption from enterprise income tax that ended in 2008, and will
continue to enjoy a 50% reduction of its enterprise income tax for the next
three years. If Suo’ang New Energy is unable to qualify for additional
preferential tax treatments at the end of such period, we would have to pay more
taxes, which could have a material and adverse effect on our financial condition
and results of operations.




Suo’ang
BST is subject to restrictions on making payments to us.




We are a
holding company incorporated in Nevada and do not have any assets or conduct any
business operations other than the contractual arrangements between Hangson and
Suo’ang BST and the minority interest in Suo’ang New Energy through Hangson. As
a result of our holding company structure, we rely entirely on payments from
Suo’ang BST under our contractual arrangements. The Chinese government also
imposes controls on the conversion of RMB into foreign currencies and the
remittance of currencies out of China. We may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign
currency. See “Government control of currency conversion may affect the value of
your investment.” Furthermore, if our affiliated entity in China incurs debt on
their own in the future, the instruments governing the debt may restrict their
ability to make payments. If we are unable to receive all of the revenues from
Suo’ang BST’s operations through the contractual arrangements between Hangson
and Suo’ang BST, we may be unable to pay dividends on our ordinary
shares.





Uncertainties
with respect to the PRC legal system could adversely affect us.




We
conduct our business primarily through Hangson and Suo’ang BST.  Our
operations in China are governed by PRC laws and regulations.  We are
generally subject to laws and regulations in China.  The PRC
legal system is based on written statutes. Prior court decisions may be cited
for reference but have limited precedential value.




However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China.  In particular, because these laws and
regulations are relatively new, and because of the limited volume of published
decisions and their nonbinding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties.  In addition, the
PRC legal system is based in part on government policies and internal rules
(some of which are not published on a timely basis or at all) that may have a
retroactive effect.  As a result, we may not be aware of our violation
of these policies and rules until some time after the violation.  In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.





You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us and our management.




We are a
holding company incorporated in Nevada and do not have any assets or conduct any
business operations other than the contractual arrangements between Hangson and
Suo’ang BST and the minority interest in Suo’ang New Energy through Hangson. In
addition, all of Suo’ang BST’s assets are located in, and all of our other
senior executive officers reside within, China. As a result, it may not be
possible to effect service of process within the United States or elsewhere
outside China upon our senior executive officers and directors not residing in
the United States, including with respect to matters arising under U.S. federal
securities laws or applicable state securities laws. Moreover, our Chinese
counsel has advised us that China does not have treaties with the United States
or many other countries providing for the reciprocal recognition and enforcement
of judgment of courts. As a result, our public shareholders may have substantial
difficulty in protecting their interests through actions against our management
or directors than would shareholders of a corporation with assets and management
members located in the United States.





Governmental
control of currency conversion may affect the value of your
investment.




The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB.  Under our current
structure, our income is primarily derived from payments from Suo’ang BST.
Shortages in the availability of foreign currency may restrict the ability of
our PRC subsidiaries and our affiliated entity to remit sufficient foreign
currency to pay dividends or other payments to us, or otherwise satisfy their
foreign currency denominated obligations.  Under existing PRC foreign
exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the
PRC State Administration of Foreign Exchange by complying with certain
procedural requirements.  However, approval from appropriate
government authorities is required where RMB is to be converted into foreign
currency and remitted out of China 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.  If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders.




Fluctuation
in the value of RMB may have a material adverse effect on your
investment.


25




The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic
conditions.  Our revenues and costs are mostly denominated in RMB,
while a significant portion of our financial assets are denominated in U.S.
dollars.  We rely entirely on fees paid to us by Suo’ang BST. Any
significant fluctuation in value of RMB may materially and adversely affect our
cash flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our stock in U.S. dollars.  For example, an
appreciation of RMB against the U.S. dollar would make any new RMB denominated
investments or expenditures more costly to us, to the extent that we need to
convert U.S. dollars into RMB for such purposes.





We
face risks related to health epidemics and other outbreaks.




Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April
2004.  Any prolonged recurrence of SARS or other adverse public health
developments in China may have a material adverse effect on our business
operations.  For instance, health or other government regulations
adopted in response may require temporary closure of our production facilities
or of our offices.  Such closures would severely disrupt our business
operations and adversely affect our results of operations.  We have
not adopted any written preventive measures or contingency plans to combat any
future outbreak of SARS or any other epidemic.




Risks
Related to an Investment in Our Securities




To
date, we have not paid any cash dividends and no cash dividends are expected to
be paid in the foreseeable future.





We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide not
to pay any dividends. We intend to retain all earnings for our
operations.




The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.





As long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the “penny stock” rules. The
“penny stock” rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser’s written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.





Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.





The
Company cannot predict the extent to which an active public market for its
common stock will develop or be sustained. However, the Company does not rule
out the possibility of applying for listing on the Nasdaq National Market or
other exchanges.




Our
common shares have historically been sporadically or "thinly-traded" on the
“Over-the-Counter Bulletin Board”, meaning that the number of persons interested
in purchasing our common shares at or near bid prices at any given time may be
relatively small or non-existent.  This situation is attributable to a
number of factors, including the fact that we are a small company which is
relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume, and
that even if we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven company such as ours or
purchase or recommend the purchase of our shares until such time as we became
more seasoned and viable.  As a consequence, there may be periods of
several days or more when trading activity in our shares is minimal or
non-existent, as compared to a seasoned issuer which has a large and steady
volume of trading activity that will generally support continuous sales without
an adverse effect on share price.  We cannot give you any assurance
that a broader or more active public trading market for our common stock will
develop or be sustained, or that current trading levels will be
sustained.




The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share
price.   The price at which you purchase our common stock may not
be indicative of the price that will prevail in the trading
market.  You may be unable to sell your common stock at or above your
purchase price if at all, which may result in substantial losses to
you.


26





The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite
future.  The volatility in our share price is attributable to a number
of factors.  First, as noted above, our common shares are sporadically
and/or thinly traded.  As a consequence of this lack of liquidity, the
trading of relatively small quantities of shares by our shareholders may
disproportionately influence the price of those shares in either
direction.  The price for our shares could, for example, decline
precipitously in the event that a large number of our common shares are sold on
the market without commensurate demand, as compared to a seasoned issuer
which could better absorb those sales without adverse impact on its share
price.  Secondly, we are a speculative or "risky" investment due to
our lack of revenues or profits to date and uncertainty of future market
acceptance for our current and potential products.  As a consequence
of this enhanced risk, more risk-adverse investors may, under the fear of losing
all or most of their investment in the event of negative news or lack of
progress, be more inclined to sell their shares on the market more quickly and
at greater discounts than would be the case with the stock of a seasoned
issuer.  The following factors may add to the volatility in the price
of our common shares: actual or anticipated variations in our quarterly or
annual operating results; adverse outcomes; the termination of our contractual
agreements with Suo’ang BST; and additions or departures of our key personnel,
as well as other items discussed under this "Risk Factors" section, as well
as elsewhere in this annual report.





Many of
these factors are beyond our control and may decrease the market price of our
common shares, regardless of our operating performance.  We cannot
make any predictions or projections as to what the prevailing market price for
our common shares will be at any time, including as to whether our common shares
will sustain their current market prices, or as to what effect that the sale of
shares or the availability of common shares for sale at any time will have on
the prevailing market price.  However, the Company does not rule out
the possibility of applying for listing on the Nasdaq National Market or other
exchanges.





Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses.  Our management is aware of the abuses
that have occurred historically in the penny stock market.  Although
we do not expect to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns from being
established with respect to our securities.  The occurrence of these
patterns or practices could increase the volatility of our share
price.




Volatility
in our common share price may subject us to securities litigation.





The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and 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.





Our corporate
actions are substantially controlled by our principal shareholders and
affiliated entities.





As of
March 27, 2009, our principal stockholders and their affiliated entities own
approximately 39% of our outstanding common shares, representing approximately
39% of our voting power. These stockholders, acting individually or as a group,
could exert substantial influence over matters such as electing directors and
approving mergers or other business combination transactions. In addition,
because of the percentage of ownership and voting concentration in these
principal stockholders and their affiliated entities, elections of our board of
directors will generally be within the control of these stockholders and their
affiliated entities. While all of our stockholders are entitled to vote on
matters submitted to our stockholders for approval, the concentration of shares
and voting control presently lies with these principal stockholders and their
affiliated entities. As such, it would be difficult for stockholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as stockholders will be viewed favorably by all stockholders of the
company.





The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by our company and
may discourage lawsuits against our directors, officers and
employees.





Our
articles of incorporation contains a provision that eliminates the liability of
our directors for monetary damages to our company and shareholders to the extent
allowed under Nevada law and we are prepared to give such indemnification to our
directors and officers to the extent provided by Nevada law.  We also
have contractual indemnification obligations under our agreements with some of
our directors. The foregoing indemnification obligations could result in our
company incurring substantial expenditures to cover the cost of settlement or
damage awards against directors and officers, which we may be unable to
recoup.  These provisions and resultant costs may also discourage our
company from bringing a lawsuit against directors and officers for breaches of
their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our shareholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
shareholders.


27




Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.




There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other similar rule changes are
likely to increase general and administrative costs and expenses. Additionally,
while we currently do not maintain any insurance policies, we are contractually
obligated to obtain coverage for directors’ and officers insurance. When we do
so, we expect that premiums for such insurance policies may be considerable in
light of the high claims rates in recent years. Additionally, there could be
changes in certain accounting rules. These and other potential changes could
materially increase the expenses we report under generally accepted accounting
principles, and adversely affect our operating results.





Past
company activities prior to the reverse merger may lead to future liability for
the Company.





Prior to
the closing of the Exchange Agreement with Hangson on October 20, 2006, we were
engaged in businesses unrelated to our current operations.  Although
certain prior Company shareholders have provided certain indemnifications
against any loss, liability, claim, damage or expense arising out of or based on
any breach of or inaccuracy in any of their representations and warranties made
in connection with the Exchange Agreement, any liabilities relating to such
prior business against which we are not completely indemnified may have a
material adverse effect on the Company.





The
market price for our stock may be volatile.




The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:





·
            actual
      or anticipated fluctuations in our quarterly operating
      results;





·
            changes
      in financial estimates by securities research
  analysts;





·
            conditions
      in alternative energy and coal-based product
  markets;





·
            changes
      in the economic performance or market valuations of other alternative
      energy and coal-based products
companies;





·
            announcements
      by us or our competitors of new products, acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;





·
            addition
      or departure of key personnel;





·
            intellectual
      property litigation; and





·
            general
      economic or political conditions in
China.




In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.




We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.




We
believe that our current cash and cash equivalents, anticipated cash flow from
operations will be sufficient to meet our anticipated cash needs for the near
future.  We may, however, require additional cash resources due to
changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.  If our resources
are insufficient to satisfy our cash requirements, we may seek to sell equity or
debt securities or obtain a credit facility.  The sale of equity
securities could result in dilution to our shareholders.  The
incurrence of indebtedness would result in increased debt service obligations
and could result in operating and financing covenants that would restrict our
operations.  We cannot assure you that financing will be available in
amounts or on terms acceptable to us, if at all.


28





Shares
eligible for future sale may adversely affect the market.





From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to amended Rule 144, non-affiliate
stockholders may sell freely after six months subject only to the current public
information requirement (which disappears after one year). Affiliates may sell
after six months subject to the Rule 144 volume, manner of sale (for equity
securities), current public information and notice requirements. Of the
approximately 92 million shares of our common stock outstanding as of March 27,
2009, approximately 14 million shares were freely tradable without restriction,
as of March 27, 2009. Any substantial sale of our common stock pursuant to Rule
144 or pursuant to any resale prospectus may have a material adverse effect on
the market price of our common stock.





If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.




We are
subject to reporting obligations under the U.S. securities laws. The SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting. In addition, beginning with our annual report for fiscal
2009, an independent registered public accounting firm must attest to and report
on management’s assessment of the effectiveness of our internal controls over
financial reporting. In our annual report on Form 10-K for the year ended
December 31, 2007, we reported certain material weaknesses involving control
activities, specifically (1) accounting and finance personnel weaknesses in that
the current staff in the accounting department is relatively inexperienced and
requires substantial training; (2) lack of internal audit function in that we
lack qualified resources to perform the internal audit functions properly, and
the scope and effectiveness of internal audit function are yet been fully
developed; and (3) lack of internal audit system in that we do not have an
internal audit department to prevent and detect control lapses and errors in the
accounting of certain key areas in accordance with the appropriate costing
method used by us.





In light
of the foregoing, our management began undertaking steps to address these
issues, including the engagement of a chief financial officer whom management
believes has the requisite financial reporting experience, skills and knowledge
to complement our existing personnel. Additionally, four independent directors
now sit on our board of directors, including a member who is appropriately
credentialed as a financial expert. The independent directors have been tasked
to establish certain internal audit functions within our company, and we have
also established audit and compensation committees comprising entirely of
independent directors. We have also hired additional accounting and operational
personnel. However, there is no assurance that additional remedial measures will
not be necessary, or that after the remediation our management will be able to
conclude that our internal controls over our financial reporting are effective.
Moreover, even if our management concludes that our internal controls over
financial reporting are effective, our independent registered public accounting
firm may still decline to attest to our management’s assessment or may issue a
report that is qualified if it is not satisfied with our controls or the level
at which our controls are documented, designed, operated or reviewed, or if it
interprets the relevant requirements differently from us.





Our
reporting obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price of
our stock. Furthermore, we anticipate that we will incur considerable costs and
use significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.





We
will incur increased costs as a result of being a public company.




As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company.  In addition, the
Sarbanes-Oxley Act, as well as new rules subsequently implemented by SEC, has
required changes in corporate governance practices of public
companies.  We expect these new rules and regulations to increase our
legal, accounting and financial compliance costs and to make certain corporate
activities more time-consuming and costly. In addition, we will incur additional
costs associated with our public company reporting requirements. We are
currently evaluating and monitoring developments with respect to these new
rules, and we cannot predict or estimate the amount of additional costs we may
incur or the timing of such costs.





Item 2.   Unregistered Sales of Equity Securities and
Use of Proceeds.





On March
31, 2009, we issued 1,166,500 shares of restricted common stock to an
independent consultant that we engaged for consultation and advisory services
relating to investor relation.





Recent
Developments


29





On April
1, 2009, we issued an additional 1,166,500 shares of restricted common stock to
the same consultant.





Item 3.   Defaults upon Senior
Securities.





None





Item 4.   Submission of Matters to a Vote of Securities
Holders.





None





Item 5.   Other Information.





None




Item 6.   Exhibits.





EXHIBIT
INDEX


Exhibit
      Number
            
            Description2.1
            
            Share
      Exchange Agreement by and between Endo Networks, Inc. (“Endo”), the
      Majority Shareholders of Endo, Hangson Ltd. (“Hangson”) and the
      Shareholders of Hangson dated October 18, 2006 (1)3.1
            
            Articles
      of Incorporation of Endo Networks, Inc., a Nevada corporation, as amended.
      (3)3.2
            
            Bylaws
      of Endo (3)3.3
            
            Text
      of Amendment to the  Bylaws (4)3.4
            
            Articles
      of Merger filed with the Secretary of State of Nevada with an effective
      date of August 15, 2007 (6)4.1
            
            Form
      of Registrant’s 18% Secured Convertible Debenture (8)4.2
            
            Form
      of Registrant’s Warrant (8)4.3
            
            Form
      of Warrant issued to Ancora Securities, Inc. (8)4.4
            
            Non-statutory
      Stock Option Agreement by and between Registrant and Hon Wan Chan dated
      December 15, 2008 (10)10.1
            
            Asset
      and Share Purchase Agreement by and between Registrant and Peter B. Day
      (for Endo Canada) (2)10.2
            
            Securities
      Purchase Agreement by and among Registrant, Peng Zhou and Shaanxi Suo’ang
      New Energy Enterprise Co., Ltd. dated June 30, 2008 (7)10.3
            
            Securities
      Purchase Agreement by and among Registrant and two institutional and
      accredited investors dated September 16, 2008 (8)10.4
            
            Securities
      Purchase Agreement by and among Registrant and four institutional and
      accredited investors dated September 19, 2008 (9)10.5
            
            Employment
      Agreement by and between Registrant and Hon Wan Chan dated December 15,
      2008 (10)10.6
            
            Form
      of Director Offer Letter (10)10.7
            
            Indemnity
      Agreement  by and between Registrant and Bennet P. Tchaikovsky
      dated December 15, 2008 (10)10.8
            
            Form
      of Exchange and Amendment Agreement by and among Registrant and six
      institutional and accredited investors (11)31.1
            
            Section
      302 Certification by the Corporation’s Chief Executive Officer
      *31.2
            
            Section
      302 Certification by the Corporation’s Chief Financial Officer
      *32.1
            
            Section
      906 Certification by the Corporation’s Chief Executive Officer
      *32.2
            
            Section
      906 Certification by the Corporation’s Chief Financial Officer
      *99.1
            
            Consulting
      Services Agreement by and between Hangson and Shaanxi Suo’ang Biological
      Science & Technology Co., Ltd. (“Suo’ang BST”) dated August 18, 2006
      (3)99.2
            
            Equity
      Pledge Agreement by and among Hangson, Suo’ang BST and Suo’ang BST’s
      Majority Shareholders dated August 18, 2006 (3)99.3
            
            Operating
      Agreement by and among Hangson, Suo’ang BST and Suo’ang BST’s Majority
      Shareholders dated August 18, 2006 (3)99.4
            
            Proxy
      Agreement by and between Hangson and Suo’ang BST’s Majority Shareholders
      dated August 18, 2006 (3)99.5
            
            Option
      Agreement between Hangson and Suo’ang BST’s Majority Shareholders dated
      August 18, 2006 (3)99.6
            
            Agreement
      by and between Suo’ang BST and Hanzhong Si Xiong Ke Chuang Business Co.
      Ltd. (“Hangzhong”) (3)99.7
            
            Supplementary
      Agreement by and between Suo’ang BST and Hanzhong dated March 25, 2007
      (5)99.8
            
            Contract
      for Technology Transfer between Suo’ang BST and HanZhongWeiDa Commercial
      Company Limited (“HangZhongWeiDa”) dated December 25, 2006
    (5)99.9
            
            Contract
      for Technology Transfer between Suo’ang BST and HanZhongWeiDa dated
      January 10, 2007 (5)


____________


* Filed
herewith


(1)
            Filed
      as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with
      the SEC on October 18, 2006 and incorporated herein by
      reference.


30




(2)
            Filed
      as Exhibit A of Registrant’s Schedule 14A filed with the SEC on August 8,
      2006 and incorporated herein by reference.(3)
            Filed
      as Exhibits to the Registrant’s Current Report on Form 8-K filed with the
      SEC on October 26, 2006 and incorporated herein by
    reference.(4)
            Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on November 17, 2006 and incorporated herein by
      reference.(5)
            Filed
      as Exhibits to the Registrant’s Annual Report on Form 10-KSB filed with
      the SEC on May 3, 2007 and incorporated herein by
    reference.(6)
            Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on August 17, 2007 and incorporated herein by
      reference.(7)
            Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on July 7, 2008 and incorporated herein by
    reference.(8)
            Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on September 17, 2008 and incorporated herein by
      reference.(9)
            Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on September 22, 2008 and incorporated herein by
      reference.(10)
            Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on December 16, 2008 and incorporated herein by
      reference.(11)
            Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on March 30, 2009 and incorporated herein by
      reference.







31


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.




SINO
      CLEAN ENERGY INC.
              (Registrant)Date:
      May 15, 2009
            By:
            /s/
      Baowen RenBaowen
      Ren
              Chief
      Executive Officer




Date:
      May 15, 2009
            By:
            /s/
      Hon Wan ChanHon
      Wan Chan
              Chief
      Financial Officer







32