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:September 30, 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
      1605, Suite B, Zhengxin Building
                    No. 5 Gaoxin 1st Road, Gao Xin
      District
                    Xi’an,
      Shaanxi Province
                    People’s Republic of China
                  
                  N/A(Address
      of principal executive offices)
                  
                  (Zip
      code)
 
  (8629) 8406-7376(Registrant’s
      telephone number, including area
code)
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by section 13 or 15 (d) of the 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: 101,261,786 issued and outstanding as of October
28, 2009.
 
 Transitional
Small Business Disclosure Form (Check one): Yes x No  ̈
  
  TABLE
OF CONTENTS
 QUARTERLY
REPORT ON FORM 10-Q
 FOR
NINE MONTHS ENDED SEPTEMBER 30, 2009
 
 PagePART
      I
                                                      FINANCIAL
      INFORMATIONItem
      1.
                                                      Financial
      Statements (unaudited)
                                                      
                                                      4Condensed
      Consolidated Balance Sheets
                                                      
                                                      4Condensed
      Consolidated Statements of Operations and Other Comprehensive Income
      (Loss)
                                                      
                                                      6Condensed
      Consolidated Statements of Shareholders’ Equity
    (Deficiency)
                                                      
                                                      7Condensed
      Consolidated Statements of Cash Flows
                                                      
                                                      8Notes
      to the Condensed Consolidated Financial Statements
                                                      
                                                      10Item
      2.
                                                      Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                      
                                                      20Item
      3.
                                                      Quantitative
      and Qualitative Disclosures about Market Risk
                                                      
                                                      26Item
      4.
                                                      Controls
      and Procedures
                                                      
                                                      26PART
      II
                                                      OTHER
      INFORMATIONItem
      1.
                                                      Legal
      Proceedings
                                                      
                                                      27Item
      1A.
                                                      Risk
      Factors
                                                      
                                                      27Item
      2.
                                                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                      
                                                      38Item
      3.
                                                      Defaults
      Upon Senior Securities
                                                      
                                                      38Item
      4.
                                                      Submission
      of Matters to a Vote of Security Holders
                                                      
                                                      38Item
      5.
                                                      Other
      Information
                                                      
                                                      38Item
      6.
                                                      Exhibits
                                                      
                                                      39Signatures
                                                      
                                                      
                                                      42
  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 Subsidiaries
 Condensed
Consolidated Balance Sheets
 
 September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    13,970,487
                    
                    
                    $
                    3,914,306Accounts
      receivable, net
                    
                    
                    2,462,248
                    
                    
                    
                    899,629Inventories
                    
                    
                    480,173
                    
                    
                    
                    45,068Prepaid
      inventories
                    
                    
                    4,164,559
                    
                    
                    
                    1,996,584Prepaid
      expenses
                    
                    
                    59,767
                    
                    
                    
                    86,958Refundable
      advance
                    
                    
                    -
                    
                    
                    
                    731,861Government
      grant receivable
                    
                    
                    -
                    
                    
                    
                    146,314Other
      receivables
                    
                    
                    24,798
                    
                    
                    
                    16,986Loans
      receivable
                    
                    
                    543,048
                    
                    
                    
                    -Land
      use right - current portion
                    
                    
                    38,735
                    
                    
                    
                    38,703Total
      current assets
                    
                    
                    21,743,815
                    
                    
                    
                    7,876,409Property,
      plant and equipment, net of accumulated depreciation and amortization of
      $1,561,097 and $491,247, respectively
                    
                    
                    8,362,457
                    
                    
                    
                    9,394,416Land
      use right - non current portion
                    
                    
                    1,776,705
                    
                    
                    
                    1,804,277Deposits
                    
                    
                    4,728,203
                    
                    
                    
                    994,395Goodwill
                    
                    
                    762,018
                    
                    
                    
                    762,018Deferred
      debt issuance costs, net of accumulated amortization of  $114,233 at
      December 31, 2008
                    
                    
                    -
                    
                    
                    
                    274,278Total
      assets
                    
                    $
                    37,373,198
                    
                    
                    $
                    21,105,793
 
 (continued)
 
 4
  Sino
Clean Energy Inc. and Subsidiaries
 Condensed
Consolidated Balance Sheets (continued)
 
 September
      30,
                      
                      
                      December
      31,2009
                      
                      
                      2008(Unaudited)LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIENCY)Current
      liabilitiesConvertible
      notes, current position, net
                      
                      $
                      -
                      
                      
                      $
                      383,490Accounts
      payable and accrued expenses
                      
                      
                      945,747
                      
                      
                      
                      1,004,999Income
      and other taxes payable
                      
                      
                      789,824
                      
                      
                      
                      305,903Due
      to directors
                      
                      
                      70,229
                      
                      
                      
                      465,049Total
      current liabilities
                      
                      
                      1,805,800
                      
                      
                      
                      2,159,441Convertible
      notes, less current position, net (includes $151,233, net amount of
      related party convertible notes)
                      
                      
                      2,921,819
                      
                      
                      
                      -Fair
      value of derivative liabilities
                      
                      
                      44,299,127
                      
                      
                      
                      -Total
      liabilities
                      
                      
                      49,026,746
                      
                      
                      
                      2,159,441Commitments
      and ContingenciesShareholders'
      Equity (Deficiency)Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, none issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $0.001 par value, 300,000,000 shares authorized, 101,261,786 and
      92,181,750 issued and outstanding  as of September 30, 2009 and
      December 31, 2008 respectively
                      
                      
                      101,262
                      
                      
                      
                      92,182Additional
      paid-in capital
                      
                      
                      14,137,202
                      
                      
                      
                      12,696,549Retained
      earnings (accumulated deficit)
                      
                      
                      (28,375,818
                      )
                      
                      
                      3,686,087Statutory
      reserves
                      
                      
                      348,309
                      
                      
                      
                      348,309Accumulated
      other comprehensive income
                      
                      
                      2,135,497
                      
                      
                      
                      2,123,225Total
      shareholders' equity (deficiency)
                      
                      
                      (11,653,548
                      )
                      
                      
                      18,946,352Total
      liabilities and shareholders' equity (deficiency)
                      
                      $
                      37,373,198
                      
                      
                      $
                      21,105,793
 
 See
accompanying notes to condensed consolidated financial statements.
   5
  Sino
Clean Energy, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Operations and Other Comprehensive Income
(Loss)
 (Unaudited)
 
 Three months ended
                      September30,
                    
                    
                    Nine months ended
                      September30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue
                    
                    $
                    10,757,826
                    
                    
                    $
                    3,419,941
                    
                    
                    $
                    26,659,312
                    
                    
                    $
                    9,156,293Cost
      of goods sold
                    
                    
                    (6,812,469
                    )
                    
                    
                    (2,297,227
                    )
                    
                    
                    (17,695,505
                    )
                    
                    
                    (6,227,606
                    )Gross
      profit
                    
                    
                    3,945,357
                    
                    
                    
                    1,122,714
                    
                    
                    
                    8,963,807
                    
                    
                    
                    2,928,687Selling,
      general and administrative expenses
                    
                    
                    888,249
                    
                    
                    
                    208,021
                    
                    
                    
                    1,875,380
                    
                    
                    
                    598,590Income
      from operations
                    
                    
                    3,057,108
                    
                    
                    
                    914,693
                    
                    
                    
                    7,088,427
                    
                    
                    
                    2,330,097Other
      income (expense)Interest
      expense
                    
                    
                    (3,149,499
                    )
                    
                    
                    -
                    
                    
                    
                    (4,231,344
                    )
                    
                    
                    -Expense
      related to escrow shares
                    
                    
                    (1,054,548
                    )
                    
                    
                    -
                    
                    
                    
                    (1,294,881
                    )
                    
                    
                    -Commission
      income
                    
                    
                    131,970
                    
                    
                    
                    80,072
                    
                    
                    
                    323,261
                    
                    
                    
                    224,947Rental
      income, net
                    
                    
                    -
                    
                    
                    
                    230
                    
                    
                    
                    
                    
                    
                    
                    79,843Interest
      income
                    
                    
                    11,708
                    
                    
                    
                    8,026
                    
                    
                    
                    22,979
                    
                    
                    
                    19,537Extinguishment
      of derivative liabilities
                    
                    
                    2,381,333
                    
                    
                    
                    -
                    
                    
                    
                    3,370,593
                    
                    
                    
                    -Change
      in fair value of derivative liabilities
                    
                    
                    (7,035,248)
                    
                    
                    
                    -
                    
                    
                    
                    (8,236,238
                    )
                    
                    
                    -Cost
      of private placement
                    
                    
                    (24,794,842
                    )
                    
                    
                    -
                    
                    
                    
                    (24,794,842)
                    
                    
                    
                    -Sundry
      income
                    
                    
                    -
                    
                    
                    
                    78
                    
                    
                    
                    -
                    
                    
                    
                    26,921Gain
      on disposal of property
                    
                    
                    -
                    
                    
                    
                    95
                    
                    
                    
                    -
                    
                    
                    
                    33,095Government
      grant
                    
                    
                    -
                    
                    
                    
                    141,614
                    
                    
                    
                    -
                    
                    
                    
                    141,614Total
      other income (expense)
                    
                    
                    (33,509,126
                    )
                    
                    
                    230,115
                    
                    
                    
                    (34,840,472
                    )
                    
                    
                    525,957Income
      (loss) before income taxes and non-controlling interest
                    
                    
                    (30,452,018
                    )
                    
                    
                    1,144,808
                    
                    
                    
                    (27,752,045
                    )
                    
                    
                    2,856,054Provision
      for income taxes
                    
                    
                    463,050
                    
                    
                    
                    71
                    
                    
                    
                    1,055,718
                    
                    
                    
                    24,779Net
      income (loss)
                    
                    
                    (30,915,068
                    )
                    
                    
                    1,144,737
                    
                    
                    
                    (28,807,763
                    )
                    
                    
                    2,831,275Net
      Income attributable to non-controlling interest
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (351,149
                    )Net
      Income (loss) attributable to Sino Clean Energy, Inc.
                    
                    
                    (30,915,068
                    )
                    
                    
                    1,144,737
                    
                    
                    
                    (28,807,763
                    )
                    
                    
                    2,480,126Other
      comprehensive incomeForeign
      currency translation adjustment
                    
                    
                    3,578
                    
                    
                    
                    124,319
                    
                    
                    
                    12,932
                    
                    
                    
                    934,996Comprehensive
      income (loss)
                    
                    $
                    (30,911,490
                    )
                    
                    $
                    1,269,056
                    
                    
                    $
                    (28,794,831
                    )
                    
                    $
                    3,415,122Weight
      average number of shares-
      Basic
                    
                    
                    100,419,101
                    
                    
                    
                    92,181,750
                    
                    
                    
                    96,091,295
                    
                    
                    
                    87,181,750-
      Diluted
                    
                    
                    100,419,101
                    
                    
                    
                    92,734,390
                    
                    
                    
                    96,091,295
                    
                    
                    
                    87,365,963(Loss)
      income per common share-
      Basic
                    
                    $
                    (0.31)
                    
                    
                    $
                    0.01
                    
                    
                    $
                    (0.30)
                    
                    
                    $
                    0.03-
      Diluted
                    
                    $
                    (0.31)
                    
                    
                    $
                    0.01
                    
                    
                    $
                    (0.30)
                    
                    
                    $
                    0.03
 
 See
accompanying notes to condensed consolidated financial
statements
  6
  Sino-Clean
Energy, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Changes in Shareholders’ Equity
(Deficiency)
 For the
nine months ended September 30, 2009
 (Unaudited)
 
 Retained
                              
                              
                              AccumulatedAdditional
                              
                              
                              
                              
                              
                              Earnings
                              
                              
                              otherCommon
      stock
                              
                              
                              paid-in
                              
                              
                              Statutory
                              
                              
                              (accumulated
                              
                              
                              comprehensiveShares
                              
                              
                              capital
                              
                              
                              reserves
                              
                              
                              deficit)
                              
                              
                              income
                              
                              
                              TotalBalance,
      December 31, 2008, as previously reported
                              
                              
                              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 relating to reclassification of
      warrants and conversion feature to derivative liability
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,335,650
                              )
                              
                              
                              -
                              
                              
                              
                              (3,254,142
                              )
                              
                              
                              -
                              
                              
                              
                              (4,589,792
                              )Balance,
      January 1, 2009,
                                as
      adjusted
                              
                              
                              92,181,750
                              
                              
                              
                              92,182
                              
                              
                              
                              11,360,899
                              
                              
                              
                              348,309
                              
                              
                              
                              431,945
                              
                              
                              
                              2,123,225
                              
                              
                              
                              14,356,560Fair
      value of shares issued for services
                              
                              
                              2,333,000
                              
                              
                              
                              2,333
                              
                              
                              
                              452,602
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              454,935Common
      stock issued upon conversion of convertible notes and accrued
      interest
                              
                              
                              6,747,036
                              
                              
                              
                              6,747
                              
                              
                              
                              1,028,820
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,035,567Expense
      related to escrow shares
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,294,881
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,294,881Foreign
      currency translation gain
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              12,272
                              
                              
                              
                              12,272Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (28,807,763
                              )
                              
                              
                              -
                              
                              
                              
                              (28,807,763
                              )Balance,
      September 30, 2009
                              
                              
                              101,261,786
                              
                              
                              $
                              101,262
                              
                              
                              $
                              14,137,202
                              
                              
                              $
                              348,309
                              
                              
                              $
                              (28,375,818
                              )
                              
                              $
                              2,135,497
                              
                              
                              $
                              (11,653,548
                              )
 
 See
accompanying notes to condensed consolidated financial
statements.
  7
  Sino
Clean Energy, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows
 (Unaudited)
 
 Ninemonths
      endedSeptember30,2009
                        
                        
                        2008Cash
      flows from operating activities:Net
      income (loss) attributable to Sino Clean Energy, Inc.
                        
                        $
                        (28,807,763
                        )
                        
                        $
                        2,480,126Adjustments
      to reconcile net income to cash provided by operating
      activities:Gain
      attributable to noncontrolling interest
                        
                        
                        -
                        
                        
                        
                        351,149Depreciation
      and amortization
                        
                        
                        1,069,850
                        
                        
                        
                        175,399Amortization
      of land use right
                        
                        
                        29,064
                        
                        
                        
                        28,031Gain
      on disposal of property
                        
                        
                        -
                        
                        
                        
                        (33,095
                        )Amortization
      of deferred debt issuance costs
                        
                        
                        274,278
                        
                        
                        
                        8,399Amortization
      of discount on convertible notes
                        
                        
                        3,873,979
                        
                        
                        
                        35,127Expense
      related to escrow shares
                        
                        
                        1,294,881
                        
                        
                        
                        -Fair
      value of shares issued for services
                        
                        
                        454,935
                        
                        
                        
                        -Cost
      of private placement
                        
                        
                        24,794,842
                        
                        
                        
                        -Change
      in fair value of derivative liabilities
                        
                        
                        8,236,238
                        
                        
                        
                        -Extinguishment
      of derivative liability
                        
                        
                        (3,370,593
                        )
                        
                        
                        -Change
      in operating assets and liabilitiesAccounts
      receivable
                        
                        
                        (1,563,019
                        )
                        
                        
                        (4,923,476
                        )Inventories
                        
                        
                        (435,105
                        )
                        
                        
                        (240,670
                        )Prepaid
      inventories
                        
                        
                        (2,167,975
                        )
                        
                        
                        1,605,350Prepaid
      expenses
                        
                        
                        27,191
                        
                        
                        
                        127,689Refundable
      advance
                        
                        
                        731,861
                        
                        
                        
                        -Government
      grant receivable
                        
                        
                        146,314
                        
                        
                        
                        411,000Other
      receivables
                        
                        
                        (7,812
                        )
                        
                        
                        (14,227
                        )Accounts
      payable and accrued expenses
                        
                        
                        37,982
                        
                        
                        
                        (196,665
                        )Income
      and other taxes payables
                        
                        
                        483,921
                        
                        
                        
                        10,143Assets
      on discontinued operationOther
      receivables
                        
                        
                        -
                        
                        
                        
                        141,795Net
      cash provided by (used in) operating activities
                        
                        
                        5,103,069
                        
                        
                        
                        (33,925
                        )Cash
      flows from investing activities:Deposits
                        
                        
                        (3,733,408
                        )
                        
                        
                        188,332Loans
      receivable
                        
                        
                        (540,365)
                        
                        
                        
                        -Purchase
      of property, plant and equipment
                        
                        
                        (29,767
                        )
                        
                        
                        (2,747,052
                        )Proceeds
      from disposal of property
                        
                        
                        -
                        
                        
                        
                        1,025,437Net
      cash provided by (used in) investing activities
                        
                        
                        (4,303,540
                        )
                        
                        
                        (1,533,283
                        )Cash
      flows from financing activities:Repayment
      of amount due to directors
                        
                        
                        (394,820
                        )
                        
                        
                        (7,427
                        )Proceeds
      from issuance of convertible debentures
                        
                        
                        11,592,000
                        
                        
                        
                        1,148,491Cost
      of private placement paid in cash
                        
                        
                        (1,543,152
                        )
                        
                        
                        -Redemption
      of convertible debenture
                        
                        
                        (400,000
                        )
                        
                        
                        -Obligations
      under capital leases
                        
                        
                        -
                        
                        
                        
                        (27,318
                        )Net
      cash provided by financing activities
                        
                        
                        9,254,028
                        
                        
                        
                        1,113,746
 
 (continued)
  8
  Sino
Clean Energy, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows (continued)
 (Unaudited)
 
 Ninemonths
      endedSeptember30,2009
                    
                    
                    2008Effect
      of foreign currency translation
                    
                    $
                    2,624
                    
                    
                    $
                    155,329Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    10,056,181
                    
                    
                    
                    (298,133
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    3,914,306
                    
                    
                    
                    2,832,132Cash
      and cash equivalents, end of period
                    
                    $
                    13,970,487
                    
                    
                    $
                    2,533,999Supplemental
      noncash investing and financing activitiesInterest
      paid
                    
                    $
                    364,843
                    
                    
                    $
                    -Income
      taxes paid
                    
                    $
                    672,639
                    
                    
                    $
                    -Supplemental
      noncash investment and financing activitiesIssuance
      of shares upon conversion of convertible notes and accrued
      interest
                    
                    $
                    1,035,567
                    
                    
                    $
                    -Allocation
      of derivative liability to note discount
                    
                    $
                    11,592,000
                    
                    
                    $
                    -Issuance
      of shares in exchange of equity interest
                    
                    $
                    
                    
                    
                    $
                    1,500,000Cumulative
      effect of change in accounting principle upon adoption of new accounting
      pronouncement on January 1, 2009, reclassification of warrants and
      conversion feature to derivative liability
                    
                    $
                    4,589,792
                    
                    
                    $
                    -
  See accompanying notes to the
consolidated financial statements.
  9
  Sino
Clean Energy, Inc. and Subsidiaries
 Notes
to Condensed Consolidated Financial Statements
 For the
Three and Nine Months Ended September 30, 2009
 (Unaudited)
 
 1.    ORGANZATION
AND BUSINESS ACTIVITIES
 
 Sino
Clean Energy, Inc. (“Sino Clean” or 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 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’s fiscal
year end is December 31.
 
 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 Shaanxi Suo’ang New Energy Enterprise Co., Ltd. (“Suo’ang New Energy”), a
PRC company that was originally 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 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 a wholly-owned subsidiary of
the Company. On
September 27, 2009, the Tongchuan Bureau of Commerce approved the transfer of
all of Suo’ang New Energy’s equity interests to Tongchuan Suoke Clean Energy
Co., Ltd. (“Suoke New Energy”), a PRC limited liability company wholly-owned by
Wiscon Holdings Limited (“Wiscon”), a Hong Kong company wholly-owned by
Hangson.  Registration of the approval with the Tongchuan municipal
government, which is necessary before Suo’ang New Energy can be deemed Suoke New
Energy’s wholly-owned subsidiary under applicable PRC law, is still
pending.
 
 The
Company controls Suo’ang BST through a series of contractual arrangements
originally between Suo’ang BST and Hangson.   On June 30, 2009, the
Company entered into a series of agreements transferring all of the rights and
obligations of Hangson under the contractual arrangements to Suoke Clean
Energy.  As these contractual arrangements obligates Suoke Clean
Energy to absorb a majority of the risk of loss from the activities of Suo’ang
BST and enables Suoke Clean Energy to receive a majority of its expected
residual returns, the Company accounts for Suo’ang BST as a variable interest
entity (“VIE”) under authoritative guidance of the Financial Accounting
Standards Board (“FASB”) on consolidation of variable interest
entities.   Accordingly, the Company consolidates the results,
assets and liabilities of Suo’ang BST.
 
 Wiscon
was incorporated on September 4, 2006, and Hangson acquired all of its issued
and outstanding equity interest on June 30, 2009. Suoke Clean Energy was
established by Wiscon on June 25, 2009.
 
 Hereinafter,
Sino Clean, Hangson, Wiscon, Suoke Clean Energy, Suo’ang BST and Suo’ang New
Energy are sometimes collectively referred to as the “Company.”
 
 2.    SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
 
 Change in accounting
principle
 
 On
January 1, 2009, the Company adopted authoritative guidance issued by the FASB
which affects the accounting for warrants and many convertible
instruments.  The Company determined the warrants and convertible debt
issued in 2008 and 2009 contained re-set provisions that preclude them from
being indexed to the Company’s own stock.  As a result, the warrants
and conversion feature previously classified in equity were reclassified to
derivative liabilities (see Note 6).
  Basis of presentation and
consolidation
  The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the United States Securities and Exchange Commission
(“SEC”). Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company’s 2008 Annual Report on Form 10-K/A 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.
  10
 
 The
consolidated financial statements include the financial statements of the
Company, its wholly owned subsidiaries Hangson, Wiscon, Suoke Clean
Energy and Suo’ang New Energy, and its VIE Suo’ang BST.  Intercompany
accounts and transactions have been eliminated in consolidation.
 
 Use of
estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.
 
 Revenue
recognition
 
 Revenues
of the Company are from sales of CWM.
 
 Sales are
recognized when the following four revenue criteria are met: persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectibility is reasonably assured.  Revenues are
presented net of value added tax (“VAT”). In our revenue arrangements, physical
delivery is the point in time when customer acceptance occurs since title and
risk of loss are transferred to the customer.  No return allowance is
made as products are normally not returnable upon acceptance by the
customers.
 
 Fair value of financial
instruments
 
 Effective
January 1, 2008, fair value measurements are determined by the Company's
adoption of authoritative guidance issued by the FASB, with the exception of the
application of the statement to non-recurring, non-financial assets and
liabilities as permitted. The adoption of the authoritative guidance did not
have a material impact on the Company's fair value measurements. Fair value is
defined in the authoritative guidance as the price that would be received to
sell an asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date. A fair value hierarchy was
established, which prioritizes the inputs used in measuring fair value into
three broad levels as follows:
 
 Level 1—Quoted
prices in active markets for identical assets or liabilities.
  Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly
or indirectly.
  Level 3—Unobservable
inputs based on the Company's assumptions.
 
 The
Company is required to use 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 September 30, 2009 (unaudited):
 
 Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    TotalFair
      value of warrants and conversion feature derivative
    liability
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    44,299,127
                    
                    
                    $
                    44,299,127-
                    
                    
                    
                    -
                    
                    
                    $
                    44,299,127
                    
                    
                    $
                    44,299,127
  See Notes
5 and 6 for more information on these financial instruments.
  11
 
 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.
 
 Stock based
compensation
 
 The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs.  Stock-based compensation is measured at the grant date, based on
the fair value of the award, and is recognized as expense over the requisite
service period.  Options vest and expire according to terms established at
the grant date.
 
 Income(loss)per common
share
 
 Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. The diluted earnings per share calculation give effect to all
potentially dilutive common shares outstanding during the period using the
treasury stock method for warrants and options and the if-converted method for
convertible debentures.
 
 As of
September 30, 2009, common stock equivalents were composed of options
convertible into 100,000 shares of the Company's common stock, warrants
convertible into 44,037,433 shares of the Company's common stock, and debentures
convertible into 61,010,526 shares of the Company’s common stock.  For
the three and nine months ended September 30, 2009, the conversion of
the options, debentures, and warrants has been excluded from the
calculation of dilutive earnings per share, as the effects of such conversion
would be anti-dilutive. As of
September 30, 2008, common stock equivalents were composed of warrants
convertible into 9,261,434 shares of the Company's common stock and debentures
convertible into 8,904,333 shares of the Company's common
stock.
 
 The
following is a reconciliation of the numerator and denominator used in the
calculation of basic and diluted earnings per share.
 
 Three months ended
                      September30
                    
                    
                    Ninemonths
      ended
                      September302009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008NumeratorNet
      income (loss)
                    
                    $
                    (30,915,068
                    )
                    
                    $
                    1,144,737
                    
                    
                    $
                    (28,807,763
                    )
                    
                    $
                    2,480,126DenominatorWeighted
      average shares outstanding-basic
                    
                    
                    100,419,101
                    
                    
                    
                    92,181,750
                    
                    
                    
                    96,091,295
                    
                    
                    
                    87,181,750Effect
      of dilutive instruments:Warrants
      and options
                    
                    
                    -
                    
                    
                    
                    552,640
                    
                    
                    
                    -
                    
                    
                    
                    184,213Weighted
      average shares outstanding-diluted
                    
                    
                    100,419,101
                    
                    
                    
                    92,734,390
                    
                    
                    
                    96,091,295
                    
                    
                    
                    87,365,963
 
 Foreign currency
translation
 
 The
accompanying 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 of the period.
  September30,
                        2009
                      
                      
                      December 31,
                        2008
                      
                      
                      September30,
                        2008Period
      end RMB : US$ exchange rate
                      
                      
                      6.8290
                      
                      
                      
                      6.8346
                      
                      
                      
                      6.8183Average
      period RMB : US$ exchange rate
                      
                      
                      6.8329
                      
                      
                      
                      7.0671
                      
                      
                      
                      7.0615
  12
  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.
 
 Reclassifications
 
 In
presenting the Company’s consolidated balance sheet at December 31, 2008, and
statement of cash flows for the nine months ended September 30, 2008, the
Company presented $994,395 of prepayments and other deposits as current assets
and their cash flows of $188,332 as operating cash flows.  In
presenting the Company’s consolidated balance sheet at September 30, 2009, and
statement of cash flows for the nine month ended September 30, 2009, the Company
has reclassified the prepayments and other deposits as long term assets and
their cash flows as investing cash flows.
 
 In
presenting the Company’s consolidated balance sheet at December 31, 2008, the
Company presented $731,861 refundable advance receivable as a prepayment
and other deposit.  In presenting the Company’s consolidated balance
sheet at September 30, 2009, the Company has reclassified the balance of
$731,861 to refundable advance.
 
 Recently issued
accounting
pronouncements
 
 In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles
effective for interim and annual reporting periods ending after September 15,
2009.  The FASB accounting standards codification (“ASC,
“Codification”) has become the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in accordance with GAAP. All existing
accounting standard documents are superseded by the Codification and any
accounting literature not included in the Codification will not be
authoritative. However, rules and interpretive releases of the SEC issued under
the authority of federal securities laws will continue to be sources of
authoritative GAAP for SEC registrants.   Beginning with the
quarter ending September 30, 2009, all references made by the Company to GAAP in
its condensed consolidated financial statements use the Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore,
it does not have an impact on our financial position, results of operations and
cash flows.
 
 On July
1, 2009, the Company adopted authoritative guidance issued by the FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting (previously referred to as the purchase
method of accounting) be used for all business combinations, but requires a
number of changes, including changes in the way assets and liabilities are
recognized and measured as a result of business combinations. It also requires
the capitalization of in-process research and development at fair value and
requires the expensing of acquisition-related costs as incurred.  We
will apply this guidance to business combinations completed after July 1, 2009.
 Adoption of the new guidance did not have a material impact on our
financial statements
 
 On July
1, 2009, the Company adopted authoritative guidance issued by the FASB on
accounting and reporting for non-controlling interests. Non-controlling
interests are to be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control are to be accounted for as equity transactions. In addition,
net income attributable to a non-controlling interest is to be included in net
income and, upon a loss of control, the interest sold, as well as any interest
retained, is to be recorded at fair value with any gain or loss recognized in
net income. Adoption of the new guidance did not have a material impact on our
financial statements.
 
 On
January 1, 2009, the Company adopted authoritative guidance issued by the FASB
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.  This pronouncement requires enhanced disclosures
concerning a company’s treatment of costs incurred to renew or extend the term
of a recognized intangible asset.   Although this 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
June 2009, the FASB made an update to consolidation of variable
interest entities.  Among other things, the update replaces the calculation
for determining which entities, if any, have a controlling financial interest in
a variable interest entity (VIE) from a quantitative based risks and rewards
calculation, to a qualitative approach that focuses on identifying which
entities have the power to direct the activities that most significantly impact
the VIE’s economic performance and the obligation to absorb losses of the VIE or
the right to receive benefits from the VIE. The update also requires ongoing
assessments as to whether an entity is the primary beneficiary of a VIE
(previously, reconsideration was only required upon the occurrence of specific
events), modifies the presentation of consolidated VIE assets and liabilities,
and requires additional disclosures about a company’s involvement in VIEs. This
update will be effective for fiscal years beginning after November 15,
2009. The Company does not currently believe that the adoption of this update
will have any effect on its consolidated financial position and results of
operations.
  13
 
 In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition.   We believe the adoption of this new guidance will
not have a material impact on our financial statements.
 
 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:
 
 September
      30,
                      
                      
                      December
      31,2009
                        (unaudited)
                      
                      
                      2008Raw
      materials
                      
                      $
                      270,641
                      
                      
                      $
                      18,290Packing
      materials
                      
                      
                      2,483
                      
                      
                      
                      2,193Finished
      goods
                      
                      
                      207,049
                      
                      
                      
                      24,585$
                      480,173
                      
                      
                      $
                      45,068
 
 Prepaid
Inventories
 
 The
Company's VIE, Suo’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.  At September 30, 2009 and December 31, 2008, prepaid
inventories totaled $4,164,559 and $1,996,584, respectively.
  4.    LOANS
RECEIVABLE
  Loans
receivable of $543,048 at September 30, 2009 includes:
 
 On July
2, 2009, the Company made a loan for $190,365.  The loan was
unsecured, bore interest at 12% per annum, and was due November 1,
2009.  The loan was repaid on October 12, 2009.
 
 On
September 8, 2009, the Company made a loan for $350,000.  The loan was
unsecured, bore interest at 12% per annum, and was due November 8,
2009.  Accrued interest at September 30, 2009 is
$2,683.  This loan was repaid on November 6, 2009.
 
 5.    CONVERTIBLE
NOTES
 
 Convertible
notes consist of the following at:
  Current
liabilities:
 September
      30,
                      
                      
                      December
      31,2009
                        (unaudited)
                      
                      
                      200818%
      convertible debentures
                      
                      $
                      -
                      
                      
                      $
                      1,335,65010%
      convertible notes
                      
                      
                      11,592,000
                      
                      
                      
                      -Valuation
      discount
                      
                      
                      (8,670,181
                      )
                      
                      
                      (952,160
                      )Convertible
      notes, net
                      
                      
                      2,921,819
                      
                      
                      
                      383,490Less
      current portion
                      
                      
                      -
                      
                      
                      
                      (383,490)Long
      term portion
                      
                      $
                      2,921,819
                      
                      
                      $
                      -
  14
 
 18%convertibledebentures
 
 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 to six investors. The Debentures bore interest at
18% per annum, matured in one year, were unsecured, and were personally
guaranteed by the Company’s Chief Executive Officer. The holders of the
Debentures had 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.
 
 During
the second and third quarters of 2009, five investors converted $935,650
principal balance of Debentures at the stated conversion price of $0.15 per
share plus accrued interest of $76,405 into 6,747,036 shares of the Company’s
common stock. The Company paid off one investor with a $400,000 principal
balance which was not converted.  The balance of the related
derivative for the conversion feature and warrants was recorded as
extinguishment of derivative.
 
 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 for 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.  The
warrants vested in full upon the conversion or payment of the Debentures in the
second and third quarters of 2009.
 
 The
8,904,334 Warrants were valued at $2,418,685 using the Black-Scholes option
valuation model with the following assumptions: risk-free interest rate of 0.62%
to 1.21%; dividend yield of 0%; volatility factors of 94.67% to 99.91%; and an
expected life of three years (statutory term). The Company also determined that
the Debentures contained a conversion feature of $1,667,752.  The
value of the Debentures and conversion option are considered as debt
discount.  Total recorded debt discount cannot be greater than the
face amount of the notes issued, and accordingly, the Company recorded a
discount of $1,335,650 which was being amortized over the life of the Debentures
on the effective interest method.  For the nine months periods ended
September 30, 2009, $753,025 of discount amortization is included in
interest expense. The balance of the unamortized debt discount of
$199,135 at the date the related Notes were converted or paid off
was recorded as additional interest expense. At September 30, 2009, the
unamortized balance of the discount is zero. At September 30, 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 $82,287 using the Black-Scholes option valuation model with the following
assumptions: risk-free interest rate of 0.62% to 1.21%; dividend yield of 0%;
volatility factors of 94.67% to 99.91%; 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 were recorded by the Company as debt issuance costs. These costs
were capitalized and were being amortized over the term of the
Debentures.  For the three and  nine month periods ended
September 30, 2009, amortization charged to interest expense was $57,176 and
$274,278, respectively, and the unamortized balance at September 30, 2009 was
zero.
 
 Escrowed
shares related to the Debentures
 
 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 does 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.
  15
 
 The
Company considered authoritative guidance 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 $1,152,137 using the
Black-Scholes option valuation model with the following assumptions: risk-free
interest rate of 0.62% to 1.21%; dividend yield of 0%; volatility factors of
94.67% to 99.91%; and an expected life of 3 months (for 2008) and 15 months (for
2009).  For the three and nine months ended September 30, 2009, the
Company recognized $240,333 and $480,666 of expense related to the escrowed
shares.  At July 1, 2009, the 4,452,168 shares were released from
escrow when the Debentures were converted or paid off, and the total value of
the escrowed shares had been fully amortized.
 
 10%seniorsecuredconvertiblenotes
 
 On July
1, 2009 and July 20, 2009, the Company issued an aggregate of $11,592,000 of 10%
senior secured convertible notes (the “Notes”) and issued warrants (the
“Warrants”) to purchase up to 30,505,263 shares of common stock of the Company
in a private placement. The Notes bear interest at 10% per annum, mature in
three year, are unsecured, and are personally guaranteed by the Company’s Chief
Executive Officer and certain shareholders. The holders of the Notes have the
right at any time to convert all or part of the outstanding principal amount of
the Notes and any accrued and unpaid interest into common shares of the Company
at the then effective conversion price, initially set at $0.19 per share (the
“Conversion Price”).  The Company’s Chief Executive Officer purchased
$350,000 of the Notes issued on July 1, 2009, and $250,000 of the Notes issued
on July 20, 2009.
 
 The
initial conversion price will automatically adjust to 75% of the Conversion
Price on January 1, 2010 if the Company does not achieve certain financial
performance targets for the fiscal year ended December 31, 2009, and provided
further that the Conversion Price will automatically adjust to 80% of the
Conversion Price on January 1, 2011 if the Company does not achieve certain
financial performance targets for the fiscal year ended December 31,
2010.  Also, the Conversion Price is subject to a full
ratchet anti-dilution adjustment in the event that the Company issues additional
equity, equity linked securities or securities convertible into equity, at a
purchase price less than the then applicable Conversion Price or the Exercise
Price.
 
 The Notes
bear interest at 10% per year and mature on June 30, 2012 and July 16, 2012 (the
“Maturity Date”). Interest is payable quarterly in cash on the first day of
January, April, July and October of each year and on the Maturity Date,
commencing October 1, 2009.
 
 The
Warrants entitle the investors to purchase up to 30,505,263 shares of common
stock (the “Warrant Shares”) in the aggregate. The Warrants have an initial
exercise price of $0.285 per share, subject to a full ratchet anti-dilution
adjustment in the event that the Company issues additional equity, equity linked
securities or securities convertible into equity, at a purchase price less than
the then applicable Conversion Price or the Exercise Price.
 
 Effective
January 1, 2009, the Company adopted authoritative guidance issued by the
FASB  that indicates any adjustment to the fixed amount (either
conversion price or number of shares) of the instrument (or embedded feature),
regardless of the probability or whether or not within the issuers’ control,
means the instrument is not indexed to the issuers own
stock.  Accordingly, the embedded conversion feature of the notes and
the conversion feature of the warrants resulted in a derivative liability being
recorded by the Company when the Notes and Warrants were
issued.    The Company determined the conversion feature of
the Notes was $24,987,313 based on a binominal valuation.  The
Company determined the conversion feature of the 30,505,263 Warrants was
$8,479,263 using the Black-Scholes option valuation model with the following
assumptions: risk-free interest rate of 1.5%; dividend yield of 0%; volatility
factor of 149%; and an expected life of three years (statutory term), resulting
in total derivative at issuance of $33,466,576.  $11,592,000 of this
amount was allocated to debt discount (i.e. up to face amount of the Notes) and
will be amortized over the term of the Notes.   For the three and
nine months period ended September 30, 2009, $2,921,819 of discount amortization
is included in interest expense.  At September 30, 2009, the
unamortized balance of the discount is $8,670,181.  The balance of the
derivative of $21,874,576 represents the excess of the fair value of the
derivatives over cash received.
 
 The
Company incurred $1,543,152 of costs directly associated with the issuance
of the Notes and also issued 4,270,736 warrants valued at $1,377,114 as finder’s
fees exercisable for three years at $0.228 per share, which vested immediately
on the issuance date.  The 4,270,736 warrants were valued
using the Black-Scholes option valuation model with the following assumptions:
risk-free interest rate of 1.5%; dividend yield of 0%; volatility factor of
149%; and an expected life of three years (statutory term).  The costs
directly associated with the issuance of the Notes of $1,543,152, plus the fair
value of the warrants issued for finder’s fee of $1,377,114, plus the
$21,874,576 excess fair value of derivative over cash received, total
$24,794,842 and are recorded as cost of private placement in the accompanying
statement of operations..
  16
 
 Escrow
shares related to the Notes
 
 In
connection with the issuance of the Notes and Warrants, the Company’s Chief
Executive Officer and a director of the Company (collectively the
“Pledgors”) entered into a pledge agreement pursuant to which they transferred
28,744,299 shares of the Company’s common stock owned by them into an escrow
account for the benefit of the investors as a guarantee against an event of
default (as defined in the Notes) by the Company.  Pursuant to the
pledge agreement, the Pledgors agreed to transfer all the escrowed shares
to the holders of the Notes if the Company defaults on the Notes.  The
escrowed shares revert back to the Pledgors at the expiration of the
Notes.
 
 The
Company considered authoritative guidance in determining whether the pledge
agreement represents a compensatory arrangement that is, in substance, a capital
contribution of common shares by the Chief Executive Officer and the director.
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 each of the Chief Executive Officer and the director.  As
such, the Company valued the escrowed shares as if the Chief Executive Officer
and the director had provided the Company an option to acquire these shares. The
aggregate value of the 28,744,299 shares was valued at $10,776,405 using the
Black-Scholes option valuation model with the following assumptions: risk-free
interest rate of 1.5%; dividend yield of 0%; volatility factor of 147%; and an
expected life of there years.  For the three months ended September
30, 2009, the Company recognized $814,215 of expense related to these escrow
shares.  As of September 30, 2009, the unamortized balance of escrow
shares is $9,962,190 and will be expensed as follows:  $898,035 for
the three months ended December 31, 2009, $3,592,135 and $3,592,135 for the
years ended December 31, 2010 and 2011, respectively, and $1,879,885 for the
year ended December 31, 2012.
 
 6.    DERIVATIVE
LIABILITY
  In June
2008, the FASB issued authoritative guidance on determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock.
 Under the authoritative guidance, effective January 1, 2009, 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 holders of
the Debentures from the potential dilution associated with future financings. In
accordance with the FASB authoritative guidance, the conversion feature of the
Notes was separated from the host contract (i.e., the Notes) and recognized as a
derivative instrument.  Both the conversion feature of the
Notes and the related warrants have been characterized as derivative
liabilities to 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:
 September30,
                        2009
                      
                      
                      July20,
                        2009
                      
                      
                      July1,
                        2009Conversion
      feature:Risk-free
      interest rate
                      
                      
                      1.5
                      %
                      
                      
                      1.5
                      %
                      
                      
                      1.5
                      %Expected
      volatility
                      
                      
                      148.47
                      %
                      
                      
                      148.69
                      %
                      
                      
                      149.64
                      %Expected
      life (in years)
                      
                      2.75
      years
                      
                      
                      2.99
      year
                      
                      
                      3.0
      yearExpected
      dividend yield
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0Warrants:Risk-free
      interest rate
                      
                      
                      1.32
                      %
                      
                      
                      1.52
                      %
                      
                      
                      1.53
                      %Expected
      volatility
                      
                      
                      148.47
                      %
                      
                      
                      148.69
                      %
                      
                      
                      149.64
                      %Expected
      life (in years)
                      
                      2.81
      years
                      
                      
                      3.0
      years
                      
                      
                      3.0
      yearsExpected
      dividend yield
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      
                      0Fair
      Value:Conversion
      feature
                      
                      $
                      28,935,118
                      
                      
                      $
                      14,270,438
                      
                      
                      $
                      10,716,875Warrants
                      
                      
                      15,364,009
                      
                      
                      
                      5,091,320
                      
                      
                      
                      3,387,943$
                      44,299,127
                      
                      
                      $
                      19,361,758
                      
                      
                      $
                      14,104,818
 
 17
  December 31,
                        2008
                      
                      
                      September 16,
                        2008 and
                        September 19,
                        2008Conversion
      feature:Risk-free
      interest rate
                      
                      
                      0.33
                      %
                      
                      
                      1.61
                      %Expected
      volatility
                      
                      
                      152.26
                      %
                      
                      
                      91.68
                      %Expected
      life (in years)
                      
                      0.7
      year
                      
                      
                      1.0
      yearExpected
      dividend yield
                      
                      
                      0
                      
                      
                      
                      0Warrants:Risk-free
      interest rate
                      
                      
                      0.33
                      %
                      
                      
                      2.21
                      %Expected
      volatility
                      
                      
                      152.26
                      %
                      
                      
                      91.68
                      %Expected
      life (in years)
                      
                      2.7
      years
                      
                      
                      3.0
      yearsExpected
      dividend yield
                      
                      
                      0
                      
                      
                      
                      0Fair
      Value:Conversion
      feature
                      
                      $
                      2,899,790
                      
                      
                      $
                      2,878,739Warrants
                      
                      $
                      1,690,002
                      
                      
                      $
                      1,501,555$
                      4,589,792
                      
                      
                      $
                      4,380,294
 
 The
risk-free interest rate was based on rates established by the Federal Reserve
Bank. 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.
 
 The FASB
authoritative guidance 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 Debentures and the
related warrants at January 1, 2009 is as follows:
 
 Additional
                            Paid-in Capital
                          
                          
                          Retained
                            Earnings
                          
                          
                          Derivative
                            LiabilityDerivative
      Instrument:Conversion
      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.
 
 As of
September 30, 2009, the derivative liability was $44,299,127.  For
the three and nine months ended September 30, 2009, the Company recorded a
change in fair value of the derivative liabilities of $7,035,248 and $8,236,238,
respectively.  At September 30, 2008, no derivative instruments were
recorded.
 
 When the
Company adopted the FASB authoritative guidance, the fair value of the warrants
and the conversion feature of the notes were bifurcated from the convertible
debt contracts and accounted for as a liability, and the gain on
extinguishment of the bifurcated derivative is shown separately from the
conversion of the debt.
  7.    COMMON
STOCK
 
 During
the nine months ended September 30, 2009, the Company issued 2,333,000 shares of
common stock in exchange for investor relations consulting services valued at
$454,935, based on the closing price of the Company’s stock on the date of
issuance.
  18
 
 On July
28, 2009, the Board of Directors approved an amendment of the articles of
incorporation to increase the number of authorized shares of the Company’s
common stock from 200,000,000 to 300,000,000 shares. The amendment was approved
by the Company's shareholders at the annual meeting of shareholders
held on September 21, 2009.
 
 On July
1, 2009, there were $935,650 of Debentures outstanding, of which $535,650 and
accrued interests were converted into 4,080,371 shares of the Company’s common
stock at the stated conversion price of $0.15 per share.
 
 8.    WARRANTS
AND OPTIONS
 
 At
September 30, 2009 and December 31, 2008, 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
                  
                  
                  34,775,999
                  
                  
                  $
                  0.285Warrants
      and options expired
                  
                  
                  -
                  
                  
                  
                  -Warrants
      and options outstanding at September 30, 2009
                  
                  
                  44,137,433
                  
                  
                  $
                  0.25
 
 The
following table summarizes information about warrants and options outstanding at
September 30, 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
                          
                          
                          9,239,798
                          
                          
                          
                          1.96
                          
                          
                          
                          9,239,798
                          
                          
                          $
                          0.15$
                          0.228
                          
                          
                          4,270,736
                          
                          
                          
                          3.00
                          
                          
                          
                          4,270,736
                          
                          
                          $
                          0.228$
                          0.24
                          
                          
                          121,636
                          
                          
                          
                          1.10
                          
                          
                          
                          121,636
                          
                          
                          $
                          0.24$
                          0.285
                          
                          
                          14,250,000
                          
                          
                          
                          2.75
                          
                          
                          
                          14,250,000
                          
                          
                          $
                          0.285$
                          0.285
                          
                          
                          16,255,263
                          
                          
                          
                          2.81
                          
                          
                          
                          16,255,263
                          
                          
                          $
                          0.285$
                          0.25
                          
                          
                          44,137,433
                          
                          
                          
                          
                          
                          
                          
                          44,137,433
                          
                          
                          $
                          0.25
 
 At
September 30, 2009, the aggregate intrinsic value of the warrants and options
outstanding and exercisable was $8,768,738.
 
 9.    RELATED
PARTY TRANSACTIONS
 
 Amounts
due to related parties at September 30, 2009 and December 31, 2008 consisted of
the following:
  September30,
                      2009
                    
                    
                    December 31,
                      2008Due
      to directors:Mr.
      Peng Zhou
                    
                    $
                    -
                    
                    
                    $
                    395,049Mr.
      Baowen Ren
                    
                    
                    70,229
                    
                    
                    
                    70,000$
                    70,229
                    
                    
                    $
                    465,049
  Amounts
due to directors are non-interest bearing, unsecured, and due on
demand.
 
 10.  SUBSEQUENT
EVENTS
 
 The
Company has evaluated subsequent events occurring between the end of our fiscal
quarter on September 30, 2009 and November 10, 2009, which is the date the
accompanying financial statements were issued.
  On
October 28, 2009, the Company commenced operations at its second CWM production
facility located in Shenyang, the capital of Liaoning Province in northeastern
China.  The Shenyang facility has annual CWM output capacity of
approximately 300,000 metric tons, which expands the Company’s total annual CWM
output capacity to approximately 650,000 metric tons.
  19
  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 is engaged in
researching, developing, producing and selling coal water mixture (“CWM”), a
fuel substitute for oil, gas and coal in the People’s Republic of China (“PRC”
or “China”).  All of the Company’s business operations are conducted
through Shaanxi Suo’ang Biological Science & Technology Co., Ltd. (“Suo’ang
BST”), a PRC company that the Company controls through contractual arrangements,
and Shaanxi Suo’ang New Energy Enterprise Co., Ltd. (“Suo’ang New Energy”), a
PRC company.
 
 The
contractual arrangements with Suo’ang BST enable us to control and receive the
profits of Suo’ang BST, and were originally between Suo’ang BST and Hangson. On
June 30, 2009, all of the rights and obligations of Hangson under the
contractual arrangements were transferred to Suoke Clean Energy. Other than our
interests in the contractual arrangements with Suo’ang BST, neither we nor our
subsidiaries have any equity interests in Suo’ang BST.
 
 In July
2009, we sold approximately $11.6 million in aggregate principal amount of 10%
senior secured convertible notes and warrants to purchase up to approximately
30.5 million shares of common stock to several institutional and/or accredited
investors, in a private placement pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended (the “July 2009 Financing”). We had two
closings, on July 1 and July 20.
 
 On
September 27, 2009, we received approval from the Tongchuan Bureau of Commerce
for the transfer of all of Suo’ang New Energy’s equity interests to Tongchuan
Suoke Clean Energy Co., Ltd. (“Suoke New Energy”), a PRC limited liability
company wholly-owned by Wiscon Holdings Limited (“Wiscon”), a Hong Kong company
wholly-owned by Hangson Limited, the Company's wholly-owned subsidiary in the
British Virgin Islands.  With the approval, Suo’ang New Energy has
become a “domestic PRC enterprise wholly-owned by a wholly-foreign owned
enterprise.”  However, registration of the approval with the Tongchuan
municipal government is necessary before Suo’ang New Energy can be deemed Suoke
New Energy’s wholly-owned subsidiary under applicable PRC law, which
registration is pending but which we anticipate to be completed by the end of
November 2009.
 
 On
September 28, 2009, we filed a Certificate of Amendment to Articles of
Incorporation (the “Certificate”) with the Nevada Secretary of State to increase
the number of our authorized shares of common stock from 200,000,000 to
300,000,000 shares. The Certificate was approved by our board of directors on
July 28, 2009, and by our shareholders at our annual meeting of shareholders on
September 21, 2009.
 
 CWM is
sold and distributed directly to our customers. We have a CWM plant located in
the city of Tongchuan, north of Xi’an, the ancient capital of China and the
provincial capital of Shaanxi Province. The Tongchuan plant presently has an
annual production capacity of 350,000 metric tons (“tonnes”), and supply to our
customers in Shaanxi Province. On October 28, 2009, we commenced operations at
our new CWM production plant located in Shenyang, the capital of Liaoning
Province in northeastern China.  The Shenyang plant has annual output
capacity of 300,000 tonnes, increasing our total annual CWM production capacity
to 650,000 tonnes.  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.
 20
 
 Significant
Factors Affecting Our Results of Operations
 
 The most
significant factors that affect our financial condition and results of
operations are:
 
 ·
              economic
      conditions in China;
 ·
              market
      price for crude oil and coal;
 ·
              supply
      and costs of principal raw
materials;
 ·
              demand
      for, and market acceptance of, CWM;
and
 ·
              production
      capacity
 
 Economic conditions in
China
 
 We
operate our manufacturing facilities in China and derive all of our revenues
from sales to customers in China.  Economic conditions in China,
therefore, and the specific geographical markets where we operate affect
virtually all aspects of our operations, including the demand for our products,
the availability and prices of our raw materials and our other
expenses.  While China is expected to experience continued growth in
all areas of investment and consumption, even in the face of a global economic
recession, we cannot speak to how long such growth will continue, if at
all.
 
 Supply and costs of coal as
the principal raw material
 
 Our
ability to manage our costs depends significantly on our ability to secure
affordable and steady supplies of coal, our primary raw materials.  We
currently procure coal from 5 suppliers in Tongchuan and Shenyang, two coal
producing regions in China. While we have historically been able to secure a
sufficient supply of coal, we are subject to fluctuating market
prices.  Between 2008 and September 30, 2009, for example, we
experienced an increase in the average cost per tonne of coal of 6%, from RMB496
to RMB527. Our operating costs may increase significantly if the price of our
raw materials increases due to changes in consumption patterns or as a result of
price fluctuations in the local coal market, which may be caused by numerous
economic and regulatory factors.  To the extent that we pass on the
material costs increase to the customers, our revenue may also increase
significantly as the coal price arises in the PRC market.
 
 Market price for coal and
crude oil
 
 We price
our CWM based on the market price for coal for two reasons: (1) coal accounts
for over 88% of our production costs, and we are able to pass on majority of the
material cost increases to the customers; (2) past experiences
indicate that we are able to sell CWM at a slight discount to local retail coal
prices. In addition, CWM is a replacement fuel for oil and gas, and thus our
business activities are affected by the price of, and demand and supply in crude
oil. Changes in global prices of crude oil, any interruption in the supply of
crude oil or any governmental regulation of the price of oil may affect our
ability to convince our customers to incur the capital expenditure of acquiring
CWM burning equipment.  During the recent years, crude oil prices have
fluctuated significantly.
 
 The
pricing of refined oil products is heavily regulated by the PRC
government.  The government occasionally publishes the price
adjustments to reflect the international crude oil price
movement.  Any material change in these guidance prices, or delay in
adjusting guidance prices despite any rapid increase in the international crude
oil price, may affect the demand and the selling prices for our CWM products,
which in turn may adversely affect our financial condition and results of
operations.
 
 Demand for, and market
awareness of, CWM
 
 China’s
CWM industry remains in an early stage. Our three principal groups of customers
are industrial, government and residential users.  These users adopt
CWM as substitute for coal or refined oil being burned as fuel for their
furnaces or boilers.  Current PRC law and government policies promote
the development and utilization of clean energy, as well as the improved
utilization of coal. We believe that demand for our CWM
products should increase over time. The average selling price of CWM
increased by 16% from RMB 620 to RMB 720 per tonne in the past 2
years.
 
 Production
capacity
 
 In order
to capture the market opportunity for our products, we have expanded, and plan
to continue to expand, our production capacity. Increased capacity has had, and
could continue to have, a significant effect on our results of operations, by
allowing us to produce and sell more CWM to generate higher revenues. Our annual
production capacity increased from 100,000 tonnes in 2007 to 350,000 tonnes in
March 2009 to 650,000 tonnes as at November 11, 2009.  We sold 31,000,
137,850, and 249,150 tonnes of CWM in 2007, 2008 and the nine months ended 30
September 2009, respectively.
  21
 
 Critical
Accounting Policies and Estimates
 
 Use of
Estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.
 
 Revenue
Recognition
 
 Sales are
recognized in when the following four revenue criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the selling price is
fixed or determinable, and collectibility is reasonably
assured.  Revenues are presented net of value added tax (“VAT”). In
our revenue arrangements, physical delivery is the point in time when customer
acceptance occurs since title and risk of loss are transferred to the
customer.  No return allowance is made as products are normally not
returnable upon acceptance by the customers.
 
 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.
 
 Stock
based Compensation
 
 The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs. Stock-based compensation is measured at the grant date, based on the fair
value of the award, and is recognized as expense over the requisite service
period. Options vest and expire according to terms established at the grant
date.
 
 Recently
issued accounting pronouncements
 
 In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles
effective for interim and annual reporting periods ending after September 15,
2009.   The FASB accounting standards codification (“ASC,
“Codification”) has become the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in accordance with GAAP. All existing
accounting standard documents are superseded by the Codification and any
accounting literature not included in the Codification will not be
authoritative. However, rules and interpretive releases of the SEC issued under
the authority of federal securities laws will continue to be sources of
authoritative GAAP for SEC registrants.   Beginning with the
quarter ending September 30, 2009, all references made by the Company to GAAP in
its condensed consolidated financial statements use the Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore,
it does not have an impact on our financial position, results of operations and
cash flows.
 
 On July
1, 2009, the Company adopted authoritative guidance issued by the FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting (previously referred to as the purchase
method of accounting) be used for all business combinations, but requires a
number of changes, including changes in the way assets and liabilities are
recognized and measured as a result of business combinations. It also requires
the capitalization of in-process research and development at fair value and
requires the expensing of acquisition-related costs as
incurred.  We will apply this guidance to business combinations
completed after July 1, 2009.  Adoption of the new guidance did not have a
material impact on our financial statements
 
 On July
1, 2009, the Company adopted authoritative guidance issued by the FASB on
accounting and reporting for non-controlling interests. Non-controlling
interests are to be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control are to be accounted for as equity transactions. In addition,
net income attributable to a non-controlling interest is to be included in net
income and, upon a loss of control, the interest sold, as well as any interest
retained, is to be recorded at fair value with any gain or loss recognized in
net income. Adoption of the new guidance did not have a material impact on our
financial statements.
  22
 
 On
January 1, 2009, the Company adopted authoritative guidance issued by the FASB
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.  This pronouncement requires enhanced disclosures
concerning a company’s treatment of costs incurred to renew or extend the term
of a recognized intangible asset.   Although this 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
June 2009, the FASB made an update to consolidation of variable
interest entities.  Among other things, the update replaces the calculation
for determining which entities, if any, have a controlling financial interest in
a variable interest entity (VIE) from a quantitative based risks and rewards
calculation, to a qualitative approach that focuses on identifying which
entities have the power to direct the activities that most significantly impact
the VIE’s economic performance and the obligation to absorb losses of the VIE or
the right to receive benefits from the VIE. The update also requires ongoing
assessments as to whether an entity is the primary beneficiary of a VIE
(previously, reconsideration was only required upon the occurrence of specific
events), modifies the presentation of consolidated VIE assets and liabilities,
and requires additional disclosures about a company’s involvement in VIEs. This
update will be effective for fiscal years beginning after November 15,
2009. The Company does not currently believe that the adoption of this
update will have any effect on its consolidated financial position and results
of operations.
 
 In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition.   We believe the adoption of this new guidance will
not have a material impact on our financial statements.
 
 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 September 30, 2009 as compared to three
month period ended September 30, 2008
 
 Revenue. During the
three-month period ended September 30, 2009, we had revenues from sales of our
coal water mixture of $10,757,826 as compared to revenues of $ 3,419,941 during
the three-month period ended September 30, 2008, an increase of
315%.   This increase is mainly attributable to the increased
production from the production line added in early 2009, which led to increase
in sales to existing customers. The annual production capacity as at September
30, 2009 was 350,000 tonnes as compared to 100,000 tonnes as at September 30,
2008. At September 30, 2009, we had 35 customers under CWM supply agreements
totaling approximately 559,000 tonnes per year, as compared to 27 customers
totaling approximately 350,000 tonnes of CWM per year at September 30,
2008.
 
 Cost of Goods Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing
overhead, depreciation of plant and machinery, was $6,812,469 for the
three-month period ended September 30, 2009, as compared to $2,297,227 for the
same period of 2008, an increase of 297%. The increase in cost of goods sold is
in line with the increase in sales. Gross profit margin improved from 33% in
2008 to 37% in 2009 as a result of better pricing in CWM. As a result of the new
production line added in early 2009, depreciation of plant and machinery for the
three-month period ended September 30, 2009 was $375,134 as compared to $58,789
for the same period last year.
 
 Selling Expenses. Selling
expenses totaled $416,566 for the three-month period ended September 30, 2009,
as compared to $3,106 for the three-month period ended September 30, 2008, an
increase of 13,412%. The increase is mainly due to the increase in
transportation cost.
 
 General and Administrative Expenses.General and administrative expenses totaled $471,683 for the three-month
period ended September 30, 2009, as compared to $204,915 for the three-month
period ended September 30, 2008.  This increase was primarily caused
by the expenses related to the July 2009 Financing.
  23
  Income from Operations. Our
income from operations for the three months ended September 30, 2009 was
$3,057,108, an increase of 334% as compared to $914,693 for the same period in
2008, in line with the increase in sales period over period.
  Other Income (Expense). Our
other income for the three months ended September 30, 2009 decreased by 14,530%,
from $230,115 in other income in 2008 to $33,509,126 in other expense in 2009,
mainly as a result of the cost of private placement of $24,794,842 related to
the July 2009 Financing.
  Net Income. We had a net
lossof $30,915,068
for the three-month period ended September 30, 2009, as compared to net income
of$1,144,737 for
the same period in 2008.  The decrease in net income is primarily
attributable to incurrence of other expense discussed above.
 
 Results
of Operations--Nine month period ended September 30, 2009 as compared to nine
month period ended September 30, 2008
 
 Revenue. During the
nine-month period ended September 30, 2009, we had revenues from sales of our
coal water mixture of $26,659,312 as compared to revenues of $9,156,293 during
the nine-month period ended September 30, 2008, an increase
of  291%.   This increase is mainly attributable to the
increased production from the production line added in early 2009, which led to
an increase in sales to existing customers. The annual production capacity as at
September 30, 2009 was 350,000 tonnes as compared to 100,000 tonnes as at
September 30, 2008.  At September 30, 2009, we had 35 customers under
CWM supply agreements totaling approximately 559,000 tonnes per year, as
compared to 27 customers totaling approximately tonnes of CWM per year at
September 30, 2008.
 
 Cost of Goods Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing
overhead, depreciation of plant and machinery, was $17,695,505 for the
nine-month period ended September 30, 2009, as compared to $6,227,606 for the
same period of 2008, an increase of 284%. The increase in cost of sales sold is
in line with the increase in sales. Gross profit margin improved from 32% in
2008 to 34% in 2009 as a result of better pricing in CWM. As a result of the new
production line added in early 2009, depreciation of plant and machinery for the
nine-month period ended September 30, 2009 was $1,068,843 as compared to $
175,399 for the same period last year.
 
 Selling Expenses. Selling
expenses totaled $422,405 for the nine-month period ended September 30, 2009, as
compared to $7,871 for the nine-month period ended September 30, 2008, an
increase of 5,366%.  This increase in selling expenses is mainly due
to the increase in transportation cost of $403,444.
 
 General and Administrative Expenses.General and administrative expenses totaled $1,452,975 for the nine-month
period ended September 30, 2009, as compared to $590,719 for the nine-month
period ended September 30, 2008.  This increase was primarily caused
by the expenses related to the July 2009 Financing.
  Income from Operations. Our
income from operations for the nine months ended September 30, 2009 was
$7,088,427, an increase of 304% as compared to $2,330,097 for the same period in
2008, in line with the increase in sales period over period.
  Other Income (Expense). Our
other income for the nine months ended September 30, 2009 decreased by 6,667%,
from $525,957 in other income in 2008 to $34,840,472 in other expense in 2009,
mainly as a result of the cost of private placement of $24,794,842 related to
the fund raised in July 2009.
  Net Income. We had a net loss
of $28,807,763 for the nine-month period ended September 30, 2009, as compared
to net income of$2,480,126 for the same
period in 2008.  The decrease in net income is primarily attributable
to incurrence of other expense discussed above.
 
 Liquidity
and Capital Resources
 
 For the
nine-month period ended September 30, 2009, we generated $5,103,069 from
operating activities, as compared to $33,925 that we used in operating
activities for the nine-month period ended September 30, 2008.  This
increaseis
primarily due to the increase in revenue.
 
 For the
nine-month period ended September 30, 2009, we generated $9,254,028 in financing
activities, primarily in connection with proceeds of $11,592,000 from the July
2009 Financing, as compared to $1,113,746 that we generated from
financing activities during the nine-month period ended September 30,
2008, mainly from the proceeds of $1,148,491 from our financing in September
2008.
  24
 
 For the
nine-month period ended September 30, 2009, $4,303,540 was used in investing
activities, mainly related to prepayments and deposits for the construction of
our new Shenyang production plant, as compared to $1,533,283  used in
investing activities for the nine-month period ended September 30,
2008.
 
 As of
September 30, 2009, we had cash of $13,970,487.  Our total current
assets were $21,743,815 and our total current liabilities were $1,805,800, which
resulted in a net working capital of $19,938,015.
 
 Capital
Resources
 
 On July
2009, we raised approximately $11.6 million of gross proceeds in the July 2009
Financing.
 
 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:Capital
      expenditure commitment
                  
                  $
                  1,010,397
                  
                  
                  
                  1,010,397
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Operating
      Leases
                  
                  $
                  328,013
                  
                  
                  
                  -
                  
                  
                  
                  123,005
                  
                  
                  
                  70,288
                  
                  
                  
                  134,720Coal
      inventory purchase agreement
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Debt
      repayment and interest on debt
                  
                  $
                  14,777,420
                  
                  
                  
                  -
                  
                  
                  
                  14,777,420
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      contractual obligations:
                  
                  $
                  16,115,830
                  
                  
                  
                  1,010,397
                  
                  
                  
                  14,900,425
                  
                  
                  
                  70,288
                  
                  
                  
                  134,720
  Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for our office premises and production plants.  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.
 
 Capital
commitments include capital contribution to a subsidiary and the purchase of
machinery for our production of CWM.
 
 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.
  Exchange
Rates
 
 Suo’ang
New Energy and Suo’ang BST maintain their books and records in Renminbi (“RMB”),
the lawful currency of the PRC.  In general, for consolidation
purposes, the Company translates the assets and liabilities of Suo’ang Newe
Energy and Suo’ang BST into U.S. Dollars using the applicable exchange rates
prevailing at the balance sheet date, and the statement of income is translated
at average exchange rates during the reporting period.  Adjustments
resulting from the translation of their financial statements are recorded as
accumulated other comprehensive income.
 
 Until
July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.30:
US$1.00.  On July 21, 2005, the PRC government reformed the exchange
rate system into a managed floating exchange rate system based on market supply
and demand with reference to a basket of currencies. In addition, the exchange
rate of RMB to US$ was adjusted to RMB8.11: US$1.00 as of July 21,
2005.  The People’s Bank of China announces the closing price of a
foreign currency such as US$ traded against RMB in the inter-bank foreign
exchange market after the closing of the market on each working day, which will
become the unified exchange rate for the trading against RMB on the following
working day.  The daily trading price of US$ against RMB in the
inter-bank foreign exchange market is allowed to float within a band of ±0.3%
around the unified exchange rate published by the People’s Bank of
China.  This quotation of exchange rates does not imply free
convertibility of RMB to other foreign currencies.  All foreign
exchange transactions continue to take place either through the Bank of China or
other banks authorized to buy and sell foreign currencies at the exchange rates
quoted by the People’s Bank of China.  Approval of foreign currency
payments by the Bank of China or other institutions required submitting a
payment application form together with invoices, shipping documents and signed
contracts.
  25
 
 The
exchange rates used to translate amounts in RMB into US Dollars for the purposes
of preparing the consolidated financial statements or otherwise stated in this
MD&A were as follows:
  September 30,
                        2009
                      December 31,
                        2008
                      September 30,
                        2008Balance
      sheet items, except for the registered and paid-up capital, as of end of
      period/year
                      USD1:RMB6.8290
                      USD1:RMB6.8346
                      USD1:RMB6.8183Amounts
      included in the statement of operations, statement of changes in
      stockholders' equity and statement of cash flows for the period/ year
      ended
                      USD1:RMB6.8329
                      USD1:RMB7.0671
                      USD1:RMB7.0615
  No
representation is made that RMB amounts have been, or would be, converted into
US$ at the above rates.
  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
 
 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 (the “Exchange Act”).  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. Such conclusion was based on the following: (i) since his
engagement in December 2008, our current Chief Financial Officer has been tasked
with monitoring and supervising our disclosure controls and procedures; (ii)
since December 2008, we have hired three additional staff members to supplement
our accounting department; and (iii) in  October, 2009, we engaged the
Beijing office of Ernst & Young as outside consultant to assist with
evaluating and improving accounting system and working process (including
internal audit and material transaction review and verification process) to
strengthen the timeliness and efficiency of our disclosure and internal controls
and procedures.
  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 September 30, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
  26
 
 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 600,000 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.
 
 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.
  27
  Our
business is currently dependent on a relatively limited number of
customers.
  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.
 
 ·
              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.
 
 28
  ·
              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.
  29
 
 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.
  30
 
 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.
  We
control Suo’ang BST by means of contractual arrangements rather than actual
ownership. If the PRC government determines that these contractual arrangements
do not comply with applicable regulations, our control of Suo’ang BST may be
adversely effected.
  We
control Suo’ang BST through contractual arrangements between Suo’ang BST and
Suoke Clean Energy 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 contractual arrangements with
Suo’ang BST comply with all applicable PRC laws, rules and regulations, and do
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.
  Neither
we nor our subsidiaries 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.
 31
  Because
we derive revenue from Suo’ang BST pursuant to the consulting services agreement
with Suo’ang BST, the termination of this agreement may severely and
detrimentally affect our financial performances.
 
 We derive
revenue on dividend payments from Suoke Clean Energy after it receives payments
from Suo’ang BST pursuant to the consulting services agreement which forms a
part of the contractual arrangements between Suoke Clean Energy and Suo’ang BST.
The consulting services agreement may be terminated by written notice of Suoke
Clean 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) Suoke Clean Energy 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.
 
 Additionally,
Suoke Clean Energy may terminate the consulting services agreement without
cause. Because neither we nor our subsidiaries 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. 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 financial
performances, 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 the Board of
Directors 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. 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 Suoke Clean Energy,
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 two
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.
  32
 
 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.
  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 derive
revenue on payments from Suo’ang BST under its contractual arrangements with
Suoke Clean Energy. 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 Suo’ang BST incurs debt on its own in the future, the
instruments governing the debt may restrict its ability to make payments. If we
are unable to receive all of the revenues from Suo’ang BST’s operations through
the contractual arrangements, this may severely and detrimentally affect our
financial performances.
 Uncertainties
with respect to the PRC legal system could adversely affect us.
  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.
  All of
the assets of Suo’ang New Energy and Suo’ang BST 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.
  33
 
 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.
  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
  The
full conversion of certain outstanding convertible notes and the full exercise
of certain outstanding warrants could result in the substantial dilution of the
company in terms of a particular percentage ownership in the company as well as
the book value of the common shares. The sale of a large amount of common shares
received upon conversion of the notes and exercise of the warrants on the public
market, or the perception that such sales could occur, could substantially
depress the prevailing market prices for our shares.
 
 There are
over 6 millions warrants outstanding from the financing that closed in September
2008. Additionally, the convertible notes that we issued in July 2009 may
currently be converted into approximately 61 million shares of common stock, and
there are also over 30 million warrants that we issued in connection with the
convertible notes. In the event of conversion or exercise of these securities,
as their conversion and exercise prices are less than the then current market
price for our common shares, a stockholder will suffer substantial dilution of
his, her or its investment in terms of the percentage ownership in us as well as
the book value of the common shares held.
 
 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.
  34
 
 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.
 
 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.
  35
  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
October 28, 2009, our management and their affiliated entities own approximately
35% of our outstanding common shares, representing approximately 35% 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.
  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.
  36
 
 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.
  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 101 million shares of our common stock outstanding as of August
13, 2009, approximately 14 million shares were freely tradable without
restriction, as of August 13, 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.
  37
 
 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.
 
 As
reported in our current reports on Form 8-K filed with the Securities and
Exchange Commission on July 8, 2009 and July 22, 2009, we sold approximately
$11.6 million in aggregate principal amount of 10% senior secured convertible
notes and warrants to purchase up to approximately 30.5 million shares of common
stock to several institutional and/or accredited investors, in a private
placement pursuant to Regulation D promulgated under the Securities Act of 1933,
as amended.
 
 Item
3. Defaults upon Senior Securities.
 
 None
 
 Item
4. Submission of Matters to a Vote of Securities Holders.
 On
September 21, 2009, we held an annual meeting of our shareholders (the “Annual
Meeting”) for the following three purposes:
 
 Re-election
of Directors
 
 The first
purpose of the Annual Meeting was to re-elect six directors to serve until the
2010 annual meeting of shareholders.  Each of the six
director-nominees was re-elected by casting of the following votes:
  Name
      of Nominee
                    
                    FOR
                    
                    
                    AGAINST
                    
                    
                    ABSTENTIONBaowen
      Ren
                    
                    
                    60,157,513
                    
                    
                    
                    205
                    
                    
                    
                    1,500Wenjie
      Zhang
                    
                    
                    60,157,688
                    
                    
                    
                    30
                    
                    
                    
                    1,500Peng
      Zhou
                    
                    
                    60,157,513
                    
                    
                    
                    205
                    
                    
                    
                    1,500Bennet
      P. Tchaikovsky
                    
                    
                    60,156,513
                    
                    
                    
                    205
                    
                    
                    
                    1,500Zidong
      Cao
                    
                    
                    60,157,513
                    
                    
                    
                    205
                    
                    
                    
                    1,500Yong
      Li
                    
                    
                    60,157,513
                    
                    
                    
                    205
                    
                    
                    
                    1,500
  Ratification
of Auditors
 
 The
second purpose of the Annual Meeting was to ratify the appointment of Weinberg
& Company P.A. as our independent registered public accounting firm for the
2009 fiscal year, which appointment was ratified by casting of the following
votes:
 
 FOR
                      
                      AGAINST
                      
                      
                      ABSTENTION60,158,013
                      
                      
                      30
                      
                      
                      
                      1,175
 
 Increase
of Number of Authorized Shares of Common Stock
 
 The third
purpose of the Annual Meeting was to approve an amendment of our Articles of
Incorporation to increase the total number of authorized shares of common stock
from 200,000,000 shares to 300,000,000 shares, which was approved by casting of
the following votes:
 
 FOR
                      
                      AGAINST
                      
                      
                      ABSTENTION59,874,660
                      
                      
                      279,322
                      
                      
                      
                      5,235
 Item
5. Other Information.
 
 None
  38
  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.
      *3.2
                    
                    Bylaws
      of Endo (3)3.3
                    
                    Text
      of Amendment to the  Bylaws (4)4.1
                    
                    Form
      of 18% Secured Convertible Debenture (8)4.2
                    
                    Form
      of Warrant issued in connection with the 18% Secured Convertible Debenture
      (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)4.5
                    
                    Form
      of 10% Senior Secured Convertible Note (13)4.6
                    
                    Form
      of Warrant issued in connection with the 10% Senior Secured Convertible
      Note (13)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 with Bennet P. Tchaikovsky
(10)10.7
                    
                    Form
      of Indemnity Agreement  by and between Registrant and Bennet P.
      Tchaikovsky (10)10.8
                    
                    Form
      of Exchange and Amendment Agreement by and among Registrant and six
      institutional and accredited investors (11)10.9
                    
                    Securities
      Purchase Agreement by and among Registrant and several institutional and
      accredited investors dated July 2009 (13)10.10
                    
                    Form
      of Director Offer Letter with Yong Li (14)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
      *
  39
  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)99.10
                
                Amendment
      to Consulting Services Agreement by and between Hangson and Shaanxi
      Suo’ang Biological Science & Technology Co., Ltd. (“Suo’ang BST”)
      dated June 30, 2009 (12)99.11
                
                Amendment
      to Equity Pledge Agreement by and among Hangson, Suo’ang BST and Suo’ang
      BST’s Majority Shareholders dated June 30, 2009 (12)99.12
                
                Agreement
      to Transfer of Operating Agreement among Hangson, Suoke SCE, Suo’ang BST,
      Suo’ang BST’s Majority Shareholders and Sino Clean dated June 30, 2009
      (12)99.13
                
                Designation
      Agreement among Hangson, Suoke SCE, Suo’ang BST, Suo’ang BST’s Majority
      Shareholders and Sino Clean dated June 30, 2009 (12)99.14
                
                Agreement
      to Transfer of Option Agreement among Hangson, Suoke SCE, Suo’ang BST,
      Suo’ang BST’s Majority Shareholders and Sino Clean dated June 30, 2009
      (12)
  *      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.
 
 (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.
  40
  (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.
 
 (12)
              Filed as an Exhibit to the
      Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2009
      and incorporated herein by
reference.
 
 (13)
              Filed as an Exhibit to the
      Registrant’s Current Report on Form 8-K filed with the SEC on July 8, 2009
      and incorporated herein by
reference.
 
 (14)
              Filed as an Exhibit to the
      Registrant’s Current Report on Form 8-K filed with the SEC on August 4,
      2009 and incorporated herein by
  reference.
  41
  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:
      November 16, 2009
                By:
                /s/ Baowen RenBaowen
      Ren
                  Chief
      Executive Officer
  42