SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
  FORM
10-Q
  þ
              Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934
  For the
quarterly period ended September 30, 2010
  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
      or Organization)
                    
                    (I.R.S.
      Employer
                      Identification
      No.)
 
 Room 1502,
Building D, Wangzuo International City Building
 No. 3
Tangyuan Road, Gaoxin District
 Xi'an,
Shaanxi Province, People’s Republic of China
 (Address
of Principal Executive Offices including zip code)
 
 +86 29
8844-7960
 (Registrant’s
Telephone Number, Including Area Code)
  Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes þNo  ̈
  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  ̈*The registrant has not
yet been phased into the interactive data requirements.
  Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company
 
 Large
      Accelerated Filer  ̈
                Accelerated
      Filer  ̈
                Non-Accelerated
      Filer  ̈
                  (Do
      not check if a smaller
                  reporting
      company)
                Smaller
      reporting
                  company
      þ
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange
Act).  Yes ð  No þ
  As of
November 9, 2010, 16,798,817 shares of the issuer’s common stock, par value
$0.001, were outstanding.
  
  Table of
Contents
 PagePART
      IFINANCIAL
      INFORMATIONITEM
      1
                                    FINANCIAL
      STATEMENTS
                                    2ITEM
      2
                                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                    18ITEM
      3
                                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                    23ITEM
      4T.
                                    CONTROLS
      AND PROCEDURES.
                                    23PART
      IIOTHER
      INFORMATIONITEM
      1
                                    LEGAL
      PROCEEDINGS
                                    24ITEM
      1A
                                    RISK
      FACTORS
                                    25ITEM
      6
                                    EXHIBITS
                                    25SIGNATURES
                                    
                                    26
  i
  PART
I
 
 FINANCIAL
INFORMATION
 Sino
Clean Energy Inc. and Subsidiaries
 Condensed
Consolidated Balance Sheets
 
 September30,
                    2010
                  
                  
                  December31,
                    2009(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  34,348,096
                  
                  
                  $
                  18,302,558Accounts
      receivable, net
                  
                  
                  3,550,690
                  
                  
                  
                  3,655,473Inventories
                  
                  
                  1,334,722
                  
                  
                  
                  892,609Prepaid
      inventories
                  
                  
                  5,644,695
                  
                  
                  
                  5,453,095Prepaid
      expenses
                  
                  
                  1,365
                  
                  
                  
                  259,627Tax
      recoverable
                  
                  
                  -
                  
                  
                  
                  138,495Other
      receivables
                  
                  
                  55,774
                  
                  
                  
                  65,584Land
      use right - current portion
                  
                  
                  39,474
                  
                  
                  
                  38,739Total
      current assets
                  
                  
                  44,974,816
                  
                  
                  
                  28,806,180Property,
      plant and equipment, net
                  
                  
                  15,063,481
                  
                  
                  
                  12,557,691Land
      use right – non current portion
                  
                  
                  1,782,624
                  
                  
                  
                  1,778,562Goodwill
                  
                  
                  762,018
                  
                  
                  
                  762,018Prepayments
      and deposits
                  
                  
                  3,656,117
                  
                  
                  
                  729,328Total
      assets
                  
                  $
                  66,239,056
                  
                  
                  $
                  44,633,779LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIENCY)Current
      liabilitiesAccounts
      payable and accrued expenses
                  
                  $
                  3,361,796
                  
                  
                  $
                  2,672,211Taxes
      payable
                  
                  
                  2,259,303
                  
                  
                  
                  1,577,249Amount
      due to directors
                  
                  
                  73,456
                  
                  
                  
                  73,466Mortgage
      payable – current portion
                  
                  
                  5,282
                  
                  
                  
                  -Derivative
      liabilities
                  
                  
                  19,101,337
                  
                  
                  
                  16,752,858Total
      current liabilities
                  
                  
                  24,801,174
                  
                  
                  
                  21,075,784Mortgage
      payable – non current portion
                  
                  
                  158,292
                  
                  
                  
                  -Convertible
      notes, net of discount
                  
                  
                  -
                  
                  
                  
                  1,615,025Derivative
      liabilities
                  
                  
                  -
                  
                  
                  
                  28,404,181Total
      liabilities
                  
                  
                  24,959,466
                  
                  
                  
                  51,094,990Commitments
      and ContingenciesShareholders'
      Equity (Deficiency)Preferred
      stock, $0.001 par value,
                    50,000,000
      shares authorized, none issued and outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $0.001 par value,
                    30,000,000
      shares authorized, 16,792,239 and 10,850,613 issued
                    and
      outstanding as of September 30, 2010 and December 31, 2009
      respectively
                  
                  
                  16,792
                  
                  
                  
                  10,850Additional
      paid-in capital
                  
                  
                  37,805,971
                  
                  
                  
                  25,432,804Accumulated
      deficit
                  
                  
                  (790,260)
                  
                  
                  
                  (35,802,987
                  )Statutory
      reserves
                  
                  
                  1,758,553
                  
                  
                  
                  1,758,553Accumulated
      other comprehensive income
                  
                  
                  2,488,534
                  
                  
                  
                  2,139,569Total
      Shareholders' equity (deficiency)
                  
                  
                  41,279,590
                  
                  
                  
                  (6,461,211
                  )Total
      liabilities and shareholders' equity (deficiency)
                  
                  $
                  66,239,056
                  
                  
                  $
                  44,633,779
  See
accompanying notes to condensed consolidated financial statements.
  2
  Sino
Clean Energy Inc. and Subsidiaries
 Condensed
Consolidated Statements of Operations and Other Comprehensive
Income
 (Unaudited)
 
 Threemonthsended
                    September30,
                  
                  
                  Ninemonthsended
                    September30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Revenue
                  
                  $
                  24,913,134
                  
                  
                  $
                  10,889,796
                  
                  
                  $
                  73,571,899
                  
                  
                  $
                  26,982,573Cost
      of goods sold
                  
                  
                  (15,269,720
                  )
                  
                  
                  (6,812,469
                  )
                  
                  
                  (44,448,913
                  )
                  
                  
                  (17,695,505
                  )Gross
      profit
                  
                  
                  9,643,414
                  
                  
                  
                  4,077,327
                  
                  
                  
                  29,122,986
                  
                  
                  
                  9,287,068Selling
      expenses
                  
                  
                  1,156,147
                  
                  
                  
                  416,585
                  
                  
                  
                  3,203,245
                  
                  
                  
                  422,405General
      and administrative expenses
                  
                  
                  579,837
                  
                  
                  
                  471,664
                  
                  
                  
                  1,925,072
                  
                  
                  
                  1,452,975Income
      from operations
                  
                  
                  7,907,430
                  
                  
                  
                  3,189,078
                  
                  
                  
                  23,994,669
                  
                  
                  
                  7,411,688Other
      income (expense)Interest
      and finance costs
                  
                  
                  (1,047
                  )
                  
                  
                  (3,149,499
                  )
                  
                  
                  (10,459,201
                  )
                  
                  
                  (4,231,344
                  )Expense
      related to escrow shares
                  
                  
                  -
                  
                  
                  
                  (1,054,548
                  )
                  
                  
                  -
                  
                  
                  
                  (1,294,881
                  )Interest
      income
                  
                  
                  29,889
                  
                  
                  
                  11,708
                  
                  
                  
                  62,113
                  
                  
                  
                  22,979Gain
      on extinguishment of derivative liability
                  
                  
                  -
                  
                  
                  
                  2,381,333
                  
                  
                  
                  28,404,181
                  
                  
                  
                  3,370,593Change
      in fair value of derivative liabilities
                  
                  
                  (970,813)
                  
                  
                  
                  (7,035,248
                  )
                  
                  
                  (2,348,479
                  )
                  
                  
                  (8,236,238
                  )Cost
      of private placement
                  
                  
                  -
                  
                  
                  
                  (24,794,842
                  )
                  
                  
                  -
                  
                  
                  
                  (24,794,842
                  )Sundry
      expense
                  
                  
                  (4,688
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      other income (expense)
                  
                  
                  (946,659)
                  
                  
                  
                  (33,641,096
                  )
                  
                  
                  15,658,614
                  
                  
                  
                  (35,163,733
                  )Income
      (loss) before provision for income taxes
                  
                  
                  6,960,771
                  
                  
                  
                  (30,452,018
                  )
                  
                  
                  39,653,283
                  
                  
                  
                  (27,752,045
                  )Provision
      for income taxes
                  
                  
                  1,349,424
                  
                  
                  
                  463,050
                  
                  
                  
                  4,640,556
                  
                  
                  
                  1,055,718Net
      income (loss)
                  
                  
                  5,611,347
                  
                  
                  
                  (30,915,068
                  )
                  
                  
                  35,012,727
                  
                  
                  
                  (28,807,763
                  )Other
      comprehensive incomeForeign
      currency translation adjustment
                  
                  
                  67,493
                  
                  
                  
                  3,578
                  
                  
                  
                  348,965
                  
                  
                  
                  12,932Comprehensive
      income (loss)
                  
                  $
                  5,678,840
                  
                  
                  $
                  (30,911,490
                  )
                  
                  $
                  35,361,692
                  
                  
                  $
                  (28,794,831
                  )Weighted
      average number of shares-
      Basic
                  
                  
                  16,703,844
                  
                  
                  
                  10,041,910
                  
                  
                  
                  15,385,062
                  
                  
                  
                  9,609,130-
      Diluted
                  
                  
                  18,780,537
                  
                  
                  
                  10,041,910
                  
                  
                  
                  18,668,856
                  
                  
                  
                  9,609,130Income
      (loss) per common share-
      Basic
                  
                  $
                  0.34
                  
                  
                  $
                  (3.08
                  )
                  
                  $
                  2.28
                  
                  
                  $
                  (3.00
                  )-
      Diluted
                  
                  $
                  0.30
                  
                  
                  $
                  (3.08
                  )
                  
                  $
                  1.88
                  
                  
                  $
                  (3.00
                  )
  See
accompanying notes to condensed consolidated financial
statements.
  3
  Sino-Clean
Energy Inc. and Subsidiaries
 Condensed
Consolidated Statements of Changes in Shareholders’ Equity
(Deficiency)
 For the
nine months ended September 30, 2010
 (Unaudited)
 
 AccumulatedAdditional
                    
                    
                    
                    
                    
                    
                    
                    
                    otherCommonstock
                    
                    
                    paid-in
                    
                    
                    Statutory
                    
                    
                    Accumulated
                    
                    
                    comprehensiveShares
                    
                    
                    Amount
                    
                    
                    capital
                    
                    
                    reserves
                    
                    
                    Deficit
                    
                    
                    income
                    
                    
                    TotalBalance,
      January 1, 2010
                    
                    
                    10,850,613
                    
                    
                    $
                    10,850
                    
                    
                    $
                    25,432,804
                    
                    
                    $
                    1,758,553
                    
                    
                    $
                    (35,802,987
                    )
                    
                    $
                    2,139,569
                    
                    
                    $
                    (6,461,211
                    )Shares
      issued for exercise of warrants and options
                    
                    
                    297,871
                    
                    
                    
                    298
                    
                    
                    
                    262,958
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    263,256Fair
      value of options granted
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    34,152
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    34,152Shares
      issued upon conversion of notes payable
                    
                    
                    5,643,755
                    
                    
                    
                    5,644
                    
                    
                    
                    12,076,057
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    12,081,701Foreign
      currency translation gain
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    348,965
                    
                    
                    
                    348,965Net
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    35,012,727
                    
                    
                    
                    —
                    
                    
                    
                    35,012,727Balance,
      September 30, 2010 (unaudited)
                    
                    
                    16,792,239
                    
                    
                    $
                    16,792
                    
                    
                    $
                    37,805,971
                    
                    
                    $
                    1,758,553
                    
                    
                    $
                    (790,260
                    )
                    
                    $
                    2,488,534
                    
                    
                    $
                    41,279,590
  See
accompanying notes to condensed consolidated financial
statements.
  4
  Sino
Clean Energy Inc. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows
 (Unaudited)
  NinemonthsendedSeptember30,2010
                      
                      
                      2009Cash
      flows from operating activities:Net
      income (loss)
                      
                      $
                      35,012,727
                      
                      
                      $
                      (28,807,763
                      )Adjustments
      to reconcile net income (loss) to cashprovided
      by operating activities:Depreciation
      and amortization
                      
                      
                      1,593,325
                      
                      
                      
                      1,098,914Amortization
      of deferred debt issuance costs
                      
                      
                      -
                      
                      
                      
                      274,278Amortization
      of discount on convertible notes
                      
                      
                      8,601,975
                      
                      
                      
                      3,873,979Fair
      value of common stock issued for payment of interest
    expense
                      
                      
                      1,864,701
                      
                      
                      
                      -Expense
      related to escrow shares
                      
                      
                      -
                      
                      
                      
                      1,294,881Fair
      value of common stock issued for services
                      
                      
                      -
                      
                      
                      
                      454,935Cost
      of private placement
                      
                      
                      -
                      
                      
                      
                      24,794,842Gain
      on extinguishment of derivative liabilities
                      
                      
                      (28,404,181
                      )
                      
                      
                      (3,370,593
                      )Change
      in fair value of derivative liabilities
                      
                      
                      2,348,479
                      
                      
                      
                      8,236,238Fair
      value of vested options
                      
                      
                      34,152
                      
                      
                      
                      -Change
      in operating assets and liabilities :Accounts
      receivable
                      
                      
                      171,480
                      
                      
                      
                      (1,563,019
                      )Other
      receivables
                      
                      
                      10,884
                      
                      
                      
                      (7,812
                      )Inventories
                      
                      
                      (418,740
                      )
                      
                      
                      (435,105
                      )Prepaid
      inventories
                      
                      
                      (86,835
                      )
                      
                      
                      (2,167,975
                      )Prepaid
      expenses
                      
                      
                      258,262
                      
                      
                      
                      27,191Tax
      recoverable
                      
                      
                      138,984
                      
                      
                      
                      -Refundable
      advance
                      
                      
                      -
                      
                      
                      
                      731,861Government
      grant receivable
                      
                      
                      -
                      
                      
                      
                      146,314Accounts
      payable and accrued expenses
                      
                      
                      (491,938
                      )
                      
                      
                      37,982Taxes
      payable
                      
                      
                      644,310
                      
                      
                      
                      483,921Net
      cash provided by operating activities
                      
                      
                      21,277,585
                      
                      
                      
                      5,103,069Cash
      flows from investing activities :Prepayments
      and deposits
                      
                      
                      (2,239,737
                      )
                      
                      
                      (3,733,408
                      )Loans
      receivable
                      
                      
                      -
                      
                      
                      
                      (540,365
                      )Purchase
      of property, plant and equipment
                      
                      
                      (2,621,605
                      )
                      
                      
                      (29,767
                      )Net
      cash used in investing activities
                      
                      
                      (4,861,342
                      )
                      
                      
                      (4,303,540
                      )Cash
      flows from financing activities:Proceeds
      from issuance of convertible debentures
                      
                      
                      -
                      
                      
                      
                      11,592,000Cost
      of private placement paid in cash
                      
                      
                      -
                      
                      
                      
                      (1,543,152
                      )Redemption
      of convertible debenture
                      
                      
                      -
                      
                      
                      
                      (400,000
                      )Prepayments
      and deposits related to deferred offering costs
                      
                      
                      (652,053
                      )Proceeds
      from mortgage payable
                      
                      
                      163,135Repayment
      of mortgage payable
                      
                      
                      (2,039
                      )
                      
                      
                      -Payment
      of advances from director
                      
                      
                      -
                      
                      
                      
                      (394,820
                      )Cash
      received from exercise of warrants and options
                      
                      
                      263,256
                      
                      
                      
                      -Net
      cash (used in) provided by financing activities
                      
                      
                      (227,701
                      )
                      
                      
                      9,254,028Effect
      of foreign currency translation
                      
                      
                      (143,004
                      )
                      
                      
                      2,624Net
      increase in cash and cash equivalents
                      
                      
                      16,045,538
                      
                      
                      
                      10,056,181Cash
      and cash equivalents, beginning of period
                      
                      
                      18,302,558
                      
                      
                      
                      3,914,306Cash
      and cash equivalents, end of period
                      
                      $
                      34,348,096
                      
                      
                      $
                      13,970,487Supplemental
      disclosure informationCash
      paid for interest
                      
                      $
                      -
                      
                      
                      $
                      364,843Cash
      paid for taxes
                      
                      $
                      4,296,422
                      
                      
                      $
                      672,639Supplemental
      non-cash investing and financing activitiesIncrease
      in property, plant and equipment and accounts payable and accrued
      expenses
                      
                      $
                      1,175,744
                      
                      
                      $
                      -Issuance
      of shares upon conversion of convertible notes
                      
                      $
                      10,217,000
                      
                      
                      $
                      1,035,567Allocation
      of derivative liability to note discount
                      
                      $
                      -
                      
                      
                      $
                      11,592,000Cumulative
      effect of change in accounting principle, reclassification of warrants and
      conversion feature to derivative liability
                      
                      $
                      -
                      
                      
                      $
                      4,589,792
  See
accompanying notes to the condensed consolidated financial
statements.
  5
  Sino
Clean Energy Inc. and Subsidiaries
 Notes to
Condensed Consolidated Financial Statements
 For the
Nine Months Ended September 30, 2010 (Unaudited)
 
 1.ORGANIZATION AND BUSINESS
ACTIVITIES
 
 Overview
  Sino
Clean Energy Inc. (the “Company”, “we” or “our”) is a holding company that,
through its subsidiaries, based upon total third party sales revenue in
China, is a leading commercial producer and distributor of coal-water slurry
fuel (“CWSF”) in China. CWSF is a clean fuel that consists of fine coal
particles suspended in water.  Our CWSF products are mainly used to
fuel boilers and furnaces to generate steam and heat for residential and
industrial applications.  We sell our products in China and our
customers include industrial, commercial, residential and government
organizations. Our strong reputation in the CWSF industry in China, together
with our established track record for consistently delivering products in large
quantities, has enabled us to expand our customer base.  We primarily
use washed coal to produce CWSF. We acquire the raw materials for our production
facilities primarily from three nearby coal mines.  We have
established strong relationships with our suppliers and our ability to purchase
large quantities of raw materials has allowed us to achieve favorable pricing
and delivery terms.
 
 Corporate
Organization and History
  We were
originally incorporated in Texas as “Discount Mortgage Services, Inc.” on July
11, 2000. In September 2001, we purchased Endo Networks, Inc., a Canadian
software developer, and changed our name to “Endo Networks, Inc.” on November 5,
2001. We re-domiciled to the State of Nevada on December 13, 2001.
  On
October 20, 2006 we consummated a share exchange transaction with Hangson, a
British Virgin Islands company, the stockholders of Hangson and a majority of
our stockholders.  We issued a total of 2,600,000 shares of our common
stock to the Hangson shareholders and a consultant in the transaction, in
exchange for 100% of the common stock of Hangson.  As a result of the
transaction we became engaged in the CWSF business, through the operations of
Suo’ang BST and Shaanxi Suo’ang New Energy.  On January 4, 2007, we
changed our name from “Endo Networks, Inc.” to “China West Coal Energy Inc.”,
and then on August 15, 2007, we changed our name again to our present name, Sino
Clean Energy Inc.
  Hangson
was a holding company that controlled Suo'ang BST and Suo'ang BST's 80%-owned
subsidiary Suo'ang New Energy, through a series of contractual arrangements. The
remaining 20% of Suo'ang New Energy was owned by Mr. Peng Zhou, a member of our
board of directors and, at that time, the chief operating officer of Suo'ang
BST. Suo'ang BST, through Suo'ang New Energy, commenced CWSF production in July
2007. Although Hangson was entitled to acquire the remaining 20% of Suo'ang New
Energy from Mr. Zhou, the transfer was not completed and Mr. Zhou remained as
the record shareholder of Suo'ang New Energy.
  In 2009,
we effected a reorganization of our corporate structure in order to make Suo'ang
New Energy a wholly-owned subsidiary which included entering into a series of
agreements transferring the contractual arrangements, through which Hangson
controlled Suo'ang BST, to Suoke Clean Energy.
  On
September 15, 2009, Suo'ang BST and Hangson entered into a share transfer
agreement with Suoke Clean Energy pursuant to which Suo'ang BST and Hangson
agreed to transfer 100% of the equity interests in Suo'ang New Energy to Suoke
Clean Energy. However, since Mr. Zhou still owned 20% of Suo'ang New
Energy, on November 10, 2010, Suo'ang BST and Hangson entered into a subsequent
share transfer agreement with Suoke Clean Energy to transfer 80% of Suo'ang New
Energy's equity interests to Suoke Clean Energy and, Mr. Zhou, with Hangson's
consent, entered into a share transfer agreement with Suoke Clean Energy to
transfer the remaining 20% equity interest of Suo'ang New Energy. On November
12, 2009, Suo'ang New Energy received a new business license from the Tongchuan
Administration for Industry and Commerce, which reflected that the acquisition
of 100% of the equity of Suo'ang New Energy by Suoke Clean Energy had been
completed. As a result we were able, through Suoke Clean Energy to own 100% of
the equity interests of Suo'ang New Energy. On October 12, 2009, Suo'ang New
Energy established a wholly-owned subsidiary to conduct the CWSF business in
Shenyang, Liaoning Province.
  6
  On
December 31, 2009, we entered into a series of termination agreements to
terminate the contractual arrangements by and among Suoke Clean Energy, Suo'ang
BST and certain stockholders of Suo'ang BST. We no longer needed to keep such
contractual arrangements in place due to the fact that Suo'ang BST was no longer
engaged in any substantial business operations. In connection with the
termination agreements, certain assets held by Suo'ang BST, such as office
equipment, vehicles, bank deposits, and accounts receivable, were transferred to
Suoke Clean Energy. Employees of Suo'ang BST signed new employment contracts
with Suoke Clean Energy. All rights and obligations under certain business
operation agreements and research and development contracts between Suo'ang BST
and third parties were assigned to Suo'ang New Energy. Hangson has had no
substantive operations of its own after the transfer and termination of the
contractual arrangements.
  On June
30, 2009, Hangson acquired all of the outstanding shares of Wiscon, a limited
liability company incorporated in Hong Kong under the Companies Ordinance. On
December 31, 2009, Hangson transferred all of the outstanding shares of Wiscon
to Sino Clean Energy Inc. As a result, Wiscon became a direct wholly-owned
subsidiary of Sino Clean Energy Inc.
  Effective
May 7, 2010, the Company announced a reverse stock split pursuant to which each
ten shares of Company's common stock then issued and outstanding was
automatically converted into one share of the Company’s common
stock.  All share and per share amounts in the accompanying condensed
consolidated financial statements have been adjusted to reflect the reverse
stock split as if it had occurred at the beginning of the earliest period
presented.
  2.SUMMARY OFSIGNIFICANTACCOUNTING
POLICIES
 
 Basis of
presentation and consolidation
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the United States Securities and Exchange Commission
(“SEC”). Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company’s 2009 Annual Report on Form 10-K for the fiscal year
ended December 31, 2009, filed with the SEC. The results of operations for
interim periods are not necessarily indicative of the results expected for a
full year or for any future period.
 
 The
consolidated condensed financial statements include the financial statements of
the Company, its wholly owned subsidiaries Wiscon, Tongchuan Suoke Clean
Energy, Shaanxi Suo’ang New Energy and Shenyang Suo’ang New Energy.
 Intercompany accounts and transactions have been eliminated in
consolidation.
 
 Use of
estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.
 
 Revenue
recognition
 
 Revenues
of the Company are from sales of CWSF. Sales are recognized when the following
four revenue criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred, the selling price is fixed or determinable, and
collectibility is reasonably assured.  Revenues are presented net of
value added tax (“VAT”). In our revenue arrangements, physical delivery is the
point in time when customer acceptance occurs since title and risk of loss
are transferred to the customer.  No return allowance is made as
products are normally not returnable upon acceptance by the
customers.
  7
  Accounts
receivable
 
 Accounts
receivables are recognized and carried at the original invoiced amount less an
allowance for any uncollectible accounts. The Company uses the aging method to
estimate the valuation allowance for anticipated uncollectible receivable
balances.  Under the aging method, bad debts determined by management
are based on historical experience as well as the current economic climate
and are applied to customers' balances categorized by the number of months the
underlying invoices have remained outstanding.  The
valuation allowance balance is adjusted to the amount computed as a
result of the aging method.  When facts subsequently become available
to indicate that an adjustment to the allowance should be made, this is recorded
as a change in estimate in the current year. As of September 30, 2010 and
December 31, 2009, accounts receivable net of allowances were zero and zero,
respectively.
  Fair
value of financial instruments
 
 Fair
value measurements are determined using authoritative guidance issued by the
FASB, with the exception of the application of the guidance to non-recurring,
non-financial assets and liabilities as permitted. Fair value is defined in the
authoritative guidance as the price that would be received to sell an asset or
paid to transfer a liability in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants at
the measurement date. A fair value hierarchy was established, which prioritizes
the inputs used in measuring fair value into three broad levels as
follows:
 
 Level 1—Quoted
prices in active markets for identical assets or liabilities.
 
 Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly
or indirectly.
 
 Level 3—Unobservable
inputs based on the Company's assumptions.
 
 The
Company is required to use observable market data if available without undue
cost and effort.
 
 The
following table presents certain investments and liabilities of the Company’s
financial assets measured and recorded at fair value on the Company’s
consolidated balance sheets on a recurring basis and their level within the fair
value hierarchy as of September 30, 2010 and December 31, 2009.
 
 September30,2010(Unaudited)Level1
                  
                  
                  Level2
                  
                  
                  Level3
                  
                  
                  TotalFair
      value of warrants
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  19,101,337
                  
                  
                  $
                  19,101,337
  December31,2009Level1
                  
                  
                  Level2
                  
                  
                  Level3
                  
                  
                  TotalFair
      value of convertible note conversion feature
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  28,404,181
                  
                  
                  $
                  28,404,181Fair
      value of warrants
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  16,752,858
                  
                  
                  
                  16,752,858$
                  
                  
                  
                  $
                  —
                  
                  
                  $
                  45,157,039
                  
                  
                  $
                  45,157,039
 
 Derivative
financial instruments
 
 The
Company evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair
value and is then re-valued at each reporting date, with changes in the fair
value reported in the consolidated statements of operations. For stock-based
derivative financial instruments, the Company uses a Monte-Carlo simulation
model 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.
  8
  Stock
based compensation
 
 The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs.  Stock-based compensation is measured at the grant date, based on
the fair value of the award, and is recognized as expense over the requisite
service period.  Options vest and expire according to terms established at
the grant date.
 
 Income
per common share
 
 Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. The diluted earnings per share calculation give effect to all
potentially dilutive common shares outstanding during the period using the
treasury stock method for warrants and options and the if-converted method for
convertible debentures.
  As of
September 30, 2010, common stock equivalents were composed of warrants
convertible into 3,633,535 shares of the Company's common stock, and options
convertible into 65,000 shares of the Company’s common stock.  As of
September 30, 2009, common stock equivalents were composed of warrants
convertible into 4,403,743 shares of the Company's common stock, debentures
convertible into 6,101,053 shares of the Company's common stock and options
convertible into 10,000 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.
 
 Threemonthsended
                    September30
                  
                  
                  Ninemonthsended
                    September302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009NumeratorNet
      income (loss)
                  
                  $
                  5,611,437
                  
                  
                  $
                  (30,915,068
                  )
                  
                  $
                  35,012,727
                  
                  
                  $
                  (28,807,763
                  )DenominatorWeighted
      average shares outstanding-basic
                  
                  
                  16,703,844
                  
                  
                  
                  10,041,910
                  
                  
                  
                  15,385,062
                  
                  
                  
                  9,609,130Effect
      of dilutive instruments:Warrants
      and options
                  
                  
                  2,076,693
                  
                  
                  
                  -
                  
                  
                  
                  3,283,794
                  
                  
                  
                  -Weighted
      average shares outstanding-diluted
                  
                  
                  18,780,537
                  
                  
                  
                  10,041,910
                  
                  
                  
                  18,668,856
                  
                  
                  
                  9,609,130
 
 Foreign
currency translation
 
 The
accompanying condensed consolidated financial statements are presented in United
States dollars. The functional currency of the Company is the Renminbi (RMB).
Capital accounts of the condensed consolidated financial statements are
translated into United States dollars from RMB at their historical exchange
rates when the capital transactions occurred. Assets and liabilities are
translated at the exchange rate as of balance sheet date. Income and
expenditures are translated at the average exchange rate of the
period
 
 September30,
                    2010
                  
                  
                  December31,
                    2009
                  
                  
                  September30,
                    2009Period
      end RMB : US$ exchange rate
                  
                  
                  6.7011
                  
                  
                  
                  6.8172
                  
                  
                  
                  6.8290Average
      period RMB : US$ exchange rate
                  
                  
                  6.8042
                  
                  
                  
                  6.8259
                  
                  
                  
                  6.8329
 
 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.
  9
  Deferred
offering costs
 
 Deferred
offering costs, consisting of legal, accounting and filing fees relating to an
offering are capitalized. The deferred offering costs will be offset against
offering proceeds in the event the offering is successful. In the event the
offering is unsuccessful or is abandoned, the deferred offering costs will be
expensed.  As of September 30, 2010 and December 31, 2009, deferred
offering costs of $687,053 and $35,000, respectively, are included in
Prepayments and Deposits in the accompanying condensed consolidated balance
sheets.
 
 Income
taxes
 
 The
Company uses asset and liability approach for financial accounting and reporting
for income taxes that allows recognition and measurement of deferred tax assets
based upon the likelihood of realization of tax benefits in future
years.  Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.  A valuation allowance is
provided for deferred tax assets if it is more likely than not these items will
either expire before the Company is able to realize their benefits, or that
future deductibility is uncertain.
 
 Research
and Development
 
 Research
and development costs are expensed as incurred.  For the nine months
ended September 30, 2010, research and   development expenses
totaled $146,968 and are included in the General and Administrative expenses in
the accompanying condensed consolidated statements of operations and other
comprehensive income.  For the nine months ended September 30, 2009,
the Company did not record any research and development
expenses.
 
 Concentrations
 
 Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and unsecured trade accounts
receivable.
 
 Cash
denominated in RMB with a US dollar equivalent of $33,923,828 and $18,275,847 at
September 30, 2010 and December 31, 2009, respectively, was held in accounts at
financial institutions located in the PRC.  In addition, the Company
maintains funds in bank accounts in the US which at times may exceed the
federally insured balance of $250,000.  The Company and its
subsidiaries have not experienced any losses in such accounts and do not believe
the cash is exposed to any significant risk.
 
 For the
nine months ended September 30, 2010, one customer, Shenyang Haizhong Heat
Resource, Ltd., (“Shenyang Haizhong”) accounted for 37% of sales and at
September 30, 2010, accounted for 25% of accounts
receivable.  Shenyang Haizhong is a subsidiary of Qingdao Haizhong
Enterprise Co. (“Haizhong Boiler"), which the Company has an exclusive sales
agency agreement to distribute CWSF boilers.  The Company also has an
exclusive agreement with Shenyang Haizhong to supply it with
CWSF.  Shenyang Haizhong is the sole supplier of heat to the
commercial and residential customers in the new economic zone in Shenyang,
Liaoning Province.  For the nine months ended September 30, 2010 and
2009, there were no other customers who accounted for 10% or more of sales or
accounts receivable.
 
 For the
three months ended September 30, 2010, Shenyang Haizhong accounted for 30% of
sales. For the three months ended September 30, 2010 and 2009, there were no
other customers who accounted for 10% or more of sales.
 
 For the
nine months ended September 30, 2010, three vendors accounted for 84% of total
purchases (32%, 27% and 25% respectively).  At September 30, 2010, one
vendor accounted for 100% of accounts payable and three vendors accounted for
97% of prepaid coal (48%, 37% and 12% respectively).  For the
nine months ended September 30, 2009, one vendor accounted for 91% of total
purchase.  At September 30, 2009, one vendor accounted for 100% of
prepaid coal.
 
 10
  Reclassifications
  In
presenting the Company’s condensed consolidated statement of income and other
comprehensive income for the three and nine months ended September 30, 2009, the
Company presented $131,970 and $323,261 respectively of commission income as
part of Other Income (Expense).  In presenting the Company’s condensed
consolidated statement of income and other comprehensive income for the three
and nine months ended September 30, 2010, the Company has reclassified the
commission income to revenue.
  Recently
issued Accounting Pronouncements
 
 In
April 2010, the Financial Accounting Standards Board (FASB) issued new
accounting guidance in applying the milestone method of revenue recognition to
research or development arrangements. Under this guidance management may
recognize revenue contingent upon the achievement of a milestone in its
entirety, in the period in which the milestone is achieved, only if the
milestone meets all the criteria within the guidance to be considered
substantive. This standard is effective on a prospective basis for research and
development milestones achieved in fiscal years, beginning on or after
June 15, 2010. Early adoption is permitted; however, adoption of this
guidance as of a date other than January 1, 2011 will require the Company
to apply this guidance retrospectively effective as of January 1, 2010 and
will require disclosure of the effect of this guidance as applied to all
previously reported interim periods in the fiscal year of adoption. As the
Company plans to implement this standard prospectively, the effect of this
guidance will be limited to future transactions. The Company does not expect
adoption of this standard to have a material impact on its financial position or
results of operations as it has no material research and development
arrangements which will be accounted for under the milestone
method.
 
 In April
2010, the FASB issued new accounting guidance to clarify that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, an entity would not classify such
an award as a liability if it otherwise qualifies as equity. The amendments are
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. The Company does not expect
adoption of this standard will have a material impact on its consolidated
financial statements.
 
 In
January 2010, the FASB issued new accounting guidance which requires new
disclosures regarding transfers in and out of Level 1 and Level 2 fair value
measurements, as well as requiring presentation on a gross basis of information
about purchases, sales, issuances and settlements in Level 3 fair value
measurements. The guidance also clarifies existing disclosures regarding level
of disaggregation, inputs and valuation techniques. The new guidance is
effective for interim and annual reporting periods beginning after
December 15, 2009.  Disclosures about purchases, sales, issuances
and settlements in the roll forward of activity in Level 3 fair value
measurements are effective for fiscal years beginning after December 15,
2010.  As this guidance requires only additional disclosure, there
should be no impact on the consolidated financial statements of the Company upon
adoption.
 
 In
October 2009, a new accounting consensus was issued for
multiple-deliverable revenue arrangements. This consensus amends existing
revenue recognition accounting standards. This consensus provides accounting
principles and application guidance on whether multiple deliverables exist, how
the arrangement should be separated and the consideration allocated. This
guidance eliminates the requirement to establish the fair value of undelivered
products and services and instead provides for separate revenue recognition
based upon management’s estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered
item. Previously the existing accounting consensus required that the fair value
of the undelivered item be the price of the item either sold in a separate
transaction between unrelated third parties or the price charged for each item
when the item is sold separately by the vendor. Under the existing accounting
consensus, if the fair value of all of the elements in the arrangement was not
determinable, then revenue was deferred until all of the items were delivered or
fair value was determined. This new approach is effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The Company is in the process of
evaluating whether the adoption of this standard will have a material effect on
its financial position, results of operations or cash flows.
 
 In June
2009, the FASB issued authoritative guidance on consolidation of variable
interest entities.  The new guidance is intended to improve financial
reporting by requiring additional disclosures about a company’s involvement in
variable interest entities.  This new guidance is effective for fiscal
years and interim periods beginning after November 15, 2009.  The
Company adopted this guidance effective January 3, 2010, and it had no impact on
the consolidated financial statements of the Company.
  11
  Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the Securities Exchange Commission (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 31,2010
                      
                      
                      2009(unaudited)Raw
      materials
                      
                      $
                      508,556
                      
                      
                      $
                      635,536Finished
      goods
                      
                      
                      826,166
                      
                      
                      
                      257,073$
                      1,334,722
                      
                      
                      $
                      892,609
  The
Company has contracts with coal mines to deliver coal for use in the production
of CWSF. At times, the Company may make payments in advance of delivery and
accounts for these prepayments as prepaid inventory.  At September 30,
2010 and December 31, 2009, prepaid inventories totaled $5,644,695 and
$5,453,095, respectively.
 
 4  PROPERTY,
PLANT AND EQUIPMENT
  Property,
plant and equipment consist of the following at:
 
 September30,
                      2010
                    
                    
                    December31,
                      2009(unaudited)Buildings
                    
                    $
                    2,869,114
                    
                    
                    $
                    2,564,638Plant
      and machinery
                    
                    
                    15,468,872
                    
                    
                    
                    11,762,449Office
      equipment
                    
                    
                    79,695
                    
                    
                    
                    76,639Motor
      vehicles
                    
                    
                    265,843
                    
                    
                    
                    148,02018,683,524
                    
                    
                    
                    14,551,746Less:
      Accumulated depreciation and amortization
                    
                    
                    (3,620,043
                    )
                    
                    
                    (1,994,055
                    )$
                    15,063,481
                    
                    
                    $
                    12,557,691
 
 Depreciation
expense for the nine months ended September 30, 2010 and 2009 was $1,564,103 and
$1,097,878, respectively.
 
 5.
CONVERTIBLE NOTES
 
 Convertible
notes consist of the following at:
  September 30,
                        
                        
                        December 31,2010
                        
                        
                        2009(unaudited)10%
      convertible notes
                        
                        $
                        —
                        
                        
                        $
                        10,217,000Valuation
      discount
                        
                        
                        —
                        
                        
                        
                        (8,601,975
                        )Convertible
      notes, net
                        
                        
                        —
                        
                        
                        
                        1,615,025Less
      current portion
                        
                        
                        —
                        
                        
                        
                        —Long
      term portion
                        
                        $
                        —
                        
                        
                        $
                        1,615,025
  12
  In July
2009, the Company issued $11,592,000 of 10% senior secured convertible notes
(the “Notes”) and issued warrants (the “Warrants”) to purchase up to 3,050,526
shares of common stock of the Company in a private placement.  The
Notes bore interest at 10% per annum, were due in 2012, were unsecured, and were
personally guaranteed by the Company’s Chief Executive Officer and certain
shareholders.  The holders of the Notes had the right at any time to
convert all or part of the outstanding principal amount of the Notes and any
accrued and unpaid interest into common shares of the Company at the then
effective conversion price, initially set at $1.90 per share.  In
2009, $1,375,000 of the convertible notes was converted at the stated conversion
price of $1.90 per share into 723,684 shares of the Company’s common
stock.  During the first quarter of 2010, the balance of the notes of
$10,217,000 was converted at the stated conversion price of $1.90 per share into
5,377,368 shares of the Company’s common stock.  On March 5, 2010, the
Company issued 266,387 shares of common stock to all holders of notes
outstanding as of March 5, 2010, as consideration for their forfeiture of
certain rights and interest payments.  The fair value of the
additional 266,387 shares of common stock was $1,864,701 on the date the shares
were issued, and is included in interest expense in the accompanying
September 30, 2010 condensed consolidated financial statements.
  At
December 31, 2009, the Company had recorded a derivative liability of
$28,404,181 related to the conversion feature of the convertible
notes.   When the notes converted, the derivative liability was
extinguished and a gain on extinguishment of the derivative was
recorded.  Also upon conversion, the unamortized balance of the note
discount of $8,601,975 was fully amortized and included an interest expense in
the accompanying condensed consolidated financial statements.
 
 6. MORTGAGE
PAYABLE
 
 In
January 2010 the Company agreed to purchase an office space for approximately
$255,000. The Company paid a deposit of approximately $90,000 and the balance
was financed by a mortgage in the amount of approximately
$165,000.  The mortgage term commenced on July 1, 2010, is secured by
the office space, and being amortized over a 20 year term, with a fixed interest
rate of 4.46%, with payments due of approximately $1,000 per
month.
 
 7.
DERIVATIVE LIABILITIY
 
 At
September 30, 2010 and December 31, 2009, derivative liabilities were made up of
the following valued based on the Black-Scholes-Merton and Monte-Carlo valuation
techniques with the following assumptions:
  September30,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)Conversion
      feature :Risk-free
      interest rate
                  
                  
                  —
                  
                  
                  
                  1.5
                  %Expected
      volatility
                  
                  
                  .—
                  
                  
                  
                  148.47
                  %Expected
      life (in years)
                  
                  
                  —
                  
                  
                  2.75
      yearsExpected
      dividend yield
                  
                  
                  —
                  
                  
                  
                  —Warrants
      :Weighted
      average risk-free interest rate
                  
                  
                  0.37
                  %
                  
                  
                  1.32
                  %Expected
      volatility
                  
                  
                  145.58
                  %
                  
                  
                  148.47
                  %Expected
      weighted average life (in years)
                  
                  1.70
      years
                  
                  
                  2.81
      yearsExpected
      dividend yield
                  
                  
                  0
                  
                  
                  
                  0Fair
      Value :Conversion
      feature
                  
                  $
                  —
                  
                  
                  $
                  28,404,181Warrants
                  
                  
                  19,101,337
                  
                  
                  
                  16,752,858$
                  19,101,337
                  
                  
                  $
                  45,157,039
  13


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





At
December 31, 2009, the Company had recorded a derivative liability of
$28,404,181 related to the conversion feature of the convertible
notes.   When the notes converted, the derivative liability was
extinguished and a gain on extinguishment of the derivative was recorded. For
the three months ended September 30, 2010 and 2009, change in derivative
liability was $(970,813) and $(7,035,248), respectively.  For the nine
months ended September 30, 2010 and 2009, change in derivative liability was
$(2,348,479) and $(8,236,238), respectively.





8.
COMMON STOCK





During
the nine months ended September 30, 2010, the Company issued 5,377,368 shares of
common stock upon conversion of $10,217,000 of convertibles notes.  On
March 5, 2010, the Company issued 266,387 shares of common stock to all
holders of notes outstanding as of March 5, 2010, as consideration for their
forfeiture of certain rights and interest payments.  The fair value of
the additional 266,387 shares of common stock was $1,864,701 on the date the
shares were issued, and is included in interest expense in the accompanying
September 30, 2010 condensed consolidated financial statements.





During
the nine months ended September 30, 2010, the Company issued 98,342 shares
of common stock upon exercise of options and warrants for total proceeds of
$263,256.





During
the nine months ended September 30, 2010, warrants to purchase 394,737 shares of
the Company's common stock were exercised on a cashless basis, and pursuant to
the warrant agreement, the Company issued 199,531 shares of the Company's common
stock. The Company did not receive any cash proceeds from the cashless
exercise.





9.  WARRANTS
AND OPTIONS





The
following table summarizes warrant and option activity for the nine months ended
September 30, 2010:




Number of
                    Shares underlying
                    Warrants
                    and Options
                  
                  
                  Weighted
                    Average
                    Exercise PriceWarrants
      and options outstanding at January 1, 2010
                  
                  
                  4,413,744
                  
                  
                  $
                  2.51Warrants
      and options granted
                  
                  
                  65,000
                  
                  
                  $
                  7.25Warrants
      and options exercised
                  
                  
                  (493,079
                  )
                  
                  $
                  2.82Warrants
      and options expired
                  
                  
                  (287,130
                  )
                  
                  $
                  1.50Warrants
      and options outstanding at September 30, 2010
                  
                  
                  3,698,535
                  
                  
                  $
                  2.64


14


The
following table summarizes information about warrants and options outstanding at
September 30, 2010:




Outstanding Warrants and
      Options
                                                    
                                                    
                                                    Exercisable Warrants and
      OptionsExercise price
                                                    
                                                    
                                                    Number of shares
                                                      underlyingwarrants
                                                      and
                                                      options
                                                    
                                                    
                                                    Weighted
                                                      average
                                                      remaining
                                                      contractual life
                                                      (years)
                                                    
                                                    
                                                    Number of shares
                                                      underlying warrants
                                                      and
                                                      options exercisable
                                                    
                                                    
                                                    Weighted
                                                      average
                                                      exercise price$
                                                    1.50
                                                    
                                                    
                                                    
                                                    603,303
                                                    
                                                    
                                                    
                                                    0.96
                                                    
                                                    
                                                    
                                                    603,303
                                                    
                                                    
                                                    $
                                                    1.50$
                                                    2.28
                                                    
                                                    
                                                    
                                                    427,074
                                                    
                                                    
                                                    
                                                    2.08
                                                    
                                                    
                                                    
                                                    427,074
                                                    
                                                    
                                                    $
                                                    2.28$
                                                    2.85
                                                    
                                                    
                                                    
                                                    2,603,158
                                                    
                                                    
                                                    
                                                    1.75
                                                    
                                                    
                                                    
                                                    2,603,158
                                                    
                                                    
                                                    $
                                                    2.85$
                                                    4.35
                                                    
                                                    
                                                    
                                                    10,000
                                                    
                                                    
                                                    
                                                    1.37
                                                    
                                                    
                                                    
                                                    10,000
                                                    
                                                    
                                                    $
                                                    4.35$
                                                    5.70
                                                    
                                                    
                                                    
                                                    5,000
                                                    
                                                    
                                                    
                                                    2.55
                                                    
                                                    
                                                    
                                                    5,000$
                                                    7.98
                                                    
                                                    
                                                    
                                                    50,000
                                                    
                                                    
                                                    
                                                    1.70
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    -$
                                                    2.64
                                                    
                                                    
                                                    
                                                    3,698,535
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    3,648,535
                                                    
                                                    
                                                    $
                                                    2.57





At
September 30, 2010, the aggregate intrinsic value of the warrants and options
outstanding and exercisable was $11,828,306.





At
September 30, 2010, warrants exercisable into 3,633,535 shares of common stock
with an initial exercise price ranging from $1.50 to $2.85 per share, are
subject to full ratchet anti-dilution adjustments 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.





On
February 12, 2010, the Company granted to its Chief Financial Officer an option
to purchase 10,000 shares of common stock.  The options have an
exercise price of $4.35 per share, an expiration date of 2 years from the date
of grant, and vested immediately.  The Company determined the fair
value of the options on the date of grant was $18,152 using the Black-Scholes
option pricing model with the following assumptions: expected volatility,
114.35%; risk-free interest rate, 0.38%; expected weighted average life, 1 year;
and expected dividend yield, 0%.  The Company has recorded $18,152 as
fair value of the options granted during the nine months ended September 30,
2010.




On June
11, 2010, the Company granted to its Corporate Development consultant an option
to purchase 50,000 shares of common stock. The options vest upon the completion
of a public offering of the Company’s common stock, have an exercise price of
$7.98 per share and an expiration date of 2 years from the grant
date. During the nine months ended September 30, 2010, the Company did not
complete a public offering of its common stock and no expense was recognized
related to these options.





On August
24, 2010, the Company granted to one of its employees an option to purchase
5,000 shares of common stock.  The options have an exercise price of
$5.70 per share, an expiration date of 2.75 years from the date of grant, and
vested immediately.  The Company determined the fair value of the
options on the date of grant was $16,000 using the Black-Scholes option pricing
model with the following assumptions: expected volatility, 93.58%; risk-free
interest rate, 0.38%; expected weighted average life, 2.75 years; and expected
dividend yield, 0%.  The Company has recorded $16,000 as fair value of
the options granted during the nine months ended September 30,
2010.





10.  INCOME
TAXES





Companies
in the PRC are generally subject to PRC Enterprise Income Tax at a uniform tax
rate of 25% under the China's Unified Enterprise Income Tax Law ("New EIT Law"),
which took effect on January 1, 2008.  The New EIT Law
provides a five-year transition period from its effective date for those
enterprises which were established before the promulgation date of the New EIT
Law and which were entitled to a preferential EIT treatment. Accordingly,
Shenyang Suo'ang New Energy is subject to the uniform tax rate of 25%. Shaanxi
Suo'ang New Energy is entitled to a two year tax holiday for 2007 and 2008 and a
50% reduction on its EIT rate for the years 2009, 2010 and 2011.





The
Company has not recorded a provision for U.S. federal income tax for the three
and nine month period ended September 30, 2010 and 2009 due to a net operating
loss carry forward in the United States of America. At September 30, 2010 and
2009, the Company had net operating loss carryforwards in the United States of
America of approximately $2,600,000 and $1,000,000, respectively, which begin to
expire in 2028. The deferred tax asset created by the net operating loss has
been offset by a 100% valuation allowance. At September 30, 2010 and 2009, there
were no other significant deferred tax assets or deferred tax
liabilities.


15





Income
tax expense consists of the following for the:





Three months ended
                  September30
                
                
                Ninemonths
      ended
                  September302010
                
                
                2009
                
                
                2010
                
                
                2009Current-PRC
      Enterprise Income Tax
                
                $
                1,349,424
                
                
                $
                463,050
                
                
                $
                4,640,556
                
                
                $
                1,055,718Deferred
      tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      income tax expense
                
                $
                1,349,424
                
                
                $
                463,050
                
                
                $
                4,640,556
                
                
                $
                1,055,718





The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the:




Three months ended
                  September30,
                
                
                Ninemonths
      ended
                  September30,2010
                
                
                2009
                
                
                2010
                
                
                2009U.S.
      statutory rate
                
                
                34
                %
                
                
                (34
                )%
                
                
                34
                %
                
                
                (34
                )%Permanent
      differences
                
                
                5
                %
                
                
                37
                %
                
                
                (13
                )%
                
                
                43
                %Tax
      holiday
                
                
                (9
                )%
                
                
                (1
                )%
                
                
                (3
                )%
                
                
                (3
                )%Effect
      of statutory rate differential
                
                
                (11
                )%
                
                
                (3
                )%
                
                
                (6
                )%
                
                
                (10
                )%Effective
      tax rate
                
                
                19
                %
                
                
                (1
                )%
                
                
                12
                %
                
                
                (4
                )%




Permanent
differences are related to gain (loss) on change in the value of derivatives and
the extinguishment of the derivatives liabilities.




Effective
January 1, 2007, the Company adopted authoritative guidance issued by the
FASB for uncertainty in income taxes. The Interpretation addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under ASC 740-10, we
may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position
should be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement. ASC 740-10
also provides guidance on de-recognition, classification, interest and penalties
on income taxes, accounting in interim periods and requires increased
disclosures. At the date of adoption, and as of September 30, 2010, the Company
does not have a liability for unrecognized tax uncertainties except as described
below. The Company and its Chinese subsidiaries have never been subject to a tax
examination and all years are open to examination by the tax
authorities.





The
Company was delinquent in filing its U.S. federal income tax returns for its
taxable years ended September 30, 2007 and 2008 and information reports for
its bank accounts located in the PRC for 2006, 2007, and 2008. There is no U.S
taxable income for the applicable years and the Company believes that its
failure to file the information reports was not willful.  Accordingly,
no provision has been made for U.S. income taxes and the Company has recorded
its estimate of total penalties that may be assessed for the delinquent U.S. tax
returns and reports in the accompanying condensed consolidated financial
statements.





The
Company enjoys certain tax holidays under the New EIT Law. For the three and
nine months ended September 30, 2010, the tax holidays decreased income tax
expense by approximately $633,000 and $1,376,000, respectively, and the benefit
of the tax holiday on net income per share (basic) was approximately $0.04 and
$0.09, respectively.  For the three and nine months ended September
30, 2009, the tax holidays decreased income tax expense by approximately
$223,000 and $782,000, respectively, and the benefit of the tax holiday on net
income per share (basic) was approximately $0.02 and $0.08,
respectively.




16





11.  RELATED
PARTY TRANSACTIONS





Amounts
due to related parties consisted of the following at:




September
      30,
                  2010
                  (unaudited)
                
                
                December
      31,
                  2009Due
      to executive officer and director :Mr.
      Baowen Ren
                
                $
                73,456
                
                
                $
                73,466





Amounts
due to executive officer and director are non-interest bearing, unsecured, and
due on demand.




12.
COMMITMENTS




Guangdong
facility





In August
2010, we have entered into an agreement with an unrelated company in Dongguan,
Guangong Province to purchase approximately 30 acres of land and a production
factory for approximately $5,550,000 (RMB 37,200,000).  At September
30, 2010, we had made an initial deposit of approximately $555,000 which is
included in Deposits and Prepayments in the accompanying condensed consolidated
financial statements.  The factory is undergoing
refurbishment.  The balance of the purchase price will be due when
refurbishment is completed, which is expected to occur by the end of December
2010.





In
September 2010, we entered into an agreement to purchase two production lines
with capacity for processing 300,000 tons of CWSF annually in Guangdong for
approximately $5,372,000 (RMB 36,000,000).  At September 30,
2010, we had made an initial deposit of approximately $1,612,000 which is
included in Deposits and Prepayments in the accompanying condensed consolidated
financial statements.  The balance of the purchase price will be due
when the productions lines are completed and in service, which is expected to
occur by the end of December 2010.





Tongchuan
facility





We have
entered into an agreement with Tongchuan City Investment and
Development Co., Ltd. ("TCID") to develop a new heat supply company
for the purpose of providing heating for the new district in Tongchuan. TCID has
stated that 15 new heat supply plants will need to be built to supply an area of
16.4 million square meters. The first three plants are expected to be built
and operational by the end of 2010, with the remaining plants expected to be
completed over the following five to seven years. The newly formed heat supply
company will require an investment of $12.5 million by TCID, for which it
will receive an 85% stake in the new company, and $2.2 million by Suo'ang
New Energy, for which it will receive a 15% stake in the new company. As of
November 11, 2010, we have not made any investment in the heat supply company,
but plan to make an investment of approximately $300,000 by the end of 2010,
which represents 15% of the estimated costs of the three plants expected to be
operational by the end of 2010.





Nanning
facility





In
November 2009, through our subsidiary, Suoke Clean Energy, we entered into a
memorandum of understanding with the local government of Nanning, Guangxi
Province, pursuant to which we plan to establish a 500,000 metric ton per annum
CWSF production facility in the city of Nanning. We expect to commence
construction on the facility in early 2011, with a view to commencing commercial
production during 2011.  As of November 11, 2010, we have not entered
into any contracts or commitments related to the Nanning facility
construction.




17




ITEM 2 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





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




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





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




Overview




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





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 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.


18





Accounts
receivable





Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for any uncollectible accounts. We use the aging method to estimate
the valuation allowance for anticipated uncollectible receivable
balances.  Under the aging method, bad debts determined by management
are based on historical experience as well as the current economic climate and
are applied to customers' balances categorized by the number of months
the underlying invoices have remained outstanding.  The
valuation allowance balance is adjusted to the amount computed as a result
of the aging method.  When facts subsequently become available to
indicate that an adjustment to the allowance should be made, this is recorded as
a change in estimate in the current year. As of September 30, 2010 and December
31, 2009, accounts receivable  net of allowances were zero and
zero, respectively.





Derivative
Financial Instruments





We
evaluate all of our 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, we use 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





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





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




We
estimate the fair value of shares of common stock issued for services based on
the closing price of our common stock on the date shares are
granted.


19


Results
of Operations





Three
month period ended September 30, 2010 compared to three month period ended
September 30, 2009




The
following tables set forth key components of our results of operations for the
periods indicated.




Three
      months ended September
                  30,(Unaudited)2010
                
                
                2009Revenue
                
                $
                24,913,134
                
                
                $
                10,889,796Cost
      of goods sold
                
                
                (15,269,720
                )
                
                
                (6,812,469)
                )Gross
      profit
                
                
                9,643,414
                
                
                
                4,077,327Selling
      expenses
                
                
                1,156,147
                
                
                
                416,585General
      and administrative expenses
                
                
                579,837
                
                
                
                471,644Income
      from operations
                
                
                7,907,430
                
                
                
                3,189,078Other
      income (expenses)Interest
      and finance costs
                
                
                (1,047
                )
                
                
                (3,149,499
                )Expense
      related to escrow shares
                
                
                -
                
                
                
                (1,054,548
                )Interest
      income
                
                
                29,889
                
                
                
                11,708Change
      in fair value of derivative liabilities
                
                
                (970,813
                )
                
                
                2,381,333Gain
      on extinguishment of derivative liability
                
                
                
                
                
                
                (7,035,248
                )Cost
      of private placement
                
                
                -
                
                
                
                (24,794,842
                )Sundry
      expenses
                
                
                (4,688
                )
                
                
                -Total
      other income (expenses)
                
                
                (946,659
                )
                
                
                (33,641,096
                )Income(loss)
      before provision for income taxes
                
                
                6,960,771
                
                
                
                (30,452,018
                )Provision
      for income taxes
                
                
                1,349,424
                
                
                
                463,050Net
      income
                
                $
                5,611,347
                
                
                $
                (30,915,068
                )




Revenue.
During the three-month period ended September 30, 2010, we had revenues from
sales of our coal-water slurry fuel of $24,913,134 as compared to revenues of
$10,889,796 during the three-month period ended September 30, 2009, an increase
of 129%. This significant increase is primarily attributable to the
increased production from the production line added in late 2009, which led to
an increase in sales to existing customers.  The annual production
capacity as at September 30, 2010 was 850,000 tons after the commencement of our
new CWSF production plant in Shenyang with annual output capacity of 300,000
tons and 200,000 production line added in Tongchuan , as compared to 350,000
tons as at September 30 2009 . At September 30, 2010 we had 43 customers under
CWSF supply agreements totaling approximately 600,000 tons per year, as compared
to 23 customers totaling approximately 400,000 tons of CWSF per year as at
September 30, 2009. We believe that our sales and number of customers in 2010 as
compared to 2009 are indicative of the growing market acceptance of
CWSF.




Cost of Goods
Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing overhead
and depreciation of plant and machinery, was $15,269,720 for the
three-month period ended September 30, 2010, as compared to $6,812,469 for the
same period of 2009, an increase of 124%. The increase in cost of goods sold is
in line with our increase in sales. However, gross profit margin improved from
37% in 2009 to 39% in 2010 mainly as a result of better pricing of CWSF in
Shenyang.





Selling
Expenses. Selling expenses totaled
$1,156,147 for the three-month period ended September 30, 2010, as compared to
$416,585 for the three-month period ended September 30, 2009. This increase is
mainly in transportation cost as a result of the growth of our business in
2010.





General and
Administrative Expenses. General and administrative
expenses totaled $579,837 for the three-month period ended September 30, 2010,
as compared to $471,664 for the three-month period ended September 30,
2009, an increase of 24%. This increase was primarily caused by our
professional expenses related to preparation of registration statements in
2010.





Income from
Operations. Our
income from operations for the three months ended September 30, 2010 was
$7,907,430, an increase of 148% as compared to $3,189,078 for the same period in
2009, in line with the increase in sales over period.





Other Income
(expense). Other expense totaled $(946,659) for the three-month
period ended September 30, 2010, mainly as the result of the change in fair
value of the derivative liabilities of $(970,813) as compared to other expense
of $(33,641,096) for the three-month period ended September 30, 2009, primarily
caused by the loss on change in fair value of derivative liabilities of
$(7,035,248) and cost of private placement of $(24,794,842) which was partially
set off by the gain on extinguishment of derivative liability of $2,381,333 in
2009.


20





Provision for
income taxes.    For the three month period ended
September 30, 2010 and 2009, our provision for income taxes was $1,349,424 and
$463,050, respectively. The increase in income taxes reflects the increase in
taxable income from our operations in China. For the three months ended
September 30, 2010 and 2009, our effective tax rate was 19% and (1%),
respectively, of income before provision for income taxes.  In 2010
and 2009, our effective tax rate was increased by 5% and 37%, respectively, due
to expenses related to financings and derivatives that are classified as
permanent differences.  Additionally, in 2010 and 2009, our effective
tax rate was reduced by 9% and 1%, respectively, for certain tax holidays we
enjoy in the PRC.





Net
Income(loss). We had
net incomeof
$5,611,437 for the three-month period ended September 30, 2010, as compared to
net loss of $30,915,068 for the same period in 2009.  The increase in
net income is primarily attributable to the increase in sales in
2010.





Nine
month period ended September 30, 2010 compared to nine month period ended
September 30, 2009




The
following tables set forth key components of our results of operations for the
periods indicated.




Nine months
      ended
                  September
      30,(Unaudited)2010
                
                
                2009Revenue
                
                $
                73,571,899
                
                
                $
                26,982,573Cost
      of goods sold
                
                
                (44,448,913
                )
                
                
                (17,695,505
                )Gross
      profit
                
                
                29,122,986
                
                
                
                9,287,068Selling
      expenses
                
                
                3,203,245
                
                
                
                422,405General
      and administrative expenses
                
                
                1,925,072
                
                
                
                1,452,975Income
      from operations
                
                
                23,994,669
                
                
                
                7,411,688Other
      income (expenses)Interest
      and finance costs
                
                
                (10,459,201
                )
                
                
                (4,231,344
                )Expense
      related to escrow shares
                
                
                -
                
                
                
                (1,294,881
                )Interest
      income
                
                
                62,113
                
                
                
                22,979Change
      in fair value of derivative liabilities
                
                
                28,404,181
                
                
                
                3,370,593Gain
      on extinguishment of derivative liability
                
                
                (2,348,479
                )
                
                
                (8,236,238
                )Cost
      of private placement
                
                
                -
                
                
                
                (24,794,842
                )Total
      other income (expenses)
                
                
                15,658,614
                
                
                
                (35,163,733
                )Income
      (loss) before provision for income taxes
                
                
                39,653,283
                
                
                
                (27,752,045
                )Provision
      for income taxes
                
                
                4,640,556
                
                
                
                1,055,718Net
      income (loss)
                
                $
                35,012,727
                
                
                $
                (28,807,763
                )




Revenue. During the nine-month period
ended September 30, 2010, we had revenues from sales of our coal water mixture
of $73,571,899 as compared to revenues of $26,982,573 during the nine-month
period ended September 30, 2009, an increase of 173%.   This
significant increase is primarily attributable to the increased production from
the production line added in late 2009, which led to an increase in sales to
existing customers.  The annual production capacity as at September
30, 2010 was 850,000 tons after the commencement of our new CWSF production
plant in Shenyang with annual output capacity of 300,000 tons and 200,000
production line added in Tongchuan , as compared to 350,000 tons as at September
30 2009 . At September 30, 2010 we had 43 customers under CWSF supply agreements
totaling approximately 600,000 tons per year, as compared to 23 customers
totaling approximately 400,000 tons of CWSF per year as at September 30, 2009.
We believe that our sales and number of customers in 2010 as compared to 2009
are indicative of the growing market acceptance of CWSF.





Cost of Goods
Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing overhead
and depreciation of plant and machinery, was $44,448,913 for the nine-month
period ended September 30, 2010, as compared to $17,695,505 for the same period
of 2009, an increase of 151%. The increase in cost of sales sold is in line with
the increase in sales. However, gross profit margin improved from 34% in 2009 to
40% in 2010 mainly as a result of better pricing of CWSF in
Shenyang.


21




Selling
Expenses. Selling expenses totaled $3,203,245 for the nine-month period
ended September 30, 2010, as compared to $422,405 for the nine-month period
ended September 30, 2009.  This increase in selling expenses is mainly
due to increase in transportation cost as a result of the growth of our business
in 2010.





General and
Administrative Expenses. General and administrative
expenses totaled $1,925,072 for the nine-month period ended September 30, 2010,
as compared to $1,452,975 for the nine-month period ended September 30, 2009, an
increase of 32%. This increase was primarily caused by our expansion in
operations and the expenses related to being a public company.





Income from
Operations. Our
income from operations for the nine-month period ended September 30, 2010 was
$23,994,669, an increase of 224% as compared to income from operations of
$7,411,688 for the same period in 2009, in line with the increase in sales and
expenses.




Other Income
(Expense). Other income totaled $15,658,614  for the
nine-month period ended September 30, 2010, as compared to other expense of
$35,163,733 for the nine-month period ended September 30, 2009, primarily caused
by the gain on extinguishment of derivative liability of $28,404,181 which was
partially set off by the interest expense of $10,459,201 in 2010.





Provision for
income taxes.    For the nine-month period ended
September 30, 2010 and 2009, our provision for income taxes was $4,640,556 and
$1,055,718, respectively. The increase in income taxes reflects the increase in
taxable income from our operations in China. For the nine-month period ended
September 30, 2010 and 2009, our effective tax rate was 12% and (4)%,
respectively, of income before provision for income taxes, due to expenses
related to financings and derivatives that are classified as permanent
differences.  Additionally, in 2010 and 2009, our effective tax rate
was reduced by 3%, for certain tax holidays we enjoy in the
PRC.





Net
Income(loss). We had
net incomeof
$35,012,727 for the nine-month period ended September 30, 2010, as compared to
net loss of $28,807,763 for the same period in 2009.  The increase in
net income is primarily attributable to the increase in sales in the first nine
months of 2010 and gain on extinguishment of derivative liability.





Liquidity
and Capital Resources





For the
nine-month period ended September 30, 2010, we generated $21,277,585 from
operating activities, as compared to $5,103,069 that we generated from operating
activities for the nine-month period ended September 30, 2009.  This
increaseis
primarily due to the increase in sales proceeds.





For the
nine-month period ended September 30, 2010, we used $4,861,342 in investing
activities, of which $2,621,605 was used in the purchase of property, plant and
equipment, as compared to the net cash used in investing activities of
$4,303,540 for the nine-month period ended September 30, 2009.





For the
nine-month period ended September 30, 2010, we used $227,701 in financing
activities, primarily due to prepayment of deferred offering cost.





As of
September 30, 2010, we had cash and cash equivalents of
$34,348,096.  Our total current assets were $44,974,816 and our total
current liabilities were $24,801,174 which resulted in a net working capital of
$20,173,642.





Except as
disclosed in condensed consolidated financial statements, we had no capital
expenditure commitments outstanding as of September 30, 2010 in relation to the
purchase of machinery.





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





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.


22





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
required for smaller reporting companies.




ITEM
4T.         CONTROLS AND
PROCEDURES.





We
maintain “disclosure controls and procedures,” as such term is defined under
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation as required by Rule 13a-15(d) under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2010.





Based
upon their evaluation and subject to the foregoing, the Chief Executive Officer
and Chief Financial Officer concluded that as of September 30, 2010 our
disclosure controls and procedures were not effective because of the material
weaknesses described below.  A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the
registrant's annual or interim financial statements will not be prevented or
detected on a timely basis.  In its assessment of the Company’s
internal control over financial reporting during the period covered by this
report, our management concluded that our internal control over financial
reporting was subject to the following material weaknesses:





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





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


3.       
    As of September 30, 2010, we have not kept a
complete set of ledgers of the parent and shell company. The parent company
has no physical operations and has been mainly functioning as a pass-through
legal entity for financing subsidiary companies that are operating
overseas.





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




Changes in Internal
Control




There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation that occurred during the quarter ended September
30, 2010 that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.




23




OTHER
INFORMATION




PART
II OTHER INFORMATION




ITEM
1             Legal
Proceedings




We are
currently not a party to any legal or administrative proceedings and are not
aware of any pending or threatened legal or administrative proceedings against
us in all material aspects.  We may from time to time become a party
to various legal or administrative proceedings arising in the ordinary course of
our business.


24




ITEM
IA.          Risk
Factors




This
information has been omitted based on the Company’s status as a smaller
reporting company.




ITEM
6             EXHIBITS




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




(a)            
Exhibits:




10.1           Manufacture
Factory Purchase and Sale Contract by and between Suoke Clean Energy
Co., Ltd. and Guangdong Dongguan Yonxu Paper Co., Ltd.




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




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




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


25




SIGNATURES




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




Dated:
November 12, 2010


SINO
      CLEAN ENERGY INC.By:
              /s/
      Baowen RenName:
      Baowen RenTitle:
      Chief Executive Officer


26




EXHIBIT
INDEX





Exhibit No.
            
            Description10.1
            
            Manufacture
      Factory Purchase and Sale Contract by and between Suoke Clean
      Energy Co., Ltd. and Guangdong Dongguan Yonxu Paper Co.,
      Ltd.31.1
            
            Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
            
            Certification
      by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
            
            Certification
      by Chief Executive Officers and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


27