UNITED
STATES


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, 2009




OR




 ̈  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from _____________ to _____________




Commission
file number: 333-126900


———————


China Clean Energy
Inc.


(Exact
Name of Registrant as Specified in Its Charter)


———————




Delaware
            87-0700927(State
      or Other Jurisdiction
            (I.R.S.
      Employerof
      Incorporation or Organization)
            Identification
      No.)





20
Sterling Circle


Suite
204


Wheaton,
Illinois 60187


(Address
of Principal Executive Offices) (Zip Code)




(224)
402-3270


(Registrant’s Telephone Number,
Including Area Code)





(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)


———————


Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes 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 oNo  ̈




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




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




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈No þ




As of
November 12, 2009, 31,512,269 shares of the issuer’s common stock, $0.001 par
value per share, were outstanding.













CHINA
CLEAN ENERGY INC.




Table
of Contents




PagePART I
            FINANCIAL
      INFORMATION
            1Item 1.
            Financial
      Statements
            1Consolidated Balance Sheets as of September 30,
      2009 (Unaudited) andDecember 31, 2008
            1Consolidated Statements of
      Operations and Other Comprehensive Income (Loss)(Unaudited) for the Three
      Months and the Nine Months ended September 30, 2009 and
      2008
            2Consolidated Statements of
      Shareholders’ Equity and Comprehensive Income
            3Consolidated Statements of Cash
      Flows for the Nine Months ended September 30, 2009 and 2008
      (Unaudited)
            4Notes to Consolidated Financial
      Statements (Unaudited)
            5Item 2.
            Management’s Discussion and Analysis of Financial
      Condition and Results ofOperations
            23Item 4.
            Controls and
      Procedures
            30PART II
            OTHER
      INFORMATION
            30Item 1A.
            Risk
    Factors
            30Item 6.
            Exhibits
            30



















PART I




FINANCIAL
INFORMATION




Item 1.




Financial
Statements.




CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


AS
OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008




ASSETSSeptember
      30,
              
              
              December
      31,2009
              
              
              2008(Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
              
              $
              4,158,374
              
              
              $
              2,913,711Restricted
      cash
              
              
              244,945
              
              
              
              -Accounts
      receivable, net of allowance for doubtful accounts of $69,733
      and$136,389 as of
      September 30, 2009 and December 31, 2008, respectively
              
              
              1,252,237
              
              
              
              1,092,768Inventories,
      net
              
              
              928,783
              
              
              
              815,210Advances
      for inventory and other current assets
              
              
              452,226
              
              
              
              310,773Prepaid
      tax credit
              
              
              99,791
              
              
              
              -Total current
      assets
              
              
              7,136,356
              
              
              
              5,132,462PLANT
      AND EQUIPMENT, NET
              
              
              24,575,426
              
              
              
              19,167,624INTANGIBLE
      ASSETS, NET
              
              
              4,912,417
              
              
              
              5,072,626ADVANCES
      ON EQUIPMENT PURCHASES
              
              
              -
              
              
              
              3,649,192TOTAL
      ASSETS
              
              $
              36,624,199
              
              
              $
              33,021,904LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              336,186
              
              
              $
              350,618Accrued
      liabilities
              
              
              190,627
              
              
              
              349,435Customer
      deposits
              
              
              81,200
              
              
              
              31,422Taxes
      payable
              
              
              95,327
              
              
              
              156,965Short-term
      notes payables
              
              
              244,945
              
              
              
              -Short-term
      bank loans
              
              
              3,080,700
              
              
              
              -Long-term
      bank loans - current portion
              
              
              -
              
              
              
              236,308Total current
      liabilities
              
              
              4,028,985
              
              
              
              1,124,748WARRANT
      LIABILITIES
              
              
              1,648,944
              
              
              
              -LONG-TERM
      BANK LOANS - NET OF CURRENT PORTION
              
              
              -
              
              
              
              21,553COMMITMENTS
      AND CONTINGENCIESTotal
      liabilities
              
              
              5,677,929
              
              
              
              1,146,301SHAREHOLDERS'
      EQUITYPreferred
      stock, par value $0.001 per share, authorized 10,000,000 shares, no
      sharesissued and
      outstanding as of September 30, 2009 and December 31, 2008,
      respectively
              
              
              -
              
              
              
              -Common
      stock, par value $0.001 per share, authorized 90,000,000 shares,
      31,512,269 and31,512,269 shares
      issued and outstanding as of September 30, 2009 and December 31, 2008,
      respectively
              
              
              31,512
              
              
              
              31,512Additional
      paid-in capital
              
              
              12,337,494
              
              
              
              21,555,645Statutory
      reserves
              
              
              1,576,349
              
              
              
              1,457,432Retained
      earnings
              
              
              13,834,443
              
              
              
              5,661,025Accumulated
      other comprehensive income
              
              
              3,166,472
              
              
              
              3,169,989Total shareholders'
      equity
              
              
              30,946,270
              
              
              
              31,875,603Total
      liabilities and shareholders' equity
              
              $
              36,624,199
              
              
              $
              33,021,904




See
accompanying notes to consolidated financial statements





1







CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)




Three
      months ended September 30,
              
              
              Nine
      months ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008REVENUES
              
              $
              3,988,916
              
              
              $
              4,101,578
              
              
              $
              11,054,925
              
              
              $
              14,053,372Less:
      cost of goods sold
              
              
              3,219,875
              
              
              
              3,233,048
              
              
              
              9,011,767
              
              
              
              10,783,153GROSS
      PROFIT
              
              
              769,041
              
              
              
              868,530
              
              
              
              2,043,158
              
              
              
              3,270,219OPERATING
      EXPENSESSelling
      and marketing
              
              
              92,789
              
              
              
              56,721
              
              
              
              237,215
              
              
              
              193,642General
      and administrative
              
              
              365,798
              
              
              
              517,203
              
              
              
              1,104,445
              
              
              
              1,634,479Research
      and development
              
              
              27,523
              
              
              
              32,154
              
              
              
              83,135
              
              
              
              123,158Total
      operating expenses
              
              
              486,110
              
              
              
              606,078
              
              
              
              1,424,795
              
              
              
              1,951,279INCOME
      FROM OPERATIONS
              
              
              282,931
              
              
              
              262,452
              
              
              
              618,363
              
              
              
              1,318,940OTHER
      INCOME (EXPENSE)Interest
      income (expense), net
              
              
              (7,175
              )
              
              
              7,910
              
              
              
              (6,619
              )
              
              
              17,718Other
      income (expense), net
              
              
              2,569
              
              
              
              70,263
              
              
              
              (3,353
              )
              
              
              (7,939
              )Change
      in fair value of warrant liabilities
              
              
              (965,965
              )
              
              
              -
              
              
              
              (1,353,563
              )
              
              
              -Total
      other expenses
              
              
              (970,571
              )
              
              
              78,173
              
              
              
              (1,363,535
              )
              
              
              9,779INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
              
              
              (687,640
              )
              
              
              340,625
              
              
              
              (745,172
              )
              
              
              1,328,719PROVISION
      FOR INCOME TAXES (CREDIT)
              
              
              44,032
              
              
              
              (61,074
              )
              
              
              206,816
              
              
              
              177,792NET
      INCOME (LOSS)
              
              
              (731,672
              )
              
              
              401,699
              
              
              
              (951,988
              )
              
              
              1,150,927OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
              
              
              43,544
              
              
              
              15,704
              
              
              
              (3,517
              )
              
              
              1,887,762COMPREHENSIVE
      INCOME (LOSS)
              
              $
              (688,128
              )
              
              $
              417,403
              
              
              $
              (955,505
              )
              
              $
              3,038,689BASIC
      AND DILUTED EARNINGS (LOSS) PER SHAREWeighted
      average number of shares
              
              
              31,512,269
              
              
              
              31,512,269
              
              
              
              31,512,269
              
              
              
              31,182,599Earnings
      (loss)  per share
              
              $
              (0.02
              )
              
              $
              0.01
              
              
              $
              (0.03
              )
              
              $
              0.04


See
accompanying notes to consolidated financial statements





2







CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME




Common
      Stock
              
              
              Additional
              
              
              Retained
      Earnings
              
              
              Accumulated
      OtherPaid-in
              
              
              Statutory
              
              
              Unrestricted
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Capital
              
              
              Reserves
              
              
              Earnings
              
              
              Income
              
              
              TotalBalance
      at December 31, 2007
              
              
              21,512,269
              
              
              $
              21,512
              
              
              $
              7,034,473
              
              
              $
              1,195,744
              
              
              $
              5,325,897
              
              
              $
              1,211,442
              
              
              $
              14,789,068Common
      stocks and warrants issued cash
              
              
              10,000,000
              
              
              
              10,000
              
              
              
              13,617,403
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,627,403Stock-based
      compensation
              
              
              
              
              
              
              
              
              
              
              758,341
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              758,341Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,150,927
              
              
              
              
              
              
              
              1,150,927Adjustment
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              258,906
              
              
              
              (258,906
              )
              
              
              
              
              
              
              -Foreign
      currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,887,762
              
              
              
              1,887,762Balance
      at September 30, 2008 (Unaudited)
              
              
              31,512,269
              
              
              
              31,512
              
              
              
              21,410,217
              
              
              
              1,454,650
              
              
              
              6,217,918
              
              
              
              3,099,204
              
              
              
              32,213,501Stock-based
      compensation
              
              
              
              
              
              
              
              
              
              
              145,428
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              145,428Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (554,111
              )
              
              
              
              
              
              
              (554,111
              )Adjustment
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,782
              
              
              
              (2,782
              )
              
              
              
              
              
              
              -Foreign
      currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              70,785
              
              
              
              70,785Balance
      at December 31, 2008, as previously reported
              
              
              31,512,269
              
              
              
              31,512
              
              
              
              21,555,645
              
              
              
              1,457,432
              
              
              
              5,661,025
              
              
              
              3,169,989
              
              
              
              31,875,603Cumulative
      effect of reclassification of warrants
              
              
              
              
              
              
              
              
              
              
              (9,539,704
              )
              
              
              
              
              
              
              9,244,323
              
              
              
              
              
              
              
              (295,381
              )Balance,
      January 1, 2009, as adjusted
              
              
              31,512,269
              
              
              
              31,512
              
              
              
              12,015,941
              
              
              
              1,457,432
              
              
              
              14,905,348
              
              
              
              3,169,989
              
              
              
              31,580,222Stock-based
      compensation
              
              
              
              
              
              
              
              
              
              
              321,553
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              321,553Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (951,988
              )
              
              
              
              
              
              
              (951,988
              )Adjustment
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              118,917
              
              
              
              (118,917
              )
              
              
              
              
              
              
              -Foreign
      currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,517
              )
              
              
              (3,517
              )Balance
      at September 30, 2009 (Unaudited)
              
              
              31,512,269
              
              
              $
              31,512
              
              
              $
              12,337,494
              
              
              $
              1,576,349
              
              
              $
              13,834,443
              
              
              $
              3,166,472
              
              
              $
              30,946,270
  See
accompanying notes to consolidated financial statements




3








CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)




Nine
      months ended September 30,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
              
              $
              (951,988
              )
              
              $
              1,150,927Adjusted
      to reconcile net income (loss) to cash providedby
      operating activities:Depreciation
              
              
              532,442
              
              
              
              514,268Recovery
      of Bad debt expense
              
              
              (66,606
              )
              
              
              -Amortization
      of intangible assets
              
              
              160,088
              
              
              
              168,382Stock-based
      compensation expense
              
              
              321,553
              
              
              
              758,341Write-down
      on inventory
              
              
              -
              
              
              
              23,871Loss
      on disposal of assets
              
              
              -
              
              
              
              490Change
      in fair value of warrants
              
              
              1,353,563
              
              
              
              -Changes
      in operating assets and liabilitiesAccounts
      receivable
              
              
              (92,744
              )
              
              
              1,804,833Inventories
              
              
              (113,488
              )
              
              
              52,854Advances
      for inventory and other current assets
              
              
              (141,359
              )
              
              
              (166,374
              )Accounts
      payable
              
              
              (14,400
              )
              
              
              342,934Accrued
      liabilities
              
              
              (158,784
              )
              
              
              50,948Customer
      deposits
              
              
              49,741
              
              
              
              (166,042
              )Taxes
      payables
              
              
              (161,306
              )
              
              
              (299,941
              )Net
      cash provided by operating activities
              
              
              716,712
              
              
              
              4,235,491CASH
      FLOWS FROM INVESTING ACTIVITIESAddition
      to construction in progress
              
              
              (2,277,979
              )
              
              
              (6,132,399
              )Purchase
      of equipment
              
              
              (11,753
              )
              
              
              (4,231,925
              )Proceeds
      from sale of equipment
              
              
              -
              
              
              
              1,747Advances
      for equipment purchases
              
              
              -
              
              
              
              (1,681,328
              )Net
      cash used in investing activities
              
              
              (2,289,732
              )
              
              
              (12,043,905
              )CASH
      FLOWS FROM FINANCING ACTIVITIESRestricted
      cash
              
              
              (244,761
              )
              
              
              -Short-term
      notes payable
              
              
              244,761
              
              
              
              -Net
      proceeds from issuance of  common stock
              
              
              -
              
              
              
              13,627,403Proceeds
      from short-term bank loans
              
              
              3,078,390
              
              
              
              -Payments
      on short-term bank loans
              
              
              -
              
              
              
              (1,075,275
              )Payments
      on long-term bank loans
              
              
              (257,667
              )
              
              
              (157,346
              )Net
      cash provided by financing activities
              
              
              2,820,723
              
              
              
              12,394,782EFFECT
      OF EXCHANGE RATE ON CASH
              
              
              (3,040
              )
              
              
              638,167INCREASE
      IN CASH AND CASH EQUIVALENTS
              
              
              1,244,663
              
              
              
              5,224,535CASH
      AND CASH EQUIVALENTS, beginning of period
              
              
              2,913,711
              
              
              
              1,133,555CASH
      AND CASH EQUIVALENTS, end of period
              
              $
              4,158,374
              
              
              $
              6,358,090SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONInterest
      expenses paid (net of amount capitalized)
              
              $
              -
              
              
              $
              45,482Income
      taxes paid
              
              $
              210,271
              
              
              $
              296,412




See
accompanying notes to consolidated financial statements




4








CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 – ORGANIZATION AND BUSINESS





China
Clean Energy, Inc. (“CCE” or the “Company”) was incorporated in the State of
Delaware on November 12, 2004. The Company originally through its direct and
indirect wholly-owned subsidiaries, China Clean Energy Resources Limited
(“CCER”), Fujian Zhongde Technology Co., Ltd. (“Fujian Zhongde”), synthesizes
and distributes renewable fuel products and specialty chemicals to customers in
both the People’s Republic of China (“PRC” or “China”) and abroad.





On
November 5, 2007, CCER established a new wholly-owned subsidiary, Fujian Zhongde
Energy Co., Ltd. (“Zhongde Energy”), in Jiangyin Industrial Zone, Fuqing City,
Fujian Province, PRC. Zhongde Energy plans to build a biodiesel and specialty
chemicals refinery in the Jiangyin Industrial Park and produce and sell
biodiesel and specialty chemicals products. The construction of its production
plant was completed in October 2009 and trial production is expected to begin
production in November 2009.





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation and
Principles of Consolidation





The
accompanying consolidated financial statements of China Clean Energy Inc.
reflect the activities of CCE and its 100% owned subsidiaries CCER, Fujian
Zhongde and Zhongde Energy (collectively the “Company”).





The
consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
and are expressed in US dollars.  All significant intercompany
balances and transactions have been eliminated in consolidation. The Company has
reclassified certain prior year amounts to conform to the current year
presentation.





In the
opinion of management, the unaudited interim consolidated financial statements
furnished herein include all adjustments, all of which are of a normal recurring
nature, necessary for a fair statement of the results for the interim period
presented.  Interim results are not necessarily indicative of the
results that may be expected for a full year.  The information
included in this Form 10-Q should be read in conjunction with information
included in Form 10-K for the year ended December 31, 2008.





Use of Estimates and
Assumptions





The
preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. For example, the Company estimates the fair value of
share-based compensation granted to its employees and estimates its potential
losses on uncollectible receivables. Management believes that the estimates
utilized in preparing its consolidated financial statements are reasonable and
prudent. Actual results could differ from those estimates.






5





Fair Value of Financial
Instruments





The
accounting standards regarding fair value of financial instruments and related
fair value measurements defines financial instruments and requires fair value
disclosures of those financial instruments.  This accounting standard
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. Current assets and current liabilities qualified as
financial instruments and management believes their carrying amounts are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and if
applicable, their current interest rate is equivalent to interest rates
currently available.  The three levels are defined as
follow:





·
            Level
      1 -- inputs to the valuation methodology are quoted prices (unadjusted)
      for identical assets or liabilities in active
  markets.


·
            Level
      2 -- inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.


·
            Level
      3 -- inputs to the valuation methodology are unobservable and significant
      to the fair value.





As of
September 30, 2009 and December 31, 2008, the short-term and long-term bank
loans amounted to $3,080,700 and $0, and $236,308 and $21,553, respectively. In
accordance with the accounting standard, the Company determined that the
carrying value of these loans approximated the fair value using the level 2
inputs by comparing the stated loan interest rate to the rate charged by the
Bank of China to similar loans.




Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates the hierarchy disclosures each
quarter. Liabilities measured at fair value on a recurring basis are summarized
as follows (unaudited):




Carrying
      Value as of
                September
      30, 2009
              
              
              Fair
      Value Measurements at
                September
      30, 2009Level
      1
              
              
              Level
      2
              
              
              Level
      3Warrant
      liability
              
              $
              1,648,944
              
              
              
              
              
              
              
              
              
              
              $
              1,648,944




The
following is a reconciliation of the beginning and ending balances of assets and
liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the period ended September 30,
2009:







WarrantBeginning
      balance*
            
            $
            295,381Total
      gains or losses:Included
      in earnings
            
            
            1,353,563Included
      in other comprehensive income
            
            
            -Purchases,
      issuances, and settlements
            
            
            -Transfer
      in and/or out of Level 3
            
            
            -Ending
      balance
            
            $
            1,648,944




*
Effective January 1, 2009, the Company adopted the provisions of an
accounting standard regarding whether an instrument (or embedded feature) is
indexed to an entity’s own stock. As the result of the adoption, the Company
reclassified from additional paid-in capital, as a cumulative effect adjustment,
$9.2 million to beginning retained earnings and $295,381 to a long-term
warrant liability to recognize the fair value of such warrants.  Refer
to Note 9 for additional information.






6




A
discussion of the valuation techniques used to measure fair value for the
liability listed above and activity for this liability for the nine months ended
September 30, 2009 is provided elsewhere in the notes.




In
addition to assets and liabilities that are recorded at fair value on a
recurring basis, the Company is required to record assets and liabilities at
fair value on a non-recurring basis.  Generally, assets are recorded
at fair value on a non-recurring basis as a result of impairment
charges.  For the three and nine months ended September 30, 2009,
there were no impairment charges.  Refer to elsewhere in the notes for
impairment valuation.





Foreign Currency
Translation





The
functional currency of CCE and CCER is the United States dollar. The functional
currency of Fujian Zhongde and Zhongde Energy is the Chinese Renminbi (“RMB”).
The reporting currency of the Company is the United States dollar.





Fujian
Zhongde and Zhongde Energy assets and liabilities are translated into United
States dollars at period-end exchange rates ($0.14670 and $0.14670 at September
30, 2009 and December 31, 2008, respectively). Fujian Zhongde and Zhongde Energy
revenues and expenses are translated into United States dollars at weighted
average exchange rates for the periods ($0.14659 and $0.14337 for the nine
months ended September 30, 2009 and 2008, respectively). Resulting translation
adjustments are recorded as a component of accumulated other comprehensive
income (loss) within stockholders’ equity. The resulting translation gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the functional currency are included in the results of
operations as incurred. Items in the consolidated cash flow statement are
translated at the average exchange rate for the period. As a result, amounts
related to assets and liabilities reported on the statements of cash flows will
not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets.





As of
September 30, 2009 and December 31, 2008, translation adjustments resulting from
this process included in accumulated other comprehensive income in the
consolidated statement of stockholders’ equity amounted to $3,166,472 and
$3,169,989, respectively.





Cash and Cash
Equivalents





The
Company considers all highly liquid instruments with original maturities of
three months or less at the time of purchase to be cash
equivalents.





Restricted
Cash





The
Company has notes payable outstanding with various banks and is required to keep
certain amounts on deposit that are subject to withdrawal
restrictions.





Accounts
Receivable





The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts.  An allowance for doubtful
account is established and recorded based on managements’ assessment of
potential losses based on the credit history and relationship with the
customers. Management reviews its receivable on a regular basis to determine if
the bad debt allowance is adequate, and adjusts the allowance when necessary.
Delinquent account balances are written-off against allowance for doubtful
accounts after management has determined that the likelihood of collection is
not probable.






7





Inventories





Inventories
are stated at the lower of cost or market using weighted average method.
Management reviews inventories for obsolescence or cost in excess of net
realizable value periodically and records an inventory write-down and additional
cost of goods sold when the carrying value exceeds net realizable
value.





Plant and
Equipment





Plant and
equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When assets are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations. Depreciation of plant and equipment is
provided using the straight-line method for substantially all assets with
estimated lives as follows:





Estimated
      Useful LifeBuildings
            10-20
      yearsVehicle
            5
      yearsOffice
      equipment
            5
      yearsProduction
      equipment
            10
      years





Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and placed into service. Maintenance, repairs and minor renewals are
charged directly to expense as incurred. Major additions and betterment to
buildings and equipment are capitalized. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred.





Intangible
Assets





Under the
accounting standard regarding goodwill and other intangible assets, all goodwill
and certain intangible assets determined to have indefinite lives will not be
amortized but will be tested for impairment at least annually. Intangible assets
other than goodwill will be amortized over their useful lives and reviewed for
impairment in accordance with the accounting standard for accounting for
impairment or disposal of long-lived assets.





Intangible
assets consist of land use right and patents. All land in China is owned by
government: however, the government grants “land use rights”. The Company
through its 100% owned subsidiaries, owns three land use rights with usable life
ranging from 42 to 50 years which will expire ranging from 2048 to 2058. The
Company amortizes the cost of land use right over contract period.





Patents,
which have legal life of 10 years in PRC, are being amortized over 10 years as
management believes that ten years is the estimated useful life of the patents
currently owned by the Company.





Impairment of Long-Lived
Assets





The
Company reviews its long-lived tangible and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may no longer be recoverable. When these events occur, the Company
measures impairment by comparing the carrying value of the long-lived assets to
the estimated undiscounted future cash flows expected to result from the use of
the assets and their eventual disposition. If the sum of the expected discounted
cash flows is less than the carrying amount of the assets, the Company would
recognize an impairment loss based on the fair value of the assets. As of
September 30, 2009 and December 31, 2008, the Company recorded an impairment
loss totaling $0 and $74,817, respectively.





8


Short-term Notes
Payable





Short-term
notes payable are lines of credit extended by banks. When purchasing raw
materials, the Company often issues a short-term note payable to the vendor.
This short-term note payable bears no interest and is guaranteed by the bank for
its complete face value and usually mature within three to six months period.
The banks usually require the Company to deposit a certain amount of cash at the
bank as a guarantee deposit, which is classified on the balance sheet as
restricted cash.





Revenue
Recognition





The
Company follows the accounting standard regarding revenue recognition which
specifies that revenue should be realized or realizable and earned when four
criteria are met:





•
            Persuasive
      evidence of an arrangement exists. (The Company considers its sales
      contracts to be persuasive evidence of an arrangement.)•
            Product
      is shipped or services have been rendered.•
            The
      seller’s price to the buyer is fixed or determinable.•
            Collectability
      of payment is reasonably assured.




The
Company’s sales are related to sales of product. Revenue for product sales is
recognized as risk and title to the product transfer to the customer, which
usually occurs at the time when shipment is made, provided that: there are no
uncertainties regarding customer acceptance; persuasive evidence of an
arrangement exists; the sales price is fixed or determinable; and collectability
is deemed probable.  Substantially all of the Company’s products are
sold FOB (“free on board”) shipping point. Title to the product passes when the
product is delivered to the freight carrier.





Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by the VAT paid
by the Company on raw materials and other materials included in the cost of
producing their finished product.





Transportation
and unloading charges and product inspection charges are included in selling
expenses and totaled $79,586 and $41,859 for the three months ended September
2009 and 2008, respectively, and $172,720 and $153,280 for the nine months ended
September 30, 2009 and 2008, respectively.





Research and Development
Costs





Research
and development (or “R&D”) expenses include salaries, material, contract and
other outside service fees, facilities and overhead costs.  In
accordance to the FASB’s accounting standards for research and development
costs, the Company expenses the costs associated with the research and
development activities when incurred.





The
research and development expenses are included in general and administrative
expenses and totaled $27,523and $32,154 for the three months ended September
2009 and 2008, respectively, and $83,135and $123,158 for the nine months ended
September 30, 2009 and 2008, respectively.






9





Stock-based
Compensation





The
Company accounts for equity instruments issued to employees and in exchange for
the receipt of goods or services from other than employees in accordance with
the FASB’s accounting standards regarding accounting for stock based
compensation and accounting for equity instruments that are issued to other than
employees for acquiring or in conjunction with selling goods or
services.  Costs are measured at the estimated fair market value of
the consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably determinable. The value of equity instruments
issued for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by the provider
of goods or services.. In the case of equity instruments issued to consultants,
the fair value of the equity instrument is recognized over the term of the
consulting agreement.





Income
Taxes





The
Company records income taxes pursuant to the FASB’s accounting standard for
income taxes.  The accounting standard requires the recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist of
taxes currently due plus deferred taxes.





The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantially enacted by the balance sheet
date.





Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated at the tax rates that are expected
to apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it is
related to items credited or charged directly to equity, in which case the
deferred tax is also dealt with in equity. Deferred tax assets and liabilities
are offset when they relate to income taxes levied by the same taxation
authority and the Company intends to settle its current tax assets and
liabilities on a net basis. Because there is no difference between income
reported under General Accepted Accounting Principle in the United States and
income reported under Chinese tax regulation, there are no deferred tax amounts
at September 30, 2009 and December 31, 2008.





The
Company adopted the FASB’s accounting standard for accounting for uncertainty in
income taxes as of January 1, 2007. A tax position is recognized as a benefit
only if it is “more likely than not” that the tax position would be sustained in
a tax examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. The adoption had no effect on the
Company’s consolidated financial statements.





China Income
Taxes





The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax
Laws).





Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).





The key
changes are:




a.
            The
      new standard EIT rate of 25% replaces the 33% rate applicable to both DES
      and FIEs, except for High Tech companies that pay a reduced rate of
      15%;






10






b.
            Companies
      established before March 16, 2007 continue to enjoy tax holiday treatment
      approved by local government for a grace period of either for the next 5
      years or until the tax holiday term is completed, whichever is
      sooner.





Earnings per
Share





Basic
earnings per common share are computed on the basis of the weighted average
number of common shares outstanding during the period.





Diluted
earnings per share are computed on the basis of the weighted average number of
common shares and dilutive securities (such as stock options and convertible
securities) outstanding. Dilutive securities having an anti-dilutive effect on
diluted earnings per share are excluded from the calculation.





Recent Accounting
Pronouncements





In
January 2009, the FASB issued an accounting standard amending the Impairment
Guidance of recognition of interest income and impairment on purchased and
retained beneficial interests in securitized financial assets. The newly issued
accounting standard changes the impairment model included to be more consistent
with the impairment model of another accounting standard for accounting for
securities.  The new accounting standard remove its exclusive reliance
on “market participant” estimates of future cash flows used in determining fair
value. Changing the cash flows used to analyze other-than-temporary impairment
from the “market participant” view to a holder’s estimate of whether there has
been a “probable” adverse change in estimated cash flows allows companies to
apply reasonable judgment in assessing whether an other-than-temporary
impairment has occurred. The adoption of this FASB Staff Positions did not have
a material impact the Company’s consolidated financial statements.





In April
2009, the FASB issued three related FASB Staff Positions: (i) Recognition of
Presentation of Other-Than-Temporary Impairments, (ii) Interim Disclosures about
Fair Value of Financial Instruments, and (iii) Determining the Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which are effective
for interim and annual reporting periods ending after June 15, 2009. The first
Staff Position modifies the requirement for recognizing other-than-temporary
impairments, changes the existing impairment model, and modifies the
presentation and frequency of related disclosures. The second Staff Position
requires disclosures about fair value of financial instruments for interim
reporting periods as well as in annual financial statements.  The
third Staff Position requires new disclosures
regarding the categories of fair value instruments, as well as the inputs and
valuation techniques utilized to determine fair value and any changes to the
inputs and valuation techniques during the period.The adoption of these
FASB Staff Positions did not have a material impact the Company’s consolidated
financial statements.





In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. In addition, it eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures.  This accounting standard is
effective for financial statements issued for fiscal years beginning after
November 15, 2009; The Company is currently assessing the impact of the standard
on its consolidated financial statements.






11





In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”).   This standard modifies how a company determines when
an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. It clarifies that the determination
of whether a company is required to consolidate an entity is based on, among
other things, an entity’s purpose and design and a company’s ability to direct
the activities of the entity that most significantly impact the entity’s
economic performance. An ongoing reassessment is required of whether a company
is the primary beneficiary of a variable interest entity. Further, it also
requires additional disclosures about a company’s involvement in variable
interest entities and any significant changes in risk exposure due to that
involvement. The standard is effective for fiscal years beginning after November
15, 2009. The Company is currently assessing the impact of the standard on its
consolidated financial statements.





In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU.  The adoption of this ASU did not have a material impact
the Company’s consolidated financial statements.





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently assessing the impact of this ASU on its
consolidated financial statements.




NOTE
3 - ACCOUNTS RECEIVABLE





Accounts
receivable consisted of the following:





September
      30, 2009
            
            
            December
      31, 2008(Unaudited)Accounts
      receivable
            
            $
            1,321,970
            
            
            $
            1,229,157Less:
      allowance for doubtful accounts
            
            
            (69,733
            )
            
            
            (136,389
            )Accounts
      receivable, net
            
            $
            1,252,237
            
            
            $
            1,092,768





The
following table consists of allowance for doubtful accounts at:





September
      30, 2009
            
            
            December
      31, 2008(Unaudited)Beginning
      allowance for doubtful accounts
            
            $
            136,389
            
            
            $
            407,593Additions
      to bad debt expense
            
            
            -
            
            
            
            -Recovery
      of amount previously reserved
            
            
            (66,606
            )
            
            
            (294,543
            )Effect
      of foreign currency translation gain (loss)
            
            
            (50
            )
            
            
            23,339Ending
      allowance for doubtful accounts
            
            $
            69,733
            
            
            $
            136,389






12





NOTE
4 – INVENTORIES





Inventories
consist of the following:




September
      30, 2009
            
            
            December
      31, 2008(Unaudited)Raw
      materials
            
            $
            527,656
            
            
            $
            353,438Work
      in process and packaging materials
            
            
            3,897
            
            
            
            70,360Finished
      goods on shipment
            
            
            -
            
            
            
            38,856Finished
      goods
            
            
            397,230
            
            
            
            352,556Subtotal
            
            
            928,783
            
            
            
            815,210Reserve
      for obsolete and slow-moving inventories
            
            
            -
            
            
            
            -Total
            
            $
            928,783
            
            
            $
            815,210





As of
September 30, 2009 and 2008, the Company recorded reserves of $0 and $24,359 for
obsolete and slow-moving inventories, respectively. The amount has been included
in the cost of goods sold for the three and nine months ended September 2009 and
2008, respectively.  Reserve for obsolete and slow-moving inventories
was reduced by $25,463 due to the increase in inventory movement as of September
30, 2009.   There was no reduction in the reserve as of September
30, 2008.





NOTE
5 – PLANT AND EQUIPMENT





Plant and
equipment, net consist of:





September
      30, 2009
            
            
            December
      31, 2008(Unaudited)Buildings
            
            $
            2,456,981
            
            
            $
            2,456,981Equipment
      and machinery
            
            
            6,630,796
            
            
            
            6,620,068Office
      equipment and vehicles
            
            
            52,414
            
            
            
            51,380Construction
      in progress
            
            
            19,008,487
            
            
            
            13,079,606Total
            
            
            28,148,678
            
            
            
            22,208,035Less
      accumulated depreciation
            
            
            (3,573,252
            )
            
            
            (3,040,411
            )Plant
      and equipment, net
            
            $
            24,575,426
            
            
            $
            19,167,624Advances
      on equipment purchases
            
            $
            -
            
            
            $
            3,649,192





Construction
in progress represents materials, labor costs, and capitalized interest incurred
to construct the production plant of Zhongde Energy Co., Ltd in Jiangyin,
Fujian. Construction of the production plant was completed in
October  2009.





Depreciation
expense was $177,646 and $200,337 for the three months ended September 30, 2009
and 2008 and was $532,442 and $514,268 for the nine months ended September 30,
2009 and 2008, respectively. During the three months ended September 30, 2009
and 2008, interest expense of $44,645 and $8,621 was capitalized into
construction in progress, respectively.  For the nine months ended
September 30, 2009 and 2008, interest expense of $63,468 and $45,482 was
capitalized into construction in progress, respectively.






13





NOTE
6 – INTANGIBLE ASSETS





Intangible
assets, net consist of:





September
      30, 2009
            
            
            December
      31, 2008(Unaudited)Land
      use rights
            
            $
            4,950,538
            
            
            $
            4,950,538Patents
      and licenses
            
            
            1,202,940
            
            
            
            1,349,640Total
            
            
            6,153,478
            
            
            
            6,300,178Less
      accumulated amortization
            
            
            (1,241,061
            )
            
            
            (1,227,552
            )Total
      intangible assets, net
            
            $
            4,912,417
            
            
            $
            5,072,626





Amortization
expense for the three months ended September 30, 2009 and 2008 amounted to
$51,749 and $61,175, respectively; and $160,088 and $168,382 for the nine months
ended September 30, 2009 and 2008, respectively. The estimated aggregate
amortization expenses for each of the five succeeding fiscal years are as the
following:





Years
            
            Estimated
      Amortization Expense2010
            
            $
            193,8582011
            
            $
            189,4572012
            
            $
            189,4572013
            
            $
            189,4572014
            
            $
            189,457








NOTE
7 – BANK INDEBTEDNESS





Bank
indebtedness consists of:




September
      30, 2009
            
            
            December
      31, 2008(Unaudited)Long-term bank
      loansDue
      bank, interest at 115% of PRC prime rate, secured by certain buildings and
      land use rights, repaid  2009
            
            $
            -
            
            
            $
            257,861Less
      current portion
            
            
            -
            
            
            
            (236,308
            )Short-term
      bank loansDue
      bank, interest at 5.841% payable monthly through April 2010 ,secured by
      the buildings and land use rights of both Zhongde Energy and Fujian
      Zhongde.
            
            
            1,467,000Due
      bank, interest at 5.841% payable monthly through April 2010 ,secured by
      the buildings and land use rights of both Zhongde Energy and Fujian
      Zhongde.
            
            
            1,613,700Total
            
            $
            3,080,700
            
            
            $
            21,553






14





Total
interest expense on the bank loans for the three months ended September 30, 2009
and 2008 amounted to $44,645 and $8,621, respectively and for the nine months
ended September 30, 2009 and 2008 amounted to $63,468 and $45,482,
respectively.  Interest expense incurred for both periods was fully
capitalized into construction in progress.





NOTE
8 – RETIREMENT AND EMPLOYMENT LIABILITIES





The full
time employees of the Company are entitled to employee benefits including
medical care, welfare subsidies, unemployment insurance and retirement benefits
through a Chinese government mandated multi-employer defined contribution plan.
The Company is required to accrue for those benefits based on certain
percentages of the employees’ salaries and make contributions to the plans out
of the amounts accrued for medical and pension benefits.  The total
provisions and contributions made for such employee benefits were $11,851 and
$287 for the three months ended September 30, 2009 and 2008, respectively; and
amounted to $28,775 and $12,227 for the nine months ended September 30, 2009 and
2008, respectively. The Chinese government is responsible for the medical
benefits and the pension liability to be paid to these employees.





As of
September 30, 2009 and December 31, 2008, the Company had no liability for
pension or post-employment benefits. The Company does not have a pension or
other retirement plan.





NOTE
9 – $15,000,000 PRIVATE PLACEMENT AND WARRANTS





On
January 9, 2008, CCE completed a private placement, pursuant to which CCE issued
10,000,000 shares of common stock and 5,000,000 five-year warrants at an initial
exercise price of $2.00 per share for aggregate gross proceeds of $15,000,000.
In connection with this private placement, CCE incurred placement agent cash
fees of approximately $1,200,000, and issued the placement agent 1,200,000
five-year warrants at an initial exercise price of $2.00 per share. The net
proceeds of $13.6 million were recorded as equity. The fair value of the
warrants issued to the placement agent, was determined to be part of the cost of
raising capital and therefore netted against the additional paid-in
capital.





In
connection with the private placement, four shareholders and officers placed a
total of 1,500,000 shares of their personally owned CCE common stock into an
escrow account, to be released to the investors of this offering if the Company
fails to (1) commence the production of biodiesel at its currently proposed
production facility in Jiangyin, PRC on or before January 1, 2009, or (2) record
at least $14,000,000 of adjusted net income for the fiscal year ending December
31, 2009. Should the Company successfully satisfy each of these two milestones,
these shares of CCE common stock will be returned to the four shareholders and
officers.





As of
January 1, 2009, the Company did not successfully commence production of
biodiesel at the Jiangyin location, and the 1,500,000 shares of Company’s common
stock held in escrow account that was previously owned by those four
shareholders and officers had been transferred to investors. The Company expects
that the transfer of the 1,500,000 shares of Company’s common stock will not
affect the Company’s financial results.





In
connection with the private placement, CCE entered into a registration rights
agreement with the purchasers and agreed to file a registration statement with
the Securities and Exchange Commission covering the resale of the common stock
issued and underlying the warrants on or before February 23, 2008 and to cause
such registration statement to be declared effective by the Securities and
Exchange Commission on or before May 8, 2008. On February 1, 2008, the Company
filed the registration statement. On February 8, 2008, the registration
statement was declared effective by the Securities and Exchange
Commission.





On
January 11, 2008, CCER made a capital contribution of $10,000,000 to Zhongde
Energy to fulfill the registered capital investment requirements stipulated by
the Fuqing City Foreign Trading and Economy Cooperation Bureau.






15





Effective
January 1, 2009, the Company adopted the provisions of an accounting
standard regarding whether an instrument (or embedded feature) is indexed to an
entity’s own stock. This accounting standard specifies that a contract that
would otherwise meet the definition of a derivative but is both (a) indexed to
the Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument.  It provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer’s own stock and thus able to qualify for the scope exception within
the standards.  As a result of adoption, 6,200,000 of issued and
outstanding warrants previously treated as equity pursuant to the derivative
treatment exemption were no longer afforded equity treatment, because these
warrants are denominated in US dollars and the Company’s functional currency is
Renminbi and the warrants are effectively “dual-indexed”. As such, effective
January 1, 2009, the Company reclassified the fair value of these warrants,
which have the “dual-indexed” feature, from equity to liability status as if
these warrants were treated as a derivative liability since their date of issue
in January 2008.  All future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired.




On
January 1, 2009, the Company reclassified from additional paid-in capital,
as a cumulative effect adjustment, $9.2 million to beginning retained
earnings and $295,381 to a long-term warrant liability to recognize the fair
value of such warrants on such date. The fair value increased to $1,648,944 as
of September 30, 2009. As such, the Company recognized a $965,965 loss from the
change in fair value for the three months ended September 30, 2009 and a
$1,353,561 not trade in an active securities market, and as such, the Company
estimates the fair value using the Black-Scholes Option Pricing Model using the
following assumptions:







September
      30,
            
            January
      1,2009
            
            2009(Unaudited)
            
            (Unaudited)Annual
      dividend yield
            
            
            —
            
            
            
            —Expected
      life (years)
            
            
            3.25
            
            
            
            4.00Risk-free
      interest rate
            
            
            1.45
            %
            
            
            1.55
            %Expected
      volatility
            
            
            107
            %
            
            
            99
            %




Expected
volatility is based primarily on historical volatility. The Company does not
have historical data that commensurate with the expected term. Historical
volatility was computed using daily pricing observations for the recent two
years.  The Company believes this method produces an estimate that is
representative of the Company’s expectations of future volatility over the
expected term of these warrants. The Company currently has no reason to believe
future volatility over the expected remaining life of these warrants is likely
to differ materially from historical volatility. The expected life is based on
the remaining term of the warrants. The risk-free interest rate is based on U.S.
Treasury securities according to the remaining term of the
warrants.





Following
is a summary of warrant activity and status:





Warrants
              Outstanding
            
            
            Warrants
              Exercisable
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Average
              Remaining
              Contractual
              LifeDecember
      31, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Granted
            
            
            6,200,000
            
            
            
            6,200,000
            
            
            $
            2.00
            
            
            
            5.0Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      at September 30, 2008 (Unaudited)
            
            
            6,200,000
            
            
            
            6,200,000
            
            
            $
            2.00
            
            
            
            4.25Granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      at December 31, 2008
            
            
            6,200,000
            
            
            
            6,200,000
            
            
            $
            2.00
            
            
            
            4.00Granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      at September 30, 2009 (Unaudited)
            
            
            6,200,000
            
            
            
            6,200,000
            
            
            $
            2.00
            
            
            
            3.25






16





NOTE
10 – OPTIONS





On
January 9, 2008, the Company adopted the 2008 Equity Incentive Plan. Under the
2008 Equity Incentive Plan, CCE is authorized to issue up to 2,000,000 options,
1,000,000 will have an exercise price equal to the greater of (i) $2.50 or (ii)
the fair market value of the common stock on the date of grant (“Tranche 1
Options”) and 1,000,000 will have an exercise price equal to the greater of (i)
$3.00 or (ii) 100% of the fair market value of the common stock on the date of
grant (“Tranche 2 Options”). Under the 2008 Equity Incentive Plan, CCE is
authorized to issue incentive stock options intended to qualify under Section
422 of the Internal Revenue Code of 1986, as amended, and non-qualified stock
options and all options under the Plan shall vest quarterly over three years.
The 2008 Equity Incentive Plan is administered by CCE’S board of
directors.





On
January 9, 2008, CCE granted options to purchase a total of 1,680,000 shares of
common stock under the 2008 Equity Incentive Plan, including 1,350,000 granted
to Company officers and directors. 840,000 options are exercisable at a price of
$2.50 per share and 840,000 options are exercisable at a price of $3.00 per
share; all 1,680,000 options expire 10 years from the date of grant. The
$3,043,429 fair value of the 1,680,000 stock options will be expensed ratably
over the three year requisite service period of the respective personnel. The
fair value of the stock options was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: exercise
prices of $2.50 (for 840,000 stock options) and $3.00 (for 840,000 stock
options), expected life of options of 10 years, expected volatility of 98%,
expected dividend yield of 0%, and risk-free interest rate of 3.82%. For the
three months ended September 30, 2009 and 2008, $83,030 and $251,103 was
amortized and recorded as compensation and for the nine months ended September
30, 2009 and 2008, $321,553 and $758,341 was amortized and recorded as
compensation expense.





Following
is a summary of stock option activity:




Options
      Outstanding
            
            
            Weighted
      Average Exercise Price
            
            
            Aggregate
      Intrinsic ValueOutstanding
      as of December 31, 2007
            
            
            -
            
            
            $
            -
            
            
            $
            -Granted
            
            
            1,680,000
            
            
            
            2.75
            
            
            
            3,043,429Forfeited
            
            
            (1,070,000
            )
            
            
            
            
            
            
            (1,902,143
            )Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Outstanding
      as of December 31, 2008
            
            
            610,000
            
            
            $
            2.75
            
            
            $
            1,141,286Granted
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Outstanding
      as of September 30, 2009
            
            
            610,000
            
            
            $
            2.75
            
            
            $
            -(Unaudited)






17







As of
September 30, 2009, outstanding and exercisable options are out of money; thus
these options have no intrinsic value.




Following
is a summary of the status of options outstanding at September 30,
2009:




Outstanding
      Options
            
            
            Exercisable
      OptionsExercise
              Price
            
            
            Number
            
            
            Average
              Remaining
              Contractual
      Life
            
            
            Average
              Exercise
      Price
            
            
            Number
            
            
            Average
              Remaining
              Contractual
      Life$
            2.50
            
            
            
            305,000
            
            
            
            8.25
            
            
            $
            2.50
            
            
            
            190,417
            
            
            
            8.25$
            3.00
            
            
            
            305,000
            
            
            
            8.25
            
            
            $
            3.00
            
            
            
            190,417
            
            
            
            8.25Total
            
            
            
            610,000
            
            
            
            
            
            
            
            
            
            
            
            380,834




NOTE
11 - EARNINGS PER SHARE





For the
three and nine months ended September 30, 2009, all warrants and options were
excluded from the calculation of diluted earnings per share because the exercise
prices of $2.00, $2.50, and $3.00 were higher than the average trading price of
the Company’s stock, making these warrants anti-dilutive. The basic and diluted
earnings (loss) per share for the three months ended September 30, 2009 and 2008
were ($0.024) and $0.01, respectively and for the nine months ended September
30, 2009 and 2008 were ($0.031) and $0.04, respectively.





NOTE
12 – STATUTORY RESERVES





The
Company’s PRC subsidiaries are required to make appropriations to reserve funds,
comprising the statutory surplus reserve, statutory public welfare fund and
discretionary surplus reserve, based on after-tax net income determined in
accordance with generally accepted accounting principles of the People’s
Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus
reserve should be at least 10% of the after tax net income determined in
accordance with PRC GAAP until the reserve is equal to 50% of the entities’
registered capital.  Appropriations to the statutory public welfare
fund are at 10% of the after tax net income determined in accordance with PRC
GAAP.  The statutory public welfare fund is established for the
purpose of providing employee facilities and other collective benefits to the
employees and is non-distributable other than in liquidation. Appropriations to
the discretionary surplus reserve are made at the discretion of the Board of
Directors. Effective January 1, 2006, the Company is only required to contribute
to one statutory reserve fund at 10% of net income after tax per annum. This
contribution will be made to meet 50% of the respective companies’ registered
capital.





The
Company has total registered capital $15,612,485.  As of September 30,
2009 and December 31, 2008, the Company allocated $1,576,349 and $1,457,432,
respectively, to the statutory reserves.  The additional amount that
still needs to be allocated to statutory reserves to meet the 50% of registered
capital as of September 30, 2009 is approximately $6,229,893.





18





NOTE
13 – TAXES





Income
Taxes





Income
taxes expenses consist of:





Three
      Months ended
              September
      30,
            
            
            Nine
      Months ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)Current:PRC
            
            $
            44,032
            
            
            $
            (61,074
            )
            
            $
            206,816
            
            
            $
            177,792United
      States
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      current
            
            
            44,032
            
            
            
            (61,074
            )
            
            
            206,816
            
            
            
            177,792Deferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            44,032
            
            
            $
            (61,074
            )
            
            $
            206,816
            
            
            $
            177,792




Fujian
Zhongde has been subject to a PRC 33% standard enterprise income tax. In 2006,
Fujian Zhongde became a wholly-owned foreign enterprise (“WOFE”). PRC income tax
laws provide that certain WOFEs may be exempt from income taxes for two years,
commencing with their first profitable year of operations, after taking into
account any losses brought forward from prior years, and thereafter 50% exempt
for the next three years. In December 2006, Fujian Zhongde applied for PRC
approval of these income tax exemptions. In March 31, 2007, the PRC tax
authorities approved a full income tax exemption for the year 2007 and a 12%
income tax rate for years 2008, 2009 and 2010.





Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The new standard EIT rate of 25% replaces the 33% rate applicable to both DES
and FIEs, except for High Tech companies that pay a reduced rate of 15%. For
companies established before March 16, 2007 continue to enjoy tax holiday
treatment approved by local government for a grace period of either for the next
5 years or until the tax holiday term is completed, whichever is
sooner.





The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months and nine months ended September 30, 2009 and
2008:





2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)U.S.
      Statutory rates
            
            
            35
            %
            
            
            35
            %Foreign
      income not recognized in USA
            
            
            (35
            )
            
            
            (35
            )China
      income taxes
            
            
            25
            
            
            
            25Tax
      exemption
            
            
            (13
            )
            
            
            (13
            )Total
      provision for income taxes
            
            
            12
            %
            
            
            12
            %





For the
three months ended September 30, 2009 and 2008, the Company’s effective income
tax rate was (6.4%) and (17.9%).  For the nine months ended September
30, 2009 and 2008, the Company’s effective income tax rate was (27.8%) and
13.4%.  These rates differ from the stated effective tax rate in China
mainly due to losses incurred by the non-Chinese entities that are not
deductible in the PRC.





The
estimated tax savings for the three months ended September 30, 2009 and 2008
amounted to $67,541 and $131,969. The net effect on earnings per share had the
income tax been applied would decrease earnings per share from ($0.03) to
($0.033) in 2009 and $0.01 to $0.009 in 2008. The estimated tax savings for the
nine months ended September 30, 2009 and 2008 amounted to $181,479 and $359,688.
The net effect on earnings per share had the income tax been applied would
decrease earnings per share from ($0.02) to ($0.03) in 2009 and $0.04 to $0.03
in 2008.






19





The
Company has cumulative undistributed earnings of foreign subsidiaries of $
9,101,043 as of September 30, 2009, which is included in consolidated retained
earnings and will continue to be indefinitely reinvested in international
operations.  Accordingly, no provision has been made for U.S. deferred
taxes related to future repatriation of these earnings, nor is it practicable to
estimate the amount of income taxes that would have to be provided if we
concluded that such earnings will be remitted in the future.





CCE was
incorporated in the United States and has incurred net operating losses for
income tax purposes for the periods ended September 30, 2009. The estimated net
operating loss carry forwards for United States income taxes amounted to
approximately $1,793,000 and $1,564,000 as of September 30, 2009 and December
31, 2008, which may be available to reduce future years’ taxable
income.  These carry forwards will expire, if not utilized, through
2024 and 2029.  Management believes that the realization of the
benefits from these losses appears uncertain due to the Company’s limited
operating history and continuing losses for United States income tax
purposes.  Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax asset benefit to reduce the asset to zero. The
valuation allowance as of September 30, 2009 was $627,567 and the valuation
allowance was increased by $80,242 for the nine months ended September 30, 2009.
Management will review this valuation allowance periodically and make
adjustments as warranted.





Value Added
Tax





Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax, VAT, in accordance
with Chinese laws. The VAT standard rate is 17% of the gross sales price. A
credit is available whereby VAT paid on the purchases of semi-finished products
or raw materials used in the production of the Company’s finished products can
be used to offset the VAT due on sales of the finished product. A preferential
rate is also applied for exporting products.





VAT on
sales and VAT on purchases amounted to $256,967 and $106,935 for the three
months ended September 30, 2009 and $406,800 and $483,279 for the three months
ended September 30, 2008. VAT on sales and VAT on purchases amounted to $944,631
and $984,445 for the nine months ended September 30, 2009 and $1,665,336 and
$1,415,320 for the nine months ended September 30, 2008, respectively. Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent because the VAT taxes are not impacted by the income tax holiday. As of
September 30, 2009, because the Company’s purchases and VAT taxes paid are
greater than sales during the period resulting in prepaid tax credits of $99,791
that can be used to offset future VAT on sales. As of December 31, 2008, VAT
payable amounted to $72,729.





NOTE
14 – RELATED PARTY TRANSACTIONS





Fujian
Zhongde purchases raw materials from companies affiliated with the Company’s
majority stockholder. Yang Fan, one of the shareholders of this “affiliated”
company, Fujian Zhongde Waste Oil Co. Ltd., is the niece of Ms. Yang Qin,
director of China Clean Energy Inc. and a major shareholder of the company. In
the nine months ended September 30, 2009 and 2008, such purchases totaled $0 and
$864,848, respectively. As of September 30, 2009 and December 31, 2008, there
were no outstanding payables due to these companies.




NOTE
15 – SEGMENT INFORMATION




The
Company operates in one industry segment – the synthesis and distribution of
renewable fuel products and specialty chemicals to customers in both the PRC and
abroad.  Substantially all of the Company’s identifiable assets were
located in the PRC. Geographic area data is based on product shipment
destination.






20








Net sales
for the three months ended September 30, 2009 and 2008 consist of:





2009
            
            
            
            
            
            2008(Unaudited)
            
            
            
            
            
            (Unaudited)Sales
            
            
            GP%
            
            
            Sales
            
            
            GP%China
            
            $
            1,511,015
            
            
            
            9.41%
            
            
            $
            2,392,941
            
            
            
            21.80%India
            
            
            1,065,588
            
            
            
            24.71%
            
            
            
            715,314
            
            
            
            23.30%Other
      foreign countries
            
            
            1,412,313
            
            
            
            23.94%
            
            
            
            993,323
            
            
            
            17.80%Total
      Sales
            
            $
            3,988,916
            
            
            
            18.64%
            
            
            $
            4,101,578
            
            
            
            21.0%





Net sales
for the nine months ended September 30, 2009 and 2008 consist of:





2009
            
            
            
            
            
            2008(Unaudited)
            
            
            
            
            
            (Unaudited)Sales
            
            
            GP%
            
            
            Sales
            
            
            GP%China
            
            $
            5,556,651
            
            
            
            11.22%
            
            
            $
            9,796,092
            
            
            
            21.22%India
            
            
            2,890,259
            
            
            
            27.31%
            
            
            
            2,315,627
            
            
            
            29.11%Other
      foreign countries
            
            
            2,608,015
            
            
            
            24.20%
            
            
            
            1,941,653
            
            
            
            27.85%Total
      Sales
            
            $
            11,054,925
            
            
            
            18.49%
            
            
            $
            14,053,372
            
            
            
            23.44%




NOTE
16 – CONCENTRATIONS AND RISKS





The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the economy in the regions where the Company’s customers are located. The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.





The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the PRC. Under existing
PRC foreign exchange regulations, payment of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where RMB is to be converted into foreign currency and remitted out of
the PRC to pay capital expenses, such as the repayment of bank loans denominated
in foreign currencies. The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.





The
Company’s demand deposits are in accounts maintained with stateowned banks within the
People’s Republic of China and an offshore account in United States of America.
Total cash deposited with banks within the People’s Republic of China, including
restricted cash balances, as of September 30, 2009 and December 31, 2008
amounted to $4,340,356 and $2,902,707, respectively, of which no deposits are
covered by insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts.





For the
three months ended September 30, 2009, one customers for specialty chemical
products (no customer for biodiesel product) accounted for 18.63% of net sales.
For the three months ended September 2008, one customer (for both biodiesel and
specialty chemical products) accounted for 11.59% of net sales. For the nine
months ended September 30, 2009, two customers for specialty chemical products
(no customer for biodiesel product) accounted for 10.73% and 10.25%,
respectively, of net sales. In 2008, no customer (for both biodiesel and
specialty chemical products) accounted for over 10% of net sales. The accounts
receivable due from these customers amounted to $213,495 and $0, respectively,
as of September 30, 2009 and December 31, 2008.






21





For the
three months ended September 30, 2009, two suppliers for feedstock and raw
materials accounted for 20.40% and 16.01%, respectively, of the total raw
material purchase. For the three months ended September 2008, four suppliers for
feedstock and raw materials accounted for 12.51%, 11.62%, 11.50%, and 11.16%,
respectively, of the total raw materials purchase. For the nine months ended
September 30, 2009, two suppliers for feedstock and raw materials accounted for
18.66% and 14.26%, respectively, of the total raw material purchase. In 2008,
one supplier for feedstock and raw materials accounted for 10.59% of the total
raw material purchase. There were no accounts payable due to these suppliers as
of September 30, 2009 and December 31, 2008.





NOTE
17 – COMMITMENTS AND CONTINGENCIES





From time
to time, the Company is involved in legal matters arising in the ordinary course
of business.  Management currently is not aware of any legal matters or
pending litigation, which would have a significant effect on the Company’s
consolidated financial statements as of September 30, 2009.





NOTE
18 – SUBSEQUENT EVENTS





The
Company has performed an evaluation of subsequent events through November 12,
2009, which is the date the financial statements were issued.





22







Item 2.





Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.




Certain
statements in this Quarterly Report on Form 10-Q, including certain statements
contained in “Management’s Discussion and Analysis,” constitute forward-looking
statements.  The words or phrases “can be,” “may,” “could,” “would,”
“expects,” “believes,” “seeks,” “estimates,” “projects” and similar words and
phrases are intended to identify such forward-looking statements. Such
forward-looking statements are subject to various risks and uncertainties.
 Any forward-looking information provided by us or on our behalf is not a
guarantee of future performance. Our actual results could differ materially from
those anticipated by such forward-looking statements due to a number of factors,
some of which are beyond our control. All such forward-looking statements are
current only as of the date on which such statements were made. We do not
undertake any obligation to publicly update any forward-looking statement to
reflect events or circumstances after the date on which any such statement is
made or to reflect the occurrence of unanticipated events.




Company
Overview




We were
originally incorporated in Delaware under the name “Hurley Exploration Inc.” on
November 12, 2004, in order to conduct mineral exploration activities. On
October 13, 2006, in anticipation of our acquisition of China Clean Energy
Resources, Ltd., we abandoned this enterprise and changed our name to China
Clean Energy Inc. On October 24, 2006, we acquired China Clean Energy Resources,
Ltd., pursuant to the terms of a Share Exchange Agreement. This transaction was
accounted for as a reverse acquisition (recapitalization), with China Clean
Energy Resources, Ltd. deemed to be the accounting acquirer and us as the legal
acquirer. Upon the closing of this transaction, we became a Chinese renewable
resource-based biodiesel and specialty chemicals manufacturer and
distributor.




China
Clean Energy Resources, Ltd. was incorporated in the British Virgin Islands on
February 13, 2006, for the purpose of holding a 100% interest in Fujian Zhongde
Technology Co. Ltd. As such, China Clean Energy Resources, Ltd. does not conduct
any substantive operations of its own, but rather conducts its primary business
operations through Fujian Zhongde Technology Co. Ltd., a Chinese company that
was incorporated in the Province of Fujian, People’s Republic of China on July
10, 1995. On November 5, 2007, Fujian Zhongde Energy Co. Ltd. was incorporated
in the Province of Fujian, People’s Republic of China as a 100% owned subsidiary
of China Clean Energy Resources, Ltd. for the development and operation of our
new biodiesel and specialty chemical refinery in Jiangyin Industrial Park,
Fuqing City, Fujian Province, People’s Republic of China.




Recent
Events




We
commenced the construction of the new Jiangyin plant in December 2007 and
completed construction in October 2009. The Jiangyin Industrial Park at which
the new facility is located is equipped with a deep sea harbor capable of
servicing 100,000 ton cargo ships, a container port and railroad that will
be connected to the People’s Republic of China’s national railroad network.
The plant has the flexibility to produce 100,000 tons of biodiesel per year, or
30,000 tons of specialty chemicals per year, or a combination of biodiesel and
specialty chemicals for a total output of 70,000 tons per year. We believe our
expansion on both biodiesel and specialty chemical production capacity will help
us to increase our competitiveness and profitability in the future.




Three
months ended September 30, 2009 compared to the three months ended September 30,
2008




Revenues. During the quarter
ended September 30, 2009, we had net sales of $3,988,916 (12% from biodiesel
sales and 88% from specialty chemicals sales), as compared to net sales of
$4,101,578 (100% from specialty chemicals sales) during the quarter ended
September 30, 2008, representing a decrease of approximately 3%. This decrease
was attributable to lower selling prices, primarily driven by the declining
demand in the domestic specialty chemicals market.  Export sales increased
by about 45% in the quarter ended September 30, 2009 as compared to the quarter
ended September 30, 2008 due to increased demand in the international market,
particularly India and Singapore.




23






Gross Profit. The cost of
goods sold, which consists of direct labor, feedstock, direct materials,
overhead and product costs, and depreciation of production facilities, was
$3,219,875 for the quarter ended September 30, 2009, as compared to cost of
goods sold of $3,233,048 for the quarter ended September 30, 2008. We had a
gross profit of $769,041 for the quarter ended September 30, 2009, as compared
to a gross profit of $868,530 for the quarter ended September 30, 2008,
representing gross margins of approximately 19% and 21%, respectively. This
decrease in gross margins primarily resulted from less profitable biodiesel
sales  due to the depressed selling prices.




Selling Expenses. Selling
expenses, which include advertising and promotion, freight charges, exporting
expenses, wages and salaries totaled $92,789 for the quarter ended September 30,
2009, as compared to $56,721 for the quarter ended September 30, 2008,
representing an increase of approximately 64%. This increase was primarily due
to the increase in our specialty chemicals exports (which increased from
approximately $1.7 million during the quarter ended September 30, 2008 to
approximately $2.5 million during the quarter ended September 30, 2009), related
export and freight charges and commissions.




General and Administrative and Other
Operating Expenses. General and administrative and other operating
expenses totaled $393,321 for the quarter ended September 30, 2009, as compared
to $549,357 for the quarter ended September 30, 2008, representing a decrease of
approximately 28%. This decrease was primarily attributable to lower stock-based
compensation expense due to a reduction in the number of our employees and
cancellation of certain consulting services.




Net Income. We recorded a net
loss of $731,672, or a loss of $0.02 per basic and diluted share, for the
quarter ended September 30, 2009, which included a non-cash charge of
$965,965 due to change in fair value measurement of the warrant liabilities. We
recorded a net income of $401,699, or $0.01 per basic and diluted share, for the
quarter ended September 30, 2008.




We review
our non-GAAP adjusted net earnings to measure the performance of our
business.  The non-GAAP adjusted net earnings exclude both
non-recurring items and non-cash charges related to the warrants issued in
connection with our 2008 private placement. We believe that these non-GAAP
adjusted financial measures are helpful because they reflect our essential
operating activities and provide a consistent method of comparison to historical
periods. We believe that providing these non-GAAP measures to investors is
beneficial for a number of reasons. The non-GAAP measures provide a consistent
basis for investors to understand our financial performance as compared to
historical periods without variation of non-recurring items and non-operating
related charges. In addition, investors are able to evaluate our performance
using the same methodology and information as that used by management. Non-GAAP
measures are subject to inherent limitations because they do not include all of
the expenses included under GAAP and because they involve the exercise of
judgment of which charges are excluded from the non-GAAP financial measure.
However, we compensate for these limitations by providing the relevant
disclosure of the items excluded.




The
following table provides the non-GAAP financial measures and a reconciliation of
the non-GAAP measures to the GAAP net income.




Three
      months ended September 30,2009
            
            
            2008Net
      Income (Loss)
            
            $
            (731.672
            )
            
            $
            401,699Add
      back (Deduct):Change
      in fair value of warrant
            
            $
            965,965Stocked-based
      compensation
            
            $
            83,030
            
            
            $
            504.722Adjusted
      Net Income
            
            $
            317,323
            
            
            $
            906,421Diluted
      Earnings Per Share
            
            $
            (0.02
            )
            
            $
            0.01Add
      back (Deduct)Change
      in fair value of warrant
            
            $
            0.03Stocked-based
      compensation
            
            $
            -
            
            
            $
            0.02Adjusted
      Earnings Per Share
            
            $
            0.01
            
            
            $
            0.03






24




The
adjusted net income of $317,323 and the adjusted earnings per share of $0.01 per
diluted share for the quarter ended September 30, 2009 in the table
above excludes a $965,965 non-cash charge due to change in the fair value
of warrants and a $83,030 stock-based compensation expense . Our adjusted net
income for the quarter ended September 30, 2008 was $906,421, or $0.03 per
diluted share.




Nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008




Revenues. During the nine
months ended September 30, 2009, we had net sales of $11,054,925 (17% from
biodiesel sales and 83% from specialty chemicals sales), as compared to net
sales of $14,053,372 (4% from biodiesel sales and 96% from specialty chemicals
sales) during the nine months ended September 30, 2008, representing a decrease
of approximately 21%. This decrease was attributable to lower selling prices,
primarily driven by the declining demand in the domestic specialty chemicals
market as the economic downturn continued in 2009.




Gross Profit. The cost of
goods sold was $9,011,767 for the nine months ended September 30, 2009, as
compared to cost of goods sold of $10,783,153 for the nine months ended
September 30, 2008. We had a gross profit of $2,043,158 for the nine months
ended September 30, 2009, as compared to a gross profit of $3,270,219 for the
nine months ended September 30, 2008, representing gross margins of
approximately 18% and 23%, respectively. This decrease in gross profit resulted
from a decrease in selling prices and the decrease in gross margins was
primarily due to the low biodiesel gross margins as the selling price remained
depressed.




Selling Expenses. Selling
expenses totaled $237,215 for the nine months ended September 30, 2009, as
compared to $193,642 for the nine months ended September 30, 2008.




General and Administrative and Other
Operating Expenses. General and administrative and other operating
expenses totaled $1,187,580 for the nine months ended September 30, 2009, as
compared to $1,757,637 for the nine months ended September 30, 2008,
representing a decrease of approximately 32%. This decrease was primarily
attributable to lower stock-based compensation expense due to a reduction in the
number of our employees and cancellation of certain consulting
services.




Net Income. We had a net loss
of $951,988, or a loss of $0.03 per basic and diluted share, for the nine months
ended September 30, 2009, which loss included a non-cash charge of $1,353,563
due to change in fair value measurement of the warrant liabilities. We had a net
income of $1,150,927, or $0.04 per basic and diluted share, for the nine months
ended September 30, 2008. This decrease in net income for the nine months
ended September 30, 2009 was primarily attributable to the decline in sales
demand and selling prices in both biodiesel and specialty chemical
markets.




Please
see above for a discussion of the benefits of providing non-GAAP financial
measures and a reconciliation of the non-GAAP measures to the GAAP net
income.




Nine months
      ended September 30,2009
            
            
            2008Net
      Income (Loss)
            
            $
            (951,988
            )
            
            $
            1,150,927Add
      back (Deduct):Change
      in fair value of warrant
            
            $
            1,353,563Stocked-based
      compensation
            
            $
            321,553
            
            
            $
            758,341Adjusted
      Net Income
            
            $
            723,128
            
            
            $
            1,909,268Diluted
      Earnings Per Share
            
            $
            (0.03
            )
            
            $
            0.04Add
      back (Deduct)Change
      in fair value of warrant
            
            $
            0.04
            
            
            
            -Stocked-based
      compensation
            
            $
            0.01
            
            
            $
            0.02Adjusted
      Earnings Per Share
            
            $
            0.02
            
            
            $
            0.06




25




The
adjusted net income of $723,128 or the adjusted EPS of $0.02 per diluted share,
for the nine months ended September 30, 2009 in the table above excludes a
$1,353,563 non-cash charge due to change in fair value measurement of warrant
liabilities and a $321,553 stock-based compensation expense. Our adjusted net
income for the nine months ended September 30, 2008 was $1,909,268, or $0.06 per
diluted share.




Liquidity
and Capital Resources




Loan
Agreement. On April
14, 2009, our wholly owned subsidiary Fujian Zhongde Technology Co. Ltd. entered
into a loan agreement and a bank note financing agreement with Fuzhou City
Commercial Bank.  Pursuant to the loan agreement, Fujian Zhongde Technology
Co. Ltd. borrowed RMB 10 million, or approximately $1.5 million, at an annual
interest rate of 5.841%.  The loan is payable monthly on the 20th day of
each month starting April 20, 2009.  The loan matures on April 1, 2010 and
its repayment is secured by, among other things, the land and buildings of
Fujian Zhongde Technology Co. Ltd. and by the land of Fujian Zhongde Energy Co.,
Ltd., our other wholly owned subsidiary.  The proceeds from the loan shall
be used primarily for construction of our new facility and for working capital
associated with the production of specialty chemicals and biodiesel at the
facility. Fujian Zhongde Technology Co. Ltd. shall be subject to a penalty
interest rate of 10.52% in the event that it does not use the proceeds from the
loan as specified in the loan agreement or timely repay the loan.




Pursuant
to the bank note financing agreement, Fujian Zhongde Technology Co. Ltd.
established a RMB 11 million, or approximately $1.6 million, revolving line of
credit.  All advances under the bank note financing agreement shall be
evidenced by a promissory note with a floating interest rate based on the face
value and maturity period of such note.  Fujian Zhongde Technology Co. Ltd.
must repay all advances under the bank note financing agreement by April 1,
2010.  The repayment of advances is secured by, among other things, the
land and buildings of Fujian Zhongde Technology Co. Ltd. and by the land of
Fujian Zhongde Energy Co., Ltd.  Advances shall be primarily used for
construction of our new facility, and for working capital associated with the
production of specialty chemicals and biodiesel at the facility. On June 24,
2009, the Company changed the RMB 11 million bank acceptance note into a
nine-month term loan, as the Company no longer uses the bank acceptance note to
do business due to customer requirements on using bank acceptance notes.
Interest rates and other bank terms stay unchanged.




General. As of
September 30, 2009 and December 31, 2008, we had cash and cash equivalents of
$4,158,374 and $2,913,711, respectively. The increase in cash and cash
equivalents was primarily attributable to the $3,078,390 of proceeds we received
from short-term bank loans, partly offset by $2,277,979 of capital expenditures
on our new plant.




Net cash
provided by operating activities totaled $716,712 for the nine months
 ended September 30, 2009, as compared to net cash provided by operating
activities of $4,235,491 for the nine months ended September 30, 2008. This
decrease in net cash provided by operating activities was primarily due to a
significant decline in operating profit and payments for inventory purchases
during the nine months ended September 30, 2009




Net cash
used in investing activities totaled $2,289,732 for the nine months ended
September 30, 2009, as compared to $12,043,905 for the nine months ended
September 30, 2008. This decrease was primarily a result of greater construction
expenses for the nine months ended September 30, 2008 that were related to the
purchase of materials and equipment for the new production plant, ongoing
construction and an increase in advanced payments to equipment vendors,
materials vendors and construction contractors. Because we were nearing
completion of our plant in Jiangying in the summer and fall of 2009, our
construction related expenses decreased for the nine months ended September 30,
2009.




26




Net cash
provided by financing activities totaled $2,820,723 for the nine months ended
September 30, 2009, as compared to $12,394,782 for the nine months ended
September 30, 2008. This decrease was primarily due to the fact that we
completed a $15 million private placement during the nine months ended September
30, 2008, combined with the fact that we retired certain bank loans during the
nine months ended September 30, 2009, which were partiallyoffset by our issuance
of certain short term notes during the nine months ended September 30,
2009.




Critical
Accounting Policies and Estimates




The
discussion and analysis of our financial condition presented in this section is
based on the consolidated financial statements. Our consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles in the United States (“GAAP”). During the preparation of the
financial statements we are required to make estimates and judgments that affect
the reported amount of assets, liabilities, revenues, expenses and the related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to sales, returns, pricing
concessions, bad debts, inventories, investments, fixed assets, intangible
assets, income taxes, fair value of warrants and other contingencies. We based
our estimates on historical experience and various other assumptions that we
believe are reasonable under the set of current conditions. Actual results may
differ from these estimates under a different set of assumptions or set of
conditions.




In
response to the Securities and Exchange Commission’s Release No. 33-8040,
“Cautionary Advice Regarding Disclosure about Critical Accounting Policy,” we
identified the most critical accounting principals upon which our financial
status depends. We determined that those critical accounting principles are
related to the use of estimates, inventory valuation, revenue recognition,
income tax, impairment of intangibles and other long-lived assets. We present
these accounting policies in the relevant sections in this management’s
discussion and analysis, including the Recently Issued Accounting Pronouncements
discussed below.




Revenue Recognition. We
recognize a sale when the revenue has been realized or realizable and has been
earned, in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 104, “Revenue Recognition in Financial Statements”. Our sales are
related to the sale of a product. Revenue for a product sale is recognized as
risk and title to the product transfer to the customer, which usually occurs at
the time shipment is made. Substantially all of our products are sold FOB (“free
on board”) shipping point. Title to the product passes when the product is
delivered to the freight carrier.




Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All products that are sold in the People’s Republic of China are
subject to a local value-added tax at a rate of 17% of the gross sales price, or
at a rate that is approved by the local government. This VAT may be offset by a
VAT paid on raw materials and other materials included in the cost of producing
the finished product.




Accounts Receivable, Trade and
Allowance for Doubtful Accounts. Substantial portions of our business
operations are conducted in the People’s Republic of China.  During the
normal course of business, we extend unsecured credit to our customers. Accounts
receivable and trades outstanding on September 30, 2009 and December 31, 2008
totaled $1,252,237 and $1,092,768, respectively. Management reviews our accounts
receivable on a regular basis to determine if the allowance for doubtful
accounts is adequate. An estimate for doubtful accounts is recorded when
collection of the full amount is no longer likely. As of September 30, 2009 and
December 31, 2008, allowances for doubtful accounts totaled $69,733 and
$136,389, respectively.




Inventories. Inventories are
stated at the lesser of cost (first in, first out method) or market. We review
our inventory on a regular basis to determine if any reserves are necessary for
potential obsolescence. As of September 30, 2009, management determined that the
carrying amount of most raw materials is equivalent to prices currently
available. No inventory was written down for the three and nine months ended
September 30, 2009.






27




Impairment of Long-Lived
Assets. Management reviews our long-lived tangible and intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may no longer be recoverable. When these events
occur, we measure impairment by comparing the carrying value of the long-lived
assets to the estimated undiscounted future cash flows expected to result from
the use of the assets and their eventual disposition. If the sum of the expected
discounted cash flows is less than the carrying amount of the assets, we would
recognize an impairment loss based on the fair value of the assets.




Change in Fair Value of
Warrants.  Effective January 1, 2009, we adopted the provisions of
EITF 07 5, “Determining Whether an Instrument (or Embedded Feature) is Indexed
to an Entity’s Own Stock” (“EITF 07 5”).  We reclassified the fair value of
our common stock purchase warrants, which have the “dual-indexed” feature, from
equity to liability status as if these warrants were treated as a derivative
liability since their date of issue in January 2008.  All future changes in
the fair value of these warrants will be recognized currently in earnings until
such time as the warrants are exercised or expire. Our adoption of this standard
is discussed in more detail in the accompanying Unaudited Condensed Consolidated
Financial Statements.




Recently
Issued Accounting Pronouncements




Financial
instruments or embedded features that have the characteristics of a derivative,
as defined by SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities,” and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock.  As a result of adopting EITF 07
5, warrants to purchase 6,200,000 shares of common stock previously treated as
equity pursuant to the derivative treatment exemption were no longer afforded
equity treatment because the warrants are effectively “dual-indexed” as they are
denominated in U.S. dollars and our functional currency is Renminbi. As such,
effective January 1, 2009, we reclassified the fair value of these warrants from
equity to liability status as if these warrants were treated as a derivative
liability since their date of issue in January 2008.  All future changes in
the fair value of these warrants will be recognized currently in earnings until
such time as the warrants are exercised or expired. On January 1, 2009, as a
cumulative effect adjustment, we reclassified $9.2 million from additional
paid-in capital to retained earnings and $295,381 to long-term warrant liability
in order to recognize the fair value of such warrants on such date. The fair
value increased to $1,648,944  as of September 30, 2009. We recognized
a $965,965 and $1,353,563 loss from this change in fair value for the three and
nine months ended September 30, 2009.




In
January 2009, the Financial Accounting Standards Board (“FASB”) issued EITF 99
20 1, “Amendments to the Impairment Guidance of EITF Issue No. 99.20, and EITF
Issue No. 99 20, Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99 20
1”).  EITF 99 20 1 changes the impairment model included within EITF
99 20, “Accounting for Retained Interests in Securitizations” (“EITF 99 20”) to
be more consistent with the impairment model of SFAS 115, “Accounting for
Certain Investments in Debt and Equity”.  EITF 99 20 1 achieves this
by amending the impairment model in EITF 99 20 to remove its exclusive reliance
on “market participant” estimates of future cash flows used in determining fair
value. Changing the cash flows used to analyze other-than-temporary impairment
from the “market participant” view to a holder’s estimate of whether there has
been a “probable” adverse change in estimated cash flows allows companies to
apply reasonable judgment in assessing whether an other-than-temporary
impairment has occurred. The adoption of EITF 99 20 1 did not have a material
impact on our consolidated financial statements.





In April
2009, the FASB issued three related FASB Staff Positions: (i) FSP FAS No. 115 2
and FAS No. 124 2, Recognition of Presentation of Other-Than-Temporary
Impairments (“FSP FAS 115 2 and FAS 124 2”), (ii) FSP FAS No. 107 1 and APB No.
28 1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS
107 1 and APB 28 1”), and (iii) FSP FAS No. 157 4, Determining the Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP
FAS 157 4”), which are effective for interim and annual reporting periods ending
after June 15, 2009. FSP FAS 115 2 modifies the requirement for recognizing
other-than-temporary impairments, changes the existing impairment model, and
modifies the presentation and frequency of related disclosures. FSP 107 1 and
APB 28 1 require disclosures about fair value of financial instruments for
interim reporting periods as well as in annual financial
statements.  FSP 157 4 requires new disclosures
regarding the categories of fair value instruments, as well as the inputs and
valuation techniques utilized to determine fair value and any changes to the
inputs and valuation techniques during the period.The adoption of these
FASB Staff Positions did not have a material impact on
our  consolidated financial statements.






28




In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets an amendment of FASB Statement No.
140 (“FAS 166”), which requires entities to provide more information regarding
sales of securitized financial assets and similar transactions, particularly if
the entity has continuing exposure to the risks related to transferred financial
assets. FAS 166 eliminates the concept of a “qualifying special-purpose entity,”
changes the requirements for derecognizing financial assets and requires
additional disclosures.  FAS 166 is effective for fiscal years
beginning after November 15, 2009.  We are is currently assessing the
impact of the standard on our consolidated financial statements.




In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FAST Interpretation No. 46® (“FAS 167”), which modifies how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. FAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. FAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. FAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. FAS 167 is effective for fiscal years
beginning after November 15, 2009. We are currently assessing the impact of the
standard on our consolidated financial statements.





In
August 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding
measuring liabilities at fair value. This ASU provides additional guidance
clarifying the measurement of liabilities at fair value in circumstances in
which a quoted price in an active market for the identical liability is not
available; under those circumstances, a reporting entity is required to measure
fair value using one or more of valuation techniques, as defined. This ASU is
effective for the first reporting period, including interim periods, beginning
after the issuance of this ASU. We are is currently assessing the impact of this
ASU on our consolidated financial statements.





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. We are currently assessing the impact of this ASU on our
consolidated financial statements.







29




Item 4.





Controls
and Procedures.




We
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and interim chief
financial officer, of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)). Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer’s management, including its principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. Based upon our evaluation, our chief executive officer and interim
chief financial officer concluded that our disclosure controls and procedures
are effective, as of the end of the period covered by this report, in ensuring
that material information that we are required to disclose in reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms.




There
were no changes in our internal control over financial reporting during the nine
month period ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




PART II




OTHER
INFORMATION




Item 1A.


Risk
Factors.




Economic
conditions could materially adversely affect us.




Our
operations and performance depend significantly on worldwide economic
conditions. Uncertainty about current global economic conditions poses a risk as
consumers and businesses may postpone spending in response to tighter credit,
negative financial news and/or declines in income or asset values, which could
have a material negative effect on the demand for our products. Other factors
that could influence demand include continuing increases in energy costs,
conditions in the real estate and mortgage markets, labor and healthcare costs,
access to credit, consumer confidence, and other macroeconomic factors affecting
consumer spending behavior. These and other economic factors could have a
material adverse effect on demand for our products and on our financial
condition and operating results.




The
current financial turmoil affecting the banking system and financial markets and
the possibility that financial institutions may consolidate or go out of
business have resulted in a tightening in the credit markets, a low level of
liquidity in many financial markets, and extreme volatility in fixed income,
credit, currency and equity markets. There could be a number of follow-on
effects from the credit crisis on our business, including insolvency of key
suppliers resulting in product delays; inability of customers to obtain credit
to finance purchases of the our products and/or customer insolvencies.
Uncertainty about current global economic conditions could also continue to
increase the volatility of our stock price.




We
continue to be subject to the risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on
March 27, 2009, as amended by Amendment No. 1 to our Annual Report on Form
10-K/A filed with the SEC on August 18, 2009.




Item 6.


Exhibits.




Exhibit No.
            Description31.1*
            Section
      302 Certification by Principal Executive Officer31.2*
            Section
      302 Certification by Principal Financial Officer32.1*
            Section
      906 Certification by Principal Executive Officer and Principal Financial
      Officer


———————




* Filed
herewith







30








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.




CHINA
      CLEAN ENERGY INC.Date:November 12, 2009
            By:
            /s/
      Tai-ming OuTai-ming
      Ou
              Chief
      Executive Officer
              (Principal
      Executive Officer)Date:November 12, 2009
            By:
            /s/
      Shannon YanShannon
      Yan
              Interim
      Chief Financial Officer
              (Principal
      Financial Officer)













31

















EXHIBIT
INDEX





Exhibit No.
              Description31.1*
              Section
      302 Certification by Principal Executive Officer31.2*
              Section
      302 Certification by Principal Financial Officer32.1*
              Section
      906 Certification by Principal Executive Officer and Principal Financial
      Officer




________________________


* Filed
herewith







32