UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.  20549
  FORM 10-Q
  (Mark One)x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended: June 30, 2011ORo
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from          to
 
 Commission file number: 000-53773
 
 CHINA CLEAN ENERGY INC.
 (Exact name of registrant as specified in its charter)
  Delaware

87-0700927(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)
 
 Jiangyin Industrial Zone, Jiangyin Town
 Fuqing City, Fujian Province
 People’s Republic of China
 (Address of principal executive offices)
 (Zip Code)
 
 (347) 235-0258
 (Registrant’s telephone number, including area code)
 
 Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ̈  No  ̈
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o

Accelerated filer oNon-accelerated filer o

Smaller reporting company x(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 o  No x
  The number of shares of the registrant’s common stock outstanding as of August 5, 2011: 31,512,269
  
  TABLE OF CONTENTS
  PagePART IItem 1.
Financial Statements
1Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17Item 4.
Controls and Procedures
22PART IIItem 1A.
Risk Factors
22Item 6.
Exhibits
22
 Table of Contents
  PART I- FINANCIAL INFORMATION
 
 Item 1.  Financial Statements
 
 CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 
 ASSETSJune 30,


December 31,2011


2010CURRENT ASSETSCash and cash equivalents

$
22,306,776


$
13,648,437Resticted cash


-



443,647Accounts receivable, net of allowance for doubtful accounts of $0and $29,665


3,234,740



4,080,424Other current assets


52,330



9,332Tax Receivable


11,465



63,865Inventories, net


2,593,738



2,126,375Advances for inventory purchases


945,093



1,031,401Machinery and equipment held for sale


110,904



108,458Total current assets


29,255,046



21,511,939Plant and Equipment, net


25,268,080



25,656,929Deferred tax assets


106,596



104,246Intangible assets, net


4,821,327



4,812,693TOTAL ASSETS

$
59,451,049


$
52,085,807LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable

$
2,543,946


$
1,400,188Bank loan payable - current portion


7,306,496



1,025,835Accrued liabilities


217,362



244,044Customer deposits


470,491



650,017Taxes payable


1,141,593



1,526,033Banker acceptances


-



1,478,825Total current liabilities


11,679,888



6,324,942Warrant liabilities


530,883



2,192,352Long-term bank loans - net of current portion


-



4,234,720Total liabilities


12,210,771



12,752,014COMMITMENTS AND CONTINGENCIESEQUITYPreferred stock, par value $0.001 per share, authorized 10,000,000 shares, no sharesissued and outstanding


-



-Common stock, par value $0.001 per share, authorized 90,000,000 shares, 31,512,269shares issued and outstanding


31,512



31,512Additional paid-in capital


13,078,201



12,708,060Statutory reserves


2,424,309



2,424,309Retained earnings


26,572,864



19,982,696Accumulated other comprehensive income


5,133,392



4,187,216Total equity


47,240,278



39,333,793Total liabilities and equity

$
59,451,049


$
52,085,807
 
 See accompanying notes to condensed consolidated financial statements
  1
 Table of Contents
  CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 (UNAUDITED)
 
 Three months ended June 30


Six months ended June 30,2011


2010


2011


2010REVENUES

$
19,253,482


$
14,140,437


$
38,231,722


$
24,878,128Less: cost of goods sold


15,167,861



11,400,938



29,801,203



20,652,433GROSS PROFIT


4,085,621



2,739,499



8,430,519



4,225,695OPERATING EXPENSESSelling and marketing


150,052



117,435



328,897



171,481General and administrative


494,882



442,169



1,060,076



874,449Research and development


38,390



34,476



75,261



44,378Total operating expenses


683,324



594,080



1,464,234



1,090,308INCOME FROM OPERATIONS


3,402,297



2,145,419



6,966,285



3,135,387OTHER INCOME (EXPENSE)Interest income (expense), net


(128,244
)


(110,536
)


(226,420
)


(167,998
)Other income


5



14,524



2,056



14,641Change in fair value of warrant liabilities


1,236,811



363,110



1,661,469



5,753Total other income (expenses)


1,108,572



267,098



1,437,105



(147,604
)INCOME BEFORE PROVISION FOR INCOME TAXES


4,510,869



2,412,517



8,403,390



2,987,783PROVISION FOR INCOME TAXES


862,236



462,927



1,813,222



688,021NET INCOME


3,648,633



1,949,590



6,590,168



2,299,762OTHER COMPREHENSIVE INCOMEForeign currency translation adjustment


699,317



29,400



946,176



28,417COMPREHENSIVE INCOME

$
4,347,950


$
1,978,990


$
7,536,344


$
2,328,179BASIC AND DILUTED EARNINGS PER SHAREWeighted average number of shares


31,512,269



31,512,269



31,512,269



31,512,269Earnings per share

$
0.116


$
0.063


$
0.209


$
0.074
 
 See accompanying notes to condensed consolidated financial statements
 2
 Table of Contents
  CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 
 For the six months endedJune 30,2011


2010CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
6,590,168


$
2,299,762Adjusted to reconcile net income to cash provided by operating activities:Depreciation


1,036,030



869,485Provision for (Recovery of) doubtful accounts


(29,665
)


109Amortization of intangible assets


99,878



135,019Stock-based compensation expense


370,141



212,630Change in fair value of warrants libility


(1,661,469
)


(5,753
)Deferred tax benefit


(2,350
)


(81
)Changes in operating assets and liabilitiesAccounts receivable


875,349



(1,787,268
)Inventories


(467,363
)


(2,830,161
)Other assets


(42,998
)Advances for inventory purchases


86,308



42,973Accounts payable


1,143,758



1,497,053Accrued liabilities


(26,682
)


(12,913
)Customer deposits


(179,526
)


140,820Taxes payables


(384,440
)


488,495Taxes receivable


52,400



(206,579
)Net cash provided by operating activities


7,459,539



843,591CASH FLOWS FROM INVESTING ACTIVITIESPurchases of equipment


(68,696
)


(266,660
)Additions to intangibles


-



(42,861
)Net cash used in investing activities


(68,696
)


(309,521
)CASH FLOWS FROM FINANCING ACTIVITIESRestricted cash


443,647



(397,518
)Proceeds from bank loans


-



4,122,360Payments on bankers acceptances


(1,478,825
)


1,060,695Payments on bank loans


(2,296,383
)


(2,204,952
)Proceeds from short-term bank loans


4,342,325



-Net cash provided by financing activities


1,010,764



2,580,585EFFECT OF EXCHANGE RATE ON CASH


256,732



28,416INCREASE IN CASH AND CASH EQUIVALENTS


8,658,339



3,143,071CASH AND CASH EQUIVALENTS, beginning of period


13,648,437



4,154,814CASH AND CASH EQUIVALENTS, end of period

$
22,306,776



7,297,885SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for:Interest

$
224,079


$
148,833Income taxes

$
2,022,876


$
301,749
 
 See accompanying notes to condensed consolidated financial statements
 3
 Table of Contents
  CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
  NOTE 1 – ORGANIZATION AND BUSINESS
 
 China Clean Energy, Inc. (“CCE” or the “Company”) through its wholly-owned subsidiaries, China Clean Energy Resources Limited (“CCER”), Fujian Zhongde Technology Co., Ltd. (“Fujian Zhongde”), and Fujian Zhongde Energy Co., Ltd. (“Zhongde Energy”), synthesizes and distributes renewable fuel products and specialty chemicals to customers in both the People’s Republic of China (“PRC” or “China”) and abroad.
 
 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Presentation and Principles of Consolidation
  The accompanying condensed consolidated financial statements of China Clean Energy Inc. reflect the activities of CCE and its 100% owned subsidiaries CCER, Fujian Zhongde and Zhongde Energy.
  The condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and are expressed in U.S. dollars.  All significant intercompany balances and transactions have been eliminated in consolidation.
  In the opinion of management, the unaudited interim condensed 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 30, 2011.
  Use of Estimates and Assumptions
 
 The preparation of financial statements in conformity with GAAP 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.  Significant estimates include the fair value of share-based compensation and warrants liability, impairment charge related to machinery and equipment and potential losses on uncollectible receivables. Management believes that the estimates utilized in preparing its condensed consolidated financial statements are reasonable and appropriate. Actual results could differ from those estimates.
 
 Fair Value of Financial Instruments
 
 The accounting standard 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 disclosure requirements regarding fair value.
 
 The three levels are defined as follows:
  4
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 CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 ·
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 liabilities, 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.
  Determining which category an asset or liability falls within the hierarchy requires significant judgment.
 
 Current assets and current liabilities are financial instruments and management believes their carrying amounts are reasonable estimates of fair values 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 Company determined that the carrying value of the long term bank loans approximated their fair value using the level 2 inputs by comparing the stated loan interest rate to the rate charged by the Bank of China on similar loans (see Note 7).  The fair value of the warrants liability was determined using level 3 inputs, as further discussed in Note 9.
  Foreign Currency Translation
 
 The functional currency of CCE, CCER, Fujian Zhongde and Zhongde Energy is the Chinese Renminbi (“RMB”). The reporting currency of the Company is the U.S. dollar.
 
 Fujian Zhongde and Zhongde Energy assets and liabilities are translated into U.S. dollars at period-end exchange rates ($0.15465 and $0.15124 at June 30, 2011 and December 31, 2010, respectively). Fujian Zhongde and Zhongde Energy revenues and expenses are translated into U.S. dollars at weighted average exchange rates for the periods ($0.15270 and $0.14673 for the six months ended June 30, 2011 and 2010, respectively). Resulting translation adjustments are recognized in the condensed consolidated statements of income and comprehensive income. 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 condensed consolidated statements of cash flows are translated at the average exchange rate for the period. As a result, amounts related to assets and liabilities reported on the condensed consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the condensed consolidated balance sheets.
  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.
  5
 Table of Contents
  CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 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 accounts is established and recorded based on management’s assessment of potential losses based on the credit history and relationship with the customers. Management reviews its receivables on a regular basis to determine if the 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.
 
 Inventories
 
 Inventories are stated at the lower of cost or market using the 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.
 
 Intangible Assets
 
 Goodwill and certain intangible assets which have indefinite lives are not amortized but are tested for impairment at least annually. Other intangible assets are 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 rights and patents. All land in China is owned by the government, however, the government grants “land use rights.” The Company, through its 100% owned subsidiaries, owns three land use rights with usable lives ranging from 42 to 50 years which will expire in various years ranging from 2048 to 2058. The Company amortizes the cost of land use right over the respective contract periods.
 
 Patents, which have a legal life of 10 years in PRC, are being amortized over 10 years as management believes that ten years is the useful lives 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 its use and eventual disposition. If the sum of the expected discounted cash flows is less than the carrying amount of the asset, the Company would recognize an impairment loss based on the fair value of the asset. In December 31, 2010, the company recorded an impairment loss related to its machinery and equipment of $258,861, using level three inputs based on estimated salvage values.
 
 Assets Held for Sale
 
 An asset or business is classified as held for sale when:
  6
 Table of Contents
 CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 ·
management commits to a plan to sell and it is actively marketed; and
 ·
it is available for immediate sale and the sale is expected to be completed within one year.
 
 Assets held for sale may not be sold within the expected one year period due to events or circumstances beyond the Company’s control. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill and other assets are assessed. After the valuation process is completed, the assets held for sale are reported at the lower of the carrying value or fair value less cost to sell and the assets are no longer depreciated or amortized. The assets and any related liabilities are aggregated and reported on separate lines of the balance sheet.
 
 Revenue Recognition
 
 Revenue for product sales is recognized when risk and title to the product transfer to the customer, which usually occurs at the time when shipment is made. However, revenue is realized and earned only when four criteria are met:
 
 ·
persuasive evidence of an arrangement exists (the Company considers its sale contracts to be persuasive evidence of an arrangement);
 ·
product is shipped or service has been rendered;
 ·
the seller’s price to the buyer is fixed or determinable; and
 ·
collectability of payment is reasonably assured.
 
 Substantially all of the Company’s products are sold 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 VAT at a rate of 17% of the gross sale price or 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 material included in the cost of producing its finished product.
 
 Transportation and unloading charges and product inspection charges are included in selling expenses totaled $295,135 and $142,857 for the six months ended June 30, 2011 and 2010, respectively, and $135,414 and $98,164 for the three months ended June 30, 2011 and 2010, respectively.
 
 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 GAAP. Costs are measured at the estimated fair  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. Equity instruments issued to consultants are measured at their fair value and recognized over the term of the consulting agreements, as earned.
 
 7
 Table of Contents
 CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Income Taxes
 
 The Company’s recorded income taxes include 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 consists of taxes currently due plus deferred taxes.
 
 The charge for taxation is based on the results for the year as adjusted for items that are non-deductible 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 probable 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.
 
 U.S. income tax returns for the years prior to 2008 are no longer subject to examination by tax authorities.
 
 China Income Taxes
 
 The Company’s subsidiaries are governed by the Income Tax Law of the People’s Republic of China concerning foreign investment enterprises and foreign enterprises (the “EIT) and various local income tax laws.
 
 The EIT utilizes a tax rate of 25%, except for companies that qualify as “High Tech” companies which pay a reduced rate of 15%. Fujian Zhongde qualifies for this reduced tax rate of 15% and its tax certificate must be re-certified every year with the local tax authority.
 
 Earnings per Share
 
 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.
 
 Basic earnings per share is computed by dividing net income attributable to holders of common shares by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common shares were exercised or converted into common shares. Convertible, redeemable preferred shares are included in the computation of diluted earnings per share on an “if converted” basis, when the impact is dilutive. Contingent exercise price resets are accounted for in a manner similar to contingently issuable shares such as warrants and options. Common share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.
  8
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 CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Recently Issued Accounting Standards
 
 On May 12, 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update 2011-04 (“ASU 2011-04”), Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRS. ASU 2011-04 completes a major project of the boards’ joint work to improve IFRS and US GAAP and to bring about their convergence. For US GAAP, ASU 2011-04 will supersede most of the guidance in Topic 820, although many of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. It also reflects the FASB’s consideration of the different characteristics of public and non-public entities for interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The adoption of this accounting standard is not expected to have a material effect on the Company’s condensed consolidated financial statements.
 
 On June 16, 2011, FASB issued Accounting Standards Update 2011-05 (“ASU 2011-05”), Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. ASU 2011-05 eliminates the current option to report other comprehensive income and its components in the statement of changes in equity, and requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this accounting standard is not expected to have a material effect on the Company’s condensed consolidated financial statements.
  NOTE 3 – INVENTORIES
 
 Inventories consist of the following:
  June 30, 2011


December 31, 2010Raw materials

$
1,269,218


$
1,011,112Work in process and packaging materials


32,897



28,448Finished goods


1,291,623



1,086,815Total

$
2,593,738


$
2,126,375
  NOTE 4 – PLANT AND EQUIPMENT
  Plant and equipment, net consist of:
  June 30, 2011


December 31, 2010Buildings

$
14,480,836


$
14,161,537Equipment and machinery


17,773,085



17,376,990Office equipment and vehicles


131,452



187,924Total


32,385,373



31,726,451Impairment of long-lived assets


(270,602
)


(258,861
)Less accumulated depreciation


(6,846,691
)


(5,810,661
)Plant and equipment, net

$
25,268,080


$
25,656,929
 
 9
 Table of Contents
 CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Depreciation expense was $1,036,030 and $869,485 for the six months ended June 30, 2011 and 2010, respectively, and $526,220 and $505,675 for the three months ended June 30, 2011 and 2010, respectively.
 
 Machinery and Equipment Held for Sale
 
 The Company announced in the third quarter of fiscal year 2010 its plan to consolidate its Fujian Zhongde facility to its new Fujian Zhongde Energy facility. As a result, machinery and equipment in the amount of $110,904 is listed as held for sale at June 30, 2011 and depreciation ceased.  The consolidation was completed during the year 2011.
 
 NOTE 5 – INTANGIBLE ASSETS
 
 Intangible assets, net consist of:
 
 June 30, 2011


December 31, 2010Land use rights

$
5,282,284


$
5,165,811Patents and licenses


927,900



1,240,168Total


6,210,184



6,405,979Less accumulated amortization


(1,388,857
)


(1,593,286
)Total intangible assets, net

$
4,821,327


$
4,812,693
 
 Amortization expense for the six months ended June 30, 2011 and 2010 amounted to $99,878 and $135,019, respectively, and $50,736 and $27,280 for the three months ended June 30, 2011 and 2010, respectively. The estimated aggregate amortization expenses for each of the five succeeding fiscal years are the following:
 
 Twelve months ending June 30,

Estimated Amortization Expense2012

$
196,5682013


196,5682014


196,5682015


196,5682016


196,568
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  CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 NOTE 6 – BANKER ACCEPTANCES
 
 Bankers acceptances have no interest if paid on or before their due dates. The Company can borrow against bankers acceptances up to 15,000,000 RMB (approximately $2,300,000).
 
 NOTE 7 – BANK LOANS PAYABLE
 
 Bank loans payable includes a loan with annual interest at 5.94% payable monthly through January 2012, secured by the buildings and land use rights of both Zhongde Energy and Fujian Zhongde. One installment payment is scheduled: 28,000,000 RMB (approximately $4,261,600) is due January 2012. The Company’s Chief Executive Officer has provided a personal guarantee for this obligation.
 
 On January 7, 2011, the Company entered into a trade financing arrangement that expires on December 15, 2011 with another bank pursuant to which the Company can borrow up to RMB 33,400,000 (approximately $5 million) with annual interest rate at the bank’s adjustable rate. The trade financing arrangement consists of the following sublimit:
 
 ●          Loans payable (packing loans)
RMB 15,000,000●          Letters of credit
RMB 28,000,000
 ●          Export negotiation
RMB 28,000,000●          Negotiation under guarantee
RMB 28,000,000
 ●          Bankers acceptance
RMB 28,000,000●          Bankers acceptance payable
RMB 28,000,000
 
 During the six months ended June 30, 2011, the Company borrowed $2,976,296 (approximately RMB 19,245,000) from the bank.
 
 Total interest expense on the bank loans for the six months ended June 30, 2011 and 2010 was approximately $224,000 and $149,000, respectively and $124,000 and $129,000 for the three months ended June 30, 2011 and 2010, respectively.
 
 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 Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans.  The total provisions made for such employee benefits were $17,020 and $14,795 for the six months ended June 30, 2011 and 2010, respectively, and $8,171 and $10,615 for the three months ended June 30, 2011 and 2010, respectively.
 
 NOTE 9 –WARRANTS
 
 The Company adopted the provisions of ASC Topic 815-40 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 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.  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 U.S. dollars and the Company’s functional currency is Renminbi and the warrants are effectively “dual-indexed.”  All changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised or expire.
  11
 Table of Contents
  CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Warrants liability measured at fair value on a recurring basis is summarized as follows:
  Carrying Value as of June 30, 2011
Fair Value Measurements at June 30, 2011Level 1
Level 2
Level 3Warrants liability
$530,883


$530,883
 
 
 Carrying Value as of December 31, 2010
Fair Value Measurements at December 31, 2010Level 1
Level 2
Level 3Warrants liability
$2,192,352


$2,192,352
  The following is a reconciliation of the beginning and ending balances of warrants liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2011 and December 31, 2010:
  June 30,2011

December 31,2010Beginning balance, January 1,
$2,192,352

$1,259,774Total gains or losses:Included in earnings
(1,661,469)

932,578Ending balance
$530,883

$2,192,352
  These warrants do 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:
  June 30,2011

December 31,2010Annual dividend yield
—

—Expected life (years)
1.50

2.00Risk-free interest rate
0.45%

1.02%Expected volatility
97%

96%
  12
 Table of Contents
  CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Expected volatility is based primarily on historical volatility. The Company does not have historical data commensurate with the expected term. Historical volatility was computed using daily pricing observations for the past three 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 with the same term as the warrants when granted.
  There were no warrants granted, forfeited or exercised during the period presented.
 
 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, of which 1,000,000 are to 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 are to have an exercise price equal to the greater of (i) $3.00 or (ii) the fair market value of the common stock on the date of grant (“Tranche 2 Options”). 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. All options under the Plan vest quarterly over three years. The 2008 Equity Incentive Plan is administered by CCE’S board of directors.
 
 On February 1, 2010, the Company granted options to purchase a total of 300,000 shares of common stock to the chief financial officer. Options totaling 150,000 are exercisable at a price of $2.50 per share and 150,000 options are exercisable at a price of $3.00 per share. All 300,000 options expire 10 years from the date of grant. The $140,180 fair value of the 300,000 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 150,000 stock options) and $3.00 (for 150,000 stock options), expected life of options of 10 years, expected volatility of 103%, expected dividend yield of 0%, and risk-free interest rate of 3.68%.
  For the six months ended June 30, 2011 and 2010, stock-based compensation expense related to these options was $370,141 and $212,630, respectively, and $179,404 and $106,315 for the three months ended June 30, 2011 and 2010, respectively, which is included in general and administrative expense.
  Following is a summary of the status of options outstanding and exercisable at June 30, 2011:
  Outstanding Options

Exercisable OptionsExercise

Price


Number


Average

Remaining

Contractual Life

Average

Exercise Price


Number


Average

Remaining

Contractual Life$2.50



435,000


6.50 years

$2.50



360,000


6.50 years$3.00



435,000


6.50 years

$3.00



360,000


6.50 yearsTotal



870,000








720,000
 
 13
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 CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 On January 4, 2011, the Board adopted the China Clean Energy Inc. 2011 Long-Term Incentive Plan (the “2011 Plan”) and the forms of award agreements for nonqualified stock option awards, incentive stock option awards and restricted stock awards to be granted under the Plan.  The Company’s outside directors and employees, including the Company’s principal executive officer, principal financial officer and other named executive officers, are all eligible to participate. Subject to certain adjustments, the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the 2011 Plan is 2,700,000 shares. All stock options granted under the 2011 Plan must have an exercise price equal to the fair market value of the common stock on the date of grant.
  Following is a summary of stock option activity:
  Options Outstanding


Weighted Average Exercise PriceOutstanding as of January 1, 2011


-Granted


2,490,000



1.02Forfeited


(257,500
)


1.02Exercised


-



-Outstanding as of June 30, 2011


2,232,500


$
1.02
  Following is a summary of the status of options outstanding and exercisable at June 30, 2011:
  Outstanding Options

Exercisable OptionsExercise Price


Number


Average Remaining Contractual Life

Average

Exercise Price


Number


Average Remaining Contractual Life$1.02



2,232,500


9.50 years

$1.02



382,500


9.50 yearsTotal



2,232,500








382,500
  NOTE 11 - EARNINGS PER SHARE
 
 For the six months ended June 30, 2011 and 2010, all warrants and options were excluded from the calculation of diluted earnings per share because the exercise prices of $1.02, $2.00, $2.50, and $3.00 were higher than the average trading price of the Company’s stock.
 
 NOTE 12 – TAXES
 
 Income Taxes
 
 Income tax provision consists of:
  Six months ended June 30,


Three months ended June 30,2011


2010


2011


2010Current:PRC

$
1,813,222


$
688,102


$
862,236


$
463,206United States


-



-



-



-Total current


1,813,222



688,102



862,236



463,206Deferred


-



(81)



-



(279)Total

$
1,813,222


$
688,021


$
862,236


$
462,927
 
 14
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 CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Fujian Zhongde is a wholly-owned foreign enterprise (“WOFE”). The 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.
 
 On March 31, 2007, the PRC tax authorities approved a 12.5% income tax rate for 2008, 2009 and 2010 for Fujian Zhongde.
 
 Deferred Income Taxes
 
 Since Zhongde Energy had an operating loss of approximately $417,000 for the year ended December 31, 2009, the loss can be carried forward to offset income through 2014.  The Company recorded deferred tax assets of $106,596 and $104,246 as of June 30, 2011 and December 31, 2010, respectively.  Based on the foregoing information, the Company believes that a valuation allowance is not deemed necessary for the deferred assets for the following reasons: (i) there will be sufficient operating income generated in future years based on the fact that the Company’s wholly owned subsidiary, Zhongde Energy, is expected to generate profits, and (ii) the current operating loss of Zhongde Energy can be carried forward through 2014 to offset future operating income under PRC tax regulations.
 
 The Company has cumulative undistributed earnings of foreign subsidiaries of $22,441,759 and $16,910,509 as of June 30, 2011 and December 31, 2010, respectively, 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.
 
 Value Added Tax
 
 VAT on sales and VAT on purchases amounted to $5,316,208 and $4,956,406, respectively, for the six months ended June 30, 2011, and $2,939,108 and $2,115,670, respectively, for the six months ended June 30, 2010. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent. Because the Company’s VAT taxes paid on purchases were greater than sales during the period, the Company has prepaid tax that can be used to offset future VAT due on sales.
  15
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  CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 NOTE 13 – CONCENTRATIONS
 
 Net sales and gross profit percentages (“GP%”) consist of:
 
 June 30,


June 30,2011


2010Sales


GP%


Sales


GP%Domestic Sales

$
30,706,344



23%


$
19,371,480



16%International Sales

$
7,525,378



21%


$
5,506,647



19%Total Sales

$
38,231,722






$
24,878,128
  Net sales and gross profit percentages (“GP%”) for the three months ended June 30, 2011 and 2010 consist of:
 
 2011


2010Sales


GP%


Sales


GP%Domestic Sales

$
15,284,446



22%


$
11,173,317



19%International Sales

$
3,969,036



21%


$
2,967,119



23%Total Sales

$
19,253,482






$
14,140,436
  The Company’s demand deposits are in accounts maintained with stateowned banks within the PRC and an account in the U.S. Total cash deposited with banks within the PRC, as of June 30, 2011 amounted to $22,306,776, 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.
 
 There were two major customers that accounted for 22% and 11% of the total accounts receivable as of June 30, 2011.  There were no customers that accounted for 10% of net sales for the six months ended June 30, 2011.
 
 NOTE 14 – COMMITMENTS AND CONTINGENCIES
  The Labor Contract Law of the People’s Republic of China requires employers to assure the liability of severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The employers will be liable for one month of severance pay for each year of service provided by the employees. As of June 30, 2011, the Company has estimated possible severance payments of approximately $156,000, which has not been reflected in its condensed consolidated financial statements because it is not more likely than not that this will be paid or incurred.
 
 16
 Table of Contents
  Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations
 
 As used in this Quarterly Report on Form 10-Q, unless otherwise indicated, the terms “we,” “us,” “our,” “CCE” and “the Company” refer to China Clean Energy Inc.
 
 The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2011.
 
 Forward-Looking Statements
 
 This Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulations. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. These uncertainties include factors that affect all businesses as well as matters specific to us, including, but not limited to, the effectiveness, profitability and marketability of our products, the future trading of our common stock, our ability to capitalize on our expanded production capacity, the period of time for which our current liquidity will enable us to fund our operations, our ability to protect our proprietary information, general economic and business conditions, the volatility of our operating results and financial condition resulting from changes in raw material prices, international oil prices and price controls imposed by the Chinese government, our ability to attract or retain qualified senior management personnel and research and development staff and independent directors, and other risks. We caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 30, 2011, as well as others that we may consider immaterial or do not anticipate at this time.
 
 Forward-looking statements in this Quarterly Report on Form 10-Q are based on management’s beliefs and opinions at the time the statements are made. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. 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 are a Chinese renewable resource-based biodiesel and specialty chemicals manufacturer and distributor.  Through our wholly-owned subsidiary, China Clean Energy Resources, Ltd. (“CCER”), a British Virgin Islands holding company, we own 100% interests in Fujian Zhongde Technology Co. Ltd. (“Fujian Zhongde”) and Fujian Zhongde Energy Co., Ltd. (“Zhongde Energy”), Chinese companies incorporated in the Province of Fujian, People’s Republic of China.  CCER does not conduct any substantive operations of its own, but rather conducts its primary business operations through Fujian Zhongde and Zhongde Energy.
 
 Zhongde Energy built and operates our new biodiesel and specialty chemical refinery in Jiangyin Industrial Park, Fuqing City, Fujian Province, People’s Republic of China.   We have successfully transferred to the new Jiangyin plant and installed plant and equipment representing 50,000 tons of biodiesel and 40,000 tons of specialty chemicals capacity, which is all of our capacity except for our printing ink production line. As previously disclosed, prior to these transfers, the new Jiangyin plant had a production capacity of 100,000 tons of biodiesel per year, 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. As a result of the consolidation of the two plants, the annual production capacity in the Jiangyin plant is now 110,000 tons of biodiesel per year, 40,000 tons of specialty chemicals per year or a combination of biodiesel and specialty chemicals for a total output of 50,000 tons of biodiesel and 40,000 tons of specialty chemicals per year.  The printing ink production line, which accounts for approximately 500 tons of annual production capacity, will remain at the old plant.
  17
 Table of Contents
  Results of Operations
 
 Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
 
 Revenues. During the quarter ended June 30, 2011, we had net sales of $19,253,482 (11% from biodiesel sales and 89% from specialty chemicals sales), compared to net sales of $14,140,437 (26% from biodiesel sales and 74% from specialty chemicals sales) during the quarter ended June 30, 2010, an increase of approximately 36%. The increase in revenue was driven by increased sales volume and  average selling prices for our specialty chemicals products. We have shifted our focus to the specialty chemicals business, where we see strong demand and higher gross margin. For the quarter ended June 30, 2011, domestic sales and international sales were $15,284,446 and $3,969,036, respectively, compared to $11,173,317 and $2,967,119, respectively, for the quarter ended June 30, 2010, an increase of approximately 37% for the domestic sales and 34% for the international sales.  During the quarter ended June 30, 2011, we had sales volume of 9,438 tons from specialty chemicals and 2,448 tons from biodiesel, compared to sales volume of 7,503 tons from specialty chemicals and 5,446 tons from biodiesel during the quarter ended June 30, 2010. We continued to expand our sales to our existing customers and also added new customers of our specialty chemical products.  During the quarter ended June 30, 2011, the average selling price was approximately $1,811 per ton for specialty chemicals and approximately $857 per ton for biodiesel, compared to the quarter ended June 30, 2010, in which the average selling price was approximately $1,406 per ton for specialty chemicals and approximately $682 per ton for biodiesel. The increase in average selling price for biodiesel was driven by an increase in the petroleum diesel wholesale price. The increase in average selling price for specialty chemicals was driven by increased demand and better product mix.
 
 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 $15,167,861 for the quarter ended June 30, 2011 compared to costs of goods sold of $11,400,938 for the quarter ended June 30, 2010.The increase in cost of goods sold was primarily driven by the additional revenue and an increase in raw material cost.For the quarter ended June 30, 2011, feedstock used for production of biodiesel and specialty chemicals averagedapproximately $816 per ton and $1,386 per ton, respectively, compared to approximately $510 per ton and $905 for the quarter ended June 30, 2010, respectively. This increase in the cost of specialty chemicals and biodiesel feedstock was primarily due to global economic recovery, which resulted in increased demand for feedstock material.
  We had a gross profit of $4,085,621 for the quarter ended June 30, 2011, compared to a gross profit of $2,739,499 for the quarter ended June 30, 2010, representing an increase of approximately 49%. This was primarily due to the increase in sales. Gross margins for the quarters ended June 30, 2011 and 2010 were 21% and 19%, respectively. This increase in gross margin was primarily driven by the increase of specialty chemicals products in our sales mix, which have a higher sales price and higher gross margin. Gross margins of specialty chemicals increased to 23% for the quarter ended June 30, 2011, compared to 22% for the quarter ended June 30, 2010.  This increase was primarily due to higher demand for and an increase in our sales mix of high end specialty chemicals products, which have a higher sales price in comparison to their production cost. Gross margins for biodiesel decreased to 5% for the quarter ended June 30, 2011, compared to 12% for the quarter ended June 30, 2010. This decrease in gross margin was primarily due to the increase in raw material cost.
 
 Selling and Marketing. Selling and marketing expenses, which include advertising and promotion, freight charges, exporting expenses, wages and salaries, totaled $150,052 for the quarter ended June 30, 2011, as compared to $117,435 for the quarter ended June 30, 2010, an increase of approximately 28%. This increase was due to selling costs related to higher sales volume and domestic shipping fees and commissions.
 
 General and Administrative. General and administrative expenses totaled $494,882 for the quarter ended June 30, 2011, as compared to $442,169 for the quarter ended June 30, 2010, an increase of approximately 12%. This increase was primarily attributable to additional expenses related to professional services and non-cash charges for employee stock-based compensation.
 
 Net Income. We recorded net income of $3,648,633, or $0.12 per basic and diluted share, for the quarter ended June 30, 2011, which included non-cash income of $1,236,811 due to the change in fair value measurement of the warrants issued in connection with our 2008 private placement. We recorded net income of $1,949,590, or $0.06 per basic and diluted share, for the quarter ended June 30, 2010.  The increase in net income was attributable mainly to the increase in sales volume and the increase in the average selling price and gross margin of specialty chemicals.
 
 18
 Table of Contents
  We have reviewed our non-GAAP adjusted net earnings to help us measure the performance of our business.  The non-GAAP adjusted net earnings to exclude both non-recurring items and non-cash charges related to our warrants liability and stock-based compensation. We believe that these non-GAAP adjusted financial measures are helpful to both management and investors because the non-GAAP measures provide a consistent basis to understand our financial performance as compared to historical periods without variation of non-recurring items and non-operating related charges. In addition, providing these measures to investors allows them to evaluate our performance using the same methodology and information that is 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 regarding which charges are excluded. However, we believe 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 (loss).
 
 Three months ended June 30,2011


2010Net income

$
3,648,633


$
1,949,590Add back:Change in fair value of warrants liability

$
(1,236,811
)

$
(363,110
)Stock-based compensation

$
179,404


$
106,315Adjusted net income

$
2,591,226


$
1,692,795Diluted earnings per share

$
0.12


$
0.06Add back:Change in fair value of warrant

$
(0.04
)

$
(0.01
)Stock-based compensation

$
0.01


$
0.00Adjusted earnings per share

$
0.08


$
0.05
  The adjusted non-GAAP net income of $2,591,226 and the adjusted non-GAAP earnings per share of $0.08 per share for the quarter ended June 30, 2011 in the table above excludes a $1,236,811 non-cash income due to change in the fair value of warrants and a $179,404 stock-based compensation expense. Our adjusted non-GAAP net income for the quarter ended June 30, 2010 was $1,692,795, or 0.05 per share.
  Six months ended June 30, 2011 compared to the six months ended June 30, 2010
 
 Revenues. During the six months ended June 30, 2011, we had net sales of $38,231,722 (11% from biodiesel sales and 89% from specialty chemicals sales), compared to net sales of $24,878,128 (26% from biodiesel sales and 74% from specialty chemicals sales) during the six months ended June 30, 2010, an increase of approximately 54%. The increase in revenue was driven by sales volume and average selling prices for our specialty chemicals products. For the six months ended June 30, 2011, domestic sales and international sales were $30,706,344 and $7,525,378, respectively, compared to $19,371,480 and $5,506,647, respectively, for the six months ended June 30, 2010, an increase of approximately 59% for the domestic sales and 37% for the international sales. We expanded our sales to our existing customers and added new customers in the specialty chemical products for the six months ended June 30, 2011.
 
 Gross Profit. The cost of goods sold was $29,801,203 for the six months ended June 30, 2011, compared to cost of goods sold of $20,652,433 for the six months ended June 30, 2010. The increase in cost of goods sold was primarily driven by an increase in revenue. For the six months ended June 30, 2011, feedstock used for production of biodiesel averaged approximately $760 per ton, compared to approximately $510 for the six months ended June 30, 2010.   For the six months ended June 30, 2011, feedstock used for production of specialty chemicals averaged approximately $1,352 per ton, compared to approximately $905 for the six months ended June 30, 2010.  This increase in the cost of specialty chemicals and biodiesel feedstock was primarily due to global economic recovery, which resulted in increased demand for feedstock material.
 
 We had a gross profit of $8,430,519 for the six months ended June 30, 2011, compared to a gross profit of $4,225,695 for the six months ended June 30, 2010, representing gross margins of 22% and 17%, respectively. This increase in gross margins was primarily due to the increased sales of specialty chemicals products.
 
 Selling and Marketing. Selling and marketing expenses totaled $328,897 for the six months ended June 30, 2011, compared to $171,481 for the six months ended June 30, 2010, an increase of approximately 92%. This increase was primarily due to higher selling costs related to sales volume and domestic shipping fees and commissions.
  19
 Table of Contents
  General and Administrative. General and administrative and other operating expenses totaled $1,060,076 for the six months ended June 30, 2011, compared to $874,449 for the six months ended June 30, 2010, an increase of approximately 21%. This increase was primarily attributable to additional expenses related to professional services and non-cash charges for employee stock-based compensation.
 
 Net Income. We recorded net income of $6,590,168, or $0.21 per basic and diluted share, for the six months ended June 30, 2011, compared to net income of $2,299,762, or $0.07 per basic and diluted share, for the six months ended June 30, 2010. This increase in net income was attributable mainly to the significant increase in revenue and gross profit and non-cash income of $1,661,469 due to the change in fair value measurement of the warrants issued in connection with our 2008 private placement.
  Liquidity and Capital Resources
 
 General.As of June 30, 2011 and December 31, 2010, we had cash and cash equivalents of $22,306,776 and $13,648,437, respectively. The increase in cash and cash equivalents was primarily attributable to the $6,590,168 net income from operating activities, $4,342,325 of proceeds we received from bank loans, $1,143,758 of additional accounts payable, and $875,349 of collections of accounts receivable, partly offset by payments of $1,478,825 on bankers acceptances and payments of $467,363 for inventory purchases during the six months ended June 30, 2011.
 
 Net cash provided by operating activities totaled $7,459,539 for the six months ended June 30, 2011, compared to net cash provided by operating activities of $843,591 for the six months ended June 30, 2010. This increase was primarily due to $6,590,168 from net income, $1,143,758 of additional accounts payable and $875,349 collections from accounts receivable for the six months ended June 30, 2011. Payments for inventory totaled $467,363 for the six months ended June 30, 2011, compared to payments for inventory of $2,830,161 for the six months ended June 30, 2010. This decrease was primarily due to the sufficiency of our inventory during the six months ended June 30, 2011. In addition, collections of accounts receivable totaled $875,349 for the six months ended June 30, 2011, compared to an increase in accounts receivable of $1,787,268 for the six months ended June 30, 2010. This increase was primarily due to prompt payments by customers.
  Net cash used in investing activities totaled $68,696 for the six months ended June 30, 2011, primarily a result of the purchase of additional equipment for the Jiangyin plant,  compared to net cash used in investing activities of $309,521 for the six months ended June 30, 2010, which was primarily related to the construction expense of our Jiangyin plant.
 
 Net cash provided by financing activities totaled $1,010,763 for the six months ended June 30, 2011 and was due to net proceeds from our bank loan of $4,342,325 for working capital uses and net proceeds from the release of restricted cash of $443,647, partially offset by $2,296,383 in payments on bank loans and $1,478,825 in payments on bankers acceptances.  Net cash provided by financing activities totaled $2,580,585 for the six months ended June 30, 2010, primarily due to net proceeds from our bank loan of $4,122,360, partially offset by $2,204,952 in payments on bank loans. The decrease was primarily due to an adequate amount of working capital for the six months ended June 30, 2011.
 
 Accounts Receivable, 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. Currently, the maximum amount of credit that may be extended to an existing customer is 5 million RMB, or approximately $750,000. Our standard collection term is three months.  Management reviews our accounts receivable based on the customers’ financial condition and their prior payment history to determine if the allowance for doubtful accounts is adequate.
 
 Loan Agreements.  In February 2010, we secured bank financing from Fujian Haixia Bank, formerly Fuzhou City Commercial Bank.  Pursuant to the loan agreement, Zhongde Energy borrowed RMB 33 million, or approximately $4.8 million, at an annual interest rate of 5.94% (the “Base Rate”). The proceeds from the loan are required to be used for working capital. Zhongde Energy must repay RMB 28 million, or approximately $4,261,600, by January 5, 2012. The loan is secured by, among other things, the real property of Zhongde Energy and the bank accounts and real property of Fujian Zhongde. Mr. Tai-Ming Ou, our chief executive officer, has personally guaranteed Zhongde Energy’s obligation under the loan agreement. Zhongde Energy will be subject to a penalty interest rate that is 30% greater than the Base Rate in the event it does not timely repay the loan and 80% greater than the Base Rate in the event that it does not use the proceeds from the loan as specified in the loan agreement. There are no additional financial covenants pursuant to the loan agreement.
  20
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  On January 7, 2011, we entered into a trade financing agreement with China Construction Bank.  Pursuant to the financing agreement, Zhongde Energy can borrow up to RMB 33.4 million, or approximately $5.0 million, with annual interest at the bank’s aggregate adjustable rate.  The financing agreement provides for letters of credit, bankers acceptance and other trade-related guarantees and advances, each of which may not exceed RMB 28 million, and a “packing loan” covering borrowings arising from the foregoing, which may not exceed RMB 15 million.  No guarantee or collateral is required under the financing agreement.  The financing agreement also does not provide for an increase in interest or payment acceleration upon an event of default, but such penalties could be assessed. There are no financial covenants pursuant to the financing agreement.  As of June 30, 2011, the Company had borrowed $2,976,296 with annual interest at the bank’s aggregate adjustable rate payable through June 30, 2011.
 
 We have historically met our liquidity and capital requirements from a variety of sources. These include internally generated cash flow, short-term borrowings from related parties and financial institutions, and proceeds from sales of common stock.
 
 We expect that current capital and other existing resources will provide a limited amount of working capital, sufficient to operate at full capacity until the end of 2011.  We also believe that revenue from our operations is sufficient to acquire an upstream feedstock supplier to mitigate our feedstock supply risk and feedstock price fluctuation.
 
 We intend to repay our debt and other obligations through cash generated from our business operations. To the extent that we have excess funds on hand, we intend to reinvest such excess funds in additional equipment.
 
 To the extent that we do not have sufficient capital to fund future construction and operation of our biodiesel and specialty chemical refineries, capital expenditures to build and operate our refineries, hiring qualified management and key employees, complying with licensing, registration and other requirements, maintaining compliance with applicable laws, production and marketing activities, administrative requirements, such as salaries, insurance expenses and general overhead expenses, legal compliance costs and accounting expenses, all of which require a substantial amount of capital and cash flow, we will be required to pursue sources of additional capital through various means, including joint venture projects, debt financing, equity financing or other means. There is no assurance that we will be successful in locating a suitable financing transaction in a timely fashion or at all. In addition, there is no assurance that we will be successful in obtaining the capital we require by any other means. Future financings through equity investments are likely to be dilutive to the existing stockholders. Also, the terms of securities we issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, and the issuance of warrants or other derivative securities, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which may adversely impact our financial condition.
 
 Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in the biodiesel and specialty chemicals industries, the fact that we are a new enterprise without a proven operating history, the location of our production facilities in the People’s Republic of China, and the price of biodiesel, oil and specialty chemicals on the commodities market, which may impact the amount of available asset-based financing. Furthermore, if petroleum, biodiesel or specialty chemicals’ prices on the commodities markets decrease, then our revenues will likely decrease. The decrease in revenues may increase our requirements for capital. Some of the contractual arrangements governing our operations may require us to maintain minimum capital, and we may lose our contract rights if we do not have the required minimum capital. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operation in one or both of our facilities and/or lay off excess employees.
 
 Obligations under Material Contracts.  We had no material commitments as of June 30, 2011 other than the loan agreements described above.
 
 Critical Accounting Policies and Estimates
 
 The discussion and analysis of our critical accounting policies and estimates presented in this section is based on the unaudited condensed consolidated financial statements. Our unaudited condensed 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 conditions.
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  In responseto the Securities and Exchange Commission’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure about Critical Accounting Policy,” we identified the most critical accounting principles upon which our financial status depends. There have been no changes to the critical accounting policies disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 30, 2011.
 
 The unaudited condensed consolidated financial statements of the Company are expressed in U.S. dollars.  All significant intercompany balances and transactions have been eliminated in consolidation.
 
 Item 4.  Controls and Procedures.
 
 Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
 
 As of June 30, 2011, we conducted an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
 
 Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2011, we have an insufficient number of personnel or consultants with an appropriate level of experience and knowledge of United States GAAP. This material weakness may affect management’s ability to effectively review and analyze elements of the financial statements and prepare financial statements in accordance with United States GAAP.  We intend to remediate this material weakness by hiring a consulting firm with expertise in United States GAAP to review our financial statements for the quarter ending September 30, 2011 and going forward.
 
 Changes in Internal Control over Financial Reporting
 
 There were no changes in our internal control over financial reporting during the three month period ended June 30, 2011 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
 
 There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 30, 2011.
  Item 6.  Exhibits
  (a)
Exhibits



See Index to Exhibits.
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  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: August 9, 2011
/s/ Tai-ming OuTai-ming OuPresident and Chief Executive Officer and

Chairman of the Board of Directors(Principal Executive Officer)/s/ William ChenWilliam ChenChief Financial Officer(Principal Financial Officer)
 
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 EXHIBIT INDEX
 
 Exhibit No.

Description3.1

Composite Certificate of Incorporation of China Clean Energy Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form SB-2 of China Clean Energy Inc. filed with the Securities and Exchange Commission on February 1, 2008).3.2

Bylaws of China Clean Energy Inc. (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on October 30, 2006).31.1*

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
  *           Filed herewith.
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