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: March 31, 2010ORo
              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 May 14,
2010: 31,512,269
  1
 Table of Contents
  TABLEOF CONTENTS
 
 PagePART
      IItem 1.
              Financial Statements
              3Item 2.
              Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
              22Item 4T.
              Controls and Procedures
              30PART
      IIItem
      1A.
              Risk
      Factors
              30Item 6.
              Exhibits
              30
  2
 Table of Contents
  PART I - FINANCIAL INFORMATION
 
 Item
1. Financial Statements
 CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETSASSETSMarch 31,
                  
                  
                  December 31,2010
                  
                  
                  2009(Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  5,305,161
                  
                  
                  $
                  4,154,814Accounts
      receivable, net of allowance for doubtful accounts of
      $69,533  and $93,761, respectively
                  
                  
                  2,698,457
                  
                  
                  
                  1,766,952Other
      current assets
                  
                  
                  11,000
                  
                  
                  
                  11,000Deferred
      tax assets
                  
                  
                  69,268
                  
                  
                  
                  69,466Tax
      receivables
                  
                  
                  335,908
                  
                  
                  
                  -Inventories,
      net
                  
                  
                  3,386,391
                  
                  
                  
                  464,842Advances
      for inventory purchases
                  
                  
                  698,757
                  
                  
                  
                  188,659Total
      current assets
                  
                  
                  12,504,942
                  
                  
                  
                  6,655,733Plant
      and equipment, net
                  
                  
                  24,860,925
                  
                  
                  
                  25,119,034Intangible
      assets, net
                  
                  
                  4,795,104
                  
                  
                  
                  4,860,645Total
      assets
                  
                  $
                  42,160,971
                  
                  
                  $
                  36,635,412LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  1,868,308
                  
                  
                  $
                  157,433Accrued
      liabilities
                  
                  
                  200,631
                  
                  
                  
                  279,516Customer
      deposits
                  
                  
                  140,124
                  
                  
                  
                  71,090Taxes
      payable
                  
                  
                  320,727
                  
                  
                  
                  130,287Short term notes payable
                  
                  
                  1,170,240
                  
                  
                  
                  3,080,700Bank
      loans payable, current portion
                  
                  
                  731,400
                  
                  
                  
                  -Total
      current liabilities
                  
                  
                  4,431,430
                  
                  
                  
                  3,719,026Warrants
      liability
                  
                  
                  1,617,131
                  
                  
                  
                  1,259,774Bank
      loans payable - net of current portion
                  
                  
                  4,095,840
                  
                  
                  
                  -Total
      liabilities
                  
                  
                  10,144,401
                  
                  
                  
                  4,978,800COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITYPreferred
      stock, par value $0.001 per share, authorized 10,000,000 shares, no shares
      issued and outstanding as of March 31, 2010 and December 31, 2009,
      respectively
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, par value $0.001 per share, authorized 90,000,000 shares,
      31,512,269 shares issued and outstanding as of March 31, 2010 and December
      31, 2009, respectively
                  
                  
                  31,512
                  
                  
                  
                  31,512Additional
      paid-in capital
                  
                  
                  12,526,838
                  
                  
                  
                  12,420,523Statutory
      reserves
                  
                  
                  1,630,882
                  
                  
                  
                  1,630,882Retained
      earnings
                  
                  
                  14,757,620
                  
                  
                  
                  14,407,448Accumulated
      other comprehensive income
                  
                  
                  3,069,718
                  
                  
                  
                  3,166,247Total
      shareholders' equity
                  
                  
                  32,016,570
                  
                  
                  
                  31,656,612Total
      liabilities and shareholders' equity
                  
                  $
                  42,160,971
                  
                  
                  $
                  36,635,412
  See
accompanying notes to condensed consolidated financial
statements.
  3
 Table of Contents
  CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS) AND COMPREHENSIVE INCOME
      (LOSS)(UNAUDITED)Three
      months ended March 31,2010
                  
                  
                  2009REVENUES
                  
                  $
                  10,737,691
                  
                  
                  $
                  2,806,262Less:
      cost of goods sold
                  
                  
                  9,251,495
                  
                  
                  
                  2,449,930GROSS
      PROFIT
                  
                  
                  1,486,196
                  
                  
                  
                  356,332OPERATING
      EXPENSESSelling
      and marketing
                  
                  
                  54,046
                  
                  
                  
                  48,056General
      and administrative
                  
                  
                  432,280
                  
                  
                  
                  441,390Research
      and development
                  
                  
                  9,902
                  
                  
                  
                  25,924Total
      operating expenses
                  
                  
                  496,228
                  
                  
                  
                  515,370INCOME
      (LOSS) FROM OPERATIONS
                  
                  
                  989,968
                  
                  
                  
                  (159,038
                  )OTHER
      INCOME (EXPENSE)Interest income (expense), net
                  
                  
                  (57,462
                  )
                  
                  
                  953Other
      income (expense)
                  
                  
                  117
                  
                  
                  
                  (1,101
                  )Change
      in fair value of warrants liability
                  
                  
                  (357,357
                  )
                  
                  
                  26,064Total
      other income (expenses)
                  
                  
                  (414,702
                  )
                  
                  
                  25,916INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  575,266
                  
                  
                  
                  (133,122
                  )PROVISION
      FOR INCOME TAXES
                  
                  
                  225,094
                  
                  
                  
                  10,362NET
      INCOME (LOSS)
                  
                  
                  350,172
                  
                  
                  
                  (143,484
                  )OTHER
      COMPREHENSIVE LOSSForeign
      currency translation adjustment
                  
                  
                  (983
                  )
                  
                  
                  (45,210
                  )COMPREHENSIVE
      INCOME (LOSS)
                  
                  $
                  349,189
                  
                  
                  $
                  (188,694
                  )BASIC
      AND DILUTED EARNINGS (LOSS) PER SHAREWeighted
      average number of shares
                  
                  
                  31,512,269
                  
                  
                  
                  31,512,269Earnings
      (loss) per share
                  
                  $
                  0.011
                  
                  
                  $
                  (0.005
                  )
  See
accompanying notes to condensed consolidated financial
statements.
  4
 Table of Contents
  CHINA
      CLEAN ENERGY INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)For
      the three months endedMarch
      312010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                  
                  $
                  350,172
                  
                  
                  $
                  (143,484
                  )Adjusted
      to reconcile net income (loss) to cash provided by (used in) operating
      activities:Depreciation
                  
                  
                  363,810
                  
                  
                  
                  177,236Allowance
      for doubtful accounts
                  
                  
                  (24,228
                  )
                  
                  
                  29,153Amortization
      of intangible assets
                  
                  
                  107,739
                  
                  
                  
                  58,463Stock-based
      compensation expense
                  
                  
                  106,315
                  
                  
                  
                  93,094Writedown
      on inventory
                  
                  
                  -
                  
                  
                  
                  25,464Change
      in warrants libility
                  
                  
                  357,357
                  
                  
                  
                  (26,064
                  )Deferred
      tax provision
                  
                  
                  198
                  
                  
                  
                  -Changes
      in operating assets and liabilitiesAccounts
      receivable
                  
                  
                  (907,277
                  )
                  
                  
                  (203,504
                  )Inventories
                  
                  
                  (2,921,549
                  )
                  
                  
                  (19,346
                  )Advances
      for inventory and other current assets
                  
                  
                  (510,098
                  )
                  
                  
                  102,880Accounts
      payable
                  
                  
                  1,710,875
                  
                  
                  
                  607,346Accrued
      liabilities
                  
                  
                  (78,885
                  )
                  
                  
                  29,803Customer
      deposits
                  
                  
                  69,034
                  
                  
                  
                  (129,361
                  )Taxes
      payables
                  
                  
                  190,440
                  
                  
                  
                  (12,235
                  )Taxes
      receivable
                  
                  
                  (335,908
                  )
                  
                  
                  -Net
      cash provided by (used in) operating activities
                  
                  
                  (1,522,005
                  )
                  
                  
                  589,445CASH
      FLOWS FROM INVESTING ACTIVITIESAddition
      to construction in progress
                  
                  
                  -
                  
                  
                  
                  (558,889
                  )Purchase
      of equipment
                  
                  
                  (105,701
                  )
                  
                  
                  (2,102
                  )Proceeds
      from sale of equipment
                  
                  
                  -
                  
                  
                  
                  -Advances
      for equipment purchases
                  
                  
                  -
                  
                  
                  
                  (194,631
                  )Addition
      to intangibles
                  
                  
                  (42,198
                  )
                  
                  
                  -Net
      cash (used in) investing activities
                  
                  
                  (147,899
                  )
                  
                  
                  (755,622
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from bank loans
                  
                  
                  4,827,240
                  
                  
                  
                  -Payments
      on bank loans
                  
                  
                  (1,910,460
                  )
                  
                  
                  (257,527
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  2,916,780
                  
                  
                  
                  (257,527
                  )EFFECT
      OF EXCHANGE RATE ON CASH
                  
                  
                  (96,529
                  )
                  
                  
                  (31,164
                  )INCREASE
      IN CASH AND CASH EQUIVALENTS
                  
                  
                  1,150,347
                  
                  
                  
                  (454,868
                  )CASH
      AND CASH EQUIVALENTS, beginning of period
                  
                  
                  4,154,814
                  
                  
                  
                  2,913,711CASH
      AND CASH EQUIVALENTS, end of period
                  
                  $
                  5,305,161
                  
                  
                  $
                  2,458,843SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONInterest
      expenses paid
                  
                  $
                  55,773
                  
                  
                  $
                  2,652Income
      taxes paid
                  
                  $
                  68,675
                  
                  
                  $
                  -Non
      cash investing activity:Reclassification
      of advance of equipment purchase to construction in
    progress
                  
                  $
                  -
                  
                  
                  $
                  587,612
  See
accompanying notes to condensed consolidated financial
statements.
  5
 Table of Contents
  CHINA
CLEAN ENERGY INC. AND SUBSIDIARIES
 NOTES TO
CONDENSED 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, through its wholly-owned
subsidiaries, China Clean Energy Resources Limited (“CCER”), a British Virgin
Islands company, and 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 built a biodiesel and specialty chemicals
refinery in the Jiangyin Industrial Park and produces and sells biodiesel and
specialty chemicals products. The Company has moved its administrative
headquarters to the new plant.
 
 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
(“GAAP”) and are expressed in U.S. 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.
 
 The
unaudited interim condensed consolidated financial statements 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, 2009, filed with the Securities and
Exchange Commission (“SEC”) on March 31, 2010, as amended by Amendment No. 1 on
Form 10-K/A filed with the SEC on April 14, 2010.
 
 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. 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 condensed consolidated financial statements are
reasonable and prudent. Actual results could differ from those
estimates.
  6
 Table of Contents
  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
disclosure 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 for
fair value measures. Current assets and current liabilities are 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
follows:
 
 ·
                  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. The Company evaluates the hierarchy disclosures each
quarter.
 
 As of
March 31, 2010 and December 31, 2009, the bank loans amounted to $5,997,480 and
$3,080,700, respectively. 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 on
similar loans.
  Liabilities
measured at fair value on a recurring basis are summarized as
follows:
 
 Carrying
      Value as of March 31, 2010 (unaudited)
                  Fair
      Value Measurements at March 31, 2010 (unaudited)Level
      1
                  Level
      2
                  Level
      3Warrants
      liability
                  $1,617,131
                  
                  
                  $1,617,131
 
 Carrying
      Value as of December 31, 2009
                  Fair
      Value Measurements at December 31, 2009Level
      1
                  Level
      2
                  Level
      3Warrants
      liability
                  $1,259,774
                  
                  
                  $1,259,774
  7
 Table of Contents
  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 three months ended March 31, 2010 and
the year ended December 31, 2009:
  For the three months ended
      March 31,2010
                  
                  
                  For the year ended
      December 31,2009Warrants Liability(Unaudited)Beginning
      balance*
                  
                  $
                  1,259,774
                  
                  
                  $
                  295,381Total
      gains or losses:Included
      in earnings
                  
                  
                  357,357
                  
                  
                  
                  964,393Included
      in other comprehensive income
                  
                  
                  -Purchases,
      issuances, and settlements
                  
                  
                  -Transfer
      in and/or out of Level 3
                  
                  
                  -Ending
      balance
                  
                  $
                  1,617,131
                  
                  
                  $
                  1,259,774
  *
Effective January 1, 2009, the Company adopted the provisions of an
accounting standardregarding 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 long-term warrants liability to recognize the
fair value of such warrants.  Refer to Note 9 for additional
information.
 
 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 United
States dollar.
 
 Fujian
Zhongde and Zhongde Energy assets and liabilities are translated into United
States dollars at period-end exchange rates ($0.1463 and $0.1467 at March 31,
2010 and December 31, 2009, respectively). Fujian Zhongde and Zhongde Energy
revenues and expenses are translated into United States dollars at weighted
average exchange rates for the periods ($0.14665 and $0.14651 for the three
months ended March 31, 2010 and 2009, respectively). Resulting translation
adjustments are recorded as a component of accumulated other comprehensive
income (loss) within shareholders’ 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 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.
 
 As of
March 31, 2010 and December 31, 2009, translation adjustments resulting from
this process included in accumulated other comprehensive income in the condensed
consolidated balance sheets amounted to $3,069,718 and $3,166,247,
respectively.
  8
 Table of Contents
  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 receivables 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.
 
 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.
 
 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
 
 Maintenance,
repairs and minor renewals are charged directly to expense as incurred. Major
additions and betterment to buildings and equipment are
capitalized.
  9
 Table of Contents
  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 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 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 rights over the respective
contract periods.
 
 Patents,
which have a legal life of 10 years in the PRC, are amortized over 10 years as
management believes that 10 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
recognizes an impairment loss based on the fair value of the assets. There was
no impairment for the three months ended March 31, 2010 and
2009.
 
 Revenue
Recognition
 
 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.  However, revenue is
realized and earned only 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;
  and•
                  collectability
      of payment is reasonably assured.
 
 Substantially
all of the Company’s products are sold free on board (“FOB”) 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 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
its finished product.
  10
 Table of Contents
  Transportation
and unloading charges and product inspection charges are included in selling
expenses totaled $44,693 and $73,909 for the three months ended March 31 2010
and 2009, respectively.
 
 Research and Development
Costs
 
 Research
and development (“R&D”) expenses include salaries, material, contract and
other outside service fees, facilities and overhead costs.  In
accordance with GAAP accounting for R&D costs, the Company expenses the
costs associated with the R&D activities when incurred.
 
 The
R&D expenses are included in general and administrative expenses totaled
$9,902 for the three months ended March 31 2010.
 
 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 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 agreements, as earned.
 
 Income
Taxes
 
 The
Company records income taxes pursuant to GAAP for income taxes which requires
the recognition of deferred income tax liabilities and assets for the expected
future tax consequences of temporary differences between the 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
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 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.
  11
 Table of Contents
  Deferred
tax assets at March 31, 2010 and December 31, 2009 was $69,268 and 69,466,
respectively.
 
 Income
tax returns for the year prior to 2005 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 that 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
 
 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.
 
 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 years. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common shares were exercised or
converted into common shares. Convertible, redeemable preferred shares if
applicable 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.
Common share equivalents are excluded from the computation of diluted earnings
per share if their effects would be anti-dilutive.
 
 Recent Accounting
Pronouncements
 
 In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about
Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 amends FASB Accounting
Standards (“ASC”) Topic 820-10 to require entities to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. In addition, ASU
2010-06 requires entities to present separately information about purchases,
sales, issuances, and settlements in the reconciliation for fair value
measurements using significant unobservable inputs (Level 3). The new disclosure
requirements apply to interim and annual reporting periods beginning after
December 15, 2009, with one exception:  the new rules regarding
purchases, sales, issuances and settlements associated with Level 3 measurements
will be effective for fiscal year beginning after December 15, 2010, and for the
interim periods with those fiscal years. Therefore, the disclosures related to
Level 1 and Level 2 fair value measurements are effective for the Company in
2010 and the disclosures related to Level 3 fair value measurements are
effective for the Company in 2011. ASU 2010-06 requires new disclosures
only.  The Company does not expect the adoption of this pronouncement
will have an impact on its consolidated financial statements.
  12
 Table of Contents
 
 In June
2009, the FASB issued an amendment to ASC Topic 810-10, “Consolidation” The
amendment requires an enterprise to qualitatively assess the determination of
the primary beneficiary of a variable interest entity(“VIE”) based on whether
the enterprise: (1) has the power to direct the activities of a VIE that
most significantly effect the entity’s economic performance; and (2) has
the obligation to absorb losses of the entity or the right to receive benefits
from the entity that could potentially be significant to the VIE. ASC Topic
810-10, as amended, requires an ongoing reconsideration of the primary
beneficiary, and amends the events that trigger a reassessment of whether an
entity is a VIE. This statement is effective as of the beginning of a reporting
entity’s first annual reporting period that begins after November 15, 2009.
Earlier application is prohibited. Retrospective application is optional. The
Company is currently evaluating the effects, if any, that the amendment to ASC
Topic 810-10 will have on its consolidated financial statements.
 
 NOTE
3 – INVENTORIES
 
 Inventories
consist of the following:
  March 31,2010
                  
                  
                  December 31,2009(Unaudited)Raw
      materials
                  
                  $
                  1,665,778
                  
                  
                  $
                  349,800Work
      in process and packaging materials
                  
                  
                  10,297
                  
                  
                  
                  4,471Finished
      goods
                  
                  
                  1,710,316
                  
                  
                  
                  110,571Total
                  
                  $
                  3,386,391
                  
                  
                  $
                  464,842
 
 NOTE
4 – PLANT AND EQUIPMENT
 
 Plant and
equipment, net consist of:
 
 March 31,2010
                  
                  
                  December 31,2009(unaudited)Buildings
                  
                  $
                  11,998,533
                  
                  
                  $
                  12,032,983Equipment
      and machinery
                  
                  
                  16,797,076
                  
                  
                  
                  16,744,242Office
      equipment and vehicles
                  
                  
                  180,025
                  
                  
                  
                  92,708Total
                  
                  
                  28,975,634
                  
                  
                  
                  28,869,933Less
      accumulated depreciation
                  
                  
                  (4,114,709
                  )
                  
                  
                  (3,750,899
                  )Plant
      and equipment, net
                  
                  $
                  24,860,925
                  
                  
                  $
                  25,119,034
  Depreciation
expense was $363,810 and $177,236 for the three months ended March 31, 2010 and
2009, respectively.
  13
 Table of Contents
  NOTE
5 – INTANGIBLE ASSETS
 
 Intangible
assets, net consist of:
 
 March 31,2010
                  
                  
                  December 31,2009(Unaudited)Land
      use rights
                  
                  $
                  4,361,181
                  
                  
                  $
                  4,950,538Patents
      and licenses
                  
                  
                  1,981,195
                  
                  
                  
                  1,349,640Total
                  
                  
                  6,342,376
                  
                  
                  
                  6,300,178Less
      accumulated amortization
                  
                  
                  (1,547,272
                  )
                  
                  
                  (1,439,533
                  )Total
      intangible assets, net
                  
                  $
                  4,795,104
                  
                  
                  $
                  4,860,645
 
 Amortization
expense for the three months ended March 31, 2010 and 2009 amounted to $107,739
and $58,463, respectively. The estimated aggregate amortization expenses for
each of the five succeeding fiscal years are as the following:
 
 Twelve
      months ending March 31,
                  
                  Estimated
      Amortization Expense2010
                  
                  $
                  193,8582011
                  
                  
                  189,4572012
                  
                  
                  189,4572013
                  
                  
                  189,4572014
                  
                  
                  189,457
  NOTE
6 – SHORT TERM NOTES PAYABLE
 NOTE 7
– BANK LOANS PAYABLE
 
 March 31,2010(Unaudited)Bank
      loans payable
                  
                  
                  4,827,240Less:  Current
      portion
                  
                  
                  731,400$
                  4,095,840
 
 Bank
loans payable consists of loans with interest at 5.94% payable monthly through
January 2012, secured by the buildings and land use rights of both Zhongde
Energy and Fujian Zhongde.  Two installment payments are scheduled:
(i) 5,000,000 RMB (Approximately $731,400) is due February 2011; and (ii)
28,000,000 RMB (approximately $4,095,840) is due January 2012.
  Total
interest expense on the bank loan for the three months ended March 31, 2010
amounted to approximately $20,000.
  14
 Table of Contents
  The
Company’s Chief Executive Officer has provided a personal guarantee of the above
bank loans.
 
 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 plan out of
the amounts accrued for medical and pension benefits.  The total
provisions and contributions made for such employee benefits were $4,180 and
$5,566 for the three months ended March 31, 2010 and 2009, respectively. The
Chinese government is responsible for the medical benefits and the pension
liability to be paid to these employees.
 
 As of
March 31, 2010 and December 31, 2009, the Company had no liability for pension
or post-employment benefits. The Company does not have a pension or other
retirement plan.
 
 NOTE
9 – 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 the offering if the Company
failed 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 ended December
31, 2009.
 
 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 was transferred to the offering investors.
 
 Effective
January 1, 2009, 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 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 qualifies 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 US dollars
and the Company’s functional currency is Renminbi and because the warrants are
effectively “dual-indexed.” As such, effective January 1, 2009, the Company
reclassified the fair value of these warrants from equity to liability status as
if these warrants had been treated as a derivative liability since their date of
issue in January 2008.  All changes in the fair value of these
warrants are recognized currently in earnings until such time as the warrants
are exercised or expired.
  15
 Table of Contents
  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 $1,259,774 at
December 31, 2009. The Company recognized a $357,357 loss from the change in
fair value for the three months ended March 31, 2010.
  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:
 
 March
      31,
                  
                  January
      1,2010
                  
                  2009(Unaudited)
                  
                  (Unaudited)Annual
      dividend yield
                  
                  
                  —
                  
                  
                  
                  —Expected
      life (years)
                  
                  
                  2.75
                  
                  
                  
                  4.00Risk-free
      interest rate
                  
                  
                  1.60
                  %
                  
                  
                  1.55
                  %Expected
      volatility
                  
                  
                  101
                  %
                  
                  
                  99
                  %
  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 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:
 
 Weighted
                  AverageAverage
                  RemainingWarrants
                  Warrants
                  Exercise
                  ContractualOutstanding
                  Exercisable
                  Price
                  LifeDecember
      31, 2007
                  -
                  -
                  -
                  -Granted
                  6,200,000
                  6,200,000
                  $2.00
                  5Forfeited
                  -
                  -
                  -
                  -Exercised
                  -
                  -
                  -
                  -Balance,
      at December 31, 2008
                  6,200,000
                  6,200,000
                  $2.00
                  4Granted
                  -
                  -
                  -
                  -Forfeited
                  -
                  -
                  -
                  -Exercised
                  -
                  -
                  -
                  -Balance,
      at December 31, 2009
                  6,200,000
                  6,200,000
                  $2.00
                  3Granted
                  -
                  -
                  -
                  -Forfeited
                  -
                  -
                  -
                  -Exercised
                  -
                  -
                  -
                  -Balance,
      at March 31, 2010 (Unaudited)
                  6,200,000
                  6,200,000
                  $2.00
                  2.75
  16
 Table of Contents
  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 these, 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) 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.  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. Options totaling 840,000 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%.
  17
 Table of Contents
  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
                  
                  
                  (20,000
                  )
                  
                  
                  2.75
                  
                  
                  
                  (9,803
                  )-Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      as of December 31, 2009
                  
                  
                  590,000
                  
                  
                  $
                  2.75
                  
                  
                  $
                  1,131,483Granted
                  
                  
                  300,000
                  
                  
                  
                  2.75
                  
                  
                  
                  137,131Forfeited
                  
                  
                  (20,000
                  )
                  
                  
                  2.75
                  
                  
                  
                  (9,268
                  )Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      as of March 31, 2010 (unaudited)
                  
                  
                  870,000
                  
                  
                  $
                  2.75
                  
                  
                  $
                  1,259,346
 
 Following
is a summary of the status of options outstanding at March 31,
2010:
  Outstanding
      Options (unaudited)
                  
                  Exercisable
      Options (unaudited)Exercise
      Price
                  Number
                  Average
      Remaining Contractual Life
                  
                  Average
      Exercise Price
                  Number
                  Average
      Remaining Contractual Life$2.50
                  435,000
                  7.75
                  
                  $2.50
                  221,250
                  7.75$3.00
                  435,000
                  7.75
                  
                  $3.00
                  221,250
                  7.75Total
                  870,000
                  
                  
                  
                  442,500
 
 NOTE
11 - EARNINGS PER SHARE
 
 For the
three months ended March 31, 2010, 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.
 
 NOTE
12 – STATUTORY RESERVES
 
 The
Company’s PRC subsidiaries are required to make appropriations to the statutory
surplus reserve fund, 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.
  18
 Table of Contents
  NOTE
13 – TAXES
 
 Income
Taxes
 
 Income
taxes expenses consist of:
 
 Three
      Months ended March 31,2010
                  
                  
                  2009(unaudited)
                  
                  
                  (unaudited)Current:PRC
                  
                  $
                  224,896
                  
                  
                  $
                  10,362United
      States
                  
                  
                  -
                  
                  
                  
                  -Total
      current
                  
                  
                  224,896
                  
                  
                  
                  10,362Deferred
                  
                  
                  198
                  
                  
                  
                  -Total
                  
                  $
                  225,094
                  
                  
                  $
                  10,362
  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 EIT 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%.  Fujian Zhongde qualifies as
a High Tech company and therefore pays a reduced tax rate of 15%.  For
companies established before March 16, 2007, however, there is a tax holiday
treatment approved by local government pursuant to which such companies will pay
no taxes for the first two years without paying tax and the subsequent three
years will have a 50% reduction in tax rate. This will apply when the Company
has its first profitable year.
  19
 Table of Contents
  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 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 $823,438 and $1,321,236, respectively,
for the three months ended March 31, 2010. VAT on sales and VAT on purchases
amounted to $317,103 and $365,099, respectively, for the three months ended
March 31, 2009. Sales and purchases are recorded net of VAT collected and paid
because the VAT taxes are not impacted by the income tax holiday. Because the
Company’s purchases and VAT taxes paid during the three months ended March 31,
2010 were greater than sales during the period, the Company has prepaid taxes
that can be used to offset future VAT on sales.
  NOTE
14 – SEGMENT INFORMATION
  The
Company operates in one industry segment – the synthesization 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
are located in the PRC.
 
 Net sales
and gross profit percentages (“GP %”) for the three months ended March 31, 2010
and 2009 consist of:
 
 2010
                  
                  
                  2009Sales
                  GP%
                  
                  Sales
                  GP%(Unaudited)
                  
                  
                  (Unaudited)Domestic
      sales
                  $
      8,198,163
                  13.78%
                  
                  $
      1,865,314
                  7.10%International
      sales
                  2,539,528
                  15.21%
                  
                  940,948
                  26.6%Total
      sales
                  $
      10,737,691
                  13.8%
                  
                  $
      2,806,262
                  12.7%
  NOTE
15 – CONCENTRATIONS
 
 The
Company’s demand deposits are in accounts maintained with stateowned banks within the
PRC and an offshore account in the U.S. Total cash deposited with banks within
the PRC, as of March 31, 2010, amounted to $5,305,161, 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.
    20
 Table of Contents
  NOTE
16 – 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 that would have a significant effect on the Company’s
condensed consolidated financial statements as of March 31, 2010.
  The Labor
Contract Law of the People’s Republic of China, effective as of January 1, 2008,
requires employers to assure the liability of the 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 March
31, 2010, the Company has estimated its severance payments are approximately
$90,000, which has not been reflected in its condensed consolidated financial
statements.
  21
 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, 2009, filed with the Securities and Exchange
Commission (“SEC”) on March 31, 2010, as amended by Amendment No. 1 to our
Annual Report on Form 10-K/A filed with the SEC on April 14, 2010.
 
 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 statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by these
forward-looking statements. Forward-looking statements involve risks and
uncertainties. These uncertainties include factors that affect all businesses as
well as matters specific to us. 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, 2009,
filed with the SEC on March 31, 2010, as amended by Amendment No. 1 to our
Annual Report on Form 10-K/A filed with the SEC on April 14, 2010, 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,
through our wholly-owned subsidiaries, China Clean Energy Resources Limited
(“CCER”) and Fujian Zhongde Technology Co., Ltd. (“Fujian Zhongde”), are engaged
in the development, manufacturing, and distribution of biodiesel and specialty
chemical products made from renewable resources.  We are engaged in
the manufacture of high-quality specialty chemical products from renewable
resources. Through cooperation with outside experts at various research
institutes and our research and development efforts, we formulated a proprietary
process for refining biodiesel from waste vegetable oils and waste grease. Using
this proprietary process, we began producing biodiesel in 2005 and commenced
selling biodiesel commercially in December 2005.  On November 5,
2007, Fujian Zhongde Energy Co. Ltd. (“Zhongde Energy”) was incorporated in the
Province of Fujian, People’s Republic of China as an indirect wholly owned
subsidiary of the Company 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
 
 On April
14, 2010, the Company engaged Friedman, LLP to serve as the Company’s
independent auditor effective immediately. Founded in 1924, Friedman, LLP is
headquartered in New York City and has offices in New Jersey and Long Island,
employing 325 personnel, and providing accounting, tax and consulting services
to public and privately held companies.
 
 We
completed construction of a new biodiesel and specialty chemical focused
production facility in the new Fuqing Jiangyin Industrial Park in the Fujian
Province, People’s Republic of China, in October 2009.  We
successfully completed the trial production phase at our new facility at the end
of 2009 and, as of January 2010, the new plant is fully operational. We have
moved our administrative headquarters to the new plant.
 
 22
 Table of Contents
  The
Fuqing Jiangyin Industrial Park is equipped with a deep sea harbor capable of
servicing 100,000 ton cargo ships, a container port and a railroad
that will be connected to the People’s Republic of China’s national
railroad network. The facility 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 of both our biodiesel and specialty
chemical production capacity will help us to increase our competitiveness and
profitability in the future.  The new plant increases our
specialty-chemicals capacity by 30,000 tons per year to a total of 40,000 tons
per year. For the
three months ended March 31, 2010, capacity utilization at our new plant was
approximately 28% for biodiesel and 36% for specialty chemicals. The plant
did not operate at full capacity during the quarter because it was not necessary
to run at the full capacity to fulfill the sales volume purchased by our
customers. We anticipate that the utilization rate at our new plant will
increase in proportion to increases in our sales volume.
  Results
of Operations
 
 Three
Months Ended March 31, 2010 Compared to the Three Months Ended March 31,
2009
 
 Revenues. During the quarter
ended March 31, 2010, we had net sales of $10,737,691 (27% from biodiesel sales
and 73% from specialty chemicals sales), as compared to net sales of $2,806,262
(20% from biodiesel sales and 80% from specialty chemicals sales) during the
quarter ended March 31, 2009, an increase of approximately 283%. The increase in
revenue was driven by the increased capacity provided by our new facility in
Jiangyin and also the apparent beginnings of a global economic recovery, both of
which increased our sales volume and increased average selling prices for both
our specialty chemicals and biodiesel product segments. During
the quarter ended March 31, 2010, we had sales volume of 5,825 tons from
specialty chemicals and 4,391 tons from biodiesel, as compared to sales volume
of 1,782 tons from specialty chemicals and 1,026 tons from biodiesel during the
quarter ended March 31, 2009.  Approximately 55% of the sales increase
was contributed by our new Jiangyin plant.We expanded our sales to our
existing customers and also added five new customers for the quarter ended March
31, 2010. During
the quarter ended March 31, 2010, the average selling price was approximately
$1,368 per ton for specialty chemicals and approximately $681 per ton
for  biodiesel, as compared to the quarter ended March 31 2009, in
which the average selling price was approximately $1,266 per ton for specialty
chemicals and approximately $528 per ton for biodiesel.
 
 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
$9,251,495 for the quarter ended March 31, 2010, as compared to cost of goods
sold of $2,449,930 for the quarter ended March 31, 2009. Feedstock
cost represents a significant portion of the cost of goods sold and our gross
profit. Feedstock cost was approximately $8,587,966 for the quarter ended March
31, 2010, as compared to $2,033,633 for the quarter ended March 31,
2009.  As the market conditions recover, management expects the price
of feedstock to increase.We had a gross profit of $1,486,196 for the
quarter ended March 31, 2010, as compared to a gross profit of $356,332 for the
quarter ended March 31, 2009, representing gross margins of approximately 13.8%
and 12.7%, respectively. This increase in gross margin was primarily driven by
the increase in the average selling price.
 
 Selling Expenses. Selling
expenses, which include advertising and promotion, freight charges, exporting
expenses, wages and salaries, totaled $54,046 for the quarter ended March 31,
2010, as compared to $48,056 for the quarter ended March 31, 2009, an increase
of approximately 12%. This increase was due to higher sale volume and higher
export freight charges, domestic shipping fees and commission fees.
 
 General and Administrative and Other
Operating Expenses. General and administrative and other operating
expenses totaled $442,182 for the quarter ended March 31, 2010, as compared to
$467,314 for the quarter ended March 31, 2009, a decrease of approximately 5%.
This decrease was primarily attributable to lower stock-based compensation
expense due to a reduction in the number of our employees and cancellation
of our Canadian consulting services, which reduced our other operating
expenses. For the
quarter ended March 31, 2010, in comparison to the quarter ended March 31, 2009,
the employment of three employees under the stock compensation plan has
terminated.Our general and administrative expenses remain at the same
level.
 
 Net Income (Loss). We
recorded net income of $350,172, or $0.011 per basic and diluted share, for the
quarter ended March 31, 2010, which included a non-cash charge of $357,357
due to change in fair value measurement of the warrants issued in connection
with our 2008 private placement. We recorded a net loss of $143,484, or $0.005
loss per basic and diluted share, for the quarter ended March 31,
2009.  The increase in net income was attributable mainly to the
increase in sales volume of both biodiesel and specialty chemicals and the
increase in the average selling price of both products.
 
 We reviewed
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 our warrants. 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 compensated for these limitations by
providing the relevant disclosure of the items excluded.
 
 23
 Table of Contents
  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 March 31,2010
              
              
              2009Net
      income (loss)
              
              $
              350,172
              
              
              $
              (143,484
              )Add
      back (deduct):Change
      in fair value of warrant
              
              $
              357,357
              
              
              
              (26,064
              )Stocked-based
      compensation
              
              $
              106,315
              
              
              $
              93,094Adjusted
      net income (loss)
              
              $
              813,844
              
              
              $
              (76,454
              )Diluted
      earnings per share
              
              $
              0.011
              
              
              $
              (0.005)Add
      back (deduct)Change
      in fair value of warrant
              
              $
              0.011
              
              
              
              (0.000
              )Stocked-based
      compensation
              
              $
              0.003
              
              
              $
              0.003Adjusted
      earnings per share
              
              $
              0.03
              
              
              $
              (0.002
              )
 
 The
adjusted non-GAAP net income of $813,844 and the adjusted non-GAAP earnings per
share of $0.03 per share for the quarter ended March 31, 2010 in the table above
excludes a $357,357 non-cash charge due to change in the fair value of warrants
and a $106,315 stock-based compensation expense. Our adjusted non-GAAP net loss
for the quarter ended March 31, 2009 was $76,454, or $0.002 loss per
share.
 
 Liquidity
and Capital Resources
 
 In January 2010, the new plant was in
operations. As previously disclosed, the new plant has a production capacity of
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. The new plant increases our specialty-chemicals capacity
by 30,000 tons to a total of 40,000 tons annually.
 
 Loan Agreement. In February
2010, we secured an additional bank financing for approximately $4,800,000 from
Fujian Haixia Bank, formerly Fuzhou City Commercial Bank, for use in working
capital at our new plant.
 
 Pursuant
to the Loan Agreement, Zhongde Energy borrowed RMB 33 million, or approximately
$4.8 million (the “Loan”), 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 5 million, or approximately
$732,064, by February 24, 2011 and RMB 28 million, or approximately $4,099,560,
by January 5, 2012. Repayment is secured by, among other things, the land of
Zhongde Energy and the land, bank accounts and real property of Fujian Zhongde
Tai-Ming Ou, the Company’s chief executive officer, has personally guaranteed
Zhongde Energy’s obligations under the Loan. Zhongde Energy shall 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 covenants under the Loan.
 
 General.As of
March 31, 2010 and December 31, 2009, we had cash and cash equivalents of
$5,305,161 and $ 4,154,814, respectively. The increase in cash and cash
equivalents was primarily attributable to the $4,827,240 of proceeds we received
from bank loans, partly offset by payments for inventory purchases during the
three months ended March 31, 2010.
 
 Net cash
used in operating activities totaled $1,522,005 during quarter ended March 31,
2010 and was primarily attributable to a $2,921,549 increase in inventories. Net
cash provided by operating activities totaled $589,445 for the quarter ended
March 31, 2009 and was primarily attributable to an increase in accounts payable
of $607,346.
 
 Net cash
used in investing activities totaled $147,899 for the quarter ended March 31,
2010, primarily a result of the purchase of equipment. Net cash used in
investing activities totaled $755,622 for the quarter ended March 31, 2009,
mainly attributable to $558,889 related to the construction of our new plant and
equipment purchase of $21,525.
 
 Net cash
provided by financing activities totaled $2,916,780 during the quarter ended
March 31, 2010 and was due to the net proceeds from bank loans of $4,827,240 for
working capital uses for the quarter ended March 31, 2010, partially offset by a
$1,910,460 payment on a bank loan.  Net cash used in financing activities
totaled $257,527 for the quarter ended March 31, 2009, primarily attributable to
repayments of our bank loan.
  24
 Table of Contents
  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 sales of common stock.
 Based upon the financial resources available to the Company, management
believes that it has sufficient capital and liquidity to sustain operations for
at least the next twelve months.
 
 Obligations under Material Contracts.  We had no material commitments as of March 31,
2010.
 
 Private Placement.On January 9, 2008, we completed a private placement, pursuant to which
we issued 10,000,000 shares of common stock at a price of $1.50 per share and
five-year warrants to purchase 5,000,000 shares of common stock at an initial
exercise price of $2.00 per share, for aggregate gross proceeds of $15,000,000.
In connection with the private placement, we incurred placement agent fees of
approximately $1,200,000, and issued the placement agent five-year warrants to
purchase an aggregate of 1,200,000 shares of common stock at an initial exercise
price of $2.00 per share. The net proceeds of $13.6 million from the above
financing were used to construct our new plant.
 
 Critical
Accounting Policies and Estimates
 
 The
discussion and analysis of our financial condition presented in this section is
based on the condensed consolidated financial statements. Our 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
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 describe
these accounting policies below and under the heading “Recently Issued
Accounting Pronouncements.”
 
 The
condensed consolidated financial statements of the Company are expressed in U.S.
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.
 
 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 disclosure requirements for
fair value measures. Current assets and current liabilities are 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
follows:
  ·
                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. The Company evaluates the hierarchy disclosures each
quarter.
  25
 Table of Contents
  As of
March 31, 2010 and December 31, 2009, the bank loans amounted to $5,997,480 and
$3,080,700, respectively. 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 on
similar loans.
  Liabilities
measured at fair value on a recurring basis are summarized as
follows:
 
 Carrying
      Value as of March 31, 2010 (unaudited)
              Fair
      Value Measurements at March 31, 2010  (unaudited)Level
      1
              Level
      2
              Level
      3Warrants
      liability
              $1,617,131
              
              
              $1,617,131
 
 Carrying
      Value as of December 31, 2009
              Fair
      Value Measurements at December 31, 2009Level
      1
              Level
      2
              Level
      3Warrants
      liability
              $1,259,774
              
              
              $1,259,774
  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 three months ended March 31, 2010 and
the year ended December 31, 2009:
  For the three months ended
      March 31,2010
              
              
              For the year ended
      December 31,2009Warrants Liability(Unaudited)Beginning
      balance*
              
              $
              1,259,774
              
              
              $
              295,381Total
      gains or losses:Included
      in earnings
              
              
              357,357
              
              
              
              964,393Included
      in other comprehensive income
              
              
              -Purchases,
      issuances, and settlements
              
              
              -Transfer
      in and/or out of Level 3
              
              
              -Ending
      balance
              
              $
              1,617,131
              
              
              $
              1,259,774
  *
Effective January 1, 2009, the Company adopted the provisions of an
accounting standardregarding 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 long-term warrants liability to recognize the
fair value of such warrants.  Refer to the condensed consolidated
financial statements for additional information.
 
 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 United
States dollar.
 
 Fujian
Zhongde and Zhongde Energy assets and liabilities are translated into United
States dollars at period-end exchange rates ($0.1463 and $0.1467 at March 31,
2010 and December 31, 2009, respectively). Fujian Zhongde and Zhongde Energy
revenues and expenses are translated into United States dollars at weighted
average exchange rates for the periods ($0.14665 and $0.14651 for the three
months ended March 31, 2010 and 2009, respectively). Resulting translation
adjustments are recorded as a component of accumulated other comprehensive
income (loss) within shareholders’ 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 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.
 
 As of
March 31, 2010 and December 31, 2009, translation adjustments resulting from
this process included in accumulated other comprehensive income in the condensed
consolidated balance sheets amounted to $3,069,718 and $3,166,247,
respectively.
  26
 Table of Contents
  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 receivables 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.
 
 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.
 
 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
 
 Maintenance,
repairs and minor renewals are charged directly to expense as incurred. Major
additions and betterment to buildings and equipment are
capitalized.
 
 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 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 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 rights over the respective
contract periods.
 
 Patents,
which have a legal life of 10 years in the PRC, are amortized over 10 years as
management believes that 10 years is the estimated useful life of the patents
currently owned by the Company.
  27
 Table of Contents
  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
recognizes an impairment loss based on the fair value of the assets. There was
no impairment for the three months ended March 31, 2010 and 2009.
  Revenue
Recognition
 
 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.  However, revenue is
realized and earned only 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;
  and•
              collectability
      of payment is reasonably assured.
 
 Substantially
all of the Company’s products are sold free on board (“FOB”) 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 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
its finished product.
  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 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 agreements, as earned.
 
 Income
Taxes
 
 The
Company records income taxes pursuant to GAAP for income taxes which requires
the recognition of deferred income tax liabilities and assets for the expected
future tax consequences of temporary differences between the income tax basis
and financial reporting basis of assets and liabilities. Provision for income
taxes consists of taxes currently due plus deferred taxes.
  28
 Table of Contents
  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 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.
  Income
tax returns for the year prior to 2005 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 that 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
 
 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.
 
 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 years. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common shares were exercised or
converted into common shares. Convertible, redeemable preferred shares if
applicable 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.
Common share equivalents are excluded from the computation of diluted earnings
per share if their effects would be anti-dilutive.
 
 Recent
Accounting Pronouncements
 
 In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about
Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 amends FASB Accounting
Standards (“ASC”) Topic 820-10 to require entities to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. In addition, ASU
2010-06 requires entities to present separately information about purchases,
sales, issuances, and settlements in the reconciliation for fair value
measurements using significant unobservable inputs (Level 3). The new disclosure
requirements apply to interim and annual reporting periods beginning after
December 15, 2009, with one exception:  the new rules regarding
purchases, sales, issuances and settlements associated with Level 3 measurements
will be effective for fiscal year beginning after December 15, 2010, and for the
interim periods with those fiscal years. Therefore, the disclosures related to
Level 1 and Level 2 fair value measurements are effective for the Company in
2010 and the disclosures related to Level 3 fair value measurements are
effective for the Company in 2011. ASU 2010-06 requires new disclosures
only.  The Company does not expect the adoption of this pronouncement
will have an impact on its consolidated financial statements.
  29
 Table of Contents
  In June 2009, theFASB issued an amendment to ASC Topic 810-10,
“Consolidation” The amendment requires an enterprise to qualitatively assess the
determination of the primary beneficiary of a variable interest entity(“VIE”) based on whether
the enterprise: (1) has the power to direct the activities of a VIE that
most significantly effect the entity’s economic performance; and (2) has
the obligation to absorb losses of the entity or the right to receive benefits
from the entity that could potentially be significant to the VIE. ASC Topic
810-10, as amended, requires an ongoing reconsideration of the primary
beneficiary, and amends the events that trigger a reassessment of whether an
entity is a VIE. This statement is effective as of the beginning of a reporting
entity’s first annual reporting period that begins after November 15, 2009.
Earlier application is prohibited. Retrospective application is optional. The
Company is currently evaluating the effects, if any, that the amendment to ASC
Topic 810-10 will have on its consolidated financial statements.
 
 Item
4T. Controls and Procedures.
 
 Management’s
Conclusions Regarding Effectiveness of Disclosure Controls and
Procedures
 
 As of
March 31, 2010, 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 are effective at the
reasonable assurance level as of March 31, 2010.
 
 Changes
in Internal Control over Financial Reporting
 
 There
were no changes in our internal control over financial reporting during the
three month period ended 

March 31, 2010
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
 
 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, 2009, filed with the SEC on
March 31, 2010, as amended by Amendment No. 1 to our Annual Report on Form
10-K/A filed with the SEC on April 14, 2010.  In addition, we are
subject to the following additional risk factor:
 
 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.
  Item
6.  Exhibits
 
 (a)
              Exhibits
                
                See
      Index to Exhibits.
  30
 Table of Contents
  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:
      May 17, 2010
              /s/
      Tai-ming
      OuTai-ming
      OuPresident
      and Chief Executive Officer and
                Chairman
      of the Board of Directors(Principal
      Executive Officer)
  31
 Table of Contents
  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).10.1
              
              Loan
      Agreement, dated February 24, 2010 between Fujian Zhongde Energy Co., Ltd.
      and Fujian Haixia Bank Co., Ltd. Longtian Branch (incorporated by
      reference to Exhibit 10.1 to the Current Report on Form 8-K of China
      Clean Energy Inc. filed with the Securities and Exchange Commission on
      March 12, 2010).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.
   32