U.S.
Securities and Exchange Commission


Washington,
DC 20549





Form
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934





FOR THE
QUARTERLY PERIOD ENDED


June 30,
2009





Commission
File Number: 1-34131





Sinoenergy
Corporation


(Name of
small business issuer as specified in its charter)





Nevada
            
            84-1491682(State
      or other jurisdiction
              of
      incorporation)
            
            (I.R.S.
      Employer
              Identification
      Number)





1603-1604,
      Tower B Fortune Centre Ao City
              Beiyuan
      Road, Chaoyang District,
              Beijing,
      People’s Republic of China 100107(Address
      of principal executive offices)Issuer’s
      telephone number, including area code:
  86-10-84928149





Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 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 (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 o No o





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





Large
      accelerated filer
            o
            Accelerated
      filer
            oNon-accelerated
      filer
              (Do
      not check if smaller reporting company)
            o
            Smaller
      reporting company
            x




Indicate
by checkmark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o  No x





As of
August 12, 2009, the Registrant had 15,942,336 shares of common stock, par
value $0.001 per share, issued and outstanding.
















SINOENERGY
CORPORATION AND SUBSIDIARIES





PagePart I.
      Financial Information
              
              
              1Item
      1. Consolidated Financial StatementsConsolidated
      Balance Sheets as of June 30, 2009 (Unaudited) and September 30,
      2008
              
              
              1Consolidated Statements of Operations and Comprehensive Income for the
      Three Months Ended June 30, 2009 and 2008
(Unaudited)
              
              
              2Consolidated Statements of Operations and Comprehensive Income for the
      Nine Months Ended June 30, 2009 and 2008 (Unaudited)
              
              
              3Consolidated
      Statement of Shareholders’ Equity for the Nine Months Ended June 30, 2009
      (Unaudited)
              
              
              4Consolidated
      Statements of Cash Flows for the Nine Months Ended June 30, 2009and 2008
      (Unaudited)
              
              
              5Notes
      to Consolidated Financial Statements for the Three and Nine Months Ended
      June 30, 2009 and 2008 (Unaudited)
              
              
              6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              
              
              25Item
      4. Controls and Procedures
              
              
              36Part
      II. Other InformationItem
      6. Exhibits
              
              
              38Signatures















Sinoenergy
Corporation and Subsidiaries


Consolidated
Balance Sheets


(In thousands, exceptshare and per share
information)




June
      30, 2009
                          (unaudited)
                        
                        
                        September
      30, 2008ASSETSCURRENT
      ASSETSCash
                        
                        $
                        12,208
                        
                        
                        $
                        8,871Restricted
      cash
                        
                        
                        439
                        
                        
                        
                        523Accounts
      and notes receivable, net
                        
                        
                        29,144
                        
                        
                        
                        22,008Other
      receivables, net
                        
                        
                        10,422
                        
                        
                        
                        16,983Deposits
      and prepayments-related
      parties
                        
                        
                        73
                        
                        
                        
                        --third
      parties
                        
                        
                        8,049
                        
                        
                        
                        7,918Inventories
                        
                        
                        5,356
                        
                        
                        
                        7,303Deferred
      expenses
                        
                        
                        60
                        
                        
                        
                        91TOTAL
      CURRENT ASSETS
                        
                        
                        65,751
                        
                        
                        
                        63,697Long-term
      investments
                        
                        
                        4,447
                        
                        
                        
                        1,568Property,
      plant and equipment, net
                        
                        
                        44,747
                        
                        
                        
                        30,298Intangible
      assets
                        
                        
                        29,540
                        
                        
                        
                        27,591Due
      from related party
                        
                        
                        426
                        
                        
                        
                        383Other
      long term asset
                        
                        
                        7,582
                        
                        
                        
                        6,891Goodwill
                        
                        
                        1,906
                        
                        
                        
                        1,906Deferred
      tax asset
                        
                        
                        17
                        
                        
                        
                        13TOTAL
      NON-CURRENT ASSETS
                        
                        
                        88,665
                        
                        
                        
                        68,650TOTAL
      ASSETS
                        
                        $
                        154,416
                        
                        
                        $
                        132,347CURRENT
      LIABILITIESShort-term
      bank loan
                        
                        $
                        38,496
                        
                        
                        $
                        11,9533%
      senior convertible notes
                        
                        
                        9,478
                        
                        
                        
                        -12%
      senior notes
                        
                        
                        15,754
                        
                        
                        
                        -Other
      notes payable
                        
                        
                        1,464
                        
                        
                        
                        1,633Accounts
      payable
                        
                        
                        4,987
                        
                        
                        
                        5,894Advances
      from customers
                        
                        
                        2,123
                        
                        
                        
                        2,409Additional
      interest payable under convertible note indenture
                        
                        
                        420
                        
                        
                        
                        420Income
      taxes payable
                        
                        
                        855
                        
                        
                        
                        633Other
      payables
                        
                        
                        3,573
                        
                        
                        
                        5,341Accrued
      expenses
                        
                        
                        417
                        
                        
                        
                        335Deferred
      income
                        
                        
                        50
                        
                        
                        
                        95TOTAL
      CURRENT LIABILITIES
                        
                        
                        77,617
                        
                        
                        
                        28,7133%
      senior convertible notes
                        
                        
                        -
                        
                        
                        
                        12,59312%
      senior notes
                        
                        
                        -
                        
                        
                        
                        16,658Long-term
      loans
                        
                        
                        4,391
                        
                        
                        
                        3,667Deferred
      tax liabilities
                        
                        
                        588
                        
                        
                        
                        1,095TOTAL
      LIABILITIES
                        
                        
                        82,596
                        
                        
                        
                        62,726Minority
      interests
                        
                        
                        15,601
                        
                        
                        
                        14,394Commitments
      and contingenciesSHAREHOLDERS’
      EQUITYCommon
      stock- par value $0.001 per share; Authorized - 50,000,000 shares; Issued
      and outstanding- 15,942,336 shares at June 30, 2009 and September 30,
      2008
                        
                        
                        16
                        
                        
                        
                        16Additional
      paid-in capital
                        
                        
                        34,477
                        
                        
                        
                        30,396Retained
      earnings
                        
                        
                        16,366
                        
                        
                        
                        19,953Accumulated
      other comprehensive income
                        
                        
                        5,360
                        
                        
                        
                        4,862TOTAL
      SHAREHOLDERS’ EQUITY
                        
                        
                        56,219
                        
                        
                        
                        55,227TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                        
                        $
                        154,416
                        
                        
                        $
                        132,347




The
accompanying notes are an integral part of these financial
statements.




-1-






Sinoenergy
Corporation and Subsidiaries


Consolidated
Statements of Income and Comprehensive Income (Unaudited)


(In
thousands, except per share information)






Three Months Ended June
      30,2009
                      
                      
                      2008NET
      SALES
                      
                      $
                      7,710
                      
                      
                      $
                      10,204COST
      OF SALES
                      
                      
                      (6,240
                      )
                      
                      
                      (6,283
                      )GROSS
      PROFIT
                      
                      
                      1,470
                      
                      
                      
                      3,921OPERATING
      EXPENSESSelling
      expenses
                      
                      
                      394
                      
                      
                      
                      246General
      and administrative expenses
                      
                      
                      1,461
                      
                      
                      
                      988TOTAL
      OPERATING EXPENSES
                      
                      
                      1,855
                      
                      
                      
                      1,234INCOME (LOSS)
      FROM OPERATIONS
                      
                      
                      (385
                      )
                      
                      
                      2,687OTHER
      INCOME (EXPENSES)Rental
      income, net of land use right amortization
                      
                      
                      -
                      
                      
                      
                      1,318Gain
      on sale of investment
                      
                      
                      -
                      
                      
                      
                      1,737Loss
      from unconsolidated entity
                      
                      
                      (11
                      )
                      
                      
                      (6
                      )Interest
      expense
                      
                      
                      (1,518
                      )
                      
                      
                      (217
                      )Additional
      interest payable under convertible note indenture
                      
                      
                      (140
                      )
                      
                      
                      (513
                      )Other
      expenses, net
                      
                      
                      16
                      
                      
                      
                      (297
                      )OTHER
      INCOME (EXPENSES), NET
                      
                      
                      (1,653
                      )
                      
                      
                      2,022INCOME (LOSS)
      BEFORE INCOME TAX AND MINORITY INTEREST
                      
                      
                      (2,038
                      )
                      
                      
                      4,709Income
      tax provision
                      
                      
                      (431
                      )
                      
                      
                      (677
                      )INCOME
      BEFORE MINORITY INTEREST
                      
                      
                      (2,469
                      )
                      
                      
                      4,032Minority
      interest
                      
                      
                      19
                      
                      
                      
                      (16
                      )NET
      INCOME (LOSS)
                      
                      
                      (2,450
                      )
                      
                      
                      4,016Other
      comprehensive income:Foreign
      currency translation adjustments
                      
                      
                      35
                      
                      
                      
                      1,422COMPREHENSIVE
      INCOME (LOSS)
                      
                      $
                      (2,415
                      )
                      
                      
                      5,438Net
      Income Per Common ShareBasic
                      
                      $
                      (0.15
                      )
                      
                      
                      0.26Diluted
                      
                      $
                      (0.15
                      )
                      
                      
                      0.20Weighted
      Average Common Shares OutstandingBasic
                      
                      
                      15,942
                      
                      
                      
                      15,709Diluted
                      
                      
                      15,942
                      
                      
                      
                      19,619





The
accompanying notes are an integral part of these financial
statements.





-2-





Sinoenergy
Corporation and Subsidiaries


Consolidated
Statements of Income and Comprehensive Income (Unaudited)


(In
thousands, except per share information)






Nine Months Ended June
      30,2009
                      
                      
                      2008NET
      SALES
                      
                      $
                      30,609
                      
                      
                      
                      26,745COST
      OF SALES
                      
                      
                      (22,861
                      )
                      
                      
                      (15,190
                      )GROSS
      PROFIT
                      
                      
                      7,748
                      
                      
                      
                      11,555OPERATING
      EXPENSESSelling
      expenses
                      
                      
                      982
                      
                      
                      
                      540General
      and administrative expenses
                      
                      
                      6,200
                      
                      
                      
                      2,963TOTAL
      OPERATING EXPENSES
                      
                      
                      7,182
                      
                      
                      
                      3,503INCOME
      FROM OPERATIONS
                      
                      
                      566
                      
                      
                      
                      8,052OTHER
      INCOME (EXPENSES)Rental
      income, net of land use right amortization
                      
                      
                      1,329
                      
                      
                      
                      2,503Loss
      from unconsolidated entity
                      
                      
                      (44
                      )
                      
                      
                      97Gain
      on sale of investment
                      
                      
                      -
                      
                      
                      
                      1,737Interest
      expense
                      
                      
                      (3,835
                      )
                      
                      
                      (1,497
                      )Additional
      interest payable under convertible note indenture
                      
                      
                      (280
                      )
                      
                      
                      (653
                      )Other
      income, net
                      
                      
                      229
                      
                      
                      
                      (150
                      )OTHER
      INCOME (EXPENSES), NET
                      
                      
                      (2,601
                      )
                      
                      
                      2,037INCOME
      BEFORE INCOME TAX AND MINORITY INTEREST
                      
                      
                      (2,035
                      )
                      
                      
                      10,089Income
      tax provision
                      
                      
                      (1,045
                      )
                      
                      
                      (722
                      )INCOME
      BEFORE MINORITY INTEREST
                      
                      
                      (3,080
                      )
                      
                      
                      9,367Minority
      interest
                      
                      
                      (507
                      )
                      
                      
                      (189
                      )NET
      INCOME (LOSS)
                      
                      
                      (3,587
                      )
                      
                      
                      9,178Other
      comprehensive income:Foreign
      currency translation adjustments
                      
                      
                      498
                      
                      
                      
                      5,155COMPREHENSIVE
      INCOME (LOSS)
                      
                      $
                      (3,089
                      )
                      
                      
                      14,333Net
      Income Per Common ShareBasic
                      
                      $
                      (0.22
                      )
                      
                      
                      0.58Diluted
                      
                      $
                      (0.22
                      )
                      
                      
                      0.54Weighted
      Average Common Shares OutstandingBasic
                      
                      
                      15,942
                      
                      
                      
                      15,709Diluted
                      
                      
                      15,942
                      
                      
                      
                      16,950




The
accompanying notes are an integral part of these financial
statements.




-3-





Sinoenergy
Corporation and Subsidiaries


Consolidated
Statement of Shareholders’ Equity (Unaudited)


(In
thousands)






Number
      of Common Shares Issued
                          
                          
                          Par
      Value Common Stock
                          
                          
                          Additional
      Paid in Capital
                          
                          
                          Retained
      Earnings
                          
                          
                          Accumulated
      Other Comprehensive Income
                          
                          
                          Total
                            Shareholder’s
      Equity -Balance,
      October 1, 2008
                          
                          
                          15,942
                          
                          
                          $
                          16
                          
                          
                          $
                          30,396
                          
                          
                          $
                          19,953
                          
                          
                          $
                          4,862
                          
                          
                          $
                          55,227Share-based
      compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          219
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          219Adjustment
      to record reduction in conversion price of 3% senior convertible
      notes
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,862
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,862Net
      (loss) for the period
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (3,587
                          )
                          
                          
                          
                          
                          
                          
                          (3,587
                          )Currency
      translation adjustment
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          498
                          
                          
                          
                          498Balance,
      June 30, 2009
                          
                          
                          15,942
                          
                          
                          $
                          16
                          
                          
                          $
                          34,477
                          
                          
                          $
                          16,366
                          
                          
                          $
                          5,360
                          
                          
                          $
                          56, 219





The
accompanying notes are an integral part of these financial
statements.







-4-




Sinoenergy
Corporation and Subsidiaries


Consolidated
Statements of Cash Flows (Unaudited)


(In thousands ofUnited Statesdollars)






Nine Months Ended June
      30,CASH
      FLOWS FROM OPERATING ACTIVITIES:
                        
                        2009
                        
                        
                        2008Net
      income (loss)
                        
                        $
                        (3,587
                        )
                        
                        $
                        9,178Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Gain
      on sale of investment
                        
                        
                        -
                        
                        
                        
                        (1,737
                        )Share-based
      compensation
                        
                        
                        219
                        
                        
                        
                        374Amortization
      of note discount
                        
                        
                        83
                        
                        
                        
                        270Deferred
      portion of interest expense
                        
                        
                        3,963
                        
                        
                        
                        1,719Earnings
      from non-consolidated affiliates
                        
                        
                        -
                        
                        
                        
                        (97
                        )Minority
      interest
                        
                        
                        1,207
                        
                        
                        
                        189Depreciation
                        
                        
                        693
                        
                        
                        
                        492Amortization
      of intangible assets
                        
                        
                        333
                        
                        
                        
                        1,538Provision
      for (recovery of) doubtful accounts
                        
                        
                        38
                        
                        
                        
                        (1
                        )Changes
      in operating assets and liabilities:Accounts
      and notes receivable
                        
                        
                        (7,153
                        )
                        
                        
                        (13,954
                        )Other
      receivables, deposits and prepayments
                        
                        
                        6,324
                        
                        
                        
                        (9,574
                        )Inventories
                        
                        
                        1,947
                        
                        
                        
                        (2,535
                        )Deferred
      tax asset
                        
                        
                        (4
                        )
                        
                        
                        -Accounts
      payable
                        
                        
                        (1,076
                        )
                        
                        
                        1,882Accrued
      expenses
                        
                        
                        82
                        
                        
                        
                        28Advances
      from customers
                        
                        
                        (286
                        )
                        
                        
                        1,687Other
      payables
                        
                        
                        (2,275
                        )
                        
                        
                        4,915Estimate
      additional interest payable under convertible note
      indenture
                        
                        
                        -
                        
                        
                        
                        653Deferred
      income
                        
                        
                        (45
                        )
                        
                        
                        -Income
      taxes payable
                        
                        
                        222
                        
                        
                        
                        571Net
      cash provided by (used in) operating activities
                        
                        
                        685
                        
                        
                        
                        (4,402
                        )CASH
      FLOWS FROM INVESTING ACTIVITIESPayable
      to investors in subsidiary
                        
                        
                        -
                        
                        
                        
                        14,590Purchase
      of property, plant and equipment
                        
                        
                        (15,851
                        )
                        
                        
                        (15,255
                        )Purchase
      of land use right
                        
                        
                        (533
                        )
                        
                        
                        (13,889
                        )Investment
      in unconsolidated entities
                        
                        
                        (2,879
                        )
                        
                        
                        (1,595
                        )Changes
      in restricted cash
                        
                        
                        84
                        
                        
                        
                        -Net
      proceeds related to investment activities
                        
                        
                        -
                        
                        
                        
                        1,210Net
      cash used in investing activities
                        
                        
                        (19,179
                        )
                        
                        
                        (14,939)CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      proceeds received from note subscription receivable
                        
                        
                        -
                        
                        
                        
                        29,840Proceeds
      from bank loan
                        
                        
                        45,083
                        
                        
                        
                        -Payment
      of bank borrowings
                        
                        
                        (22,690
                        )
                        
                        
                        (3,180
                        )Net
      cash provided by financing activities
                        
                        
                        22,393
                        
                        
                        
                        26,660Effect
      on cash of changes in exchange rate
                        
                        
                        (562
                        )
                        
                        
                        5,155Net
      increase in cash
                        
                        
                        3,337
                        
                        
                        
                        12,474Cash
      at beginning of period
                        
                        
                        8,871
                        
                        
                        
                        4,547Cash
      at end of period
                        
                        $
                        12,208
                        
                        
                        $
                        17,021Supplemental
      disclosure of cash flow information:Interest
      paid
                        
                        $
                        3,565
                        
                        
                        
                        1,322Income
      taxes paid
                        
                        $
                        397
                        
                        
                        $
                        172




The
accompanying notes are an integral part of these financial
statements.






-5-




Sinoenergy
Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited)


June
30, 2009





1.
            The
      Company




(a)
Organization





Sinoenergy
Corporation (“Sinoenergy” or the “Company”) was incorporated in Nevada on March
2, 1999 under the name Franklyn Resources III, Inc. (“Franklyn”). The Company’s
corporate name was changed to Sinoenergy Corporation on September 28,
2006.




(b)
Reverse Split of Common Stock





The
Company amended its articles of incorporation on June 17, 2008 by a certificate
of change. The certificate of change effected a one-for-two reverse split of the
common stock and reduced the Company’s authorized shares from 100,000,000 shares
of common stock to 50,000,000 shares without changing the par value. This
reverse stock split became effective on July 9, 2008. All share and per share
information in these financial statements retroactively reflects the reverse
split for all periods presented.





(c)
Change of Fiscal Year





The
Company changed its fiscal year from the calendar year to September 30,
effective September 30, 2007.





(d)
Subsidiaries of the Company





Set forth
below is a list of the Sinoenergy’s wholly-owned and majority-owned
subsidiaries, all of whose financial statements are consolidated with
Sinoenergy. References to the Company include the Company and its consolidated
subsidiaries unless the context indicates otherwise. The percentage ownership
reflects the percentage ownership by Sinoenergy.




Company
                
                Ownership
      %
                
                Business
      activitiesSinoenergy
      Holding Limited
                
                100%
                
                Holding
      companyQingdao
      Sinogas General
                  Machinery
      Limited Corporation (“Sinogas”)
                
                75.05%
                
                Production
      of compressed natural gas (CNG) facilities, technical consulting in CNG
      filling station construction, manufacturing of CNG vehicle conversion
      kitQingdao
      Sinogas Yuhan
                  Chemical
      Equipment Company Limited (“Yuhan”)
                
                81%**
                
                Manufacturing
      of customized pressure containersWuhan
      Sinoenergy Gas Company Limited (“Wuhan Sinoenergy”)
                
                80%*
                
                Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsPingdingshan
      Sinoenergy Gas
                  Company
      Limited (“Pingdingshan Sinoenergy”)
                
                90%
                
                Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsJiaxing
      Lixun Automotive
                  Electronic
      Company Limited (“Lixun”)
                
                81%**
                
                Design
      and manufacturing of electric control devices for alternative
      fuelHubei
      Gather Energy
                  Company
      Limited (“Hubei Gather”)
                
                80%
                
                Construction
      and operating of natural gas processing plantsXuancheng
      Sinoenergy
                  Vehicle
      Gas Company Limited
                  (“Xuancheng
      Sinoenegy”)
                
                100%
                
                Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsQingdao
      Jingrun General
                  Machinery
      Company Limited (“Jingrun”)
                
                100%
                
                Design
      and manufacturing of petroleum refinery equipment and petroleum
      machineryQingdao
      Sinoenergy General
                  Machinery
      Company Limited
                  (“Qingdao
      Sinoenergy”)
                
                100%
                
                Manufacturing
      and installation of general machinery equipmentNanjing
      Sinoenergy Gas Company Limited (“Nanjing
Sinoenergy”)
                
                90%
                
                Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion
kits






-6-




*            
This subsidiary is owned 40% by Sinogas and 50% by Sinoenergy
Holding.


**           These
subsidiaries are owned 75% by Sinogas and 25% by Sinoenergy
Holding.





Nanjing
Sinoenergy was incorporated in May 2009.  Jingrun, a subsidiary of the
Company, contributed RMB20 million (US$2.9 million) for a 90% ownership of
Nanjing Sinonenergy, with the remaining 10% owned by an unrelated third
party.  There was no other activities or operations related with
Nanjing Sinoenergy as of June 30, 2009.





As of
August 10, 2009, Hubei Gather, Jingrun, Qingdao Sinoenergy and Nanjing
Sinoenergy remain in the start-up stage and have no operations.





2.
Summary of Significant Accounting Policies





Management’s Responsibilityfor Interim Financial
Statements Including All Adjustments Necessary for Fair
Presentation





Management
acknowledges its responsibility for the preparation of the accompanying interim
consolidated financial statements, which reflect all adjustments, consisting of
normal recurring adjustments, considered necessary in its opinion for a fair
statement of its consolidated financial position and the results of its
operations for the interim period presented. These consolidated financial
statements should be read in conjunction with the summary of significant
accounting policies and notes to consolidated financial statements included in
the Company’s Form 10-K annual report for the fiscal year ended September 30,
2008. Results for the nine months ended June 30, 2009 are not necessarily
indicative of results to be expected for the year.





The
financial statements at June 30, 2009 have been prepared assuming that the
Company will continue as a going concern and, accordingly, do not include any
adjustments that might result from the uncertainties described in the following
paragraph which matters create substantial uncertainty about the Company's
ability to continue as a going concern.





At June
30, 2009, the Company was not in compliance with the financial covenants in the
indentures relating to its 12% senior notes due 2012 in the principal amount of
$16,000,000 and 3.0% senior convertible notes due 2012 in the principal amount
of $14,000,000, as discussed below. These covenants had been amended on May 19,
2009. Although the noteholders waived compliance with the covenants at June 30,
2009 and for the period then ended, the waiver was limited to June 30, 2009. As
a result of (i) the failure of the Company to be in compliance at June 30, 2009
with covenants that were amended in May 2009, (ii) the limited nature of the
waiver, (iii) the likelihood that the Company will not be in compliance at
September 30, 2009 and (iv) the uncertainty that the noteholders will grant a
further waiver, the notes have been classified as current liabilities at June
30, 2009. As a result, the Company has, at June 30, 2009, a working capital
deficiency of $11,866,000. Further, the Company’s principal current asset is its
accounts receivable, which were $29,144,000 at June 30, 2009, and the accounts
receivable, along with other receivables, totaled approximately $40,000,000. At
September 30, 2008, the Company’s accounts receivable were outstanding for an
average of 124 days, and at June 30, 2009, the Company’s accounts receivable
were outstanding for an average of 229 days. A significant amount of receivables
that were outstanding at September 30, 2008 remained outstanding on June 30,
2009. In addition, at June 30, 2009, the Company had a note receivable of
$2,636,000 resulting from the termination of a sublease for which no payments
had been made by the tenant. As of August 10, 2009, no payments had been made on
account of that note. The failure of the Company to restructure or refinance its
obligations under its notes or obtain a long-term waiver or to collect its
receivables in the normal course of business could impair its ability to
continue in business.





Management
is addressing these issues by seeking alternative financing in the PRC in order
to repay the principal, interest and premium on the senior notes and by seeking
more aggressively to collect its receivables. Management recognizes that China,
like the rest of the world, is suffering from an economic stagnation. The
Company hopes that the effects of the Chinese government’s stimulus plan,
together with its stated intention to promote fuel alternatives to gasoline,
will enable it to operate profitably in the future. However, the Company cannot
give any assurance that it will be successful or that it will be able to
continue in operation. Ultimately, the Company’s continued existence is
dependent upon its ability to achieve profitable operations and maintain
adequate financing, as to which there can be no
assurance.


Basis of
Presentation





The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and the rules
of the Securities and Exchange Commission relating to interim financial
statements.





Principles of
Consolidation




The
accompanying consolidated financial statements include the financial statements
of Sinoenergy Corporation and its wholly-owned and majority-owned subsidiaries.
Intercompany transactions and balances have been eliminated in
consolidation.






-7-





Use of
Estimates





In
preparing financial statements in conformity with accounting principles
generally accepted in the United States, the Company makes estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and sales and expenses during the reported periods. Significant
estimates include depreciation and the allowance for doubtful accounts and other
receivables, asset impairment consideration, valuation of warrants and options
and inventory valuation, and the determination of revenue and
costs.  The Company bases its estimates on historical experience
and on various other assumptions that it believes are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those estimates.




Goodwill





Goodwill
represents the excess of the purchase price of business combinations over the
fair value of the net assets acquired and is tested for impairment at least
annually. The impairment test requires allocating goodwill and all other assets
and liabilities to assigned reporting units. The fair value of each reporting
unit is estimated and compared to the net book value of the reporting unit. If
the estimated fair value of the reporting unit is less than the net book value,
including goodwill, then goodwill is written down to the implied fair value of
goodwill through a charge to operations. Because quoted market prices are not
available for the Company’s reporting units, the fair values of the
reporting units are estimated based upon several valuation analyses. The
goodwill on the Company’s financial statements was a result of the transactions
pursuant to which the Company acquired Yuhan, Lixun, Xuancheng Sinoenergy
and Jingrun, and relates to the pressure container, vehicle conversion
kits, and CNG station operation reporting segments. As of June 30, 2009,
management determined that there is no indication of impairment.





Cash andCash
Equivalents





The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents. As of June
30, 2009 and September 30, 2008, the Company did not have any cash
equivalents.





Allowance for Doubtful
Accounts





An
allowance for doubtful accounts is maintained for customers based on a variety
of factors, including the length of time the receivables are past due,
significant one-time events and historical experience. An additional reserve for
individual accounts is recorded when the Company becomes aware of a customer’s
inability to meet its financial obligations, such as in the case of bankruptcy
filings or deterioration in the customer’s operating results or financial
position. When circumstances related to customers change, estimates of the
recoverability of receivables are further adjusted.





Inventories





Inventories
are comprised of raw materials, work in process, finished goods and low value
consumable articles. Amounts are stated at the lower of cost or market value.
Substantially all inventory costs are determined using the weighted average
basis. Costs of finished goods include direct labor, direct materials, and
production overhead before the goods are ready for sale. Inventory costs do not
exceed net realizable value.





Long-Term
Investments





Investments
in entities in which the Company owns more than 20% and up to 50% of the equity
and does not have the ability to control, but has the ability to exert
significant influence, are accounted for using the equity method.  Under
the equity method, an investment is initially recorded at cost. Subsequently,
the carrying amount of the investment is increased to reflect the investor's
share of income of the investee and is reduced to reflect the investor's
share of losses of the investee or dividends received from the
investee.




Property, Plant and
Equipment





Property,
plant and equipment are stated at cost. Depreciation is provided principally by
use of the straight-line method over the useful lives of the related assets.
Expenditures for maintenance and repairs which do not improve or extend the
expected useful life of the assets are expensed to operations while major
repairs and improvements are capitalized.





The
estimated useful lives are as follows:





Buildings
      and facilities
              20
      yearsMachinery
      and equipment
              8
      yearsMotor
      vehicles
              5
      to 10 yearsOffice
      equipment and others
              5
      to 8 years






-8-





Intangible
Assets





Intangible
assets, representing patents, technical know-how, and acquired land use rights,
are stated at cost less accumulated amortization and impairment losses.
Amortization is calculated on the straight-line method over the estimated useful
lives of the assets which range from 10 to 50 years.





There is
no private ownership of land in the People’s Republic of China (“PRC”). All land
is owned by the government and the government grants what is known as a land use
right, which is a transferable right to use the land. The land use rights for
the land on which the Sinogas, Jiaxing, Xuancheng, Jingrun, Hubei Gather, and
Qingdao Sinoenergy facilities are located are recorded as intangible
assets.





Impairment of
Assets





In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”),
impairment of assets is monitored on a periodic basis, and is assessed based on
the undiscounted cash flows expected to be generated by the underlying assets.
The Company estimates the future undiscounted cash flows to be derived from an
asset to assess whether or not impairment has occurred when events or
circumstances indicate that the carrying value of a long-lived asset may be
impaired. If the carrying value exceeds the Company’s estimate of future
undiscounted cash flows, the Company then calculates the impairment as the
excess of the carrying value of the asset over the Company’s estimate of its
fair market value.




Capitalization of
Interest





The
Company capitalizes interest incurred in connection with the construction of
assets, principally its CNG stations, during the construction
period.  Capitalized interest is recorded as an increase to
construction in progress and, upon completion of the construction, to property
and equipment.  The Company capitalized $401,568 and $542,847 of
interest during the three months ended June 30, 2009 and 2008, respectively, and
$643,558 and 1,334,847 of interest during the nine months ended June 30, 2009
and 2008, respectively.





Revenue
Recognition





The
Company recognizes revenue when significant risks and rewards of ownership have
been transferred to the customer, including factors such as when persuasive
evidence that an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and collectability is reasonably assured.  CNG
station construction and building technical consulting service revenue related
is recognized on the percentage of completion basis. Under the
percentage-of-completion method, revenue is recognized based upon contract costs
incurred to date as a percentage of total contract costs expected to be
incurred at contract completion (the customer will provide progress report based
on the actual percentage of the work volume). Revenue is presented net of any
sales tax and value added tax.





Rental
Income





Rental
income is recognized ratably over the term of the lease.





Warranty
Reserves





Warranty
reserves represent the Company’s obligation to repair or replace defective
products under certain conditions.  The estimate of the warranty reserves
is based on historical experience and industry practice.  Based on
experience and industry practice, the Company has established a warranty reserve
rate of 0.2% of gross sales for customized pressure containers and CNG station
facilities and construction segments. The Company periodically reviews this rate
and revises it as necessary.





The
following tables show a reconciliation of the changes in the Company’s product
warranty liability (dollars in thousands).  Warranty liability is
included in accrued expenses on the balance sheets.





Nine
      months ended June,2009
                    
                    
                    2008Product
      warranty liability, as of September 30
                    
                    $
                    167
                    
                    
                    $
                    76Reductions
      for payments made (in cash or kind) during period
                    
                    
                    -
                    
                    
                    
                    -Changes
      in liability for warranties issued during the period
                    
                    
                    43
                    
                    
                    
                    55Foreign
      exchange gain/loss
                    
                    
                    1
                    
                    
                    
                    4Product
      warranties, as of June 30
                    
                    $
                    211
                    
                    
                    $
                    135






-9-







Income
Taxes





The
Company accounts for income taxes under Statement of Financial Accounting
Standard (SFAS) No. 109, “Accounting for Income Taxes.” Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applicable to taxable income in the years in which those temporary differences
are expected to be reversed or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.





The
Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109,” on October 1,
2007. The Company recognizes a tax benefit associated with an uncertain tax
position when, in management’s judgment, it is more likely than not that the
position will be sustained upon examination by a taxing authority. For a tax
position that meets the more-likely-than-not recognition threshold, the Company
initially and subsequently measures the tax benefit as the largest amount that
it judges to have a greater than 50% likelihood of being realized upon ultimate
settlement with a taxing authority. The liability, if any, associated with
unrecognized tax benefits is adjusted periodically due to changing
circumstances, such as the progress of tax audits, case law developments and new
or emerging legislation. Such adjustments are recognized entirely in the
period in which they are identified.





There are
many transactions and calculations for which the ultimate tax determination is
uncertain during the ordinary course of business. The Company recognizes
liabilities for anticipated tax audit issues based on estimates of whether
additional taxes will be due. Where the final tax outcome of these matters is
different from the amounts that were initially recorded, such differences affect
the income tax and deferred tax provisions in the period in which such
determination is made.




Foreign Currency
Translations





The
Company’s functional currency is Renminbi (“RMB”) and its reporting currency is
U.S. dollars. The Company’s balance sheet accounts are translated using the
closing exchange rate in effect at the balance sheet date and operating accounts
are translated using the average exchange rate prevailing during the
quarter. Equity accounts are translated using the historical rate as incurred.
Translation gains and losses are deferred and accumulated as a component of
accumulated other comprehensive income in shareholders’ equity. Transaction
gains and losses that arise from exchange rate fluctuations from transactions
denominated in a currency other than the functional currency are included in the
statement of operations as incurred.





Fair Value of Financial
Instruments





The
Company adopted Statement of Financial Accounting Standards (“SFAS”)
157, “Fair Value Measurements” and SFAS 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” on October 1,
2008.  The Company has not yet adopted the provisions of these
statements related to non-financial assets and non-financial liabilities, as
permitted.





SFAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels as follows:





-
            Level
      1 — quoted prices (unadjusted) in active markets for identical asset
      or liabilities that the Company has the ability to access as of the
      measurement date. Financial assets and liabilities utilizing Level 1
      inputs include active exchange-traded securities and exchange-based
      derivatives.-
            Level
      2 — inputs other than quoted prices included within Level 1 that are
      directly observable for the asset or liability or indirectly observable
      through corroboration with observable market data. Financial assets and
      liabilities utilizing Level 2 inputs include fixed income securities,
      non-exchange-based derivatives, mutual funds, and fair-value
      hedges.-
            Level
      3 — unobservable inputs for the asset or liability only used when there is
      little, if any, market activity for the asset or liability at the
      measurement date. Financial assets and liabilities utilizing Level 3
      inputs include infrequently-traded, non-exchange-based derivatives and
      commingled investment funds, and are measured using present value pricing
      models.





SFAS 159
permits companies to choose to measure many financial instruments and certain
other items at fair value.





The
Company determined that as of June 30, 2009, the Company did not have
any significant financial assets or liabilities that require fair value
measurement pursuant to SFAS 157, nor did the company choose to report any
assets or liabilities at fair value, pursuant to SFAS 159.





Minority
Interest





Minority
interest refers to the portion of a consolidated subsidiary which is not
wholly-owned by the Company. The Company records the minority interest portion
of any related profits and losses in consolidation.






-10-




Stock-Based
Compensation





The
Company grants stock options to employees and stock options and warrants to
non-employees in non-capital raising transactions for services and for financing
costs. The Company has adopted SFAS No. 123R, “Share-Based Payment,” which
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. In accordance with SFAS
No. 123R, the fair value of stock options and warrants issued to employees and
non-employees is measured at the grant date. The Company utilizes the
Black-Scholes option pricing model to determine fair value. The resulting amount
is charged to expense on the straight-line basis over the period in which the
Company expects to receive benefit, which is generally the vesting period. In
some cases, the Company’s principal shareholder, which is owned by the Company’s
chief executive officer and chairman, both of whom are directors, provided or
agreed to provide common shares to executive officers in connection with
their employment.  These shares are treated as if the shares were
contributed to and issued by the Company.  The value of the shares is
determined in accordance with SFAS No. 123R.





Concentration of Credit
Risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of trade accounts receivable. While there
are risks associated with any concentration of customers management believes
that the active monitoring system in place to monitor the creditworthiness
of customers will minimize such risks.





The
Company performs ongoing credit evaluations of its debtors, but does not require
collateral, in accordance with general industry practice in PRC.




The
Company maintains its cash accounts with major banks in China.  The Chinese
banks do not provide deposit insurance.


Fair Value of Financial
Instruments
 
 SFAS No.
107, “Disclosures about Fair Values of Financial Instruments”, requires
disclosing fair value to the extent practicable for financial instruments that
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
 
 For
certain financial instruments, including cash, accounts receivable, related
party and other receivables, accounts payable, other payables and accrued
expenses, the Company estimates that the carrying amounts approximate fair value
because of the nature of the assets and short- term maturities of the
obligations.




Earnings per
Share





The
Company computes earnings per share (“EPS’) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  SFAS
No. 128 requires companies with complex capital structures to present basic
and diluted EPS.  Basic EPS is measured as net income divided by the
weighted average common shares outstanding for the period.  Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options and warrants) as
if they had been converted at the beginning of the periods presented, or
issuance date, if later.  Potential common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.





The
calculation of diluted weighted average common shares outstanding is based on
the average of the closing price of the Company’s common stock during the
reporting periods, and is applied to options and warrants using the treasury
stock method to determine if they are dilutive. The common stock issuable upon
conversion of the convertible preferred stock and convertible notes payable is
included on an “as if converted” basis when the preferred stock and convertible
notes are dilutive.





Comprehensive
Income





The
Company has adopted the provisions of SFAS No. 130, “Reporting Comprehensive
Income” (“SFAS No. 130”). SFAS No. 130 establishes standards for the reporting
and presentation of comprehensive income, its components and accumulated
balances in a full set of general purpose financial statements. SFAS No. 130
defines comprehensive income or loss to include all changes in equity except
those resulting from investments by owners and distributions to owners,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable
securities.





The
Company’s only component of other comprehensive income is foreign currency
translation gain $35,000 and $1,422,000 for the three months ended June 30,
2009 and 2008, respectively, and $498,000 and $5,155,000 for the nine months
ended June 30, 2009 and 2008, respectively.  Cumulative other
comprehensive income is recorded as a separate component of shareholders’
equity.





Subsequent
Events





For
purposes of determining whether a post-balance sheet event should be evaluated
to determine whether it has an effect on the financial statements for the period
ending June 30, 2009, subsequent events were evaluated by the Company as of
August 13, 2009, the date on which the unaudited consolidated financial
statements at and for the quarter ended June 30, 2009 were issued.


-11-


New Accounting
Pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations” (“SFAS No. 141(R)”).
SFAS No. 141(R) requires an entity to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date.  Subsequent
changes to the estimated fair value of contingent consideration will be
reflected in earnings until the contingency is settled. 
SFAS No. 141(R) also requires acquisition-related costs and
restructuring costs to be expensed as incurred rather than treated as part of
the purchase price. The Company will be required to adopt SFAS No. 140 on
October 1, 2009, which will apply to business combinations completed on or after
that date.  Earlier adoption is not permitted.  The Company
is currently evaluating the impact that SFAS 141(R) may have on its
consolidated financial position, results of operations, and cash flows upon
adoption.


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” to improve the relevance, comparability, and
transparency of financial information provided to investors by requiring all
entities to report noncontrolling (minority) interests in subsidiaries in the
same way as required in the consolidated financial statements. Moreover, SFAS
No. 160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. The Company will be required to adopt SFAS
No. 160 on October 1, 2009.  Earlier adoption is not permitted.
The Company is currently evaluating the impact that SFAS 160 may have
on its consolidated financial position, results of operations, and cash
flows upon adoption.




In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - an Amendment of FASB Statement
133.” SFAS No. 161 provides new disclosure requirements for an entity’s
derivative and hedging activities. SFAS No. 161 was adopted by the Company
on January 1, 2009.  The adoption of SFAS No. 161 did not have an
impact on the Company’s financial position, results of operations, or cash
flows.





In
April 2008, the FASB issued Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). This
position amends the factors an entity should consider when developing renewal or
extension assumptions used in determining the useful life over which to amortize
the cost of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.” FSP FAS 142-3 requires an entity to consider its own
historical experience in renewing or extending similar arrangements in
determining the amortizable useful life. Additionally, this position requires
expanded disclosure regarding renewable intangible assets.  The
Company will be required to adopt FSP FAS 142-3 on October 1,
2009.  Earlier adoption is not permitted.  The guidance for
determining the useful life of a recognized intangible asset must be applied
prospectively to intangible assets acquired after the effective
date.





At its
June 25, 2008 meeting, the Financial Accounting Standards Board ratified the
consensus reached by the Emerging Issues Task Force Issue 07-5 Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock  (EITF
07-5).  The adoption of EITF 07-5’s requirements will affect accounting for
convertible instruments and warrants with down-round provisions. 
Down-round provisions are designed to protect an investor in the event the
issuer issues securities at a lower price or with a lower exercise or conversion
price.  Convertible instruments and warrants which are derivatives and
have such provisions will no longer be recorded in equity.  EITF 07-5 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years.  Earlier
application by an entity that has previously adopted an alternative accounting
policy is not permitted.  The Company will be required to adopt EITF 07-5
commencing with the quarter ending December 31, 2009, which is the first quarter
of the fiscal year ending September 30, 2010.  To the extent that
the Company’s convertible notes and certain of its warrants are outstanding on
December 31, 2009, the Company will reflect as a derivative liability the fair
value of the derivate component of these securities and will reflect a gain or
loss for the derivative liability based on the change in value of the derivative
liability during each fiscal quarter during which the instruments are
outstanding.




In May
2008, the FASB issued Financial Accounting Standards Board Staff Position No.
APB 14-1 ("FSP APB 14-1"), Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 specifies that issuers of such instruments must
account separately for the liability and equity components in a manner that
reflects the entity's estimated non-convertible borrowing rate at the date of
issuance. FSP APB 14-1 is effective for periods subsequent to December 15, 2008
and must be applied retrospectively.  The adoption of FSP APB
14-1 did not have an impact on the Company’s financial statements.





In April
2009, the FASB issued FSP FAS 107-1, “Interim Disclosures about Fair Value of
Financial Instruments,” and APB 28-1, “Interim Financial Statements,” which
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. The adoption of FSP FAS 107-1 and APB 28-1 did not have any impact
on the Company’s consolidated financial statement presentation or
disclosures.




In May
2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165).
SFAS 165 establishes general standards for accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are available to be issued (subsequent events). More specifically, SFAS 165
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition in the financial statements, identifies the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements and the disclosures that
should be made about events or transactions that occur after the balance sheet
date. SFAS 165 provides largely the same guidance on subsequent events
which previously existed only in auditing literature. The statement was adopted
by the Company in its second quarter and did not have an impact on its
Consolidated Financial Statements.






-12-




In June
2009, the FASB issued SFAS 166, "Accounting for Transfers of Financial Assets"
an amendment of FAS 140.  SFAS 166 is intended to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial statements regarding transfers
of financial assets, including the effects of a transfer on its financial
position, financial performance, and cash flows, and the transferor's continuing
involvement, if any, in the transferred financial assets. This statement
must be applied as of the beginning of the Company’s first annual reporting
period that begins after November 15, 2009. The Company does not expect the
adoption of SFAS 166 to have a material impact on its results of operations,
financial condition or cash flows.


In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162 (SFAS 168). SFAS 168
establishes the FASB Standards Accounting Codification (Codification) as the
source of authoritative U.S. generally accepted accounting principles
(GAAP) recognized by the FASB to be applied to nongovernmental entities and
rules and interpretive releases of the SEC as authoritative GAAP for SEC
registrants. The Codification will supersede all the existing non-SEC accounting
and reporting standards upon its effective date and subsequently, the FASB will
not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. SFAS 168 also replaces FASB Statement
No. 162, The Hierarchy of Generally Accepted Accounting Principles, given
that once in effect, the Codification will carry the same level of authority.
SFAS 168 will be effective for financial statements issued for reporting periods
that end after September 15, 2009.




3.
Restricted Cash





The
restricted cash as at June 30, 2009 and September 30, 2008 represent deposits on
a bill of exchange issued by the Company for the purchase of
materials.




4.
Accounts and notes receivable





Accounts
and notes receivables deducted from accounts receivable are as follows (dollars
in thousands):





June
      30,2009
                      
                      
                      September
      30,2008Accounts
      receivable
                      
                      $
                      26,221
                      
                      
                      $
                      22,100Notes
      receivable-rental
      receivable
                      
                      
                      2,636
                      
                      
                      
                      --bank
      acceptance
                      
                      
                      510
                      
                      
                      
                      114Less:
      allowance for doubtful receivables
                      
                      
                      (223
                      )
                      
                      
                      (206
                      )Balance
                      
                      $
                      29,144
                      
                      
                      $
                      22,008




During
the nine months ended June 30, 2009, accounts receivable increased by $4.2
million, from $22.0 million to $26.2 million.  As a result of
competitive market pressures during a period of financial uncertainties, the
Company extended very favorable payment terms for customers of CNG
equipment.  At September 30, 2008, the Company’s accounts receivable
were outstanding for an average of 124 days, and at June 30, 2009, the Company’s
accounts receivable were outstanding for an average of 229 days.  A
significant amount of our receivables that were outstanding at September 30,
2008 remained outstanding on June 30, 2009.





On March
1, 2008, Sinogas entered into an agreement to sublease certain parcels of land
to a non-affiliated third party for a three-year term beginning in January 2008
and expiring on December 31, 2010.   The tenant failed to pay
rent under the sublease and, on March 31, 2009, Sinogas signed a memorandum of
understanding with the tenant pursuant to which the rental agreement was
terminated as of December 31, 2008 and the rental receivable was reduced by 40%,
and the tenant issued a note for the reduced rent payable.  The amount
due is reflected under other receivables as a rental receivable at September 30,
2008 and as a note receivable at June 30, 2009.  As of August 10,
2009, the tenant has not made any payment on the note. See Notes 5 and
9.





5.
Other receivables





Details
of other receivable are as follows (dollars in thousands)





June
      30, 2009
                  
                  
                  September
      30, 2008Unsecured
      interest free receivables relating to projects
                  
                  $
                  8,966
                  
                  
                  $
                  10,236Rental
      receivable
                  
                  
                  -
                  
                  
                  
                  2,933Miscellaneous
      receivables
                  
                  
                  1,489
                  
                  
                  
                  3,826Less:
      allowance for doubtful receivables
                  
                  
                  (33
                  )
                  
                  
                  (12
                  )Balance
                  
                  $
                  10,422
                  
                  
                  $
                  16,983






-13-





6.
Inventories




Inventories
at June 30, 2009 and September 30, 2008 are as follows (dollars in
thousands):




June
      30, 2009
                  
                  
                  September 30, 2008Raw
      materials
                  
                  $
                  2,095
                  
                  
                  $
                  4,145Work
      in progress
                  
                  
                  1,015
                  
                  
                  
                  2,428Finished
      goods
                  
                  
                  2,220
                  
                  
                  
                  721Low
      value consumables
                  
                  
                  26
                  
                  
                  
                  9Total
                  
                  $
                  5,356
                  
                  
                  $
                  7,303




7.
Long-term investments





At June
30, 2009 and September 30, 2008, the details of long-term investments are as
follows (dollars in thousands):




June
      30, 2009
                    
                    
                    September 30, 2008Anhui GatherInitial
      Investment
                    
                    $
                    1,654
                    
                    
                    $
                    1,653Equity
      in (loss)
                    
                    
                    (134
                    )
                    
                    
                    (85
                    )Sinogas
      General Luxi Natural Gas Facilities Co., Ltd. (Sinogas
      Luxi)Initial
      Investment
                    
                    
                    2,927
                    
                    
                    
                    -Total
                    
                    $
                    4,447
                    
                    
                    $
                    1,568




Anhui
Gather





On March
23, 2007, the Company and Hong Kong China New Energy Development Investment Co.,
Ltd. (“China New Energy”) organized two companies to construct and operate
natural gas processing plants – Anhui Gather Energy Company (“Anhui Gather”),
which is based in Wuhu City, and Hubei Gather Energy Gas Co., Ltd. (“Hubei
Gather”), which is located in Wuhan.




Anhui
Gather was initially owned 55% by China New Energy and 45% by Tianjin Green
Fuel.  On July 4, 2007, the Company purchased the 45% interest from
Tianjin Green Fuel for $2,750,000.  Hubei Gather was initially owned
55% by the Company and 45% by China New Energy.   The Company’s
capital obligation to Hubei Gather was $4,000,000, of which $1,375,000 has been
paid as of June 30, 2009.





In
July2008, the
Company entered into an agreement with China New Energy pursuant to which it
exchanged a 25% interest in Anhui Gather for a 25% interest in Hubei
Gather.  As a result of the exchange, the Company owns an 80% interest
in Hubei Gather and a 20% interest in Anhui Gather.  Neither Hubei
Gather nor Anhui Gather has commenced business activities.  The
results of Hubei Gather’s operations are included in the Company’s consolidated
operations, and Hubei Gather is not treated as a long-term
investment.





Sinogas
General Luxi Natural Gas Facilities Co., Ltd. (Sinogas Luxi)





On
October 31, 2008, in order to provide for a supply of steel bottles, a major
component in its CNG trailer, Sinogas signed a joint venture agreement with LuXi
Chemical Group, a Chinese chemical company, to set up a company located in
Liaocheng City, Shandong province, with a proposed annual production capacity of
4,000 steel bottles. The total registered capital is RMB 50 million (equivalent
to $7.31 million based on the exchange rate on June 30, 2009), of which Sinogas
has a 40% interest and will contribute 40% to this enterprise. As of June 30,
2009, Sinoags contributed RMB20 million (equivalent to $2.9 million based on the
exchange rate on June 30, 2009.) Sinogas Luxi has not commenced business
activities as of August 10, 2009.





8.
Property, Plant and Equipment




As of
June 30, 2009 and September 30, 2008, property, plant and equipment consist of
the following (dollars in thousands):






-14-






June
      30, 2009
                  
                  
                  September
      30, 2008Buildings
      and facility
                  
                  $
                  9,794
                  
                  
                  $
                  6,254Machinery
      equipment
                  
                  
                  11,993
                  
                  
                  
                  7,538Motor
      vehicles
                  
                  
                  2,226
                  
                  
                  
                  838Office
      equipment and other
                  
                  
                  327
                  
                  
                  
                  395Total
                  
                  
                  24,340
                  
                  
                  
                  15,025Accumulated
      depreciation
                  
                  
                  (2,319
                  )
                  
                  
                  (1,666
                  )22,021
                  
                  
                  
                  13,359Construction
      in process
                  
                  
                  22,726
                  
                  
                  
                  16,939Net
      Book Value
                  
                  $
                  44,747
                  
                  
                  $
                  30,298





9.
Intangible Assets





As of
June 30, 2009 and September 30, 2008, intangible assets consist of the following
(dollars in thousands):





June
      30, 2009
                  
                  
                  September 30, 2008Patent
      and technology know-how, etc
                  
                  $
                  462
                  
                  
                  $
                  424Land
      use rights
                  
                  
                  30,297
                  
                  
                  
                  28,054Total
                  
                  
                  30,759
                  
                  
                  
                  28,478Accumulated
      amortization
                  
                  
                  (1,219
                  )
                  
                  
                  (887
                  )Net
      Book value
                  
                  $
                  29,540
                  
                  
                  $
                  27,591




Patents
and technology know-how is being amortized over 10 years through September
2014.





The land
use rights include four parcels of land purchased by the Company, which are held
by Sinogas, Jingrun, Xuancheng, Qingdao Sinoenergy and Jiaxing Lixun. The land
use rights are being amortized over the following periods for which they are
transferable and renewable (dollars in thousands):





Owner
                
                Cost
                
                ExpirationSinogas
                
                $
                20,729
                
                May
      2057Jingrun
                
                
                4,398
                
                December
      2056Xuancheng
      Sinoenergy
                
                
                1,096
                
                June
      2058Qingdao
      Sinoenergy
                
                
                3,172
                
                December
      2058Jiaxing
      Lixun
                
                
                368
                
                June
      2058Hubei
      Gather
                
                
                534
                
                June
      2059Total
                
                $
                30,297





The land
use right owned by Sinogas represents two parcels of land located in the central
portion of Qingdao City, on which Sinogas and Yuhan’s offices and
manufacturing facilities are located. The land use right was purchased by the
Company from Beijing Sanhuan, a former shareholder of Sinogas, for a price of
RMB142 million, equivalent to US$20.73 million based on the June 30, 2009
exchange rate. The land use right is being amortized from May 2007 over a
50-year term.





On March
1, 2008, Sinogas entered into an agreement to sublease certain parcels of land
to Qingdao Mingcheng Real Estate Co., Ltd. (“Qingdao Mingcheng”), a
non-affiliated third party, for a term of three years beginning in January 2008
and expiring on December 31, 2010, at an annual rental of RMB40 million,
equivalent to approximately $5.9 million based on the June 30, 2009 exchange
rate. The lease also gives Qingdao Mingcheng a right of first refusal to
purchase the property at a value to be negotiated if Sinogas proposes to sell
the property during the term of the lease. On March 31, 2009, Sinogas signed a
memorandum of understanding with Qingdao Mingcheng pursuant to which the Company
terminated the rental agreement as of December 31, 2008 and reduced the rental
receivable by 40%. The reduced rent is payable in quarterly installments over a
one-year period commencing June 30, 2009. Up to now, Qingdao Mingcheng did not
pay the installment yet as of August 10, 2009.





On
December 15, 2007, the Company purchased from a non-affiliated third party all
of the equity of Jingrun, whose sole asset is the land use right and
construction in progress, for approximately RMB60 million ($8.8
million based on the June 30, 2009 exchange rate). The cost of the land use
right paid by the Company was approximately $4.4 million based on the June 30,
2009 exchange rate.







-15-






The land
use right owned by Xuancheng was purchased by the Company from Shanghai CNPC
Enterprises Group, a non-affiliated third party. The Company has paid the
purchase price and obtained the title deed for the land use right.





On
January 4, 2008, the Company purchased all of the equity of Qingdao Shan Yang
Tai Chemistry Resources Development Co., Ltd. (“QDSY”) from an unrelated third
party for approximately RMB43 million.  QDSY’s sole asset is the
land use right and construction in progress. The Company obtained the title deed
for the land use right on December 31, 2008.





In June
2008, Lixun acquired from a non-affiliated third party a land use right. Lixun
has constructed a new plant on this land.





In June
2009, Hubei Gather acquired from a non-affiliated third party a land use right,
which will be used to construct a mother station. The Company is applying for
the title deed for the land use right.





10.
Other long-term assets





The
amount of other long-term assets in the consolidated financial statements at
June 30, 2009 consists primarily of the following (dollars in
thousands).





(1)
$1,667 prepayments for CNG station equipment. This equipment will be used to
construct CNG filling stations as long-term fixed assets.





(2) $925
due from customers related to deferred income.





(3)
$4,084 prepayments for the rent for CNG stations.





The other
long-term assets in the consolidated financial statements at September 30,
2008 consists primarily of the following (dollars in
thousands):





(1)
$3,715 prepayments for CNG station equipment. This equipment will be used to
construct CNG filling stations as long-term fixed assets





(2) $1,021
due from the customers related to deferred income.





(3)
$1,303 prepayments for the CNG land rental.





11.
Short Term Bank Loan





The
following table summarizes the contractual short-term borrowings between the
banks and the Company as of June 30, 2009 (dollars in thousands):





Bank
      Name
                  Purpose
                  Borrowing
      Date
                  Borrowing
      Term
                  
                  Annual
      Interest Rate
                  
                  
                  AmountBank
      of Communication
                  Working
      Capital
                  May
      10, 2009
                  One
      year
                  
                  
                  5.31
                  %
                  
                  $
                  4,977China
      Construction Bank
                  Working
      Capital
                  March
      16, 2009
                  One
      year
                  
                  
                  5.5755
                  %
                  
                  
                  7,318China
      Construction Bank
                  Working
      Capital
                  April
      20, 2009
                  One
      year
                  
                  
                  5.31
                  %
                  
                  
                  21,955CITIC
      Bank
                  Working
      Capital
                  February
      6, 2009
                  One
      year
                  
                  
                  5.841
                  %
                  
                  
                  73CITIC
      Bank
                  Working
      Capital
                  January
      4, 2009
                  One
      year
                  
                  
                  5.841
                  %
                  
                  
                  220Industrial
      Bank Co., Ltd.
                  Working
      Capital
                  May
      25, 2009
                  One
      year
                  
                  
                  5.81
                  %
                  
                  
                  381Industrial
      Bank Co., Ltd.
                  Working
      Capital
                  June
      2, 2009
                  One
      year
                  
                  
                  5.81
                  %
                  
                  
                  644China
      Merchants Bank
                  Working
      Capital
                  January
      19, 2009
                  One
      year
                  
                  
                  5.5755
                  %
                  
                  
                  1,463China
      Merchants Bank
                  Working
      Capital
                  March
      5, 2009
                  One
      year
                  
                  
                  5.5755
                  %
                  
                  
                  439China
      Merchants Bank
                  Working
      Capital
                  May
      8, 2009
                  One
      year
                  
                  
                  5.5755
                  %
                  
                  
                  1,026Total
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  38,496





The
following table summarizes the contractual short-term borrowings between the
banks and the Company as of September 30, 2008 (dollars in
thousands):





Bank
      Name
                  Purpose
                  Borrowing
      Date
                  Borrowing
      Term
                  
                  Annual
      Interest Rate
                  
                  
                  AmountBank
      of Communication *
                  Working
      Capital
                  August
      5, 2008
                  Six
      months
                  
                  
                  5.04
                  %
                  
                  $
                  5,866Bank
      of Communication **
                  Working
      Capital
                  September
      5, 2008
                  One
      year
                  
                  
                  5.58
                  %
                  
                  
                  5,866Bank
      of Communication
                  Working
      Capital
                  July
      17, 2008
                  One
      year
                  
                  
                  7.326
                  %
                  
                  
                  221Total
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  11,953





* 6 month
interest rate


** 6-12
month interest rate






-16-




The
interest rates, which are subject to adjustment by the banks determined by the
Chinese government economic development policy, reflect the interest rate in
effect on September 30, 2008.





12.
Advances from Customers





Advances
from customers at June 30, 2009 and September 30, 2008 consist of advances
received for routine sales orders according to the Company’s sales
policy.





13.
Income Taxes Payable





The
Company pays national and local income tax in China.  Beginning
January 1, 2008, the Chinese government has adopted a new statutory tax
rate at 25%.





Because
each subsidiary is separately taxed, or exempt from tax, under the Chinese tax
regulations, the Company, on a consolidated basis, may incur income taxes
although its consolidated operations generated a loss. As PRC subsidiaries that
qualify as wholly foreign owned manufacturing enterprises, Sinogas, Yuhan and
Jiaxing Lixun were granted tax preferences. Sinogas and Yuhan were granted a
100% enterprise income tax exemption for calendar years 2006 and 2007 and a 50%
enterprise income tax exemption for the following three years (2008 through
2010). Jiaxing Lixun was granted a 100% tax exemption from August 2007 through
December 2008 and a 50% enterprise income tax exemption for the following three
calendar years (2009 through 2011). In January 2009, the Chinese tax authorities
issued a ruling that a joint venture enterprise incorporated after March 16,
2007 cannot enjoy the tax preferences. Since Jiaxing Lixun is a joint venture
incorporated in July 2007, it cannot enjoy the tax preferences. Jiaxing Lixun
was recognized as a high-tech enterprise, and enjoyed the 15% tax rate from
January 2008. Since Jiaxing Lixun is a joint venture and therefore not eligible
for the tax exemption, Jiaxing Lixun incurred income tax of $207,369 during the
nine months ended June 30, 2009, based on its taxable income during the last
quarter of calendar 2008. During the nine months ended June 30, 2009, Sinogas
incurred income taxes of $132,189 as a result of an adjustment relating to its
2008 income tax. The income tax for the nine month period also reflects
adjustments to taxable income required under the Chinese tax
regulations.




Under the
current tax laws of the PRC, the Company’s other PRC subsidiaries, Wuhan
Sinoenergy and, Pingdingshan Sinoenergy will each be entitled to a two-year 100%
tax exemption followed by three years of a 50% tax exemption
once they become profitable.





No
provision for taxes outside of the PRC is made as Sinoenergy Holding Limited, an
investment holding company, has no taxable income in the British Virgin
Islands.





14.  Notes
payable





In
September 2007, the Company issued 12% senior notes due 2012 in the principal
amount of $16,000,000 and 3.0% senior convertible notes due 2012 in the
principal amount of $14,000,000.





The
convertible notes are due in September 2012 and bear interest at the stated
interest rate of 3% per annum. If the convertible notes are not redeemed or
converted or purchased and cancelled by the maturity date, the Company is
required to redeem the convertible notes at the amount which results in a yield
to maturity of 13.8% per annum, net of interest previously received, plus any
interest accrued on overdue principal (and, to the extent lawful, on overdue
interest) and premium, if any, at a rate which is 3% per annum in excess of the
rate of interest then in effect. As a result, the Company is accruing interest
at the rate of 13.8% per annum. Since the Company is only required to pay
interest currently at the interest rate of 3% per annum, the remaining 10.8% per
annum interest rate is accrued and treated as deferred interest payable. If the
convertible notes are converted, the deferred interest payable will be credited
to additional paid in capital.





The
convertible note indenture requires the Company to offer to purchase the Notes
at a price which would generate a 13.8% yield if the Company does not maintain
the listing of its common stock on the Nasdaq Stock Market, if, after obtaining
the listing, the common stock is not listed on either a United States national
or regional securities exchange or the Nasdaq Stock Market or if trading of the
common stock on any exchange or market has been suspended for ten or more
days.





The
indenture also requires the Company to pay additional interest as
follows:




•
            At
      the rate of 3.0% per annum if the Company fails to maintain the listing of
      its common stock on the Nasdaq Global Market or the Nasdaq Capital
      Market.•
            At
      the rate of 1.0% for each 90-day period in which the Company has failed to
      comply with the registration obligations under the registration rights
      agreement. As of March 31, 2009, the Company had accrued additional
      interest of $560,000 pursuant to this provision, of which $280,000
      was paid in January 2009 and $280,000 remained outstanding. The Company
      has accounted for the additional interest payable as a result of the
      failure of the Company to have the shares of common stock issuable upon
      conversion of the 3% senior notes registered in accordance with FSP EITF
      00-19-2, “Accounting for Registration Payment Arrangements”, and SFAS
      No.5, “Accounting for Contingencies”. Accordingly, the Company has accrued
      the additional interest payable under registration rights agreements up to
      June 30, 2009. The Company will review and adjust this accrual at each
      subsequent period end.






-17-




At March
31, 2009, the holders of the Notes have the right to convert their Notes into
common stock at a conversion price of $4.20 per share, reflecting a reduction in
the conversion price through March 28, 2009. The indenture, as clarified,
provides that if the Company sells common stock or issues convertible securities
with a conversion or exercise price less than the conversion price, the
conversion price is to be reduced to the sales price or the exercise or
conversion price, but not less than $0.80 per share. The Company agreed not to
sell shares at a price or issue convertible securities with an exercise or
conversion price less than $0.80.





In
addition, the average price of the common stock is computed in accordance with
the indenture on September 28 and March 28 of each year.  If the
average price of the common stock is less than the conversion price, the
conversion price is reduced to the greater of the average price or $4.20 per
share. Since the average price before March 28, 2009 is lower than $4.20, the
conversion price was reduced to $4.20 at March 28, 2009.





The
indenture provides for an adjustment in the conversion price if the Company
fails to have net income, as defined in the indenture, of $14.0 million for the
year ended December 31, 2008 and $22.5 million for the year ending December 31,
2009. The indenture also had a required net income target for 2007. The
investors waived the right to any adjustment based on 2007 net income, in
consideration for which the Company’s principal stockholder, which is an entity
owned by the chief executive officer and the chairman of the board agreed to pay
the investors a total of $600,000.  The noteholders waived payment of
this obligation on February 23, 2009.





The
Company changed its fiscal year from the calendar year to the year ended
September 30, effective with the year ended September 30, 2007. Since the
Company does not have audited financial statements for the year ended December
31, 2008, which covers parts of two fiscal years, as of August 10, 2009, the
Company has not computed its net income, as defined in the indenture, for the
twelve months ended December 31, 2008.




If the
Company’s net income does not reach the stated level for 2008 or 2009, the
conversion rate, which is the number of shares of common stock issuable upon
conversion of $100,000 principal amount of convertible notes, shall be adjusted
in accordance with the formula. [(A x B)/ C], where


A =
 the total number of shares of common stock issued and outstanding on a
fully-diluted basis at the date of determination of such
adjustment;





B
= 3% expressed as a decimal; and





C = the
aggregate principal amount of the Notes issued on the Issue Date divided by
$100,000.




The
following discussion is based on the assumptions that (a) the target levels are
not met for both 2008 and 2009, (b) the number of fully diluted shares of common
stock (other than shares issuable upon conversion of the convertible notes)
through the end of 2009, and (c) none of the notes are converted. Any change in
any of these components will affect the amount of any adjusted conversion
rate and conversion price. Under the formula, if the 2008 target was not met,
the conversion rate would increase to 24,021 shares per $100,000 principal
amount of note and the conversion price would be adjusted to $4.162
from the conversion price at June 30, 2009, which is $4.20, which
represents a conversion rate of 23,810 shares per $100,000 principal amount of
notes. If the targets for both 2008 and 2009 are not met, the conversion rate
would become 28,665 shares per $100,000 principal amount, and the conversion
price would be $3.489.




The
senior notes mature on September 28, 2012. The Company is required to make
mandatory prepayments on the senior notes on the following dates and in the
following amounts:





Date
                  
                  Principal
      AmountMarch
      28, 2010
                  
                  $
                  2,000,000September
      28, 2010
                  
                  $
                  2,000,000March
      28, 2011
                  
                  $
                  4,000,000September
      28, 2011
                  
                  $
                  4,000,000March
      28, 2012
                  
                  $
                  2,000,000




Commencing
September 28, 2008, the Company may redeem the senior notes at the
declining percentages of the principal amount commencing at
108%.





The
indentures for both the convertible notes and the senior notes, as amended
through May 19, 2009, have certain covenants, including the
following:






-18-




•
            If
      the Company sells assets and does not reinvest the proceeds in its
      business in the time frames set forth in the indenture, the Company is
      required to offer the holders of the notes the right to have the Company
      use such excess proceed to purchase their notes at the principal amount
      plus accrued interest.•
            If
      there is a change of control, as defined in the indenture, the Company is
      required to offer to repurchase the notes at 103% of the principal of the
      note, plus accrued interest.•
            The
      Company is restricted from incurring additional debt unless, either (i)
      after giving effect to the borrowing, the Company maintains (i) a fixed
      charge coverage ratio of at least 2.00 to 1.00 through December 31, 2009
      and 3.0 to 1.00 thereafter, and (ii) a leverage ratio of not more than 6.0
      to 1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, or (ii) the
      debt is permitted debt. The noteholders agree that they shall not take any
      action to cause or declare an Event of Default as long as the Company is
      in compliance with these amended ratio. The fixed charge coverage ratio is
      the ratio of the Company’s earnings before interest, taxes, depreciation
      and amortization, which is generally known as EBITDA, to consolidated
      interest expense, as defined. Leverage ratio means the ratio of
      outstanding debt to EBITDA, with the interest component being the
      consolidated interest expense, as defined. Permitted debt includes
      indebtedness by Sinogas of not more than $10,000,000 and certain purchase
      money indebtedness.•
            The
      Company is subject to restriction in paying dividends, purchasing its own
      securities or those of its subsidiaries, prepaying subordinated debt, and
      making any investment other than any investments in itself and its
      subsidiaries engaged in the Company’s business and certain other permitted
      investments or incurring liens.•
            The
      Company cannot enter into transactions with affiliates unless the
      transaction is not less favorable to the Company than the Company could
      obtain from a non-affiliate in an arms’ length transaction, with any
      transaction involving more than $1,000,000 requiring audit committee
      approval and any transaction involving more than $5,000,000 requiring a
      written opinion from an independent financial
  advisor.




•
              The
      indentures pursuant to which the notes were issued, as amended through May
      19, 2009, provide that the Company shall maintain, as of the last day of
      each fiscal quarter, (i) a fixed charge coverage ratio of at least 2.00 to
      1.00 through December 31, 2009 and 3.0 to 1.00 thereafter, (ii) a leverage
      ratio of not more than 6.0 to 1.00 through December 31, 2009 and 4.5 to
      1.00 thereafter, and (iii) a consolidated subsidiary debt to consolidated
      net tangible asset ratio of not more than 0.35 thereafter. The noteholders
      agreed that they would not take any action to declare an event of default
      as long as the Company is in compliance with the modified
      covenants.
                  
                  At
      June 30, 2009, the Company’s fixed charge coverage ratio was 0.75 to 1.00,
      its leverage ratio was 22.00 to 1.00 and its consolidated subsidiary debt
      to consolidated net tangible asset ratio was 0.4 to 1.00.  As a
      result, the Company was not in compliance with the required financial
      covenants at June 30, 2009.  On August 10, 2009, the noteholders
      waived the Company’s obligations to meet those requirements at June 30,
      2009 and agreed not to take any action with respect to an event of default
      for failure to meet these covenants.  However, because (i) the
      noteholders agreed to a modification of the ratios in May 2009 and the
      Company did not meet the tests at June 30, 2009, (ii) the waiver did not
      go beyond June 30, 2009, (iii) it is reasonably likely that the Company
      will not meet the tests at September 30, 2009 and (iv) there is no
      assurance that the noteholders will grant a further waiver, the notes
      are treated as current liabilities at June 30,
  2009.




The
Company also entered into an investor rights agreement, pursuant to which, as
long as an investor holds at least $2,000,000 principal amount of notes or at
least 3% of the issued and outstanding stock:




•
              The
      investor has the right to approve the Company’s annual budget, and the
      Company cannot deviate by more than 15% of the amount in the approved
      budget.•
              The
      Company and its subsidiaries cannot replace or change the substantive
      responsibilities of the chief executive officer except in the event of his
      incapacity, resignation or retirement.•
              The
      Company and its subsidiaries cannot take any action that would result in a
      change of control, as defined in the indentures.•
              The
      Company and its subsidiaries cannot change the number of board members or
      the composition or structure of the board or board committees or delegate
      powers to a committee or change the responsibilities and powers of any
      committee.•
              The
      investors have a right of first refusal on future financings by us and
      proposed transfers, with limited exceptions, by Mr. Huang and Mr. Deng.
      The investors also have a tag-along right in connection with proposed
      sales by Mr. Huang and Mr.
Deng.




Management
reviewed the accounting for these transactions and concluded that the conversion
option did not constitute an embedded derivative under SFAS No. 133, as the
Company has sufficient authorized but unissued shares to meet its maximum share
obligations upon conversion, including any reductions in the conversion price.
However, the transaction includes a beneficial conversion feature pursuant to
EITF 98-5 and 00-27, and the total beneficial conversion feature of $176,656 was
charged to additional paid in capital and is being amortized over the life of
the notes commencing October 1, 2007. However, in the first quarter of the
fiscal year ending September 30, 2010, the Company will be required to adopt
EITF 07-5, as a result of which the conversion feature of the convertible notes
will be treated as a derivative. See Note 2-New Accounting
Pronouncements.






-19-





As a
result of the reduction in the conversion price from $6.34 to $5.125, the
Company recorded an additional beneficial conversion feature of $3,360,905 as a
discount to the notes and additional paid in capital, which is being amortized
as interest expense over the remaining term of the notes commencing April 1,
2008. As a result of the reduction of the conversion price to $4.20 in
March 2009, the Company recorded an additional beneficial conversion feature of
$3,862,000 as a discount to the notes and additional paid-in capital, which is
being amortized over the remaining terms of the notes commencing April 1,
2009.





Mr. Huang
and Mr. Deng are also prohibited from transferring any shares, with limited
exceptions, until the investors shall have sold, singularly or in the aggregate,
more than 5% of the Company’s total outstanding equity on a fully-diluted
basis.





From the
closing date and as long as long as the original noteholders continue to hold
more than 5% of the outstanding shares of common stock on an as-converted basis,
(i) Abax Lotus Ltd. (“Abax”), one of the original Noteholders, shall be entitled
to appoint up to 20% of the voting members (or the next higher whole number if
such percentage does not yield a whole number) of the Company’s board of
directors, and (ii) if the Company fails to meet the net income requirements
under the indenture for the convertible notes, Abax has the right to appoint an
additional director. The Abax director shall be entitled to serve on each
committee of the board, except that, the Abax director shall not serve on the
audit committee unless he or she is an independent director. Mr. Huang and Mr.
Deng have agreed to vote their shares for the election of the Abax
directors. The Company is required to amend its by-laws to provide that a quorum
for action by the board shall include at least one Abax director.





A
reconciliation of the original principal amount of the 12% senior notes to the
amounts shown on the balance sheet is as follows (dollars in
thousands):





Original
      amount
                  
                  $
                  16,000Note
      discount
                  
                  
                  (378
                  )Balance,
      September 30, 2007
                  
                  
                  15,622Accrual
      of interest
                  
                  
                  1,930Amortization
      of beneficial conversion feature
                  
                  
                  76Interest
      paid
                  
                  
                  (970
                  )Balance,
      September 30, 2008
                  
                  
                  16,658Accrual
      of interest
                  
                  
                  1,440Amortization
      of beneficial conversion feature
                  
                  
                  56Interest
      paid
                  
                  
                  (2,400
                  )Balance,
      June 30, 2009
                  
                  $
                  15,754




A
reconciliation of the original principal amount of the 3% senior convertible
notes to the amounts shown on the balance sheet is as follows (amounts in
thousands):





Original
      amount
                
                $
                14,000Beneficial
      conversion feature
                
                
                (177
                )Balance,
      September 30, 2007
                
                
                13,823Amortization
      of beneficial conversion feature
                
                
                35Interest
      paid
                
                
                (211
                )Interest
      accrued for guaranteed 13.8% return
                
                
                1,934Discount
      resulting from reset adjustment effective March 28,
    2008
                
                
                (3,361
                )Amortization
      of discount resulting from reset
                
                
                373Balance,
      September 30, 2008
                
                
                12,593Amortization
      of beneficial conversion feature
                
                
                26Interest
      paid
                
                
                (1,803
                )Interest
      accrued for guaranteed 13.8% return
                
                
                1,449Discount
      resulting from reset adjustment effective March 28,
    2009
                
                
                (3,862
                )Amortization
      of discount resulting from reset
                
                
                1,075Balance,
      June 30, 2009
                
                $
                9,478





15. Related Party Relationships and
Transactions




The
related parties with which the Company had transactions in the three months and
nine months ended June 30, 2009 and 2008, are as follows:




-20-







Name
      of related party
              
              RelationshipBeijing
      Sanhuan Technology Development Co., Ltd (Beijing
      Sanhuan)
              
              Parent
      company of a subsidiary before November 8, 2005. The Company’s CEO was the
      legal representative of Beijing Sanhuan before July 2007.Qingdao
      Kangtai Machinery Equipment Manufacture Co. Limited
      (Kangtai)
              
              Minority
      shareholder of a subsidiary (Yuhan) from May 2005Mr.
      Guiqiang Shi
              
              Shareholder
      of KangtaiMr.
      Tianzhou Deng
              
              Chairman
      of the CompanyChina
      New Energy
              
              The
      minority shareholder of a subsidiary (Hubei Gather) and the 80%
      shareholder of a company in which the Company has a 20% interest (Anhui
      Gather).




Significant
transactions between the Company and its related parties during the three
months and nine months ended June 30, 2009 and 2008 are as follows (dollars in
thousands):





(1) Sales
and purchase transactions with related parties





Name
      of the Company
                
                For
      the nine months ended
                  June
      30, 2009
                
                For
      the nine months ended
                  June
      30, 2008Beijing
      Sanhuan
                
                $73 prepayment
      for raw material
                
                None





(2) Due
from related parties





Name
      of the Company
                      
                      June
      30, 2009
                      
                      
                      September 30,
      2008China
      New Energy
                      
                      $
                      382
                      
                      
                      $
                      383Anhui
      Gather
                      
                      $
                      44
                      
                      
                      None




16.
Segment Information





Operating
segments are defined by SFAS No.131, “Disclosure about Segments of an Enterprise
and Related Information,” as components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance.




As all
businesses of the Company are carried out in the PRC, the Company is deemed to
operate in one geographical area.




The
information set forth below represents the segment information for the three
months and nine months ended June 30, 2009 and 2008.




Three
      Months Ended June 30, 2009
                      (dollars
      in thousands)
                    
                    Customized
                      pressure
                      containers
                    
                    CNG
      station
                      facilities
      and construction
                    
                    CNG
      station
                      operation
                    
                    Vehicle
                      conversion
                      kits
                    
                    TotalNet
      sales
                    
                    $
                    413
                    
                    $
                    761
                    
                    $
                    4,867
                    
                    $
                    1,669
                    
                    $
                    7,710Cost
      of sales
                    
                    
                    324
                    
                    
                    492
                    
                    
                    4,258
                    
                    
                    1,166
                    
                    
                    6,240Gross
      profit
                    
                    
                    89
                    
                    
                    269
                    
                    
                    609
                    
                    
                    503
                    
                    
                    1,470Gross
      margin
                    
                    
                    21
                    %
                    
                    35
                    %
                    
                    13
                    %
                    
                    30
                    %
                    
                    19
                    %Operating
      expenses:Selling
      expenses
                    
                    
                    20
                    
                    
                    17
                    
                    
                    211
                    
                    
                    146
                    
                    
                    394General
      and administrative expenses
                    
                    
                    246
                    
                    
                    698
                    
                    
                    338
                    
                    
                    179
                    
                    
                    1,461Total
      operating expense
                    
                    
                    266
                    
                    
                    715
                    
                    
                    549
                    
                    
                    325
                    
                    
                    1,855Loss
      from operations
                    
                    $
                    (177
                    )
                    $
                    (446
                    )
                    $
                    60
                    
                    $
                    178
                    
                    $
                    (385
                    )Total
      assets
                    
                    $
                    38,861
                    
                    $
                    65,384
                    
                    $
                    42,119
                    
                    $
                    8,052
                    
                    $
                    154,416








-21-








Three
      Months Ended June 30, 2008
                      (dollars
      in thousands)
                    
                    Customized
                      pressure
                      containers
                    
                    
                    CNG
      station
                      facilities
      and
                      construction
                    
                    
                    CNG
      station
                      operation
                    
                    
                    Vehicle
                      conversion
                      kits
                    
                    
                    TotalNet
      sales
                    
                    $
                    1,729
                    
                    
                    $
                    5,270
                    
                    
                    $
                    542
                    
                    
                    $
                    2,663
                    
                    
                    $
                    10,204Cost
      of sales
                    
                    
                    938
                    
                    
                    
                    3,235
                    
                    
                    
                    336
                    
                    
                    
                    1,774
                    
                    
                    
                    6,283Gross
      profit
                    
                    
                    791
                    
                    
                    
                    2,035
                    
                    
                    
                    206
                    
                    
                    
                    889
                    
                    
                    
                    3,921Gross
      margin
                    
                    
                    46
                    %
                    
                    
                    39
                    %
                    
                    
                    38
                    %
                    
                    
                    33
                    %
                    
                    
                    38
                    %Operating
      expenses:Selling
      expenses
                    
                    
                    76
                    
                    
                    
                    16
                    
                    
                    
                    52
                    
                    
                    
                    102
                    
                    
                    
                    246General
      and administrative expenses
                    
                    
                    213
                    
                    
                    
                    380
                    
                    
                    
                    137
                    
                    
                    
                    258
                    
                    
                    
                    988Total
      operating expense
                    
                    
                    289
                    
                    
                    
                    396
                    
                    
                    
                    189
                    
                    
                    
                    360
                    
                    
                    
                    1,234Income from
      operations
                    
                    $
                    502
                    
                    
                    $
                    1,639
                    
                    
                    $
                    17
                    
                    
                    $
                    529
                    
                    
                    $
                    2,687Total
      assets
                    
                    $
                    31,942
                    
                    
                    $
                    58,033
                    
                    
                    $
                    25,352
                    
                    
                    $
                    11,768
                    
                    
                    $
                    127,095





Nine
      Months Ended June 30, 2009
                  (dollars
      in thousands)
                
                Customized
                  pressure
                  containers
                
                CNG
      station
                  facilities
      and construction
                
                CNG
      station
                  operation
                
                Vehicle
                  conversion
                  kits
                
                TotalNet
      sales
                
                $
                4,234
                
                $
                8,211
                
                $
                13,650
                
                $
                4,514
                
                $
                30,609Cost
      of sales
                
                
                3,097
                
                
                4,958
                
                
                11,681
                
                
                3,125
                
                
                22,861Gross
      profit
                
                
                1,137
                
                
                3,253
                
                
                1,969
                
                
                1,389
                
                
                7,748Gross
      margin
                
                
                27
                %
                
                40
                %
                
                14
                %
                
                31
                %
                
                25
                %Operating
      expenses:Selling
      expenses
                
                
                118
                
                
                49
                
                
                467
                
                
                348
                
                
                982General
      and administrative expenses
                
                
                834
                
                
                3,576
                
                
                1,179
                
                
                611
                
                
                6,200Total
      operating expense
                
                
                952
                
                
                3,625
                
                
                1,646
                
                
                959
                
                
                7,182Income
      from operations
                
                $
                185
                
                $
                (372
                )
                $
                323
                
                $
                430
                
                $
                566




Nine
      Months Ended June 30, 2008
                    (dollars
      in thousands)
                  
                  Customized
                    pressure
                    containers
                  
                  
                  CNG
      station
                    facilities
      and
                    construction
                  
                  
                  CNG
      station
                    operation
                  
                  
                  Vehicle
                    conversion
                    kits
                  
                  
                  TotalNet
      sales
                  
                  $
                  5,400
                  
                  
                  $
                  13,659
                  
                  
                  $
                  892
                  
                  
                  $
                  6,794
                  
                  
                  $
                  26,745Cost
      of sales
                  
                  
                  3,076
                  
                  
                  
                  7,140
                  
                  
                  
                  559
                  
                  
                  
                  4,415
                  
                  
                  
                  15,190Gross
      profit
                  
                  
                  2,324
                  
                  
                  
                  6,519
                  
                  
                  
                  333
                  
                  
                  
                  2,379
                  
                  
                  
                  11,555Gross
      margin
                  
                  
                  43
                  %
                  
                  
                  48
                  %
                  
                  
                  37
                  %
                  
                  
                  35
                  %
                  
                  
                  43
                  %Operating
      expenses:Selling
      expenses
                  
                  
                  169
                  
                  
                  
                  49
                  
                  
                  
                  88
                  
                  
                  
                  234
                  
                  
                  
                  540General
      and administrative expenses
                  
                  
                  470
                  
                  
                  
                  1,453
                  
                  
                  
                  240
                  
                  
                  
                  800
                  
                  
                  
                  2,963Total
      operating expense
                  
                  
                  639
                  
                  
                  
                  1,502
                  
                  
                  
                  328
                  
                  
                  
                  1,034
                  
                  
                  
                  3,503Income
      (loss) from operations
                  
                  $
                  1,685
                  
                  
                  $
                  5,017
                  
                  
                  $
                  5
                  
                  
                  $
                  1,345
                  
                  
                  $
                  8,052




17.
Capital Stock





As of
June 30, 2009, the Company had the following shares of common stock reserved for
issuance:




•
            555,359
      shares issuable upon exercise of the warrants issued in the June 2006
      private placement and issued for services of investment relations
      company;•
            3,333,333
      shares issuable upon conversion of 3% senior convertible
      notes;•
            1,000,000
      shares issuable upon exercise of stock options or other equity-based
      incentives pursuant to the Company’s 2006 long-term incentive
      plan.






-22-






Number
      of shares issuable on exercise of warrants$1.70
      Warrants
              
              $2.40
      Warrants
              
              $4.20
      Warrants
              
              $8.00
      Warrants
              
              TotalBalance
      at September 30, 2008
              
              
              85,715
              
              
              369,644
              
              
              75,000
              
              
              25,000
              
              
              555,359Issued
      during the period
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Exercised
      during the period
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Balance
      at June 30, 2009
              
              
              85,715
              
              
              369,644
              
              
              75,000
              
              
              25,000
              
              
              555,359





As at
June 30, 2009, the weighted average exercise price for the above mentioned
warrants is $2.79. None of the outstanding warrants are subject to reset
provisions other than as a result of a stock distribution, split or dividend, a
reverse split or combination of shares or other recapitalization, and, in the
case of the warrants to purchase 455,359 shares of common stock issued in
the June 2006 private placement, sales of common stock at prices below the
exercise price. The warrants issued in the June 2006 private placement may be
treated as derivatives pursuant to EITF 07-5 commencing with the first quarter
of the fiscal year ended September 30, 2010. See Note 2-New Accounting
Pronouncements.





Stock
options





Pursuant
to the 2006 long-term incentive plan, each newly-elected independent director
receives, at the time of his or her election, a five-year option to purchase
15,000 shares of common stock at the fair market value on the date of his or her
election. The plan provides for the annual grant to each independent director of
an option to purchase 2,500 shares of common stock on the first
trading day in April of each calendar year, at market price. The options become
exercisable cumulatively as to fifty percent (50%) of the shares subject
thereto six months from the date of grant and as to the remaining fifty percent
(50%), eighteen months from the date of grant, and expire on the earlier of (i)
five years from the date of grant, or (ii) seven (7) months from the date such
independent director ceases to be a director if such independent director ceases
to be a director other than as a result of his death or
disability.





Pursuant
to the automatic grant provisions, on April 1, 2008, the four independent
directors were granted stock options to purchase a total of 10,000 shares of
common stock at an exercise price of $5.80 per share, being the fair market
value on the date of grant.




Shares subject
                    to
      options
                  
                  
                  Weighted
                    average
      exercise price
                  
                  
                  Remaining 
      life
                    (years)Options
      outstanding at September 30, 2008
                  
                  
                  845,000
                  
                  
                  $
                  4.39
                  
                  
                  
                  4.26Options
      granted during the period
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      cancelled during the period
                  
                  
                  (75,000
                  )
                  
                  
                  5.72
                  
                  
                  
                  -Options
      outstanding at June 30, 2009
                  
                  
                  770,000
                  
                  
                  $
                  4.26
                  
                  
                  
                  3.06Options
      exercisable at June 30, 2009
                  
                  
                  360,000
                  
                  
                  $
                  4.26
                  
                  
                  
                  2.81




The fair
value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the assumptions shown in the
following table:





Stock
      Options Granted OnGrant
      Date
                
                June
      1, 2008
                
                
                April
      1, 2008
                
                
                March
      10, 2008
                
                
                January
      9, 2008
                
                
                April
      9, 2007
                
                
                April
      1, 2007
                
                
                June
      2, 2006Expected
      volatility
                
                
                46.1
                %
                
                
                46.1
                %
                
                
                68.32
                %
                
                
                80.06
                %
                
                
                26.39
                %
                
                
                35.16
                %
                
                
                50
                %Risk-free
      rate
                
                
                2.93
                %
                
                
                2.93
                %
                
                
                4.64
                %
                
                
                4.64
                %
                
                
                4.64
                %
                
                
                4.64
                %
                
                
                4.64
                %Expected
      term (years)
                
                
                3
                
                
                
                5
                
                
                
                5
                
                
                
                5
                
                
                
                5
                
                
                
                5
                
                
                
                3Dividend
      yield
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %
                
                
                0
                %Fair
      value per share
                
                $
                1.94
                
                
                $
                2.54
                
                
                $
                3.56
                
                
                $
                5.16
                
                
                $
                1.24
                
                
                $
                1.2
                
                
                $
                0.5




The
share-based compensation expense during the three months and nine months ended
June 30, 2009 was $62,000 and $219,000, respectively, which was charged to
operations as general and administrative expense.




18.  Basic
and Diluted Earnings Per Share





Earnings
per share is calculated in accordance with the Statement of Financial Accounting
Standards No. 128 (“SFAS No. 128”), “Earnings per share.” Basic earnings per
share is based upon the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is based on the
assumption that all dilutive convertible shares, stock options and
warrants were converted or exercised. The number of shares included in
determining diluted earnings per share is computed by applying the treasury
stock method. Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of issuance, if later),
with the funds obtained thereby being used to purchase common stock at the
average market price during the period.






-23-





The
details for the fully diluted outstanding shares for the nine months ended March
31, 2009 and 2008 is as follows:





Nine
      months ended June 30, 2009
                  
                  
                  Nine
      months ended June 30, 2008Weighted
      average common stock outstanding during period
                  
                  
                  15,942,336
                  
                  
                  
                  15,709,033Common
      stock issuable upon conversion of 3% convertible
    notes
                  
                  
                  -
                  
                  
                  
                  -Common
      stock issuable pursuant to warrants and stock
options
                  
                  
                  -
                  
                  
                  
                  1,241,083Total
      diluted outstanding shares
                  
                  
                  15,942,336
                  
                  
                  
                  16,950,116





19.
Commitments and Contingencies




The
Company and New Energy formed Hubei Gather to construct and operate natural gas
process plants with expected annual processing capacity of 100-300 million cubic
meters in Hubei Province. The registered capital is $5 million of which the
Company will contribute $4 million as an 80% equity owner and New Energy will
contribute $1 million for a 20% interest. The term of the business of Hubei
Gather is from March 23, 2007 to March 22, 2027. As of June 30, 2009, the
Company’s commitment for future funding was $2,625,000.




In the
normal course of its business the Company issues purchase orders for equipment
for its CNG stations and well as for components for its products.  As of
June 30, 2009, there were no significant outstanding purchase
orders.




20.
Retirement Benefits




The
full-time contracted employees of the Company are entitled to welfare benefits,
including medical care, labor injury insurance, housing benefits, education
benefits, unemployment insurance and pension benefits through a Chinese
government-mandated multi-employer defined contribution plan.  The
Company is required to accrue the employer-portion for these benefits based on
certain percentages of the employees’ salaries.  The total provision
for such employee benefits was $51,243 and $55,625 for the three months ended
June 30, 2009 and 2008, respectively, and $254,976 and $175,429 for the nine
months ended June 30, 2009 and 2008, respectively, and was recorded as other
payables. The PRC government is responsible for the staff welfare benefits
including medical care, casualty, housing benefits, unemployment insurance and
pension benefits to be paid to these employees. The Company is responsible for
the education benefits to be paid.





From time
to time, the Company may hire some part time workers or short term workers to
satisfy temporary labor shortage. Those workers have the right to terminate
their work to the Company at any time. For those part time non-contracted
workers, it is difficult for the Company to accurately record the working time,
total wages and then accrue welfare benefits. Based on the common practice in
the PRC, the Company treats those workers as probationary employees, and does
not accrue welfare benefits for them. Although the Company believes that it is
treating these employees in accordance with applicable law, it is possible that
the government may require the Company to accrue the welfare benefit and may
assess a penalty for the under-accrual.





21.
 Significant Concentrations




In the
CNG station facilities and construction segment, the Company manufactures, sells
and installs CNG vehicle and gas station equipment. The Company provides
products for third party companies that operate fixed and/or mobile CNG filling
stations and it designs the CNG station construction plans, constructs CNG
stations, and installs CNG station equipment and related systems.





These
products and services are designed to meet the customer
specifications.  Sales in this segment are dependent upon the Company
developing a continuing stream of business so that we will not incur a
significant lag between the time we complete one contract and start
another.  Although the Company does not have a long history of
operations in this business, its experience is that its major
customers vary from period to period.





In the
three months ended June 30, 2009, one customer of the station facilities and
construction segment accounted for 24.6% of total sales and at June 30, 2009,
approximately 53.2% of accounts receivable was from this customer.





In the
three months ended June 30, 2008, two customers in the station facilities and
construction segment each accounted for more than 10% of our total
sales.  These customers, who purchased CNG truck trailers, accounted
for approximately44% of total sales.  At June 30, 2008, approximately
49% of our accounts receivable were from these
customers.





During
the nine months ended June 30, 2009, one customer in the CNG station facilities
and construction segment accounted for 26% of consolidated sales. During
the nine months ended June 30, 2008, two customers in the CNG station facilities
and construction segment accounted for 32% of consolidated sales.






-24-




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





The
following discussion of the results of our operations and financial condition
should be read in conjunction with our financial statements and the related
notes, which appear elsewhere in this quarterly report. The following
discussion includes forward-looking statements. For a discussion of important
factors that could cause actual results to differ from results discussed in the
forward-looking statements, see “Forward Looking Statements.”




FORWARD-LOOKING
STATEMENTS





This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include, but are not
limited to, statements that express our intentions, beliefs, expectations,
strategies, predictions or any other statements relating to our future
activities or other future events or conditions. These statements are based
on current expectations, estimates and projections about our business based, in
part, on assumptions made by management. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual outcomes and results may, and are
likely to, differ materially from what is expressed or forecasted in the
forward-looking statements due to numerous factors, including those described
above and those risks discussed from time to time in this quarterly report,
including the risks described under “Risk Factors,” and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in our annual
report on Form 10-K for the year ended September 30, 2008 and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in
this Form 10-Q as well as any other filings we make with the SEC. In addition,
such statements could be affected by risks and uncertainties related to the
ability to conduct business in the PRC, product demand, including our ability to
continue to be in compliance with the financial covenants under the indentures
relating to our senior debt, our ability to collect outstanding accounts
receivable, the demand for CNG and our conversion kits, our ability to develop,
construct and operate a CNG station business, our ability to raise any financing
which we may require for our operations, competition, government regulations and
requirements, pricing and development difficulties, our ability to make
acquisitions and successfully integrate those acquisitions with our business, as
well as general industry and market conditions and growth rates, and
general economic conditions as well as economic conditions that affect the
natural gas industry. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Our expectations are as of
the date this annual report is filed, and we do not intend to update any of the
forward-looking statements after the date this quarterly report is filed to
conform these statements to actual results, unless required by law.





OVERVIEW





At June
30, 2009, we were not in compliance with the financial covenants in the
indentures relating to our 12% senior notes due 2012 in the principal amount of
$16,000,000 and 3.0% senior convertible notes due 2012 in the principal amount
of $14,000,000, as discussed below.  These covenants had been amended
on May 19, 2009.  Although the noteholders waived compliance with the
covenants at June 30, 2009 and for the period then ended, the waiver was limited
to June 30, 2009.  As a result of (i) our failure to be in compliance
at June 30, 2009 with covenants that were amended in May 2009, (ii) the limited
nature of the waiver, (iii) the likelihood that the Company will not be in
compliance at September 30, 2009 and (iv) the uncertainty that the noteholders
will grant a further waiver, the notes have been classified as current
liabilities at June 30, 2009.  As a result, the Company has, at June
30, 2009, a working capital deficiency of $11,866,000.  Further, our
principal current asset is our accounts receivable, which were $29,144,000 at
September 30, 2009, and the accounts receivable, along with other receivables,
totaled approximately $40,000,000.  At September 30, 2008, the
Company’s accounts receivable were outstanding for an average of 124 days,
and at June 30, 2009, the Company’s accounts receivable were outstanding
for an average of 229 days.  A significant amount of receivables that
were outstanding at September 30, 2008 remained outstanding on June 30,
2009.  In addition, at September 30, 2009, we had a note receivable of
$2,636,000 resulting from the termination of a sublease for which no payments
had been made by the tenant.  As of August 10, 2009, no payments had
been made on account of that note.  Our failure to restructure or
refinance our obligations under our notes or obtain a long-term waiver or to
collect our receivables in the normal course of business could impair our
ability to continue in business.





We
design, manufacture and market a range of pressurized containers for CNG.
Although our initial business involved the manufacturing of customized equipment
and pressure containers, our business has evolved as an increasing market is
developing in the PRC for the use of CNG. Our CNG vehicle and gas station
construction business consists of two divisions (i) the manufacturing of CNG
vehicle and gas station equipment, and (ii) the design of construction plans
for CNG stations, the construction of the CNG stations, and the
installation of CNG station equipment and related systems.





We
continue to manufacture a wide variety of pressure containers for use in
different industries, including the design and manufacture of various types of
pressure containers in the petroleum and chemical industries, the metallurgy and
electricity generation industries and the food and brewery industries and have
the capacity to design and manufacture various types of customized
equipment.





All of
our products and services are manufactured or performed pursuant to agreements
with our customers, which provide the specifications for the products and
services. We do not sell our products from inventory. As a result, our revenue
is dependent upon the flow of contracts. In any fiscal period, a small
number of customers may represent a disproportionately large percentage of our
business in one period and a significantly lower percentage, if any, in a
subsequent period.






-25-





Commencing
in 2006, we began to construct CNG stations and, commencing in 2008, we began to
operate CNG stations. This aspect of our business is different from our other
business. The business of operating CNG stations requires a substantial capital
investment.  For this segment, we raised approximately $30 million
from the sale of convertible and fixed rate notes in September 2007. The
indentures relating to these notes have restrictions on our incurring additional
debt. The nature of the operation of the business and the risks associated with
that business are significantly different from the manufacturing of equipment or
the construction of CNG stations for third parties. One aspect of the operation
of CNG stations is price control, whereby both the price at which we purchase
CNG and the price at which we sell CNG are subject to price controls by central
government and municipal governments. As a result of these price controls, our
gross margin is effectively dependent upon the governments’ pricing policies.
The operation of CNG stations is reported as a separate segment.




During
2007, we entered into two agreements to form joint ventures for the operation of
natural gas processing plants. We have a majority interest in one of these two
ventures and a minority interest in the other. At June 30, 2009, our total
commitments under these agreements were approximately $5.0 million, of which we
had paid a total of approximately $2.4 million. These two companies are in the
early construction stage, and neither of these ventures has commenced
operations. We also have contracted with an unrelated party for the purchase of
natural gas which is to be delivered through a pipeline that is presently under
construction and was originally expected to be completed during the first half
of 2009, and its completion date has been rescheduled for the second half of
2009. These contracts do not have specific delivery quantities or prices, all of
which are to be determined later, and the delivery of natural gas through this
pipeline is dependent upon the completion of the pipeline.  We cannot
assure you that the pipeline will be completed as scheduled, based on the
revised schedule, or that the operator will be able to deliver natural gas in
the quantity contemplated by the agreement.




In early
2007, we established a division to sell and manufacture CNG vehicle conversion
kits to OEM’s and aftermarket customers. These kits are designed to enable a
gasoline powered vehicle to operate on CNG. We began to generate revenue from
this business segment in the second quarter of calendar 2007. Lixun designs and
manufactures electric control devices for alternative fuel, such as compressed
natural gas and liquefied petroleum gas vehicles, as well as a full range
of electric devices, such as computer controllers, conversion switches, spark
advancers, tolerance sensors and emulators for use in multi-powered
vehicles.  The business of manufacturing electronic parts for vehicle
conversion kits as well as producing conversion kits is reported as a separate
segment.





Our CNG
vehicle and gas station equipment business include two product
lines:




•
            the
      manufacturing of equipment for CNG vehicles and gas stations
      and





•
            the
      design of CNG station and construction plans, construction of CNG stations
      and installation of CNG station equipment and related
    systems.




Steel
plate and tubes are the major raw material used in manufacturing CNG facilities
and gas station equipment. We purchase steel plate from a Chinese domestic
manufacturer, and we believe that alternative suppliers are available. We had
purchased steel bottles, a key raw material for CNG truck trailers, from an
Italian supplier, which carried the risk of delays that could interrupt our
manufacturing process. Beginning in May 2007, we also began to purchase steel
tubes from the PRC domestic market and engaged a Korean company to manufacture
the bottles from the steel tubes.  In August 2007, we engaged a PRC
company to manufacture these bottles. Although we believe that we have reduced
the risks of interruption of our manufacturing process, we cannot eliminate the
risk entirely.





Our
functional currency is RMB, which is the currency of the PRC, and our reporting
currency is United States dollars. In addition, our purchases from
an Italian supplier are in Euros, although we have significantly reduced
our purchases from this supplier. When we discuss the amount of our future
obligations, we convert RMB or Euros to dollars at the current exchange rate.
However, since the payment will be made in the future, the amount paid in United
States dollars may be different from the amount set forth in this report as a
result of fluctuations in the currency rates.





The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. Following a period of general economic growth, China, like the
rest of the world, has recently been subject to an economic
downturn.  There can be no assurance that the downturn will not have a
negative effect on our business especially if it results in either a decreased
use of products such as ours or in pressure on us to lower our prices. Our
customized pressure container business and our CNG station facilities and
construction business are dependent upon our customers making significant
capital purchases, either for pressure containers or for new CNG
stations.  The availability of financing to our customers as well as
the capital requirements of our customers could significantly reduce the need
for these products and services.  Since our CNG station business is
dependent upon the development of a market for cars and trucks that run on CNG
rather than gasoline, any economic trends which have the effect of dampening the
market for CNG vehicles could affect our ability both to sell our CNG products
and to sell CNG at our proposed CNG stations. The recent sharp decline in oil
and gasoline prices may affect the need for both CNG stations and conversion
kits that enable gasoline-powered vehicles to operate on
CNG.  Although the government of China has encouraged the use of CNG
as part of its effort to reduce pollution in China, the factors described above
may affect the development of the CNG industry in
China.  We cannot predict whether or how these factors will
affect the market for CNG in the areas in which we are constructing and
operating our CNG filling stations or the market for our CNG station
construction services and our conversion kits.






-26-





During
the nine months ended June 30, 2009, our accounts receivable increased by $4.2
million, from $22.0 million to $26.2 million.  As a result of
competitive market pressures during a period of financial uncertainties, we
extended very favorable payment terms for customers of CNG
equipment.  At September 30, 2008, our accounts receivable were
outstanding for an average of 124 days, and at June 30, 2009, our accounts
receivable were outstanding for an average of 229 days.  A significant
amount of our receivables that were outstanding at September 30, 2008 remained
outstanding on June 30, 2009. Although the government of the PRC has announced a
stimulus package which can be used by our customers to help them to make
payments to us, we cannot require our customers to use any of the available
programs.   Our ability to develop our business may be impaired
in the event that we do not receive payments from our customers in a timely
manner.  We cannot assure you that we will be able to collect our
accounts receivables in a timely manner, if at all, and the failure to collect
the accounts receivables is likely to impair our liquidity and our ability to
conduct our business.




On March
31, 2008, Sinogas entered into an agreement to sublease certain parcels of land
to Qingdao Mingcheng Real Estate Co., Ltd. (“Qingdao Mingcheng”), an
non-affiliated third party, for a term of three years beginning in January 2008
and expiring on December 31, 2010, at an annual rental of RMB40 million,
equivalent to approximately $5.9 million based on the March 31, 2009
exchange rate. As a result of the failure of Qingdao Mingcheng to make the
required rental payments, on March 31, 2009, Sinogas signed a memorandum of
understanding with Qingdao Mingcheng pursuant to which Sinogas agreed to a
termination of the sublease, and reduced the rental receivable by 40%, or
$1.8 million, which is reflected in general and administrative expenses in the
nine months ended June 30, 2009. The reduced rental is now payable in quarterly
installments over a one-year period commencing June 30, 2009. As of August 10,
2009, Qingdao Mingcheng has not made any payments on account of the
note.  To the extent that the Qingdao Mingcheng is unable to make the
payments under the note, we will have to take further writeoffs.





Each of
our PRC subsidiaries is subject to income tax based on its taxable income
determined in accordance with the PRC tax laws, and may be eligible for whole or
partial tax exemptions or reductions in tax rates.  Taxable income
under the PRC tax laws may be determined in a manner different from that in the
United States.  As a result, even though the Company sustained a loss
on a consolidated basis, it may, nonetheless, incur income tax.





RESULTS
OF OPERATIONS





We are
engaged in four business segments:





(i)
Customized pressure container business





Our
customized equipment and pressure container business is a traditional chemical
equipment manufacturing business with low profit margin. It includes design and
manufacturing of various types of pressure containers for industries such as the
petroleum and chemical, metallurgy, electricity generation and food and
beverage industries.




(ii)
CNG Station Facilities and Construction





Our CNG
station construction business represents:




▪
            The
      manufacture and installation of CNG vehicle and gas station equipment that
      is used in the transportation and storage of CNG and the operation of a
      CNG station. We provide these services for other companies that operate
      CNG stations.




▪
            CNG
      station construction service, which includes the design of CNG station
      construction plans, construction of CNG stations, and installation of CNG
      station equipment and related systems. The gross margin for CNG gas
      stations technical consulting service was high, as a result of our
      know-how in CNG system design and the absence of significant competition.
      Because of our emergence into the CNG filling station business, we did not
      receive any CNG station construction service orders from the beginning of
      2007. We anticipate that, at least in the near term, we will devote most,
      if not all, of our CNG construction business to the construction of our
      own CNG filling stations.





(iii)
CNG station operations




In 2006,
we entered the CNG station business, which involves the design, construction and
equipping of CNG stations and the operation of those stations.  As of
August 10, 2009, we were operating twenty-one CNG stations, of which
sixteen are located in Wuhan, two in Pingdingshan and three in
Xuancheng.




(iv)
Vehicle fuel conversion equipment




We
manufacture conversion kits and electrical control devices that enable vehicles
that are designed to operate on gasoline to operate on CNG.







-27-






RESULTS
OF OPERATIONS





Three Months EndedJune
30, 2009 and
2008





The
information set forth below represents segment information for the three months
ended June 30, 2009 and 2008.




Three
      Months Ended June 30, 2009
                      (dollars
      in thousands)
                    
                    Customized
                      pressure
                      containers
                    
                    
                    CNG
      station
                      facilities
      and construction
                    
                    
                    
                    CNG
      station
                      operation
                    
                    
                    Vehicle
                      conversion
                      kits
                    
                    
                    TotalNet
      sales
                    
                    $
                    413
                    
                    
                    $
                    761
                    
                    
                    
                    $
                    4,867
                    
                    
                    $
                    1,669
                    
                    
                    $
                    7,710Cost
      of sales
                    
                    
                    324
                    
                    
                    
                    492
                    
                    
                    
                    
                    4,258
                    
                    
                    
                    1,166
                    
                    
                    
                    6,240Gross
      profit
                    
                    
                    89
                    
                    
                    
                    269
                    
                    
                    
                    
                    609
                    
                    
                    
                    503
                    
                    
                    
                    1,470Gross
      margin
                    
                    
                    21
                    %
                    
                    
                    35
                    %
                    
                    
                    
                    13
                    %
                    
                    
                    30
                    %
                    
                    
                    19
                    %Operating
      expenses:Selling
      expenses
                    
                    
                    20
                    
                    
                    
                    17
                    
                    
                    
                    
                    211
                    
                    
                    
                    146
                    
                    
                    
                    394General
      and administrative
                    
                    
                    246
                    
                    
                    
                    698
                    
                    
                    
                    
                    338
                    
                    
                    
                    179
                    
                    
                    
                    1,461Total
      operating expense
                    
                    
                    266
                    
                    
                    
                    715
                    
                    
                    
                    
                    549
                    
                    
                    
                    325
                    
                    
                    
                    1,855(Loss)
      income from operations
                    
                    $
                    (177
                    )
                    
                    $
                    (446
                    )
                    
                    
                    $
                    60
                    
                    
                    $
                    178
                    
                    
                    $
                    (385
                    )




Three
      Months Ended June 30, 2008
                    (dollars
      in thousands)
                  
                  Customized
                    pressure
                    containers
                  
                  
                  CNG
      station
                    facilities
      and
                    construction
                  
                  
                  CNG
      station
                    operation
                  
                  
                  Vehicle
                    conversion
                    kits
                  
                  
                  TotalNet
      sales
                  
                  $
                  1,729
                  
                  
                  $
                  5,270
                  
                  
                  $
                  542
                  
                  
                  $
                  2,663
                  
                  
                  $
                  10,204Cost
      of sales
                  
                  
                  938
                  
                  
                  
                  3,235
                  
                  
                  
                  336
                  
                  
                  
                  1,774
                  
                  
                  
                  6,283Gross
      profit
                  
                  
                  791
                  
                  
                  
                  2,035
                  
                  
                  
                  206
                  
                  
                  
                  889
                  
                  
                  
                  3,921Gross
      margin
                  
                  
                  46
                  %
                  
                  
                  39
                  %
                  
                  
                  38
                  %
                  
                  
                  33
                  %
                  
                  
                  38
                  %Operating
      expenses:Selling
      expenses
                  
                  
                  76
                  
                  
                  
                  16
                  
                  
                  
                  51
                  
                  
                  
                  102
                  
                  
                  
                  246General
      and administrative
                  
                  
                  213
                  
                  
                  
                  380
                  
                  
                  
                  138
                  
                  
                  
                  258
                  
                  
                  
                  988Total
      operating expense
                  
                  
                  289
                  
                  
                  
                  396
                  
                  
                  
                  189
                  
                  
                  
                  360
                  
                  
                  
                  1,234Income from
      operations
                  
                  $
                  502
                  
                  
                  $
                  1,639
                  
                  
                  $
                  17
                  
                  
                  $
                  529
                  
                  
                  $
                  2,687





Net Sales. Net sales for the
three months ended June 30, 2009 (“June 2009 quarter”) were approximately $7.7
million, a decrease of approximately $2.5 million, or 24%, from sales of
approximately $10.2 million for the three months ended June 30, 2008 (“June 2008
quarter”).  This decrease resulted from:




•
            A
      decrease of approximately $1.3 million, or 76%, in sales from customized
      pressure containers, reflecting the effects of the financial crisis
      on the development of manufacturing enterprises.•
            A
      decrease of approximately $4.5 million, or 86%, in sales from the CNG
      stations facilities and construction, reflecting a decrease in demand
      resulting largely from the economic downturn.•
            An
      increase of approximately $4.3 million due to ramping up of our CNG
      station operations. In the June 2008 quarter, we had only one CNG station
      in operation, while we had 21 stations in operation during the June 2009
      quarter.•
            A
      decrease of approximately $1.0million, or 37%, in sales from vehicle
      conversion kits, reflecting the effects of the economic downturn and a
      reduction in price of oil, which resulted in a reduced demand for vehicle
      conversion kits.




Cost of Sales; Gross Margin.  Cost of sales for
the June 2009 quarter and June 2008 quarter was approximately $6.2 million and
$6.3 million, respectively. The CNG station operation segment contributed
$3.9 million of the total increase in cost of sales reflecting the
increase in the number of stations we operated, and $4.0 million aggregate
decrease came from the other three segments reflecting the significant decline
in sales from each of those segments. Our overall gross margin decreased
from 38% to 19% from the June 2008 quarter to the June 2009 quarter for the
following reasons:






-28-





•
            Our
      gross margin for the customized pressure containers deceased from 46% to
      21% because of price increases of raw materials.  We were not
      able to pass on all of these cost increases to our customers. In
      addition, we had no sales of bio-diesel equipment in June 2009
      quarter. These products carry a higher gross margin than our other
      pressure products.•
            Our
      gross margin for the CNG station facilities and construction decreased
      from 39% to 35% because of price increases for raw materials which we were
      not able to pass on to our customers.•
            The
      CNG station operation segment gross margin in the June 2009 quarter
      is 13%, compared with 38% in the June 2008 quarter, which lowered the
      overall gross margin. During the June 2009 quarter, the increase of
      freight cost, together with price control, lowered our gross margin in
      this segment.




Selling
Expenses.  Selling expenses increased approximately $148,000,
or approximately 60%, from the June 2008 quarter to the June 2009
quarter.  Our selling expenses relating to our CNG
operations increased as a direct result of the increase in the number of
stations in operation.





General and Administrative
Expenses.  General and administrative expenses increased
approximately $473,000.  Our general and administrative expenses
include, in addition to the management expenses and depreciation related to the
division, an allocation of corporate expenses, including expensesrelating to our status
as a public company, such as legal, audit and investor relations
costs.  General and administrative expense is allocated among the
segments based on the relative time devoted by management to the business of the
segments.




Interest
Expense.  Interest expense for the June 2009 quarter was
approximately $1.5 million, as compared with $217,000 for the June 2008 quarter.
Most of this increase relates to interest on an increased level of bank
borrowing.





Other Income and Other
Expenses. During the June 2008 quarter, we recognized
rental income of approximately $1.3 million for the rental of the land
use rights for Sinogas’ former manufacturing facility. In March 2009, this
lease was terminated and no rental income recognized anymore from that
time.




Income Taxes.  The
income tax provision decreased approximately $586,000, from June 2008
quarter to June 2009 quarter, which reflects the decrease in income before
income taxes mainly for Sinogas and Yuheng and an effective tax rate of 12.5%,
and Jiaxing Lixun at an effective tax rate of 15%. As PRC subsidiaries that
qualify as wholly foreign owned manufacturing enterprises, Sinogas, Yuhan and
Jiaxing Lixun were granted tax preferences. Sinogas and Yuhan were granted a
100% enterprise income tax exemption for calendar years 2006 and 2007 and a 50%
enterprise income tax exemption for the following three years (2008 through
2010). Jiaxing Lixun was granted a 100% tax exemption from August
2007 through December 2008 and a 50% enterprise income tax exemption
for the following three calendar years (2009 through 2011). In January
2009, the Chinese tax authorities issued a ruling that a joint venture
enterprise incorporated after March 16, 2007 cannot enjoy the tax preferences.
Since Jiaxing Lixun is a joint venture incorporated in July 2007, it is not
eligible for the tax preferences. Jiaxing Lixun was recognized as a high-tech
enterprise, and enjoyed the 15% tax rate from January 2008.  Jiaxing
Lixun incurred income tax of $207,369 during the June 2009
quarter.


Minority
Interest.  The minority interest represents the share of the
income of our subsidiaries allocated to that portion of the subsidiaries’ equity
owned by third parties.  It changed from a $16,000 charge in the
June 2008 quarter to income of $52,000 in the June 2009 quarter.





Net Income.  As a
result of the foregoing, we had a net loss of approximately $2.4 million, or
$0.15 per share (basic and diluted), for the June 2009 quarter, as compared with
net income of approximately $4.0 million, or $0.26 per share (basic) and $0.24
(diluted), for the March 2008 quarter.




Comprehensive
Income.  Comprehensive income was approximately $35,000 for the
June 2009 quarter as compared with approximately $1.4 million for the June 2008
quarter.  The comprehensive income in both periods reflects foreign
currency translation adjustments resulting from changes in the currency rates
between the RMB and the United States dollar.





NineMonths EndedJune 30, 2009 and
2008





The
information set forth below represents segment information for the nine months
ended June 30, 2009 and 2008.






-29-







Nine
      Months Ended June 30, 2009
                  (dollars
      in thousands)
                
                Customized
                  pressure
                  containers
                
                CNG
      station
                  facilities
      and construction
                
                CNG
      station
                  operation
                
                Vehicle
                  conversion
                  kits
                
                TotalNet
      sales
                
                $
                4,234
                
                $
                8,211
                
                $
                13,650
                
                $
                4,514
                
                $
                30,609Cost
      of sales
                
                
                3,097
                
                
                4,958
                
                
                11,681
                
                
                3,125
                
                
                22,861Gross
      profit
                
                
                1,137
                
                
                3,253
                
                
                1,969
                
                
                1,389
                
                
                7,748Gross
      margin
                
                
                27
                %
                
                40
                %
                
                14
                %
                
                31
                %
                
                25
                %Operating
      expenses:Selling
      expenses
                
                
                118
                
                
                49
                
                
                467
                
                
                348
                
                
                982General
      and administrative
                
                
                834
                
                
                3,576
                
                
                1,179
                
                
                611
                
                
                6,200Total
      operating expense
                
                
                952
                
                
                3,625
                
                
                1,646
                
                
                959
                
                
                7,182Income
      (loss) from operations
                
                $
                185
                
                $
                (372
                )
                $
                323
                
                $
                430
                
                $
                566




Nine
      Months Ended June 30, 2008
                        (dollars
      in thousands)
                      
                      Customized
                        pressure
                        containers
                      
                      
                      CNG
      station
                        facilities
      and
                        construction
                      
                      
                      CNG
      station
                        operation
                      
                      
                      Vehicle
                        conversion
                        kits
                      
                      
                      TotalNet
      sales
                      
                      $
                      5,400
                      
                      
                      $
                      13,659
                      
                      
                      $
                      892
                      
                      
                      $
                      6,794
                      
                      
                      $
                      26,745Cost
      of sales
                      
                      
                      3,076
                      
                      
                      
                      7,140
                      
                      
                      
                      559
                      
                      
                      
                      4,415
                      
                      
                      
                      15,190Gross
      profit
                      
                      
                      2,324
                      
                      
                      
                      6,519
                      
                      
                      
                      333
                      
                      
                      
                      2,379
                      
                      
                      
                      11,555Gross
      margin
                      
                      
                      43
                      %
                      
                      
                      48
                      %
                      
                      
                      37
                      %
                      
                      
                      35
                      %
                      
                      
                      43
                      %Operating
      expenses:Selling
      expenses
                      
                      
                      169
                      
                      
                      
                      49
                      
                      
                      
                      88
                      
                      
                      
                      234
                      
                      
                      
                      540General
      and administrative
                      
                      
                      470
                      
                      
                      
                      1,453
                      
                      
                      
                      240
                      
                      
                      
                      800
                      
                      
                      
                      2,963Total
      operating expense
                      
                      
                      639
                      
                      
                      
                      1,502
                      
                      
                      
                      328
                      
                      
                      
                      1,034
                      
                      
                      
                      3,503Income
      (loss) from operations
                      
                      $
                      1,685
                      
                      
                      $
                      5,017
                      
                      
                      $
                      5
                      
                      
                      $
                      1,345
                      
                      
                      $
                      8,052





Net Sales. Net sales for the
nine months ended June 30, 2009 were approximately $30.6 million, an increase of
approximately $3.9 million, or 14%, from sales of approximately $26.7 million
for the nine months ended June 30, 2008.  This increase mainly
resulted from:




•
            An
      increase of approximately $12.8 million was due to the expansion of our
      CNG station operations. In the nine months ended June 30, 2008, we had
      only one CNG station in operation, while in the nine months ended June 30,
      2009, we increased the number of stations from one station at October 1,
      2008 to 21stations at June 30, 2009.•
            Decreases
      of approximately $5.4 million, or 40%, in sales from CNG station
      facilities and construction, and approximately $1.2 million, or 21%, in
      sales of pressured containers, reflecting the effects of the economic
      downturn.•
            A
      decrease of approximately $2.3 million, or 34%, in sales from vehicle
      conversion kits, reflecting the effects of the economic downturn and a
      reduction in price of oil, which resulted in a reduced demand for vehicle
      conversion kits.




Cost of Sales; Gross Margin. The cost of
sales for the nine months ended June 30, 2009 was approximately $22.9 million,
an increase of approximately 51% from approximately $15.2 million for the nine
months ended June 30, 2008.  The CNG station operation segment
contributed $11.1 million of the total cost of sales. Our overall
gross margin decreased from 43% to 25% from nine months ended June 30, 2008 to
the nine months ended June 30, 2009 for the following reasons:





•
            Our
      gross margin for the customized pressure containers deceased from 43% to
      27% because of price increases of raw materials.  We were not
      able to pass on all of these cost increase to our customers. In
      addition, we had no sales of bio-diesel equipment in the nine months ended
      June 30, 2009. These products carry a higher gross margin than our other
      pressure products.•
            Our
      gross margin for the CNG station facilities and construction decreased
      from 48% to 40% because of the price increases for raw materials which we
      were not able to pass on to our customers.•
            The
      CNG station operation segment gross margin in the nine months ended
      June 30, 2009 is 14%, which lowered the overall gross
      margin.  The significant decrease is due to the increase of
      freight costs, together with the sales price control by the
      government.






30






SellingExpenses.  Selling
expenses increased approximately $442,000, or approximately 82%, from the nine
months ended June 30, 2008 to the nine months ended June 30,
2009.  The increase mainly related to the CNG station operations,
because of the increase in the number of stations in operation, as well as the
vehicle conversion kits segment.





General and Administrative
Expenses.  General and administrative expenses increased
approximately $3.2 million.  A significant portion of this increase
resulted from a $1.8 million bad debt charge as a result of a partial writeoff
of a rental receivable. The expenses in CNG station
operation increased approximately $939,000 because of the increase in the
number of stations in operation. Our general and administrative expenses
include, in addition to the management expenses and depreciation related to the
division, an allocation of corporate expenses, including expensesrelating to our status
as a public company, such as legal, audit and investor relations
costs.  General and administrative expense is allocated among the
segments based on the relative time devoted by management to the business of the
segments.





Interest
Expense.  Interest expense for the nine months ended June
30, 2009 was approximately $3.8 million, as compared with $1.5 million for the
nine months ended June 30, 2008.  Most of this increase related to
interest on increased bank borrowings.





Other Income and Other
Expenses.  During the nine months ended June 30, 2009 and 2008,
we recognized rental income of approximately $1.3 million and $2.5 million,
respectively, for the rental of the land use rights for Sinogas’ former
manufacturing facility. In March 2009, this lease was terminated and we wrote
off approximately $1.8 million of the rent receivable. As noted above, the
writeoff is reflected in general and administrative expenses.





Income Taxes.  The
income tax provision was $1,045,000 in the nine months ended June 30,
2009, which reflects the increase of income before income taxes mainly for
Sinogas and Yuheng and an effective tax rate of 12.5%, and Jiaxing at an
effective tax rate of 15%. During the nine months ended June 30, 2008,
Sinogas benefited from a 100% tax exemption for the three months ended December
31, 2007. As PRC subsidiaries that qualify as wholly foreign
owned manufacturing enterprises, Sinogas, Yuhan and Jiaxing Lixun were
granted tax preferences. Sinogas and Yuhan were granted a 100% enterprise income
tax exemption for calendar years 2006 and 2007 and a 50% enterprise income tax
exemption for the following three years (2008 through 2010). Jiaxing Lixun
was granted a 100% tax exemption from August 2007 through
December 2008 and a 50% enterprise income tax exemption for the following
three calendar years (2009 through 2011). In January 2009, the Chinese tax
authorities issued a ruling that a joint venture enterprise incorporated after
March 16, 2007 cannot enjoy the tax preferences. Since Jiaxing Lixun is a joint
venture incorporated in July 2007, it cannot enjoy the tax preferences. Jiaxing
Lixun was recognized as a high-tech enterprise, and enjoyed the 15% tax rate
from January 2008.  Jiaxing Lixun incurred income tax of $132,189
during the nine months ended June 30, 2009.




Minority
Interest.  The minority interest represents the share of the
income of our subsidiaries allocated to that portion of the subsidiaries’ equity
owned by third parties.  It increased from $189,000 to $578,000 from
the nine months ended June 30, 2008 to the nine months ended June 30,
2009.





Net Income.  As a
result of the foregoing, we had a net loss of approximately negative $3.6
million, or $0.22 per share (basic and diluted) for the nine months ended June
30, 2009, as compared with net income of approximately $9.2 million, or $0.58
per share (basic) and $0.54 (diluted) for the nine months ended June 30,
2008.




Comprehensive
Income.  Comprehensive income was approximately $498,000 for
the nine months ended June 30, 2009 as compared with approximately $5.2 million
for the nine months ended June 30, 2008.  The comprehensive income in
both periods reflects foreign currency translation adjustments resulting from
changes in the currency rates between the RMB and the United States
dollar.




Liquidity
and Capital Resources




At June
30, 2009, we had a negative working capital of approximately $11.9 million,
as compared with positive working capital of approximately $35.0 million at
September 30, 2008.  The following table sets forth information as to
the principal changes in the components of our working capital (dollars in
thousands).




31






September
      30, 2008 to June 30, 2009Category
                        June
      30, 2009
                        
                        September
      30, 2008
                        
                        
                        
                        Change
                        
                        
                        
                        Percent
      ChangeASSETSCURRENT
      ASSETSCash
                        
                        
                        $
                        12,208
                        
                        
                        
                        $
                        8,871
                        
                        
                        
                        
                        3,337
                        
                        
                        
                        
                        37.6
                        %Restricted
      cash
                        
                        
                        
                        439
                        
                        
                        
                        
                        523
                        
                        
                        
                        
                        (84
                        )
                        
                        
                        
                        (16.1
                        %)Accounts
      and notes receivable, net
                        
                        
                        
                        29,144
                        
                        
                        
                        
                        22,008
                        
                        
                        
                        
                        7,136
                        
                        
                        
                        
                        32.4
                        %Other
      receivables, net
                        
                        
                        
                        10,422
                        
                        
                        
                        
                        16,983
                        
                        
                        
                        
                        (6,561
                        )
                        
                        
                        
                        (38.6
                        %)Deposits
      and prepayments
                        
                        
                        
                        8,122
                        
                        
                        
                        
                        7,918
                        
                        
                        
                        
                        204
                        
                        
                        
                        
                        2.6
                        %Inventories
                        
                        
                        
                        5,356
                        
                        
                        
                        
                        7,303
                        
                        
                        
                        
                        (1,947
                        )
                        
                        
                        
                        (26.7
                        %)Deferred
      expenses
                        
                        
                        
                        60
                        
                        
                        
                        
                        91
                        
                        
                        
                        
                        (31
                        )
                        
                        
                        
                        (34.1
                        %)CURRENT
      LIABILITIESShort-term
      bank loan
                        
                        
                        $
                        38,496
                        
                        
                        
                        $
                        11,953
                        
                        
                        
                        
                        26,543
                        
                        
                        
                        
                        222.1
                        %3%
      senior convertible notes
                        
                        
                        
                        9,478
                        
                        
                        
                        
                        -
                        
                        
                        
                        
                        9,478
                        
                        
                        
                        
                        *12%
      senior notes
                        
                        
                        
                        15,754
                        
                        
                        
                        
                        -
                        
                        
                        
                        
                        15,754
                        
                        
                        
                        
                        *Other
      notes payable
                        
                        
                        
                        1,464
                        
                        
                        
                        
                        1,633
                        
                        
                        
                        
                        (169
                        )
                        
                        
                        
                        (10.3
                        %)Accounts
      payable
                        
                        
                        
                        4,987
                        
                        
                        
                        
                        5,894
                        
                        
                        
                        
                        (907
                        )
                        
                        
                        
                        (15.4
                        %)Advances
      from customers
                        
                        
                        
                        2,123
                        
                        
                        
                        
                        2,409
                        
                        
                        
                        
                        (286
                        )
                        
                        
                        
                        (11.9
                        %)Additional
      interest on notes
                        
                        
                        
                        420
                        
                        
                        
                        
                        420
                        
                        
                        
                        
                        0
                        
                        
                        
                        
                        0.0
                        %Income
      taxes payable
                        
                        
                        
                        855
                        
                        
                        
                        
                        633
                        
                        
                        
                        
                        222
                        
                        
                        
                        
                        35.1
                        %Other
      payables
                        
                        
                        
                        3,573
                        
                        
                        
                        
                        5,341
                        
                        
                        
                        
                        (1,768
                        )
                        
                        
                        
                        (33.1
                        %)Accrued
      expenses
                        
                        
                        
                        417
                        
                        
                        
                        
                        335
                        
                        
                        
                        
                        82
                        
                        
                        
                        
                        24.5
                        %Deferred
      income
                        
                        
                        
                        50
                        
                        
                        
                        
                        95
                        
                        
                        
                        
                        (45
                        )
                        
                        
                        
                        (47.4
                        %)Total
      current assets
                        
                        
                        
                        65,751
                        
                        
                        
                        
                        63,697
                        
                        
                        
                        
                        2,054
                        
                        
                        
                        
                        3.2
                        %Less:           total
      current liabilities
                        
                        
                        $
                        77,617
                        
                        
                        
                        $
                        28,713
                        
                        
                        
                        
                        48,904
                        
                        
                        
                        
                        170.3
                        %Net
      working capital (deficiency)
                        
                        
                        
                        (11,866
                        )
                        
                        
                        
                        34,984
                        
                        
                        
                        
                        (46,850
                        )
                        
                        
                        
                        *




*           The
percentage change is not applicable.





The
principal reason for our $11.9 million working capital deficiency at June 30,
2009, is the reclassification of $25.2 million in senior debt from long-term to
short-term. See Notes 2 and 14 of Notes to Consolidated Financial Statements in
connection with the reclassification.





Our
largest current assets are our accounts and notes receivable and other
receivables.  The accounts receivable at June 30, 2009 were $26.2
million.  These accounts receivables are outstanding for an average of
229 days, as compared with 124 days at September 30, 2008. The increase in
accounts receivable reflects the nature of the competition as well as the
economy, with customers seeking and receiving a longer period to make
payments.   A significant portion of the accounts receivable that
were outstanding at September 30, 2008 remained outstanding at June 30, 2009.
Also, other receivables at September 30, 2008 included a rent receivable of $2.9
million. In March 2009, we wrote off $1.8 million of the rent receivable and
took a note for the balance. Payments on the note were to commence June 30,
2009,  As of August 10, 2009, no payment had been made on the
note.  We cannot assure you that we will be able to collect these
accounts or other receivables in a timely manner, and our inability to
collect our receivables could impair our liquidity and our ability to conduct
our business.





Other
receivables were $10.4 million at June 30, 2009 and $17.0 at September 30,
2008.  Other receivables at June 30, 2009, include (1) $9.0
million as a unsecured interest free receivables relating to payments which we
made in connection with a bid we made with a non-affiliated company for a
project to provide a bio-diesel fuel manufacturing facility and (2) $1.4 million
for unsecured interest free note receivables which we accepted in respect to
accounts receivables.





For the
nine months ended June 30, 2009, net cash provided in operating activities was
$687,000. The changes in working capital for the nine months ended June 30,
2009, were primarily related to a $7.2 million increase in accounts receivable
which resulted from the increase in our business and longer period during which
our accounts receivables (principally those generated by Sinogas) are
outstanding, a $2.2 million decrease in other payables, and offset by a $6.3
decrease of deposit and prepayment, and a $1.9 million decrease of
inventories.





For the
nine months ended June 30, 2009, we used approximately $19.0 million in
investing activities, primarily due to the expansion of our CNG station
operations and purchase of property, plant and equipment of $15.9 million,
purchase of land use right of $0.5 million, and $2.9 million to invest in the
unconsolidated entities.






32




Net cash
provided by financing activities was $22 million for the nine months ended June
30, 2009 related loans from domestic banks in China and repayment of a bank
loan.





For the
nine months ended June 30, 2008, we used $4.4 million in operating activities,
and we used approximately $30.7 million, principally for purchase of property,
plant and equipment ($15.2 million), land use right ($13.9 million), and the
purchase of minority interest in subsidiaries (1.6 million) offset by increase
in payable to investors in subsidiary, and we generated cash flow form the
investment activities approximately $1.2 million, including gain on sale of
investment (HK Power) $1.7 million.





For the
nine months ended June 30, 2008, our cash flow from financing activities
represented the net proceeds of the $30 million financing in September 2007,
which was received in October 2007, net of bank loan payments of $3.1
million.




We
believe that, as long as the holders of $16 million principal amount of
guaranteed senior notes and $14 million principal amount of guaranteed senior
convertible notes do not seek to accelerate payment of the notes, our working
capital, together with cash flow expected to be generated from our
operations, will provide us with the funds necessary to continue to develop our
business, which, because of efforts to develop the CNG station business, is very
cash intensive.  However, to the extent that we are unable to collect
the accounts and notes receivable or other receivables in a timely manner, we
may not have the cash to develop our business.  We will continue to
incur capital expenditures for the CNG station segment in the future. Because
the CNG business in the PRC is a relatively new industry, it is necessary for us
to plan, construct and equip each CNG station before we can generate any
revenue.





The
indentures relating to the issuance of $16 million principal amount of
guaranteed senior notes and $14 million principal amount of guaranteed senior
convertible notes have covenants which could impair our ability to raise
additional funds if we require the funds either to develop or expand our present
businesses, primarily the CNG station business, or to make acquisitions. 
These covenants, as amended through May 19, 2009, include the
following:




•
            We
      cannot incur any debt unless, after (i) giving effect to the borrowing,
      either (a) the fixed charge coverage ratio would be greater than 2.00 to
      1.00 through December 31, 2009 and 3.0 to 1.00 thereafter, and (b) the
      leverage ratio would not exceed 6.0 to 1.00 through December 31, 2009 and
      4.5 to 1.00 thereafter, or (ii) the debt is permitted debt. The fixed
      charge coverage ratio is the ratio of our earnings before interest, taxes,
      depreciation and amortization, which is generally known as EBITDA, to
      consolidated interest expense, as defined. Leverage ratio means the
      ratio of outstanding debt to EBITDA, with the interest component being the
      consolidated interest expense, as defined.  Permitted debt
      includes indebtedness of Sinogas of up to $10 million and certain purchase
      money indebtedness.




•
            We
      must maintain, as of the last day of each fiscal quarter, (i) a fixed
      charge coverage ratio of at least 2.00 to 1.00 through December 31,
      2009 and 3.0 to 1.00 thereafter, (ii) a leverage ratio of not more than
      6.0 to 1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, and
      (iii) a consolidated subsidiary debt to consolidated net tangible asset
      ratio of not more than 0.35.•
            We
      are subject to restriction in paying dividends, purchasing our own
      securities or those of our subsidiaries, prepaying subordinated debt, and
      making any investment other any investments in our own business and our
      subsidiaries engaged in our business and certain other permitted
      investments.•
            We
      are subject to restrictions on incurring
liens.





At June
30, 2009, the fixed charge coverage ratio was 0.75 to 1.00, the leverage ratio
was 22.00 to 1.00 and the consolidated subsidiary debt to consolidated net
tangible asset ratio was 0.4 to 1.00. As a result, we were not in
compliance with the required financial covenants at June 30, 2009.  On
August 10, 2009, the noteholders waived our obligations to meet those
requirements at June 30, 2009 and agreed not to take any action with respect to
an event of default for failure to meet these covenants at June 30, 2009 and for
the period then ended. However, because (i) the noteholders agreed to a
modification of the ratios in May 2009 and the Company did not meet the tests at
June 30, 2009, (ii) the waiver did not go beyond June 30, 2009, (iii) it is
reasonably likely that the Company will not meet the tests at September 30, 2009
and (iv) there is no assurance that the noteholders will grant a further waiver,
the notes are treated as current liabilities at June 30, 2009. See Notes 2 and
14 of Notes to Consolidated Financial Statements.


The
indenture relating to the 3% senior convertible notes provides for an adjustment
in the conversion rate if we do not generate net income for the year ended
December 31, 2008 of $14.0 million, based upon our audited financial statements
for that year. We changed our fiscal year from the calendar year to the year
ended September 30, effective with the year ended September 30, 2007. Since we
do not have audited financial statements for the year ended December 31, 2008,
which covers parts of two fiscal years, as of the date of this report, we
have not determined our net income, as defined in the indenture, for the twelve
months ended December 31, 2008.  The indenture also provides for an
adjustment in the conversion rate if our net income is less than $22.5 million
for the twelve months ended December 31, 2009.







33




The
registration rights agreement with the holders of the convertible notes required
us to have a registration statement covering the shares of common stock issuable
upon conversion of the notes effective by March 28, 2008. We failed to meet that
date. As a consequence, beginning March 28, 2008, for each 90 day period that we
fail to have the registration statement declared effective, we must pay
additional interest of $140,000, which is 1% of the principal amount of the
notes. Through July 31, 2009, we had accrued additional interest of $700,000, of
which $280,000 has been paid and $420,000 remained outstanding. If we fail to
have the registration statement declared effective by September 19, 2009, an
additional payment of $140,000 will become due.





We
believe, as long as the noteholders do not take any action to accelerate payment
of the notes, that we will have the financial ability to make all payments on
the convertible notes and the senior notes based on the original terms set forth
in the indentures, including payments of principal, interest, and additional
interest, and we intend to make those payments. However, more than $40 million
of our current assets are represented by receivables, many of which have been
outstanding for a significant period of time. If we are not able to collect our
accounts and notes receivable and other receivables in a timely manner, we may
have difficulty in making the required payments as well as funding our
operations. If we are unable to make the payments as and when required under the
indentures, the noteholders may exercise the remedies available under the
indentures, including the right to accelerate payment of the notes in the total
principal amount of $30.0 million. If the noteholders accelerate payment, we may
be unable to continue in business unless we obtain replacement financing, which
may not be available to us.




Commitments




We and
Hong Kong China New Energy Development Investment Co. Ltd (“New Energy”), formed
Hubei Gather Energy Gas Co., Ltd (“Hubei Gather”) to construct and operate
natural gas process plants with expected annual processing capacity of 100-300
million cubic meters in Hubei Province. The registered capital is $5
million of which we will contribute $4 million as an 80% equity owner and
New Energy will contribute $1 million for a 20% interest. The term of the
business of Hubei Gather is from March 23, 2007 to March 22, 2027. As of June
30, 2009, we have invested $1,375,000 and our remaining commitment for future
funding is $2,625,000.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES




Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.





Use of
Estimates.In preparing financial statements in conformity
with accounting principles generally accepted in the United States of America,
we are required to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the reported periods. Significant estimates include
depreciation and the allowance for doubtful accounts and other receivables,
asset impairment, valuation of warrants and options and inventory valuation, and
the determination of revenue and costs for under the percentage of completion
method of revenue recognition.  We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from those
estimates.





Revenue
Recognition.  We recognize revenue when the significant risks
and rewards of ownership have been transferred to the customer, including
factors such as when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collectability is
reasonably assured.  We recognize product sales upon delivery. CNG
station construction and revenue related to building technical consulting
service is recognized on the percentage of completion basis. The percentage of
completion method recognizes income as work on a contract (or group of closely
related contracts) progresses.  The recognition of revenues and
profit is generally related to costs incurred in providing the services required
under the contract. Revenue is presented net of any sales tax and
VAT.





Stock-Based
Compensation. We grant stock options and stock grants to employees and
stock options or warrants to non-employees in non-capital raising transactions
for services and for financing costs.  We have adopted Statement of
Financial Accounting Standards (“SFAS”) No. 123R, “Accounting for Stock-Based
Compensation,” which establishes a fair value method of accounting for
share-based compensation. In accordance with SFAS No. 123R, the fair value of
stock options and warrants issued to employees and non-employees is measured at
the grant date. The fair value is determined using the Black-Scholes option
pricing model. The resulting amount is charged to expense on the straight-line
basis over the period in which the Company expects to receive benefit, which is
generally the vesting period. In some cases, our principal stockholder, which is
owned by our chief executive officer and our chairman, both of whom are
directors, provided or agreed to provide stock to executive officers in
connection with their employment.  These shares are treated as if the
shares were contributed to us and issued by us.  The value of the
shares is determined in accordance with SFAS No. 123R.





Capitalization of
Interest.  We capitalize interest incurred in connection with
the construction of assets, principally our CNG stations, during the
construction period.  Capitalized interest is recorded as an increase
to construction in progress and, upon completion of the construction, to
property.






34




NEW
ACCOUNTING PRONOUNCEMENTS





In
December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations” (“SFAS No. 141(R)”).
SFAS No. 141(R) requires an entity to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date.  Subsequent
changes to the estimated fair value of contingent consideration will be
reflected in earnings until the contingency is settled. 
SFAS No. 141(R) also requires acquisition-related costs and
restructuring costs to be expensed as incurred rather than treated as part of
the purchase price. The Company will be required to adopt SFAS No. 140 on
October 1, 2009, which will apply to business combinations completed on or after
that date.  Earlier adoption is not permitted.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” to improve the relevance, comparability, and
transparency of financial information provided to investors by requiring all
entities to report noncontrolling (minority) interests in subsidiaries in the
same way as required in the consolidated financial statements. Moreover, SFAS
No. 160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. The Company will be required to adopt SFAS
No. 160 on October 1, 2009.  Earlier adoption is not permitted.
The Company is currently evaluating the impact that SFAS 160 may have
on  its consolidated financial position, results of operations, and
cash flows upon adoption.





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - an Amendment of FASB Statement
133.” SFAS No. 161 provides new disclosure requirements for an entity’s
derivative and hedging activities. SFAS No. 161 was adopted by the Company
on January 1, 2009.  The adoption of SFAS No. 161 did not have an impact on
the Company’s financial position, results of operations, or cash
flows.





In
April 2008, the FASB issued Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). This
position amends the factors an entity should consider when developing renewal or
extension assumptions used in determining the useful life over which to amortize
the cost of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.” FSP FAS 142-3 requires an entity to consider its own
historical experience in renewing or extending similar arrangements in
determining the amortizable useful life. Additionally, this position requires
expanded disclosure regarding renewable intangible assets.  The
Company will be required to adopt FSP FAS 142-3 on October 1,
2009.  Earlier adoption is not permitted.  The guidance for
determining the useful life of a recognized intangible asset must be applied
prospectively to intangible assets acquired after the effective
date.





At its
June 25, 2008 meeting, the Financial Accounting Standards Board ratified the
consensus reached by the Emerging Issues Task Force Issue 07-5 Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock  (EITF
07-5).  The adoption of EITF 07-5’s requirements will affect accounting for
convertible instruments and warrants with down-round provisions. 
Down-round provisions are designed to protect an investor in the event the
issuer issues securities at a lower price or with a lower exercise or conversion
price.  Convertible instruments and warrants which are derivatives and
have such provisions will no longer be recorded in equity.  EITF 07-5 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years.  Earlier
application by an entity that has previously adopted an alternative accounting
policy is not permitted.  The Company will be required to adopt EITF
07-5 commencing with the quarter ending December 31, 2009, which is the first
quarter of the fiscal year ending September 30, 2010.  To the extent
that our convertible notes and certain of its warrants are outstanding on
December 31, 2009, we will reflect as a derivative liability the fair value of
the derivate component of these securities and will reflect a gain or loss for
the derivative liability based on the change in value of the derivative
liability during each fiscal quarter during which the instruments are
outstanding.





In April
2009, the FASB issued FSP FAS 107-1, “Interim Disclosures about Fair Value of
Financial Instruments,” and APB 28-1, “Interim Financial Reporting,” which
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements.  The adoption of FSP FAS 107-1 and APB 28-1 did not have
any impact on the Company’s consolidated financial statement presentation or
disclosures.




In May
2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165).
SFAS 165 establishes general standards for accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are available to be issued (subsequent events). More specifically, SFAS 165
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition in the financial statements, identifies the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements and the disclosures that
should be made about events or transactions that occur after the balance sheet
date. SFAS 165 provides largely the same guidance on subsequent events
which previously existed only in auditing literature. The statement was adopted
by the Company in its second quarter and did not have an impact on its
Consolidated Financial Statements.




In June
2009, the FASB issued SFAS 166, "Accounting for Transfers of Financial Assets"
an amendment of SFAS 140.  SFAS 166 is intended to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial statements regarding transfers
of financial assets, including the effects of a transfer on its financial
position, financial performance, and cash flows, and the transferor's continuing
involvement, if any, in the transferred financial assets. This statement must be
applied as of the beginning of the Company’s first annual reporting period that
begins after November 15, 2009. The Company does not expect the adoption of SFAS
166 to have a material impact on its results of operations, financial condition
or cash flows.







35




In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162 (SFAS 168). SFAS 168
establishes the FASB Standards Accounting Codification (Codification) as the
source of authoritative U.S. generally accepted accounting principles
(GAAP) recognized by the FASB to be applied to nongovernmental entities and
rules and interpretive releases of the SEC as authoritative GAAP for SEC
registrants. The Codification will supersede all the existing non-SEC accounting
and reporting standards upon its effective date and subsequently, the FASB will
not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. SFAS 168 also replaces FASB Statement
No. 162, The Hierarchy of Generally Accepted Accounting Principles, given
that once in effect, the Codification will carry the same level of authority.
SFAS 168 will be effective for financial statements issued for reporting periods
that end after September 15, 2009.





Item
4. Controls and Procedures




It is the
responsibility of management to establish and maintain adequate internal
controls over our financial reporting.  Management, including our
chief executive officer and chief financial officer, does not expect that our
disclosure controls and procedures or our internal control over financial
reporting will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected.





Conclusion
Regarding Effectiveness of Disclosure Controls and Procedures





Under the
supervision and with the participation of management, our chief executive
officer and chief financial officer have carried out an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended.  Based upon that evaluation, our chief
executive officer and chief financial officer concluded that there were material
weaknesses in our internal controls over financial reporting as of the end of
the period covered by this report as a result of which our disclosure controls
and procedures may not be effective.  In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations (“COSO”) of the Treadway Commission in Internal Control —
Integrated Framework. Our management concluded that, as of December 31, 2008,
our internal control over financial reporting was not effective based on these
criteria.  Our chief executive officer and chief financial officer
identified weaknesses related to our accounting personnel’s ability to identify
various accounting and disclosure issues, account for transactions that include
an equity-based component, and prepare financial statements and footnotes in
accordance with U.S. GAAP.  Until June 2006, we were a privately-owned
company engaged with all of our assets and operations located in China, and our
financial statements were prepared in accordance with PRC GAAP.  Since
we became a publicly-traded company, we have significantly expanded the
scope of our business, so that we presently have four business
segments.  We have also engaged in two financings, entered into joint
ventures, acquired and disposed of companies and assets, and granted
equity-based incentives.  All of these events presented complex
accounting issues which were new to our financial staff.  Furthermore,
we do not have a large accounting department and it has been difficult for us to
hire qualified personnel who understand English and Chinese and are
familiar with both U.S. GAAP and PRC GAAP.  We are addressing
these issues by reviewing and revising our internal accounting policies and
procedures, expanding the resources allocated to our accounting department, and
hiring outside accounting advisors.  We expect resolution of these
matters may take several months, and we cannot assure you that we will have the
resources to enable us to adequately address these issues in the near future.
Accordingly, based on the foregoing, the certifying officers have concluded that
our disclosure controls and procedures are not effective at this
time.




The
conclusion of chief executive officer and chief financial officer regarding our
disclosure controls and procedures is based solely on management’s conclusion
that our internal control over financial reporting was not
effective.




Our
material weaknesses related to:




•
            an
      insufficient complement of personnel in our corporate accounting and
      financial reporting function with an appropriate level of technical
      accounting knowledge, experience, and training in the application of US
      GAAP commensurate with our complex financial accounting and reporting
      requirements and materiality
thresholds.





•
            Lack
      of internal audit function – the monitoring function of internal
      control is not well performed due to insufficient capable resources. In
      addition, the scope and effectiveness of internal audit function are yet
      to be developed.•
            Insufficient
      or lack of written policies and procedures relating to periodic review of
      current policies and procedures and their
  implementation.




Our
deficiency related to the lack of adequate training of employees, especially
those recently hired, on our accounting policies and our antifraud
programs.






36




Remediation
and Changes in Internal Control over Financial Reporting




The
Company has discussed the material weaknesses and deficiency in its internal
control over financial reporting with the audit committee of the board of
directors and is in the process of developing and implementing remediation plans
to address the material weaknesses and deficiency in our internal control over
financial reporting. During the fiscal year ended September 30, 2008 and the
nine months ended June 30, 2009, management conducted a program to plan the
remediation of all identified deficiencies using a risk-based approach based on
the “Internal Control — Integrated Framework” issued by COSO. These plans
contemplate various changes in processes, procedures, policy, training and
organizational design, and are currently being implemented. In addition, the
Company intends to hire and/or appoint new managers in the accounting area
and/or engage accounting professionals from external resources to address
internal control weaknesses related to technical accounting.




The
following specific remedial actions are currently in process, to address the
material weaknesses and deficiency in our internal control over financial
reporting described above:




•
            Reorganize
      and restructure our corporate accounting staff by:•
            revising
      the reporting structure and establishing clear roles, responsibilities,
      and accountability;•
            hiring
      additional technical accounting personnel to address our complex
      accounting and financial reporting requirements;•
            assessing
      the technical accounting capabilities at our subsidiaries to ensure the
      right complement of knowledge, skills, and training;
and•
            establishing
      internal audit functions,•
            Improve
      period-end closing procedures by:•
            ensuring
      that account reconciliations and analyses for significant financial
      statement accounts are reviewed for completeness and accuracy by qualified
      accounting personnel;•
            implementing
      a process that ensures the timely review and approval of complex
      accounting estimates by qualified accounting personnel and subject matter
      experts, where appropriate;•
            developing
      better monitoring controls for corporate accounting and at our
      subsidiaries;•
            documenting
      and implementing antifraud programs and controls as well as comprehensive
      risk assessment of procedures, programs and controls;
  and•
            making
      efforts to develop written policies and procedures, but the progress has
      been slowed due to limited resources and personnel
  changes.




During
2008, we hired an internal audit manager and, we will increase our efforts to
hire qualified personnel.  We anticipate that we will be able to
complete the remediation before September 30, 2009.




PART
II. OTHER INFORMATION





Item 6. Exhibits




31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act32.1
            Certification
      of Chief Executive and Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act









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SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





SINOENERGY
      CORPORATION.(Registrant)Dated:
      August 14, 2009
            s/
      Bo HuangBo
      Huang, Chief Executive Officers/
      ShiaoMing ShengDated:
      August 14, 2009
            Chief
      Financial Officer













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