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


December
31, 2008





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 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
February 13, 2009, the Registrant had 15,942,336 shares of common stock,
par value $0.001 per share, issued and outstanding.





Transitional
Small Business Disclosure Format: Yes o  No x













SINOENERGY
CORPORATION AND SUBSIDIARIES





PagePart
      I. Financial InformationItem
      1. Consolidated Financial Statements
                
                
                2Consolidated
      Balance Sheets as of December 31, 2008 (Unaudited) and September 30,
      2008
                
                
                2Consolidated
      Statements of Operations and Comprehensive Income for the Three Months
      Ended December 31, 2008 and 2007 (Unaudited)
                
                
                3Consolidated
      Statement of Stockholders’ Equity for the Three Months Ended December 31,
      2008 (Unaudited)
                
                
                4Consolidated
      Statements of Cash Flows for the Three Months Ended December 31, 2008 and
      2007 (Unaudited)
                
                
                5Notes
      to Consolidated Financial Statements for the Three Months Ended December
      31, 2008 and 2007 (Unaudited)
                
                
                6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                
                
                24Item
      4. Controls and Procedures
                
                
                33Part
      II. Other Information
                
                
                35Item
      6. Exhibits
                
                
                35Signatures











-1-





Sinoenergy
Corporation and Subsidiaries


Consolidated
Balance Sheets


(In
thousands of United States dollars)




December
      31, 2008
                    (unaudited)
                  
                  
                  September
      30, 2008ASSETSCURRENT
      ASSETSCash
                  
                  $
                  4,049
                  
                  
                  $
                  8,871Restricted
      cash
                  
                  
                  878
                  
                  
                  
                  523Accounts
      and notes receivable, net
                  
                  
                  27,308
                  
                  
                  
                  22,008Other
      receivable, net
                  
                  
                  16,108
                  
                  
                  
                  16,983Deposits
      and prepayments
                  
                  
                  8,449
                  
                  
                  
                  7,918Due
      from related party
                  
                  
                  29
                  
                  
                  
                  -Inventories
                  
                  
                  4,058
                  
                  
                  
                  7,303Deferred
      expenses
                  
                  
                  101
                  
                  
                  
                  91TOTAL
      CURRENT ASSETS
                  
                  
                  60,980
                  
                  
                  
                  63,697Long-term
      investments
                  
                  
                  3,012
                  
                  
                  
                  1,568Property,
      plant and equipment, net
                  
                  
                  35,285
                  
                  
                  
                  30,298Intangible
      assets
                  
                  
                  27,607
                  
                  
                  
                  27,591Due
      from related party
                  
                  
                  383
                  
                  
                  
                  383Other
      long term asset
                  
                  
                  6,673
                  
                  
                  
                  6,891Goodwill
                  
                  
                  1,906
                  
                  
                  
                  1,906Deferred
      tax asset
                  
                  
                  15
                  
                  
                  
                  13TOTAL
      NON-CURRENT ASSETS
                  
                  
                  74,881
                  
                  
                  
                  68,650TOTAL
      ASSETS
                  
                  $
                  135,861
                  
                  
                  $
                  132,347CURRENT
      LIABILITIESShort-term
      bank loan
                  
                  $
                  12,627
                  
                  
                  $
                  11,953Other
      notes payable
                  
                  
                  2,926
                  
                  
                  
                  1,633Accounts
      payable
                  
                  
                  4,238
                  
                  
                  
                  5,894Advances
      from customers
                  
                  
                  2,095
                  
                  
                  
                  2,409Additional
      interest payable under convertible note indenture
                  
                  
                  420
                  
                  
                  
                  420Income
      taxes payable
                  
                  
                  1,116
                  
                  
                  
                  633Other
      payables
                  
                  
                  4,699
                  
                  
                  
                  5,341Accrued
      expenses
                  
                  
                  356
                  
                  
                  
                  335Deferred
      income
                  
                  
                  79
                  
                  
                  
                  95TOTAL
      CURRENT LIABILITIES
                  
                  
                  28,556
                  
                  
                  
                  28,7133%
      senior convertible notes
                  
                  
                  13,059
                  
                  
                  
                  12,59312%
      senior notes
                  
                  
                  16,170
                  
                  
                  
                  16,658Long-term
      loans
                  
                  
                  4,389
                  
                  
                  
                  3,667Deferred
      tax liabilities
                  
                  
                  1,095
                  
                  
                  
                  1,095TOTAL
      LIABILITIES
                  
                  
                  63,269
                  
                  
                  
                  62,726Minority
      interests
                  
                  
                  15,745
                  
                  
                  
                  14,394CommitmentsSHAREHOLDERS’
      EQUITYCommon
      stock- par value $0.001 per share; Authorized - 50,000,000 shares; Issued
      and outstanding- 15,942,336 shares at December 31, 2008 and September 30,
      2008
                  
                  
                  16
                  
                  
                  
                  16Additional
      paid-in capital
                  
                  
                  30,479
                  
                  
                  
                  30,396Retained
      earnings
                  
                  
                  21,651
                  
                  
                  
                  19,953Accumulated
      other comprehensive income
                  
                  
                  4,701
                  
                  
                  
                  4,862TOTAL
      SHAREHOLDERS’ EQUITY
                  
                  
                  56,847
                  
                  
                  
                  55,227TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                  
                  $
                  135,861
                  
                  
                  $
                  132,347





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 of United States dollars except per share information)






Three Months Ended December
      31,2008
                  
                  
                  2007NET
      SALES
                  
                  $
                  15,928
                  
                  
                  $
                  8,807COST
      OF SALES
                  
                  
                  (11,126
                  )
                  
                  
                  (4,896
                  )GROSS
      PROFIT
                  
                  
                  4,802
                  
                  
                  
                  3,911OPERATING
      EXPENSESSelling
      expenses
                  
                  
                  514
                  
                  
                  
                  156General
      and administrative expenses
                  
                  
                  1,357
                  
                  
                  
                  1,008TOTAL
      OPERATING EXPENSES
                  
                  
                  1,871
                  
                  
                  
                  1,164INCOME
      FROM OPERATIONS
                  
                  
                  2,931
                  
                  
                  
                  2,747OTHER
      INCOME (EXPENSES)Rental
      income, net of land use right amortization of $61
                  
                  
                  1,329
                  
                  
                  
                  -Loss
      from unconsolidated entity
                  
                  
                  (16
                  )
                  
                  
                  (20
                  )Interest
      income
                  
                  
                  10
                  
                  
                  
                  11Interest
      expense
                  
                  
                  (1,218
                  )
                  
                  
                  (571
                  )Other
      income, net
                  
                  
                  185
                  
                  
                  
                  144OTHER
      INCOME (EXPENSES), NET
                  
                  
                  290
                  
                  
                  
                  (436
                  )INCOME
      BEFORE INCOME TAXES AND MINORITY INTEREST
                  
                  
                  3,221
                  
                  
                  
                  2,311Income
      taxes recovery (expenses)
                  
                  
                  (568
                  )
                  
                  
                  120INCOME
      BEFORE MINORITY INTEREST
                  
                  
                  2,653
                  
                  
                  
                  2,431Minority
      interest
                  
                  
                  (955
                  )
                  
                  
                  (112
                  )NET
      INCOME
                  
                  
                  1,698
                  
                  
                  
                  2,319Other
      comprehensive income:Foreign
      currency translation adjustments
                  
                  
                  (161)
                  
                  
                  
                  968COMPREHENSIVE
      INCOME
                  
                  $
                  1,537
                  
                  
                  $
                  3,287Net
      Income Per Common ShareBasic
                  
                  $
                  0.11
                  
                  
                  $
                  0.15Diluted
                  
                  $
                  0.11
                  
                  
                  $
                  0.13Weighted
      Average Common Shares OutstandingBasic
                  
                  
                  15,942
                  
                  
                  
                  15,709Diluted
                  
                  
                  16,060
                  
                  
                  
                  18,911





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








-3-





Sinoenergy
Corporation and Subsidiaries


Consolidated
Statement of Shareholders’ Equity (Unaudited)


(In
thousands of United States dollars)






Number
      of Common Shares Issued
                
                
                Par
      Value Common Stock
                
                
                Additional
      Paid in Capital
                
                
                Retained
      Earnings
                
                
                Accumulated
      Other Comprehensive Income
                
                
                Total
                  Shareholder’s
      Equity -Balance,
      September 30, 2008
                
                
                15,942
                
                
                $
                16
                
                
                $
                30,396
                
                
                $
                19,953
                
                
                $
                4,862
                
                
                $
                55,227Share-based
      compensation
                
                
                
                
                
                
                
                
                
                
                83
                
                
                
                
                
                
                
                
                
                
                
                83Net
      income for the period
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,698
                
                
                
                
                
                
                
                1,698Currency
      translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (161
                )
                
                
                (161
                )Balance,
      December 31, 2008
                
                
                15,942
                
                
                $
                16
                
                
                $
                30,479
                
                
                $
                21,651
                
                
                $
                4,701
                
                
                $
                56,847












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)


Three Months Ended December
      31,CASH
      FLOWS FROM OPERATING ACTIVITIES:
                  
                  2008
                  
                  
                  2007Net
      income
                  
                  $
                  1,698
                  
                  
                  $
                  2,319Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Share-based
      compensation
                  
                  
                  83
                  
                  
                  
                  118Amortization
      of note discount
                  
                  
                  214
                  
                  
                  
                  28Deferred
      portion of interest expense
                  
                  
                  963
                  
                  
                  
                  585Minority
      interest
                  
                  
                  955
                  
                  
                  
                  112Depreciation
                  
                  
                  93
                  
                  
                  
                  140Amortization
      of intangible assets
                  
                  
                  104
                  
                  
                  
                  244Provision
      for (recovery of) doubtful accounts
                  
                  
                  (10
                  )
                  
                  
                  90Changes
      in operating assets and liabilities:Accounts
      and notes receivable
                  
                  
                  (5,291
                  )
                  
                  
                  (2,595
                  )Other
      receivables, deposits and prepayments
                  
                  
                  306
                  
                  
                  
                  (7,325
                  )Inventories
                  
                  
                  3,245
                  
                  
                  
                  238Deferred
      tax asset
                  
                  
                  (2
                  )
                  
                  
                  -Accounts
      payable
                  
                  
                  (363
                  )
                  
                  
                  (656
                  )Accrued
      expenses
                  
                  
                  (1,178
                  )
                  
                  
                  (158
                  )Advances
      from customers
                  
                  
                  (314
                  )
                  
                  
                  (11
                  )Other
      payables
                  
                  
                  (642
                  )
                  
                  
                  3,020Deferred
      income
                  
                  
                  (16
                  )
                  
                  
                  -Income
      taxes payable
                  
                  
                  483
                  
                  
                  
                  (119
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  328
                  
                  
                  
                  (3,970
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property, plant and equipment
                  
                  
                  (4,862
                  )
                  
                  
                  (9,646
                  )Purchase
      of land use right
                  
                  
                  (120
                  )
                  
                  
                  (6,423
                  )Investment
      in un-consolidated entities
                  
                  
                  (1,444
                  )
                  
                  
                  (1,023
                  )Changes
      in restricted cash
                  
                  
                  (355
                  )
                  
                  
                  404Other
      payment for investment activities
                  
                  
                  -
                  
                  
                  
                  (2,542
                  )Net
      cash used in investing activities
                  
                  
                  (6,781
                  )
                  
                  
                  (19,230
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      proceeds received from note subscription receivable
                  
                  
                  -
                  
                  
                  
                  29,840Proceeds
      from bank loan
                  
                  
                  1,396
                  
                  
                  
                  -Payment
      of bank borrowings
                  
                  
                  -
                  
                  
                  
                  (468
                  )Net
      cash provided by financing activities
                  
                  
                  1,396
                  
                  
                  
                  29,372Effect
      on cash of changes in exchange rate
                  
                  
                  235
                  
                  
                  
                  968Net
      increase (decrease) in cash
                  
                  
                  (4,822
                  )
                  
                  
                  7,140Cash
      at beginning of period
                  
                  
                  8,871
                  
                  
                  
                  3,322Cash
      at end of period
                  
                  $
                  4,049
                  
                  
                  $
                  10,462Supplemental
      disclosure of cash flow information:Interest
      paid
                  
                  $
                  1,382
                  
                  
                  $
                  255Income
      taxes paid
                  
                  $
                  80
                  
                  
                  $
                  -


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







-5-








Sinoenergy
Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited)


December
31, 2008





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.




On June
2, 2006, the Company acquired Sinoenergy Holding Limited (“Sinoenergy Holding”),
a British Virgin Islands corporation.  Sinoenergy Holding was the sole
stockholder of Qingdao Sinogas General Machinery Limited Corporation
(“Sinogas”), a wholly foreign-owned enterprise (“WFOE”) registered under laws of
the People’s Republic of China (the “PRC”). Sinoenergy Holding had no business
other than its ownership of Sinogas. As a result of this transaction, Sinoenergy
Holding and its subsidiary, Sinogas, became subsidiaries of the Company and the
business of Sinogas became the business of the Company.





Under
accounting principles generally accepted in the United States, both acquisitions
described above are considered to be capital transactions in substance, rather
than business combinations. With respect to such acquisitions, they are
equivalent to the issuance of stock by Sinogas for the net monetary assets of
Sinoenergy Holding, and the issuance of stock by Sinoenergy Holding for the net
monetary assets of Sinoenergy. Each transaction was, in essence, a
recapitalization, and was accounted for as a change in capital structure. The
accounting for the acquisitions is identical to that resulting from a reverse
acquisition, and no goodwill is recorded. Under reverse takeover accounting, the
comparative historical financial statements in the Sinoenergy/Sinoenergy Holding
acquisition of the “legal acquirer,” Sinoenergy, are those of the “accounting
acquirer,” which is Sinogas.





(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
kits
  -6-
   Jiaxing
      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
  equipment


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


**           This
subsidiary is owned 75% by Sinogas and 25% by Sinoenergy.





As of
February 14, 2009, Hubei Gather, Jingrun, and Qingdao Sinoenergy remain in the
start-up stage and have no operations.





2.
Summary of Significant Accounting Policies





Management’sResponsibility





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. These financial statements have been prepared assuming that the Company
will continue as a going concern. Results for the first quarter of 2009 are not
necessarily indicative of results to be expected for the year.





Basis of
Presentation





The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.





Principles of
Consolidation




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





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 and
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.  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.





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, Jiaxing Lixun, Xuancheng Sinoenergy and
Jingrun, and relates to the pressure container, vehicle conversion kits, and CNG
station operation reporting segments.






-7-





Cash and Cash
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
December 31, 2008 and 2007, the Company did not have any cash
equivalents.





Allowance for Doubtful
Accounts





An
allowance for doubtful accounts is maintained for customers (other than related
parties) 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% but less than 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





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 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 right for the land on which the Sinogas,
Xuancheng, Jingrun, and Qingdao Sinoenergy facilities are located is recorded as
an intangible asset.





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.
In the event that the carrying amount of assets exceeds the undiscounted future
cash flows (fair value), then the carrying amount of such assets is adjusted to
their fair value.






-8-





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 $102,373 and $287,000 of
interest during the three months ended December 31, 2008 and 2007.





Revenue
Recognition





The
Company recognizes revenue when the 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.  The
Company recognizes product sales at the time the product is shipped. 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).





Three months ended December
    31,2008
                    
                    
                    2007Product
      warranty liability, beginning of period
                    
                    $
                    167
                    
                    
                    $
                    76Reductions
      for payments made (in cash or kind) during period
                    
                    
                    -
                    
                    
                    
                    -Changes
      in liability for warranties issued during the period
                    
                    
                    26
                    
                    
                    
                    19Foreign
      exchange gain/loss
                    
                    
                    (30
                    )
                    
                    
                    (2
                    )Product
      warranties, end of period
                    
                    $
                    163
                    
                    
                    $
                    93





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 recovered 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.








-9-





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 Measurementsand 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.


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 December 31, 2008, the
Company did not have any significant financial instruments that require fair
value measurement pursuant to SFAS 157 or 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.





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, 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 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 industry practice in China.






-10-





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




Earnings perShare





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 display 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 loss $161,000 for the 3 months ended December 31, 2008 and foreign
currency translation gain of  $968,000 for the three months ended
December 31, 2007.  Cumulative other comprehensive income is recorded
as a separate component of shareholders’ equity.





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 is currently evaluating whether the adoption of
SFAS No. 141(R) will have a significant effect on its consolidated
financial position, results of operations or cash flows.





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. SFAS No. 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company is currently
evaluating whether the adoption of SFAS No. 160 will have a significant
effect on its consolidated financial position, results of operations or cash
flows.





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 is effective for periods
beginning after November 15, 2008. The Company has not yet determined the
impact on its consolidated financial statements of adopting
SFAS No. 161.








-11-





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. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. The guidance
for determining the useful life of a recognized intangible asset must be applied
prospectively to intangible assets acquired after the effective date. Early
adoption is prohibited. The Company expects to adopt FSP FAS 142-3 as of
October 1, 2009.





3.
Restricted Cash





The
balances of restricted cash as at December 31, 2008 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





Details
of allowance for doubtful receivables deducted from accounts receivable are as
follows (dollars in thousands):





December
      31, 2008
                  
                  
                  September
      30, 2008Accounts
      receivable
                  
                  $
                  27,264
                  
                  
                  $
                  22,100Notes
      receivable-bank acceptance
                  
                  
                  241
                  
                  
                  
                  114Less:
      allowance for doubtful receivables
                  
                  
                  (197
                  )
                  
                  
                  (206
                  )Balance
                  
                  $
                  27,308
                  
                  
                  $
                  22,008





5.
Other receivable





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





December
      31, 2008
                  
                  
                  September
      30, 2008Unsecured
      interest free receivables relating to projects
                  
                  $
                  8,963
                  
                  
                  
                  10,236Rental
      receivable
                  
                  
                  4,389
                  
                  
                  
                  2,933Miscellaneous
      receivables
                  
                  
                  2,767
                  
                  
                  
                  3,826Less:
      allowance for doubtful receivables
                  
                  
                  (11
                  )
                  
                  
                  (12
                  )Balance
                  
                  $
                  16,108
                  
                  
                  
                  16,983





6.
Inventories




Inventories
at December 31, 2008 and September 30, 2008 are as follows (dollars in
thousands):




December
      31, 2008
                  
                  
                  September 30,2008Raw
      materials
                  
                  $
                  2,710
                  
                  
                  $
                  4,145Work
      in progress
                  
                  
                  871
                  
                  
                  
                  2,428Finished
      goods
                  
                  
                  468
                  
                  
                  
                  721Low
      value consumables
                  
                  
                  9
                  
                  
                  
                  9Total
                  
                  $
                  4,058
                  
                  
                  $
                  7,303




7.
Long-term investments





At
December 31, 2008 and September 30, 2008, the details of long-term investments
are as follows (dollars in thousands):








-12-





December
      31, 2008
                  
                  
                  September 30,2008Anhui
      GatherInitial
      Investment
                  
                  $
                  1,653
                  
                  
                  $
                  1,653Equity
      in (loss)
                  
                  
                  (104
                  )
                  
                  
                  (85
                  )Sinogas
      General Luxi Natural Gas Facilities Co., Ltd. (Sinogas
      Luxi)Initial
      Investment
                  
                  
                  1,463
                  
                  
                  
                  -Total
                  
                  $
                  3,012
                  
                  
                  $
                  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 was
paid as of December 31, 2008.





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, we own 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 $7.32 million based on the exchange rate on December 31, 2008), of which
Sinogas has a 40% interest and will contribute 40% to this enterprise. In
December 2008, Sinoags contributed RMB10 million (equivalent to $1.47 million
based on the exchange rate on December 31, 2008.) Sinogas Luxi has not commenced
business activities. The remainder is due on February 25,
2009.





8.
Property, Plant and Equipment




As of
December 31, 2008 and September 30, 2008, property, plant and equipment consist
of the following (dollars in thousands):




December
      31, 2008
                  
                  
                  September
      30, 2008Buildings
      and facility
                  
                  $
                  6,684
                  
                  
                  $
                  6,254Machinery
      equipment
                  
                  
                  9,733
                  
                  
                  
                  7,538Motor
      vehicles
                  
                  
                  2,002
                  
                  
                  
                  838Office
      equipment and other
                  
                  
                  326
                  
                  
                  
                  395Total
                  
                  
                  18,745
                  
                  
                  
                  15,025Accumulated
      depreciation
                  
                  
                  (1,720
                  )
                  
                  
                  (1,666
                  )17,025
                  
                  
                  
                  13,359Construction
      in process
                  
                  
                  18,260
                  
                  
                  
                  16,939Net
      Book Value
                  
                  $
                  35,285
                  
                  
                  $
                  30,298






-13-





9.
Intangible Assets





As of
December 31, 2008 and September 30, 2008, intangible assets consist of the
following (dollars in thousands):





December
      31, 2008
                  
                  
                  September 30, 2008Patent
      and technology know-how
                  
                  $
                  456
                  
                  
                  $
                  424Land
      use rights
                  
                  
                  28,141
                  
                  
                  
                  28,054Total
                  
                  
                  28,597
                  
                  
                  
                  28,478Accumulated
      amortization
                  
                  
                  (990
                  )
                  
                  
                  (887
                  )Net
      Book value
                  
                  $
                  27,607
                  
                  
                  $
                  27,591




Patents
and technology know-how is being amortized over 10 years through September 2014.
Included in the cost of patent and technology know-how is $91,000, which
represents the technical know-how purchased, while $226,000 represents the
technical know-how contributed from Kangtai (minority shareholder) when Yuhan
was incorporated. An additional $42,000 represents the patent and know-how of
Jiaxing Lixun.





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:





Owner
                  
                  Cost
                  
                  ExpirationSinogas
                  
                  $
                  20,722
                  
                  May
      2057Jingrun
                  
                  
                  4,116
                  
                  December
      2056Xuancheng
      Sinoenergy
                  
                  
                  872
                  
                  June
      2058Qingdao
      Sinoenergy
                  
                  
                  1,909
                  
                  December
      2058Jiaxing
      Lixun
                  
                  
                  522
                  
                  June
      2058Total
                  
                  $
                  28,141





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
RMB160 million, equivalent to US$23.41 million based on the December 31, 2008
exchange rate. The land 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”), 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 December 31, 2008 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
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 December 31, 2008 exchange rate). The cost of the land
use right paid by the Company was approximately $4.1 million based on the
December 31, 2008 exchange rate.





The land
use right owned by Xuancheng was purchased by the Company from Shanghai CNPC
Enterprises Group, a non-affiliated third party, for $872,000 based on the
December 31, 2008 exchange rate. The Company has paid the purchase price, and
obtained the title deed for the land.





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 cost of the land use right paid
by the Company was approximately $1.9 million based on the December 31, 2008
exchange rate. The Company obtained the title deed for the land on December
31, 2008.





In June
2008, Lixun acquired from a non-affiliated third party a land use right for
$368,000, which will be used for construction of a new plant.








-14-





10.
Other long-term assets





The
amount of other long-term assets in the consolidated financial statements at
December 31, 2008 (dollars in thousands) consists primarily of the
following:





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





(2) $1,019
due from the customers related to the deferred income.





(3)
$3,149 prepayments for the CNG land rental.





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





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





(2) $1,021
due from the customers related to the 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 December 31, 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
              %
              
              $
              5,853Bank
      of Communication **
              Working
      Capital
              September
      5, 2008
              One
      year
              
              
              5.58
              %
              
              
              5,853Industrial
      Bank Co., Ltd.
              Working
      Capital
              November
      21, 2008
              Six
      months
              
              
              7.839
              %
              
              
              146CITIC
      Bank
              Working
      Capital
              December
      22, 2008
              Six
      months
              
              
              5.544
              %
              
              
              439Bank
      of Communication
              Working
      Capital
              July
      17, 2008
              One
      year
              
              
              7.326
              %
              
              
              336Total
              
              
              
              
              
              
              
              
              $
              12,627





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 December 31, 2008.




* 6 month
interest rate


** 6-12
month interest rate





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





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.




* 6 month
interest rate


** 6-12
month interest rate








-15-





12.
Advances from Customers





Advances
from customers at December 31, 2008 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.  Pursuant to the
PRC income tax laws, the Company’s PRC subsidiaries are generally subject to
enterprise income tax at a statutory rate of 33%, which comprises 30% national
income tax and 3% local income tax. Beginning January 1, 2008, the Chinese
government has adopted a new statutory tax rate at 25%, replacing the 33%
enterprise tax, so our subsidiaries are subjected to this new tax
rate.





As PRC
subsidiaries that qualify as wholly foreign owned manufacturing enterprises,
Sinogas, Yuhan and Jiaxing Lixun were granted tax preferences. Sinogas and Yuhan
was 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).




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 other overseas tax is made as Sinoenergy Holding Limited, which is
an investment holding company, and has no taxable income in the British Virgin
Islands.





14.  Long
term notes payable





In
September 2007, the Company issued its 12% senior notes due 2012 in the
principal amount of $16,000,000 and its 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 or if the trading in the market is not listed
and the absence of a suspension of trading in the common stock.





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
      or if the common stock does meet certain minimum trading
      levels.•
            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 December 31, 2008, the Company had accrued additional
      interest of $420,000 pursuant to this provision, of which $280,000
      was paid in January 2009 and $140,000 remained outstanding. If the
      registration statement is not declared effective by March 24, 2009,
      additional interest of $140,000 will be due at that date. 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 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
      December 31, 2008. The Company will review and adjust this accrual at each
      subsequent period end.






-16-




At
December 31, 2008, the holders of the Notes have the right to convert their
Notes into common stock at a conversion price of $5.125 per share, reflecting a
reduction in the conversion price pursuant to a supplemental indenture dated as
of June 23, 2008. 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.





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 ended December 31,
2009. The indenture also had a required net income target for 2007,
however, the investors have waived the right to any adjustment based on 2007 net
income, in consideration for which the Company’s principal stockholders, which
is owned by the chief executive officer and the chairman of the board by
December 1, 2008, agreed to pay the investors at total of
$600,000.  The noteholders have 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 February 19, 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 following formula. Conversion rate then in effect + [(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 table sets forth a computation of the resulting conversion price if
(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.




Year
                Conversion Rate
                  Beginning of
                  Year*
                
                Conversion Price
                  Beginning of
                  Year
                
                Conversion Rate
                  As Adjusted
                
                Conversion Price
                  As Adjusted2008
                19,512
                
                $
                5.125
                
                24,021
                
                $
                4.1632009
                24,021
                
                $
                4.163
                
                28,665
                
                $
                3.489





* The
conversion rate at the beginning of the year has been adjusted to reflect the
adjustment made pursuant to the indenture as supplemented by a supplemental
indenture dated as of June 23, 2008.





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






-17-






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 have certain
covenants, including the following:




•
            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, after giving
      effect to the borrowing, (i) the fixed charge coverage ratio would be
      greater than 2.75 to 1.00 until September 28, 2008 and 3.5 to 1.0 if the
      debt is incurred thereafter, and (ii) the leverage ratio would not exceed
      4.25 to 1.00 until September 28, 2008 and 3.75 to 1.00 if the debt is
      incurred thereafter, provided, that the certain subsidiaries may continue
      to maintain debt under credit facilities of not more than $15,000,000
      until September 28, 2008 and $10,000,000 thereafter, and may incur
      purchase money indebtedness. 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.•
            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 provided that the
      Company shall maintain, as of the last day of each fiscal quarter, (i) a
      fixed charge coverage ratio of at least 1.75 to 1.00 through March 28,
      2008, 2.75 to 1.00 from April 1, 2008 to September 30, 2008 and 3.0 to
      1.00 thereafter, (ii) a leverage ratio of not more than 7.5 to 1.00
      through March 31, 2008, 5.0 to 1.00 from April 1, 2008 to September 30,
      2008, and 4.5 to 1.00 thereafter, and (iii) a consolidated subsidiary debt
      to consolidated net tangible asset ratio of not more than 0.2 through
      September 30, 2008 and 0.15 thereafter. Pursuant to an amendment and
      waiver agreement dated February 23, 2009, the noteholders consented that,
      from and after December 31, 2008, the consolidated subsidiary debt ratio
      shall be modified to be 0.35, and the noteholders would not take any
      action to declare an event of default as long as the Company is in
      compliance with the modified covenant.  The Company currently
      projects that it will remain in compliance with this modified covenant
      through December 31, 2009.  At December 31, 2008, the fixed charge
      ratio was 3.6 to 1, the leverage ratio was 3.16 to 1 and the
      subsidiary debt ratio was 0.19.


The
Company also entered into an investor rights agreement, as clarified, 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.






-18-




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.





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.





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 Abax continues to hold more than 5% of the
outstanding shares of common stock on an as-converted basis, (i) Abax 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 (amounts 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
              
              
              480Amortization
      of beneficial conversion feature
              
              
              19Interest
      paid
              
              
              (987
              )Balance,
      December 31, 2008
              
              $
              16,170





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
              
              
              9Interest
      paid
              
              
              (212
              )Interest
      accrued for guaranteed 13.8% return
              
              
              483Amortization
      of discount resulting from reset
              
              
              186Balance,
      December 31, 2008
              
              $
              13,059






-19-





15. Related Party Relationships and
Transactions




The
related parties with which the Company had transactions in the three months
ended December 31, 2008 and 2007, are as follows:




Name
      of related party
              
              RelationshipBeijing
      Sanhuan Technology Development Co., Ltd (Beijing
      Sanhuan)
              
              Parent
      company of a subsidiary before November 8, 2005. Legal representative of
      Beijing Sanhuan is the Company’s CEO 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)




Significant
transactions between the Company and its related parties during the three
months ended December 31, 2008 and 2007are as follows:





(1) Sales
and purchase transactions with related parties





Name
      of the Company
            
            For
      the three months ended
              December
      31, 2008
            
            For
      the three months ended
              December
      31, 2007Beijing
      Sanhuan
            
            $263,366
      fee for right to use the technology and software in the CNG
      construction
            
            None




(2) Due
from related parties





Name
      of the Company
              
              December
      31, 2008
              
              
              September
      30, 2008China
      New Energy
              
              $
              383,000
              
              
              $
              383,000Beijing
      Sanhuan
              
              $
              29,263
              
              
              None




(3)  Other
Transaction





The
indenture relating to the Company’s 3% convertible notes provides for an
adjustment in the conversion price of the notes if the Company fails to meet
certain earnings levels (see Note 14).  Although the Company did not
meet the earnings level 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 owned by the Company’s chief executive officer
and the chairman of the Company’s board of directors, agreed to pay the
investors $600,000 by December 1, 2008.  The noteholders waived this
payment on February 23, 2009.




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 ended December 31, 2008 and 2007.






-20-




Three
      Months Ended December 31, 2008
                (dollars
      in thousands)
              
              Customized
                pressure
                containers
              
              CNG
      station
                facilities
      and construction
              
              CNG
      station
                Operation
              
              Vehicle
                conversion
                kits
              
              TotalNet
      sales
              
              $
              3,136
              
              $
              5,779
              
              $
              4,751
              
              $
              2,262
              
              $
              15,928Cost
      of sales
              
              
              2,221
              
              
              3,506
              
              
              3,783
              
              
              1,616
              
              
              11,126Gross
      profit
              
              
              915
              
              
              2,273
              
              
              968
              
              
              646
              
              
              4,802Gross
      margin
              
              
              29
              %
              
              39
              %
              
              20
              %
              
              29
              %
              
              30
              %Operating
      expenses:Selling
      expenses
              
              
              58
              
              
              22
              
              
              308
              
              
              126
              
              
              514General
      and administrative expenses
              
              
              278
              
              
              457
              
              
              394
              
              
              228
              
              
              1,357Total
      operating expense
              
              
              336
              
              
              479
              
              
              702
              
              
              354
              
              
              1,871Income
      from operations
              
              $
              579
              
              $
              1,794
              
              $
              266
              
              $
              292
              
              $
              2,931Total
      assets
              
              $
              35,982
              
              $
              58,565
              
              $
              33,701
              
              $
              7,613
              
              $
              135,861





Three
      Months Ended December 31, 2007
                              (dollars
      in thousands)
                            
                            Customized
                              pressure
                              containers
                            
                            CNG
      station
                              facilities
      and
                              construction
                            
                            CNG
      station
                              Operation
                            
                            Vehicle
                              conversion
                              kits
                            
                            TotalNet
      sales
                            
                            $
                            1,849
                            
                            $
                            4,638
                            
                            $
                            68
                            
                            $
                            2,252
                            
                            $
                            8,807Cost
      of sales
                            
                            
                            1,085
                            
                            
                            2,313
                            
                            
                            44
                            
                            
                            1,454
                            
                            
                            4,896Gross
      profit
                            
                            
                            764
                            
                            
                            2,325
                            
                            
                            24
                            
                            
                            798
                            
                            
                            3,911Gross
      margin
                            
                            
                            41
                            %
                            
                            50
                            %
                            
                            36
                            %
                            
                            35
                            %
                            
                            44
                            %Operating
      expenses:Selling
      expenses
                            
                            
                            58
                            
                            
                            12
                            
                            
                            7
                            
                            
                            79
                            
                            
                            156General
      and administrative expenses
                            
                            
                            208
                            
                            
                            482
                            
                            
                            94
                            
                            
                            224
                            
                            
                            1,008Total
      operating expense
                            
                            
                            266
                            
                            
                            494
                            
                            
                            101
                            
                            
                            303
                            
                            
                            1,164Income
      (loss) from operations
                            
                            $
                            498
                            
                            $
                            1,831
                            
                            $
                            (77
                            )
                            $
                            495
                            
                            $
                            2,747Total
      assets
                            
                            $
                            13,355
                            
                            $
                            41,170
                            
                            $
                            26,278
                            
                            $
                            12,630
                            
                            $
                            93,433





17.
Capital Stock





As of
December 31, 2008, 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;•
            2,731,707
      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.




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 December 31, 2008
              
              
              85,715
              
              
              369,644
              
              
              75,000
              
              
              25,000
              
              
              555,359






-21-





As at
December 31, 2008, 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.





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, subject to stockholder approval
of the plan, commencing in 2007. 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
              
              
              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 December 31, 2008
              
              
              770,000
              
              
              $
              4.26
              
              
              
              3.31Options
      exercisable at December 31, 2008
              
              
              360,000
              
              
              $
              3.55
              
              
              
              4.01




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 ended December 31, 2008
and 2007 was $83,000 and $118,000, 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.





The
details for the fully diluted outstanding shares for the three months ended
December 31, 2008 and 2007 is as follows:







-22-








Three
      monthsended
      December 31, 2008
              
              Three
      monthsended
      December 31, 2007Weighted
      average common stock outstanding during period
              
              15,942,336
              
              15,709,033Common
      stock issuable pursuant to warrants
              
              85,820
              
              632,820Common
      stock issuable upon conversion of 3% convertible
    notes
              
              -
              
              2,208,202Common
      stock issuable upon exercise of options outstanding during the
      period
              
              32,093
              
              360,652Total
      diluted outstanding shares
              
              16,060,249
              
              18,910,707




Diluted
earnings per share for the three months ended December 31, 2008, are computed as
follows:


Three
      monthsended
      December 31, 2008
                
                
                Three
      monthsended
      December 31, 2007Net
      income
                $
                1,698
                
                $
                2,319Add
      back interest on convertible notes
                
                -
                
                
                114Net
      income attributable to common shareholders
                $
                1,698
                
                $
                2,433




Convertible notes are
anti-dilutive for the three months ended December 31, 2008 and are therefore
excluded from the computation of diluted earnings per share for the
period.




19.
Commitments and Contingencies




The
Company 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 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
December 31, 2008, the Company’s commitment for future funding was
$2,625,000.




In the
normal course of our business the Company issues purchase orders for equipment
for its CNG stations and well as for components for its products.  At
December 31, 2008, 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 $101,094 and $68,885 for the three months ended
December 31, 2008 and 2007, 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 the peak season labor requirement. 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 underaccrual.





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.








-23-





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 we do not have a long history of operations in this
business, we anticipate that our major customers will vary from period to
period.





In the
three months ended December 31, 2008, one customer of our station facilities and
construction segment accounted for 27.8% of our total sales and at December 31,
2008, approximately 19.5% of our accounts receivable was from this
customer.





And in
the three months ended December 31, 2007, two customers of our station
facilities and construction segment each accounted for more than 10% of our
total sales.  These customers, who purchased CNG truck trailers,
accounted for approximately 45.6% of total sales.  At December 31,
2007, approximately 38.0% of our accounts receivable were from these
customers.  The following table sets forth information as to the sales
generated from each of these customers for the three months ended December 31,
2008 (dollars in thousands):





Name
                
                Three
      Months Ended
                  December
      31, 2008
                
                
                Three
      Months Ended
                  December
      31, 2007Dollars
                
                
                Percent
                
                
                Dollars
                
                
                PercentWuhan
      Lvneng Gas Transportation Co.,
                
                $
                4,425
                
                
                
                27.8
                %
                
                
                *
                
                
                
                *Wuhan
      Fukang Company
                
                
                *
                
                
                
                *
                
                
                $
                1,864
                
                
                
                21.2
                %Liuzhou
      MingHui Bio-Fuel Co.,
                
                
                *
                
                
                
                *
                
                
                
                2,149
                
                
                
                24.4
                %





*  Less
than 10%





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 prospectus, 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.








-24-





OVERVIEW





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.





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 the price controls, 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 December 31, 2008, 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 for the purchase of natural gas which is to
be delivered through a pipeline that is presently under construction and is
expected to be completed during the first 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 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 and
steel tubing 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, and 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.






-25-





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 our Italian
supplier are in Euros. 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.





During
the three months ended December 31, 2008, our accounts receivable increased by
$5.3 million, from $22.0 million to $27.3 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 December 31, 2008, our accounts
receivable were outstanding for an average of 140 days.  Although the
government of the PRC has announced a stimulus package which can be used by our
customers to enable 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.





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.








-26-





(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
February 10, 2009, we were operating nineteen CNG stations, of which fourteen
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.





RESULTS
OF OPERATIONS





The
information set forth below represents segment information for the three months
ended December 31, 2008 and 2007.





Three
      Months Ended December 31, 2008
                (dollars
      in thousands)
              
              Customized
                pressure
                containers
              
              CNG
      station
                facilities
      and construction
              
              CNG
      station
                Operation
              
              Vehicle
                conversion
                kits
              
              TotalNet
      sales
              
              $
              3,136
              
              $
              5,779
              
              $
              4,751
              
              $
              2,262
              
              $
              15,928Cost
      of sales
              
              
              2,221
              
              
              3,506
              
              
              3,783
              
              
              1,616
              
              
              11,126Gross
      profit
              
              
              915
              
              
              2,273
              
              
              968
              
              
              646
              
              
              4,802Gross
      margin
              
              
              29
              %
              
              39
              %
              
              20
              %
              
              29
              %
              
              30
              %Operating
      expenses:Selling
      expenses
              
              
              58
              
              
              22
              
              
              308
              
              
              126
              
              
              514General
      and administrative expenses
              
              
              278
              
              
              457
              
              
              394
              
              
              228
              
              
              1,357Total
      operating expense
              
              
              336
              
              
              479
              
              
              702
              
              
              354
              
              
              1,871Income  from
      operations
              
              $
              579
              
              $
              1,794
              
              
              266
              
              $
              292
              
              $
              2,931








Three
      Months Ended December 31, 2007
                                (dollars
      in thousands)
                              
                              Customized
                                pressure
                                containers
                              
                              CNG
      station
                                facilities
      and
                                construction
                              
                              CNG
      station
                                Operation
                              
                              Vehicle
                                conversion
                                kits
                              
                              TotalNet
      revenue
                              
                              $
                              1,849
                              
                              $
                              4,638
                              $
                              
                              68
                              
                              $
                              2,252
                              
                              $
                              8,807Cost
      of revenues
                              
                              
                              1,085
                              
                              
                              2,313
                              
                              
                              44
                              
                              
                              1,454
                              
                              
                              4,896Gross
      profit
                              
                              
                              764
                              
                              
                              2,325
                              
                              
                              24
                              
                              
                              798
                              
                              
                              3,911Gross
      margin
                              
                              
                              41
                              %
                              
                              50
                              %
                              
                              36
                              %
                              
                              35
                              %
                              
                              44
                              %Operating
      expenses:Selling
      expenses
                              
                              
                              58
                              
                              
                              12
                              
                              
                              7
                              
                              
                              79
                              
                              
                              156General
      and administrative expenses
                              
                              
                              208
                              
                              
                              482
                              
                              
                              94
                              
                              
                              224
                              
                              
                              1,008Total
      operating expense
                              
                              
                              266
                              
                              
                              494
                              
                              
                              101
                              
                              
                              303
                              
                              
                              1,164Income
      (loss) from operations
                              
                              $
                              498
                              
                              $
                              1,831
                              
                              $
                              (77
                              )
                              $
                              495
                              
                              $
                              2,747


Net Sales. Net sales for the
three months ended December 31, 2008 (“December 2008 quarter”) were
approximately $15.9 million, an increase of approximately $7.1 million, or 81%,
from sales of approximately $8.8 million for the three months ended December 31,
2007 (“December 2007 quarter”).  This increase resulted
from:




•
            An
      increase of approximately $1.3 million, or 70%, in sales from customized
      pressure containers, reflecting an increase in demand for these products,
      representing a fairly constant sales price per unit with an increase in
      the number of units sold.•
            An
      increase of approximately $1.1 million, or 25%, in sales from the CNG
      stations facilities and construction, resulting from the increased demand
      for the construction and equipping of CNG stations.•
            An
      increase of approximately $4.7 million due to ramping up of our CNG
      station operations. . In the December 2008 quarter, we operated sixteen
      CNG stations while in the December 2007 quarter, only  one
      station was in operation. With more stations being put into operation, CNG
      station business will contribute more to our sales.






-27-




For most
of 2008, China was in a period of economic growth, and the CNG businesses were
affected by both this period of growth as well as the policies of the government
to encourage the use of CNG as a method of reducing pollution.  We
cannot predict the effect of the economic downturn on our business in the near
future.





Cost of Sales; Gross Margin.
The cost of sales for the December 2008 quarter was approximately $11.1 million,
an increase of approximately 127% from approximately $4.9 million for the
December 2007 quarter.  The CNG station operation segment contributed
$3.7 million, or approximately 33.3% of the total increase in cost of sales. Our
overall gross margin decreased from 44% to 30% from the December 2007 quarter to
the December  2008 quarter for the following
reasons:





•
            Our
      gross margin for the customized pressure containers deceased from 41% to
      29% because of price increases of raw materials of approximately 35%
      .  We were not able to pass on all of these cost increase to our
      customers.•
            Our
      gross margin for the CNG station facilities and construction decreased
      from 50% to 39% because of the price increasing of raw materials which we
      were not able to pass on to our customers.•
            The
      CNG station operation segment gross margin in the December 2008
      quarter is 20%, which lowered the overall gross
      margin.  During the December 2008 quarter, our CNG stations were
      operating at less than optimum capacity. Further, during the December 2007
      quarter, we were in the startup phase and did not include any depreciation
      in cost of sales. During 2009 our stations were operating at approximately
      70% of their capacity, which should help to improve our
      margins.  During both the December 2008 quarter and the December
      2007 quarter, we did not operate a mother station. A mother station is a
      facility in which we can store CNG for delivery to our stations and
      enables us to purchase CNG more economically, and we plan to operate a
      mother station during 2009, although we cannot give any assurance that we
      will be able to do so.•
            With
      the general economic downturn, and with the maturity of the products, our
      gross margin in the vehicle conversion kits segment decreased
       from 35% to 29%.




Selling
Expenses.  Selling expenses increased approximately $358,000,
or approximately 229%, from the December 2007 quarter to the December 2008
quarter.  A significant portion of the increase relates to the CNG
station segment, where we had only $7,000 selling expenses in the December 2007
quarter and selling expenses of $308,000 in the December 2008 quarter. In
addition, selling expenses for the vehicle conversion kits segment increased
$47,000 because of the expansion of our marketing efforts.





General and Administrative
Expenses.  General and administrative expenses increased
approximately $349,000, or 35%.  The expenses in CNG station
operation  increased approximately $300,000 from the December 2007
quarter to the December 2008 quarter 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.  Included in general and administrative expenses is non-cash
compensation expense of $83,000 in the December 2008 quarter and
$118,000  in the December 2007 quarter, for the value of stock options
and warrants issued.  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 December 2008 quarter
was approximately $1.2 million, as compared with $571,000 for the December
2007quarter.  Our non-cash interest charges increased by $378,000 from
the December 2007 quarter to the December 2008 quarter, which was not recognized
in December 2007 quarter.  The non-cash interest reflects the interest
on the 3% senior convertible notes which is only payable if the notes are not
converted or if we are required to redeem the notes in cash.





OtherIncome and Other Expenses.
During
the December 2008 quarter,  we generated rental income of
approximately $1.3 million for the rental of the land use rights for
Sinogas’ former manufacturing facility. In March 2008, Sinogas signed
a lease agreement with Qingdao Mingcheng Real Estate Co., Ltd (Qingdao
Mingcheng), a non-related party, with a three-year term from January 2008 to
December 2010, at a quarterly rental of RMB10 million (equivalent to $1.46
million based on the exchange rate at December 31, 2008).




-28-




Income Taxes.  The
income tax provision in the December 2008 quarter was $568,000, which
reflects the increase in income before income taxes mainly for Sinogas and
Yuheng and an effective tax rate of 12.5%. In the December
2007 quarter, Sinogas, Yuhan, and Wuhan Sinoenergy benefited from an
exemption from corporate income tax as a result of which we did not accrue any
income tax in the December 2007 quarter. As Lixun received an exemption from
corporate income tax from August 2007, in the December 2007 quarter, we recorded
a tax credit of $120,000 for the full amount of the taxes previously
accrued by Lixun. The statutory tax rates are 25% and 33% for the December 2008
and 2007 quarters, respectively.




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.  The increase from $112,000 in the December
2007 quarter to $955,000 in the December 2008 quarter results both from
increased income in the subsidiaries and a change in our interests in Sinogas
resulting from the sale of a 24.95% interest in Sinogas during the year ended
September 30, 2008. During the December 2007 quarter, Sinogas was wholly owned,
and there was no minority interest in Sinogas. In the December 2008 quarter,
there was a 24.95% minority interest in Sinogas.





Net Income.  As a
result of the foregoing, we had net income of approximately $1.7 million, or
$0.11 per share (basic) and $0.13 (diluted) for the December 2008 quarter, as
compared with net income of approximately $2.3 million, or $0.15 per share
(basic) and $0.13 (diluted) for the December 2007 quarter.




Comprehensive
Income.  Comprehensive income was approximately $1.5 million
for the December 2008 quarter as compared with approximately $3.3 million for
the December 2007 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, or approximately
$161,000 reduction in 2008 as compared with a positive adjustment of
$968,000 in 2007.




Liquidity
and Capital Resources




At
December 31, 2008, we had working capital of approximately $3.2 million, as
compared with 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).





Category
                
                December
      31,
                
                
                September 30,
                
                
                September
      30 to December 31, 20082008
                
                
                2008
                
                
                Change
                
                
                Percent
      ChangeCurrent
      AssetsCash
                
                $
                4,049
                
                
                $
                8,871
                
                
                
                (4,822
                )
                
                
                (54.4
                %)Restricted
      cash
                
                
                878
                
                
                
                523
                
                
                
                355
                
                
                
                67.9
                %Accounts
      and notes receivable, net
                
                
                27,308
                
                
                
                22,008
                
                
                
                5,300
                
                
                
                24.1
                %Other
      receivables, net
                
                
                16,137
                
                
                
                16,983
                
                
                
                (846
                )
                
                
                (5.0
                %)Deposits
      and prepayments
                
                
                8,449
                
                
                
                7,918
                
                
                
                531
                
                
                
                6.7
                %Inventories
                
                
                4,058
                
                
                
                7,303
                
                
                
                (3,245
                )
                
                
                (44.4
                %)Deferred
      expenses
                
                
                101
                
                
                
                91
                
                
                
                10
                
                
                
                11.0
                %Current
      LiabilitiesShort-term
      bank loan
                
                
                12,627
                
                
                
                11,953
                
                
                
                674
                
                
                
                5.6
                %Notes
      payable
                
                
                2,926
                
                
                
                1,633
                
                
                
                1,293
                
                
                
                79.2
                %Accounts
      payable
                
                
                4,238
                
                
                
                5,894
                
                
                
                (1,656
                )
                
                
                (28.1
                %)Advances
      from customers
                
                
                2,095
                
                
                
                2,409
                
                
                
                (314
                )
                
                
                (13.0
                %)Additional
      interest on notes
                
                
                420
                
                
                
                420
                
                
                
                0
                
                
                
                -Income
      taxes payable
                
                
                1,116
                
                
                
                633
                
                
                
                483
                
                
                
                76.3
                %Other
      payables
                
                
                4,699
                
                
                
                5,341
                
                
                
                (642
                )
                
                
                (12.0
                %)Accrued
      expenses
                
                
                356
                
                
                
                335
                
                
                
                21
                
                
                
                6.3
                %Deferred
      income
                
                
                79
                
                
                
                95
                
                
                
                (16
                )
                
                
                (16.8
                %)Total
      current assets
                
                $
                60,980
                
                
                $
                63,697
                
                
                $
                (2,717
                )
                
                
                (4.37
                %)Less:  total
      current liabilities
                
                
                28,556
                
                
                
                28,713
                
                
                $
                (157
                )
                
                
                (0.6
                %)Net
      working capital
                
                $
                32,424
                
                
                $
                34,984
                
                
                $
                (2,560
                )
                
                
                (7.3
                %)











-29-





Our
largest current assets are our accounts and notes receivable and other
receivables.  The accounts receivable at December 31, 2008, were $27.3
million.  These accounts receivables are outstanding for an average of
140 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.   Of the $22.0 million of accounts receivable that were
outstanding at September 30, 2008, approximately $5.0 million has been collected
in cash and $17.0 million remained outstanding on February 12, 2009. We cannot
assure you that we will be able to collect these receivables in a timely manner,
and our inability to collect the receivables could impair our liquidity and our
ability to conduct our business.





Other
receivables were $16.1 million at December 31, 2008 and $17.0 at September 30,
2008.  Other  receivables at December 31, 2008, include (1)
$3.7 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; (2) $5.3 million
for unsecured interest free note receivables relating to current accounts, and
(3) $4.4 million due representing a rent receivable arising from the lease of
our land use rights for our former manufacturing facility  Of the
$17.0 million of other receivable outstanding at September 30, 2008,
approximately $1.4 million has been collected in cash and $15.6 million remained
outstanding on February 5, 2009.





For the
three months ended December 31, 2008, net cash provided by operating activities
was $0.3 million. The changes in working capital for the three months ended
December 31, 2008, were primarily related to a $5.3 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 $363,000 decrease of accounts payable, a $314,000 decrease of
advance from customers and $642,000 decrease in other payables, partially offset
by a $3.2 million decrease of inventories because of the lower inventory as of
the calendar year end, and a $306,000 decrease in other receivables and
prepayments, and $1.2 million decrease of interest paid on our long-term
notes.


We used
approximately $6.8 million in investing activities for the three months ended
December 31, 2008. This was due primarily to the expansion of our CNG
station operation segment, principally for purchase of property, plant and
equipment of $4.9 million, and $1.4 million to invest in the unconsolidated
entities.




Net cash
provided by financing activities was $1.4 million for the three months ended
December 31, 2008, related to $1.4 million loans from domestic banks in
China.





For the
December 2007 quarter, we generated negative cash flow of approximately $4.0
million from our operations, and we used approximately $19.2 million for
investments, consisting of payments of approximately $16.1 million for the
purchase of property, plant and equipment, including the purchase of land use
rights, and approximately $1.0 million to purchase a portion of the minority
interest in some of our subsidiaries.





We
generated approximately $29.8 million cash from issuance of 12% guaranteed
senior notes and 3% guaranteed convertible notes, and we repaid approximately
$468,000 short term bank loans, which, as of December 31, 2007, were in the
aggregate principal amount of approximately $29.3 million.





We
believe that 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,
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 include the following:


•
              We
      cannot incur any debt unless, after giving effect to the borrowing, (i)
      the fixed charge coverage ratio would be greater than 3.5 to 1.0, and (ii)
      the leverage ratio would not exceed 3.75 to 1.00 if the debt is incurred
      thereafter, provided, that certain subsidiaries may continue to maintain
      debt under credit facilities of not more than $10,000,000, and may incur
      purchase money indebtedness. 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.   -30-
    •
              We
      must maintain, as of the last day of each fiscal quarter, (i) a fixed
      charge coverage ratio of at least  3.0 to 1.00, (ii) a leverage
      ratio of not more than 4.5 to 1.00 thereafter, and (iii) a consolidated
      subsidiary debt to consolidated net tangible asset ratio of not more than
      0.15.•
              Sinogas
      cannot incur debt under its credit facilities except to the extent that
      such debt does not exceed $10.0 million.•
              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.





As of
December 31, 2008, the fixed charge coverage ratio was 3.6 to 1, the
leverage ratio was 3.16 to 1, the consolidated subsidiary debt to consolidated
net tangible asset ratio was 0.19. Pursuant to an amendment and waiver agreement
dated February 23, 2009, the noteholders consented that, from and after December
31, 2008, the consolidated subsidiary debt ratio shall be modified to be 0.35,
and the noteholders would not take any action to declare an event of default as
long as we were in compliance with the modified covenant.  As a
result, we were in compliance with the financial covenants, as amended, at
December 31, 2008.
 
 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.
 
 We
believe 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, in the
event that 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.  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 December 31,
2008, we have invested $1,375,000 and our remaining commitment for future
funding is $2,625,000.





We have
purchase orders with several suppliers with aggregated amount of $28.84 million.
At December 31, 2008, we had paid a total of $19.45 million for the purchase,
and goods costing $22.04 million have been delivered to us.





We also
lease thirteen parcels of land in Wuhan City and Pingdingshan City for CNG
stations.  The current annual rent under these leases is approximately
$462,600.





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.








-31-





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.





Foreign Currency
Translation.  Ourfunctional
currency is RMB, and our reporting currency is United States dollars. Our
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 year. 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 stockholders’ 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 statements of operations as
incurred.





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.




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 is currently evaluating whether the adoption of
SFAS No. 141(R) will have a significant effect on its consolidated
financial position, results of operations or cash flows.





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. SFAS No. 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company is currently
evaluating whether the adoption of SFAS No. 160 will have a significant
effect on its consolidated financial position, results of operations or cash
flows.








-32-





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 is effective for periods
beginning after November 15, 2008. The Company has not yet determined the
impact on its consolidated financial statements of adopting
SFAS No. 161.





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. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. The guidance
for determining the useful life of a recognized intangible asset must be
applied prospectively to intangible assets acquired after the effective date.
Early adoption is prohibited. The Company expects to adopt FSP FAS 142-3 as of
October 1, 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.  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.





-33-








•
            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.




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
quarter ended December 31, 2008, 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.




Due to
lack of qualified personnel in our operating region, we were not able to hire
sufficient internal audit resources before the end of 2008. 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.









-34-







PART
II. OTHER INFORMATION





Item 6. Exhibits and Reports on Form
8-K




10.1
            Letter
      agreement dated February 23, 2009, by and between the Registrant and Abax
      Lotus Ltd. And CCIF Petrol Limited31.1
            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







-35-





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:
      February 23, 2009
                s/
      Bo HuangBo
      Huang, Chief Executive Officers/
      ShiaoMing ShengDated:
      February 23, 2009
                Chief
      Financial Officer