UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  FORM
10-K
 x
              
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the fiscal year ended December 31, 2008
  OR
 o
              
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the transition period from

to
  Commission
file number: 000-51753
 
  SINO
CLEAN ENERGY INC.
 (Exact
name of Registrant as specified in its charter)
 Nevada
                  
                  75-2882833(State
      or other jurisdiction of incorporation or organization)
                  
                  (I.R.S.
      Employer Identification No.)Room
      1605, Suite B, Zhengxin Building
                    No.
      5, Gaoxin 1st Road, Gaoxin District
                    Xi’an, Shaanxi Province,
      People’s Republic of China
                  
                  N/A(Address
      of principal executive offices)
                  
                  (Zip
      Code)
  Registrant’s
      telephone number: (8629)
      8209-1099
  Securities
registered pursuant to Section 12(b) of the Act: None
 Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par
value
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o No þ
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o No þ
 
 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 þ No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained herein, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. 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” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large
      accelerated filer  o
                  Accelerated
      filer  oNon-accelerated
      filer  o
                  Smaller
      reporting company  þ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   Yes o No þ
  As of
June 30, 2008, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $11,338,000 based on a
closing price of $0.20 per share of common stock as reported on the
Over-the-Counter Bulletin Board on such date.
 
 On March
27, 2009, we had 92,181,750 shares of common stock issued and
outstanding.
  
  
 TABLE OF CONTENTS
 TO
ANNUAL REPORT ON FORM 10-K
 FOR
YEAR ENDED DECEMBER 31, 2008
 
 PART
      I
                  
                  PageItem
      1.
                  Business
                  2Item
      1A.
                  Risk
      Factors
                  8Item
      1B.
                  Unresolved
      Staff Comments
                  19Item
      2.
                  Properties
                  19Item
      3.
                  Legal
      Proceedings
                  19Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  20PART
      IIItem
      5.
                  Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  20Item
      6.
                  Selected
      Financial Data
                  21Item
      7.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
                  21Item
      7A.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  24Item
      8.
                  Financial
      Statements and Supplementary Data
                  24Item
      9.
                  Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                  25Item
      9A(T).
                  Controls
      and Procedures
                  25Item
      9B.
                  Other
      Information
                  27PART
      IIIItem
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  27Item
      11.
                  Executive
      Compensation
                  29Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  31Item
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  32Item
      14.
                  Principal
      Accounting Fees and Services
                  33PART
      IVItem
      15.
                  Exhibits,
      Financial Statement Schedules
                  34Signatures
                  
                  35
  1
 
 CAUTION
REGARDING FORWARD-LOOKING INFORMATION
  This
report contains forward-looking statements. All forward-looking statements are
inherently uncertain as they are based on current expectations and assumptions
concerning future events or future performance of the Company. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
are only predictions and speak only as of the date hereof. Forward-looking
statements usually contain the words “estimate,” “anticipate,” “believe,”
“expect,” or similar expressions, and are subject to numerous known and unknown
risks and uncertainties. In evaluating such statements, prospective investors
should carefully review various risks and uncertainties identified in this
Report, including the matters set forth under the captions “Risk Factors” and in
the Company’s other SEC filings. These risks and uncertainties could cause the
Company’s actual results to differ materially from those indicated in the
forward-looking statements.
  Although
forward-looking statements in this annual report on Form 10-K reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the heading “Risks Relating to Our Business” below,
as well as those discussed elsewhere in this annual report on Form 10-K. Readers
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this annual report on Form 10-K. We file reports
with the Securities and Exchange Commission (“SEC”). You can read and copy any
materials we file with the SEC at the SEC’s Public Reference Room, 100 F.
Street, NE, Washington, D.C. 20549 on official business days during the hours of
10 a.m. to 3 p.m. You can obtain additional information about the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including the Company.
  We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
annual report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this annual report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.
 
 PART
I
  ITEM
1.  BUSINESS
 
 Overview
 
 Sino
Clean Energy Inc. (sometimes referred to in this annual report as “Company”,
“we” or “our”) is a holding company that, through its wholly owned
subsidiary Hangson Limited (“Hangson”), and its variable interest entity
(“VIE”) Shaanxi Suo’ang Biological Science & Technology Co., Ltd. (“Suo’ang
BST”) researches, develops, produces and sells coal water mixture (hereinafter
“CWM”), a fuel substitute for oil, gas and coal in the People’s Republic of
China (“PRC” or “China”).  Suo’ang BST operates the CWM business
through its subsidiary, Shaanxi Suo’ang New Energy Enterprise Co., Ltd.
(“Suo’ang New Energy”). We control Suo’ang BST and Suo’ang New Energy through
contractual arrangements between Hangson and Suo’ang BST. These contractual
arrangements enable Hangson to control and receive the profits of Suo’ang BST.
Other than our interests in the contractual arrangements with Suo’ang BST,
neither we nor our subsidiary have any equity interests in Suo’ang
BST.
 
 Corporate
Organization and History
 
 We were
originally incorporated in Texas as “Discount Mortgage Services, Inc.” on July
11, 2000. In September 2001, we purchased Endo Networks, Inc., a Canadian
software developer, and changed our name to “Endo Networks, Inc.” on November 5,
2001. We re-domiciled to the State of Nevada on December 13, 2001.
 
 On
October 20, 2006 (the “Closing Date”), we closed a share exchange transaction
pursuant to a share exchange agreement (“Exchange Agreement”) that we entered
into on October 18, 2006, by and among Hangson and the stockholders of 100% of
Hangson’s common stock (the “Hangson Stockholders”), on the one hand, and the
Company and a majority of the Company’s shareholders, on the other
hand.  In connection with the share exchange transaction, we effected
a 1-for-5 reverse stock split of our common stock on October 17, 2006, which was
previously approved by a majority of our shareholders on September 5, 2006. In
addition, immediately prior to the Closing Date, four shareholders of the
Company, including Peter B. Day, the Company’s then President, CEO and sole
director, voluntarily cancelled an aggregate of 1,154,350 (post reverse split)
common shares, and the Company issued an additional 669,600 common shares
pursuant to certain anti-dilution provisions contained in agreements between the
Company and two consultants.  Taking into account the cancellations,
the anti-dilution issuances to the consultants, the reverse split and minor
corrective issuances for rounding of fractional shares resulting from the
reverse split, we had approximately 2,227,250 shares of common stock
outstanding.  On the Closing Date, we issued a total of 26,000,000
common shares to the Hangson Stockholders and a consultant in the transaction,
in exchange for 100% of the common stock of Hangson. Thus, immediately after the
share exchange transaction, we had approximately 28,227,250 shares of common
stock outstanding, with the Hangson Stockholders owning approximately 85% of the
Company’s outstanding common stock. Additionally, on the Closing Date, Hangson
paid our creditors a total of $500,000 for services rendered, in order to
satisfy certain obligations as set forth in the Exchange
Agreement.  We accounted for the share exchange transaction with
Hangson as a reverse acquisition and recapitalization and, as a result, our
consolidated financial statements are in substance those of Hangson, with our
assets, liabilities, revenues and expenses being included effective from the
Closing Date.
 
 2
 Effective
on January 4, 2007, we changed our name from “Endo Networks, Inc.” to “China
West Coal Energy Inc.”, and increased the number of our authorized capital stock
to 250,000,000 shares, including 200,000,000 shares of common stock and
50,000,000 shares of preferred stock, by filing a Certificate of Amendment to
our Articles of Incorporation with the Nevada Secretary of State.
 
 On
January 15, 2007, our board of directors unanimously approved a change
of our fiscal year end from September 30 to December 31, commencing with
our fiscal year ended December 31, 2006.
 
 Effective
on August 15, 2007, we changed our name again to our present name, “Sino Clean
Energy, Inc.” to better reflect the direction and business of the Company,
and we effected a 3-for-1 forward stock split of our common stock. We
effected the name change through a merger with our wholly owned subsidiary, Sino
Clean Energy Inc., a Nevada corporation, with the Company as the surviving
entity, and filed our Articles of Merger with the Nevada Secretary of State. We
effected the forward stock split by way of share dividend, whereby two common
shares were issued for each outstanding common share held by shareholders of
record on August 15, 2007.
 
 Hangson
Limited
 
 Hangson
was incorporated on June 2, 2006 under the laws of the British Virgin Islands.
Since incorporation, Hangson has not conducted any substantive operations of its
own and conducts its primary business operations through its VIE, Suo’ang
BST. Suo’ang BST has the licenses and approvals necessary to operate our CWM
business in China.  We have contractual arrangements with Suo’ang BST
and its shareholders pursuant to which we provide technology consulting and
other general business operation services to Suo’ang BST.  Through
these contractual arrangements, we also have the ability to substantially
influence Suo’ang BST’s daily operations and financial affairs, appoint its
senior executives and approve all matters requiring shareholder approval. As a
result of these contractual arrangements, which enable us to control Suo’ang BST
and to receive a majority of its expected residual returns while absorbing a
majority of the risk of loss from its activities, we believe Suo’ang BST is a
VIE under FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51”, because the equity
investors in Suo’ang BST do not have the characteristics of a controlling
financial interest, and we should be considered the primary beneficiary of
Suo’ang BST. Accordingly, we consolidate Suo’ang BST’s results, assets and
liabilities in our financial statements.For a description of these
contractual arrangements, see the section below titled “Contractual Arrangements
with Suo’ang BST and its Stockholders.” The Company’s consolidated assets do not
include any collateral for Suo’ang BST’s obligations. The creditors of Suo’ang
BST do not have recourse to the general credit of the Company.
 
 Shaanxi Suo’ang Biological
Science & Technology Co., Ltd.
 
 Suo’ang
BST is a limited liability company organized under the laws of PRC on August 26,
2002.  The paid-in capital of Suo’ang BST was funded by the Hangson
Stockholders. Our entire CWM business is operated by Suo’ang BST through its
subsidiary Suo’ang New Energy. Prior to 2007, Suo’ang BST was engaged in two
lines of business: (1) production and sale of coal-polymer (“COPO”) resin
products, such as degradable mulch used for moisture conservation and
temperature control of soil for protection of plant roots, and materials used
for plastic injection molding, electric wire covering, and garbage bags, and (2)
development of CWM. However, Suo’ang BST decided to focus on CWM and in December
2006, began to phase out the COPO resin products business by selling its
patented COPO resin production technology. In January 2007, Suo’ang BST ceased
operations of its COPO resin manufacturing plant and sold the related machinery.
Suo’ang BST entered into its first CWM sales contracts in January 2007, and
commenced CWM production in July 2007.
 
 Shaanxi Suo’ang New Energy
Enterprise Co., Ltd.
 
 Suo’ang
New Energy is a limited liability company organized under the laws of the PRC on
May 8, 2006, with 80% of the registered capital, representing 80% of its equity
interests, from Suo’ang BST, and the remaining 20% from Mr. Peng Zhou, a member
of our board of directors. Suo’ang New Energy was formed for the purpose of
engaging in the research, development, production and distribution of CWM. On
June 30, 2008, we entered into a securities purchase agreement with Mr. Zhou and
Suo’ang New Energy, pursuant to which we issued 7,500,000 restricted common
shares to Mr. Zhou in exchange for transferring his 20% equity interests of
Suo’ang Energy to Hangson, our wholly owned subsidiary. This transaction was
unanimously approved by disinterested directors on our board of
directors.
 
 3
 Contractual
Arrangements with Suo’ang BST and Its Stockholders
 
 Our
relationships with Suo’ang BST and its stockholders are governed by a series of
contractual arrangements, as we (including our subsidiary) do not own any equity
interests in Suo’ang BST. Under Chinese laws, each of Hangson and Suo’ang BST is
an independent legal entity and neither one is exposed to liabilities incurred
by the other.  Other than pursuant to the contractual arrangements
between Hangson and Suo’ang BST, Suo’ang BST does not transfer any other funds
generated from its operations to Hangson.  On August 18, 2006, Hangson
entered into the following contractual arrangements with Suo’ang BST and its
stockholders:
 
 Consulting
Services Agreement. Pursuant to the exclusive
consulting services agreements between Hangson and Suo’ang BST, Hangson has the
exclusive right to provide to Suo’ang BST general business operations services
as well as consulting services related to the technological research and
development of coal-based products as well as general business operation advice
and strategic planning (the “Services”).  Under this agreement,
Hangson owns the intellectual property rights developed or discovered through
research and development, in the course of providing the Services, or derived
from the provision of the Services. Suo’ang BST pays a quarterly consulting
service fees in Renminbi (“RMB”) to Hangson that is equal to all of Suo’ang
BST’s revenue for such quarter.
 
 Operating
Agreement.
Pursuant to the operating agreement among Hangson, Suo’ang BST and the
stockholders of Suo’ang BST (collectively “Suo’ang BST Stockholders”), Hangson
provides guidance and instructions on Suo’ang BST’s daily operations, financial
management and employment issues.  Suo’ang BST Stockholders must
designate the candidates recommended by Hangson as their representatives on
Suo’ang BST’s board of directors, and Hangson has the right to appoint
Suo’ang BST’s senior executives.  In addition, Hangson agreed to
guarantee Suo’ang BST’s performance under any agreements or arrangements
relating to Suo’ang BST’s business arrangements with any third party. Suo’ang
BST, in return, agreed to pledge its accounts receivable and all of its
assets to Hangson.  Moreover, Suo’ang BST agreed that without the
prior consent of Hangson, Suo’ang BST will not engage in any transactions that
could materially affect the assets, liabilities, rights or operations of
Suo’ang BST, including, without limitation, incurrence or assumption of any
indebtedness, sale or purchase of any assets or rights, incurrence of any
encumbrance on any of its assets or intellectual property rights in favor of
a third party, or transfer of any agreements relating to its business
operation to any third party. The term of this agreement is ten (10) years from
August 18, 2006 and may be extended only upon Hangson’s written confirmation
prior to the expiration of this agreement, with the extended term to be
mutually agreed upon by the parties.
 
 Equity
Pledge Agreement.Under the equity pledge
agreement between Suo’ang BST Stockholders and Hangson, Suo’ang BST Stockholders
have pledged all of their equity interests in Suo’ang BST to Hangson to
guarantee Suo’ang BST’s performance of its obligations under the consulting
services agreement.  If Suo’ang BST or Suo’ang BST Stockholders breach
their respective contractual obligations, Hangson, as pledgee, will be
entitled to certain rights, including the right to sell the pledged equity
interests.  Suo’ang BST Stockholders also agreed that upon occurrence
of any event of default, Hangson shall be granted an exclusive, irrevocable
power of attorney to take actions in the place and stead of Suo’ang BST
Stockholders to carry out the security provisions of the equity pledge agreement
and take any action and execute any instrument that Hangson may deem necessary
or advisable to accomplish the purposes of the equity pledge agreement. Suo’ang
BST Stockholders further agreed not to dispose of the pledged equity interests
or take any actions that would prejudice Hangson’ interest.  The
equity pledge agreement will expire two (2) years after Suo’ang BST’s
obligations under the consulting services agreements have been
fulfilled.
 
 Option
Agreement. Under the option
agreement between Suo’ang BST Stockholders and Hangson, Suo’ang BST Stockholders
have irrevocably granted Hangson or its designee an exclusive option to
purchase, to the extent permitted under PRC law, all or part of their equity
interests in Suo’ang BST for the cost of their initial contributions to the
registered capital or the minimum amount of consideration permitted by
applicable PRC law. Hangson or its designee has sole discretion to decide when
to exercise the option, whether in part or in full. The term of this agreement
is ten (10) years from August 18, 2006 and may be extended prior to its
expiration by written agreement of the parties.
 
 Proxy
Agreement. Pursuant to the proxy agreement between Hangson and Suo’ang
BST Stockholders, Suo’ang BST Stockholders have agreed to irrevocably grant a
designee of Hangson with the right to exercise their voting and other rights,
including the right to attend and vote at Suo’ang BST’s shareholders’ meetings
(or to consent in writing in lieu of such meetings) in accordance with
applicable laws and Suo’ang BST’s Article of Association, the right to sell or
transfer all or any of their equity interests in Suo’ang BST, and the right to
appoint and vote for the directors and chairman as the authorized
representatives of  Suo’ang BST Stockholders.  The term of
this proxy agreement is ten (10) years from August 18, 2006 and may be extended
prior to its expiration by written agreement of the parties.
 
 4
 Current
Corporate Structure
 
 As a
result of the contractual arrangements described above and the transaction with
Mr. Peng Zhou in June 2008, our current organizational structure is as follows
(the percentages depict the current equity interests):
 
 
 
 Our
Products
 
 Coal
water mixture, or CWM, is a viscous, heavy liquid fuel that is produced by
mixing grounded coal, water and chemical additives.  CWM can be
stored, pumped and burned as a substitute for oil or gas in properly modified
furnaces or boilers.  In general, CWM is cheaper than, but has
combustion thermal efficiency similar to, oil or gas. CWM burns cleaner than
coal, and is free of coal dust or the danger of spontaneous combustion during
transportation and storage.
 
 China is
a large producer and consumer of coal and will remain so for the foreseeable
future. To address environmental concerns from the use of coal, the Chinese
central government in August 1995 formulated the “9th Five-Year Plan for Clean
Coal Technology in China and a Development Program to 2010,” which
emphasizes the need to strengthen research and development of clean coal
technologies and to promote commercialization of proven clean coal
technologies. CWM is one such proven technology which already has the
support and endorsement of a number of local governments throughout China. For
example, the municipal government of Tongchuan, where our plant is located,
adopted resolutions on June 27, 2008 requiring all existing coal furnaces within
city limits to be replaced by CWM furnaces or other clean energy furnaces
by 2012, and requiring all new furnaces to use CWM as fuel effective
immediately. The city has established a working group headed by both the deputy
mayor and the director of the local environmental protection bureau to promote
CWM, and has designated RMB six million of its annual budget from 2008 to
2012 for subsidies and grants to facilitate the switch from coal to
CWM.  Other cities that are actively promoting CWM include Dongguan in
Guangdong Province, one of China’s manufacturing bases, and Nanchang, the
provincial capital of Jiangxi Province. Both cities have adopted resolutions
(Dongguan in May 26, 2008 and Nanchang in August 19, 2008) similar to those of
Tongchuan that first encourage and then mandate the switch from coal to CWM.
Additionally, both of these cities seek to establish and foster a CWM production
industry within their borders.
 
 Suo’ang
BST began studying market demands for CWM and the feasibility of a CWM business
in 2004. On May 8, 2006, Suo’ang BST established Suo’ang New Energy as a
subsidiary for the purpose of engaging in the research, development,
production and sale of CWM.  Suo’ang BST entered into its first sales
contracts for CWM in January 2007, and commenced CWM production in July
2007.
 
 5
 Our
Production Plant
 
 Our CWM
production plant is located in the city of Tongchuan, north of Xi’an, the
ancient capital of China and the provincial capital of Shaanxi Province. We
produce CWM by mixing coal with water and certain chemical additives as
follows:
 
 
 
 The
entire manufacturing process is controlled by and monitored from a computerized
central control system, which, among other things, measures and dispenses the
exact amount of water and chemical additives for each production cycle to ensure
that each batch of CWM is consistent in quality with all other batches that we
produce.
 
 The plant
was completed in July 2007 with an annual production capacity of 100,000 metric
tons (“tonnes”). Recently, we completed the installation of a fluid acoustic
energy CWM system, which we purchased from Zhejiang Jinggong Group, an unrelated
third party vendor. The system’s technology simplifies the mixing process of the
ingredients of CWM, thereby reducing the overall amount of raw materials
required while increasing the production volume as compared to the
traditional production method. The system’s technology also prevents
sedimentation that can result from long-distanced transportation of CWM under
the traditional production method, which can impact its combustion and heating
proficiencies. The system is now operational, and we expect to increase our
current annual CWM production volume by 250,000 tonnes.
 
 Our
Customers
 
 CWM is
sold and distributed directly to our customers. Suo’ang New Energy entered into
its first sales contracts for CWM in January 2007, and as of December 31, 2008,
we had over 19 customers all within Shaanxi Province, four of which collectively
accounted for approximately 49% of our total sales:
 
 ·
              Shaanxi
      Tongchuan Yitong High Tension Insulator Factory accounted for 14% of our
      total sales in 2008;
 
 ·
              Shaanxi
      Huayuan Paper Enterprise Co., Ltd. accounted for 13% of our total sales in
      2008;
 
 ·
              Xi’an
      Lijun Drug Manufacturing Factory accounted for 12% of our total sales in
      2008; and
 
 ·
              Shaanxi
      Sanxin Group accounted for 10% of our total sales in
  2008.
 
 We sell
CWM on a per tonne basis, and our sales are net of applicable sales taxes.
Customers generally enter into one-year supply contracts with Suo’ang New
Energy, pursuant to which they make monthly payments of the total sales in an
agreed amount.  As we are dependent on four major customers for a
substantial portion of our revenues, nonrenewal or termination of our contracts
with these customers would have a materially adverse effect on our
revenues. In the event that any one of our major customers does not renew
or terminates our contract, there can be no assurance that we will be able to
obtain another supply contract similar in scope. Additionally, there can be no
assurance that our business will not remain largely dependent on a limited
customer base accounting for a substantial portion of our revenues.
 
 Suo’ang
New Energy also acts as an agent for Qingdao Haizhong Industry Inc., an
unrelated third-party manufacturer of boilers that are compatible with our CWM,
and receives commission for sales of such boilers.
 
 As CWM is
still a relatively new industry, we look for opportunities to participate in
energy-related tradeshows and government-sponsored events to promote CWM
generally and our Company specifically. We regularly give on-site presentations
at our plant to visiting dignitaries at the request of the Tongchuan Municipal
Government. We participated in the “Popularizing CWM and Enhancing Energy
Conservation and Pollutants Reduction Conference ” held in Xi’an on March 27,
2008 and the first “Clean Fuel Popularization Conference” sponsored by Shaanxi
Province Environmental Protection Bureau on March 13, 2008.  In April
2009, we will be participating in the Investment & Trade Forum for
Cooperation between Eastern & Western China that will
take place in Xi’an, and in the China Import & Export Commodities
Fair that will take place in Guangdong.
 
 6
 Competition
 
 As the
largest CWM producer in northeastern China, we do not have any competition in
Shaanxi Province where we are based. We do have four competitors in other
provinces: Tai’an Liangda CWM Co., Ltd. in Shandong Province, Datong Huihai CWM
Company in Shanxi Province, Daqing Shengtai Clean Coal Fuel Co., Ltd. in
Heilongjiang Province, and Ningbo Hongyuan CWM Co., Ltd. in Zhejiang
Province.  Some of our competitors may have greater financial,
marketing, distribution and technological resources than we have,
and they may have more well-known brand names in the
markets.  They may also seek to enter and compete with us in our
market.
 
 Sources
and Availability of Raw Materials and Our Principal Suppliers
 
 Our
principal raw material is washed coal which is supplied directly from local coal
mines.  The coal price in China is subject to market forces largely
beyond our control, including energy costs, market demand, and freight
costs. While the price of coal in China generally did not change
significantly between 2005 and 2006, there was a significant increase in 2007
and 2008 driven by market demands. Our principal supplier of washed coal is Tong
Chuan City Yao Zhou District Zhao Jin County Xin Yuan Coal Mine, which
supplies up to 85% of our coal needs.  In March 2008, to hedge against
possible rising coal prices, Suo’ang New Energy contracted with Xin Yuan Coal
Mine to purchase up to 200,000 tonnes of washed coal at RMB 510 per tonne.
However, we are free to purchase washed coal from any other source that may
offer more competitive pricing. While our relationship with Xin Yuan Coal Mine
is good, we can readily find other sources of coal that are close to our plant,
as Shaanxi Province is one of China’s coal producing centers.
 
 Intellectual
Properties and Licenses
 
 We have
no material patents, licenses or other intellectual property. We may, however,
enter into confidentiality, non-compete and invention assignment agreements with
our employees and consultants and nondisclosure agreements with third
parties.  While CWM and its manufacturing process is not patented or
patentable, nevertheless, we may at times be involved in litigation based on
allegations of infringement or other violations of intellectual property
rights.  Furthermore, the application of laws governing intellectual
property rights in the PRC is uncertain and evolving and could involve
substantial risks to us.
 
 Government
Approval and Regulation of Our Principal Products or Services
 
 The
Environmental Protection Law of the PRC governs us and our CWM
products.  The Environmental Protection Law, promulgated by the
National People’s Congress on December 26, 1989, is the cardinal law for
environmental protection in China. The law establishes the basic principle for
coordinated advancement of economic growth, social progress and environmental
protection, and defines the rights and duties of governments at all levels.
Local environmental protection bureaus may set stricter local standards than the
national standards and enterprises are required to comply with the stricter of
the two sets of standards. The Environmental Protection Law requires any entity
operating a facility that produces pollutants or other hazards to incorporate
environmental protection measures into its operations and to establish an
environmental protection responsibility system, which must adopt effective
measures to control and properly dispose of waste gases, waste water, waste
residue, dust or other waste materials.
 
 Violators
of the Environmental Protection Law and various environmental regulations may be
subject to warnings, payment of damages and fines. Any entity undertaking
construction work or manufacturing activities before the pollution and waste
control and processing facilities are inspected and approved by the relevant
environmental protection bureau may be ordered to suspend production or
operations and may be fined. The violators of relevant environment protection
laws and regulations may be exposed to criminal liability if violations result
in severe loss of property, personal injuries or death.
 
 In
addition, China is a signatory to the 1992 United Nations Framework Convention
on Climate Change and the 1997 Kyoto Protocol, which are intended to limit
emissions of greenhouse gases.  Efforts to control greenhouse gas
emission in China could result in reduced use of coal if power generators switch
to sources of fuel with lower carbon dioxide emissions, which in turn could
reduce the revenues of our business and have a material adverse effect on
our results of operations.
 
 7
 The
Company endeavors to ensure the safe and lawful operation of its facilities in
manufacturing and distribution of  CWM and believes it is in compliance in
all material respects with applicable PRC laws and regulations.
 
 No
enterprise may start production at its facilities until it receives approval
from the Ministry of Commerce to begin operations. Suo’ang New Energy currently
has the requisite approval and licenses from the Ministry of Commerce in order
to operate our production facilities.
 
 Research
and Development
 
 We had no
research and development expenses in 2008 and in 2007. While we plan to
establish a research and development department sometime in 2009, the
anticipated costs are not known to us as of the date of this annual
report.
 
 Costs
and Effects of Compliance with Environmental Laws
 
 We had no
environmental compliance costs in 2008 and 2007, as our use of washed coal,
which is our primary raw material, and our manufacturing process are not deemed
to generate pollutant emissions or discharges under applicable PRC environmental
regulations.
 
 Employees
  In 2008,
we have approximately 68 employees, all of which were full time employees. In
2007, we had 63 employees, all of which were full time employees. None of these
employees are represented by any collective bargaining agreements. We have not
experienced a work stoppage. Management believes that our relations with our
employees are good.
 
 ITEM
1A.  RISK FACTORS
 
 You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this offering that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
 
 Risks
Associated With Our Business
  Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
  We have a
relatively limited operating history.   Suo’ang
BST commenced operations in 2002 and first achieved profitability in the year
ended 2004.  Accordingly, you should consider our future prospects in
light of the risks and uncertainties experienced by early stage companies in
evolving industries such as the coal products and alternative energy industry in
China. An investor in our securities must consider the risks, uncertainties and
difficulties frequently encountered by companies in new and rapidly evolving
markets. The risks and difficulties we face include challenges in accurate
financial planning as a result of limited historical data and the uncertainties
resulting from having had a relatively limited time period in which to implement
and evaluate our business strategies as compared to older companies with longer
operating histories.
 
 We
have a very brief operating history as a CWM producer.
 
 In
December 2006, we decided to solely focus on the research, development,
production, marketing and sale of CWM and accordingly phased out our COPO resin
products business in January 2007.  We signed our first sales
contracts for CWM in early 2007, completed our first CWM production line in June
2007, and commenced production and distribution of CWM in July
2007.  While we have also recently increased our annual production
capacity to 350,000 tonnes, our operating history as a CWM producer is fairly
brief, and we cannot assure you that our operations will be able to generate
sufficient revenue to continue our operations or that the CWM business will be
profitable.
  We
may require additional financing to execute our business plan.
 
 The
revenues from the sales of CWM may not be adequate to support the expansion of
our business. We will need substantial additional funds to build and maintain
new production facilities, pursue research and development activities, obtain
necessary regulatory approvals and market our business. While we may seek
additional funds through public or private equity or debt financing, strategic
transactions and/or from other sources, there are no assurances that future
funding will be available on favorable terms or at all. If additional funding is
not obtained, we may need to reduce, defer or cancel any plans of expansion,
including overhead expenditures, to the extent necessary. The failure to fund
our capital requirements as they arise would have a material adverse effect on
our business, financial condition and results of operations.
  8
 Our
business and results of operations are dependent on the PRC coal markets, which
may be cyclical.
 
 As the
majority of our revenue is derived from sales of CWM, our business and
operating results are substantially dependent on the domestic supply of coal,
especially washed coal. The PRC coal market is cyclical and exhibits fluctuation
in supply and demand from year to year and is subject to numerous factors beyond
our control, including, but not limited to, the economic conditions in the PRC,
the global economic conditions and fluctuations in industries with high demand
for coal, such as the power and steel industries. Fluctuations in supply and
demand for coal have effects on coal prices which, in turn, affect our operating
and financial performance. The demand for coal is primarily affected by the
overall economic development and the demand for coal from the electricity
generation, steel and construction industries. The supply of coal, on the other
hand, is primarily affected by the geographical location of the coal supplies,
the volume of coal produced by domestic and international coal suppliers, and
the quality and price of competing sources of coal. Alternative fuels such as
natural gas, oil and nuclear power, alternative energy sources such as
hydroelectric power, and international shipping costs also have effects on the
market demand for coal. Excess demand for coal may have an adverse effect on
coal prices which would, in turn, cause a decline in our profitability. A
significant increase in domestic coal prices could also materially and adversely
affect our business and result of operations.
 
 Our
business relies on our major customers.
  Four
customers accounted for approximately 49% of our total sales in 2008, namely,
Shaanxi Tongchuan Yitong High Tension Insulator Factory, Shaanxi Huayuan Paper
Enterprise Co., Ltd., Xi’an Lijun Drug Manufacturing Factory and Shaanxi Sanxin
Group. Given that a large percentage of our revenue was derived from sales
to these four customers, any adverse developments to their respective business
operations could have an adverse impact on our results of
operations.
 
 Our
business and prospects will be adversely affected if we are not able to compete
effectively.
 
 We face
competition in all areas of our business. While we have no direct competitor for
CWM in Shaanxi Province where we are based, there are other CWM producers in
other areas of China that may look to expand their business into our market.
Additionally, we must compete against producers of other forms of energy such as
coal, gas and oil, which may have broader market acceptance. Some of our
competitors may have greater financial, marketing, distribution
and technological resources than we have, and they may have more
well-known brand names in the marketplace.  If we are unable to
compete effectively against our competitors, this may have a material adverse
impact on our results of operations.
 
 We
may suffer losses resulting from industry-related accidents and lack of
insurance.
 
 Our
manufacturing facilities may be affected by water, gas, fire or structural
problems. As a result, we, like other coal-based products companies, may
experience accidents that will cause property damage and personal injuries.
Although we have implemented safety measures for our production facilities and
provided on-the-job training for our employees, there can be no assurance that
industry-related accidents will not occur in the future. Additionally, the risk
of accidental contamination or injury from handling and disposing of our product
cannot be completely eliminated. In the event of an accident, we could be held
liable for resulting damages.
 
 We do not
currently maintain fire, casualty or other property insurance covering our
properties, equipment or inventories, other than with respect to vehicles. In
addition, we do not maintain any business interruption insurance or any third
party liability insurance to cover claims related to personal injury,
property or environmental damage arising from accidents on our properties, other
than third party liability insurance with respect to vehicles. Any uninsured
losses and liabilities incurred by us could exceed our resources and have a
material adverse effect on our financial condition and results of operations.
Additionally, we could incur significant costs to comply with PRC environmental
laws and regulations in the future.
  Our
operations are subject to a number of risks relating to the PRC.
 
 We are
also subject to a number of risks relating to the PRC, including the
following:
 
 ·
                The
      PRC government currently supports the development and operation of clean
      coal technology such as CWM. If the PRC government changes its current
      policies that are currently beneficial to us, we may face significant
      constraints on our flexibility and ability to expand our business
      operations or to maximize our
  profitability.
 ·
                  Under
      current PRC regulatory requirements, projects for the development of CWM
      require approval of the PRC government. If we are required to undertake
      any such projects for our growth or for cost reduction and we do not
      obtain the necessary approval on a timely basis or at all, our financial
      condition and operating performances could be adversely
      affected.
 9
  ·
                    The
      PRC government has been reforming, and is expected to continue to reform
      its economic system. Many of the reforms are unprecedented or
      experimental, and are expected to be refined and improved. Other
      political, economic and social factors can also lead to further
      readjustment of the reform measures. This refining and readjustment
      process may not always have a positive effect on our operations. Our
      operating results may be adversely affected by changes in China’s economic
      and social conditions and by changes in policies of the PRC government
      such as changes in laws and regulations (or the interpretation thereof),
      imposition of additional restrictions on currency conversion and reduction
      in tariff protection and other import
      restrictions.
 ·
                      Since
      1994, the conversion of RMB into foreign currencies, including Hong Kong
      and U.S. dollars, has been based on rates set by the People’s Bank of
      China, or PBOC, which are set daily based on the previous day’s PRC
      interbank foreign exchange market rate and current exchange rates on the
      world financial markets. Since 1994, the official exchange rate for the
      conversion of RMB to U.S. dollars has generally been stable. On July
      21, 2005, however, PBOC announced a reform of its exchange rate system.
      Under the reform, RMB is no longer effectively linked to US dollars but
      instead is allowed to trade in a tight 0.3% band against a basket of
      foreign currencies. Any devaluation of the RMB may adversely affect
      the value of, and dividends payable on our shares as we receive our
      revenues and denominate our profits in RMB. Our financial condition and
      operating performance may also be affected by changes in the value of
      certain currencies other than RMB in which our earnings and obligations
      are denominated. In particular, a devaluation of the RMB is likely to
      increase the portion of our cash flow required to satisfy our foreign
      currency-denominated
  obligations.
 ·
                        Since
      1997, many new laws and regulations covering general economic matters have
      been promulgated in the PRC. Despite this activity to develop the legal
      system, PRC’s system of laws is not yet complete. Even where adequate law
      exists, enforcement of existing laws or contracts based on existing law
      may be uncertain and sporadic, and it may be difficult to obtain swift and
      equitable enforcement or to obtain enforcement of a judgment by a court of
      another jurisdiction. The relative inexperience of PRC’s judiciary in many
      cases creates additional uncertainty as to the outcome of any litigation.
      In addition, interpretation of statutes and regulations may be subject to
      government policies reflecting domestic political
      changes.
 Competitors may
develop and market products that are less expensive, more effective or safer,
making CWM obsolete or uncompetitive.
 
 Some of
our competitors and potential competitors may have greater product development
capabilities and financial, scientific, marketing and human resources than we
do. Technological competition from other alternative energy companies is intense
and is expected to increase.  Other companies have developed
technologies that could be the basis for competitive products. Some of these
products may be more effective and are less costly than CWM. Over time, CWM may
become obsolete or uncompetitive.
 
 CWM
may not gain wide market acceptance.
  Despite
the central government’s push for clean-coal technology and the support for CWM
amongst a number of municipal governments, CWM may ultimately not gain wide
market acceptance in the PRC. The degree of market acceptance of any product
depends on a number of factors, including establishment and demonstration of its
efficacy and safety, cost-effectiveness, advantages over alternative products,
and marketing and distribution support for the product. Limited information
regarding these factors is available in connection with CWM or competitive
products.
  To
establish wide market acceptance of CWM, we will require a marketing and sales
force with appropriate technical expertise and supporting distribution
capabilities, as well as continuing governmental support for the use of CWM. We
may not be able to establish sales, marketing and distribution capabilities or
enter into arrangements with third parties on acceptable terms, and our ability
to influence governmental support is limited. If CWM does not gain wide market
acceptance, our ability to continue to generate or increase revenue may be
limited.
  If
we were successfully sued for product liability, we could face substantial
liabilities that may exceed our resources.
  We may be
held liable if our product causes injury or is found unsuitable during product
testing, manufacturing, marketing, sale or use. We currently do not have product
liability insurance. We are not insured with respect to this liability. If we
choose to obtain product liability insurance but cannot obtain sufficient
insurance coverage at an acceptable cost or otherwise protect against potential
product liability claims, the commercialization of our product may be prevented
or inhibited. If we are sued for any injury caused by our product, our
liability could exceed our total assets.
 
 10
 We
have no business insurance coverage.
  The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.
 
 Our
success depends on attracting and retaining qualified personnel.
  We depend
on a core team of management and operational personnel. The loss of any of these
individuals could prevent us from achieving our business objectives. Our future
success will depend in large part on our continued ability to attract and retain
other highly qualified management and operational personnel, as well as
personnel with expertise in our field and industry. We face competition for
personnel from other companies, universities, public and private research
institutions, government entities and other organizations. If our recruitment
and retention efforts are unsuccessful, our business operations could
suffer.
 
 Downturn
in the global economy may slow domestic growth in China, which, in turn, may
effect our business.
 
 Due to
the global downturn in the financial markets, China may not be able to maintain
its recent growth rates mainly due to the decreased demand for China’s
exported good in countries that are in recessions. Although we do not
presently export any of our products, our earnings may become unstable if
China’s domestic growth slows significantly and the domestic demand for energy
declines.
 
 Risk
Related to the Alternative Energy Industry
 
 A
drop in the retail price of conventional energy or other alternative energy may
have a negative effect on our business.
  A
customer's decision to purchase CWM will be primarily driven by the return on
investment resulting from the energy savings from CWM. Any fluctuations in
economic and market conditions that impact the viability of conventional and
other alternative energy sources, such as decreases in the prices of oil and
other fossil fuels could cause the demand for CWM to decline. Although we
believe that current levels of retail energy prices support a reasonable return
on investment for CWM, there can be no assurance that future retail pricing of
conventional energy and other alternative energy will remain at such
levels.
 
 Existing
regulations and changes to such regulations may present technical, regulatory
and economic barriers to the purchase and use of CWM, which may significantly
affect the demand for our products.
  CWM is
subject to oversight and regulations in accordance with national and local
ordinances and regulations relating to safety, environmental protection, and
related matters. We are responsible for knowing such ordinances and regulations,
and must comply with these varying standards. Any new government regulations or
utility policies pertaining to our product may result in significant additional
expenses to us and our customers and, as a result, could cause a significant
reduction in demand for our product.
 
 The
market for CWM is emerging and rapidly evolving, and its future success remains
uncertain. If CWM is not suitable for widespread adoption or sufficient demand
for CWM does not develop or takes longer to develop than we anticipate, our
sales would not significantly increase and we would be unable to achieve or
sustain profitability. In addition, demand for CWM in the markets and geographic
regions where we operate may not develop or may develop more slowly than we
anticipate. Many factors will influence the widespread adoption of CWM and
demand for our products, including:
 ·
                    cost-effectiveness
      of CWM as compared with conventional and other alternative energy products
      and
technologies;
 ·
                        performance
      and reliability of CWM as compared with conventional and other alternative
      energy products and
      technologies;
 ·
                            capital
      expenditures by customers that tend to decrease if the PRC or global
      economy slows down;
  and
 ·
                                availability
      of government subsidies and
      incentives.
  11
 Risks
Related to Our Corporate Structure
  PRC
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation, we
could be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our business.
  There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our affiliated Chinese entity, Suo’ang BST, and its
stockholders. We are considered a foreign person under PRC law. As a result, we
are subject to PRC law limitations on foreign ownership of certain Chinese
companies. These laws and regulations are relatively new and may be subject to
change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively.
 
 The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
 
 We
may be adversely affected by complexity, uncertainties and changes in PRC
regulation of our business and industry, including limitations on our ability to
own key assets.
  The PRC
government regulates the energy industries including foreign ownership of, and
the licensing and permit requirements pertaining to, companies in these
industries. These laws and regulations are relatively new and evolving, and
their interpretation and enforcement involve significant uncertainty. As a
result, in certain circumstances it may be difficult to determine what
actions or omissions may be deemed to be a violation of applicable laws and
regulations. Issues, risks and uncertainties relating to PRC government
regulation of our industry include the following:
 ·
                  We
      only have contractual control over Suo’ang BST. Neither we nor our
      subsidiary own any equity interests in Suo’ang BST due to restriction of
      foreign investment in certain Chinese businesses;
      and
  ·
                  Uncertainties
      relating to the regulations of our industry in China, including evolving
      licensing practices, means that permits, licenses or operations at our
      company may be subject to challenge. This may disrupt our business, or
      subject us to sanctions, requirements to increase capital or other
      conditions or enforcement, or compromise enforceability of related
      contractual arrangements, or have other harmful effects on
      us.
 The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, alternative energy businesses in
China, including our business.
  In
order to comply with PRC laws limiting foreign ownership of certain Chinese
companies, we conduct our business through Suo’ang BST by means of contractual
arrangements. If the PRC government determines that these contractual
arrangements do not comply with applicable regulations, our business could be
adversely affected.
  The PRC
government restricts foreign investment in certain industries in China.
Accordingly, we operate our business in China through contractual arrangements
with Suo’ang BST. Suo’ang BST holds the licenses and approvals necessary to
operate the CWM business in China. We have contractual arrangements with Suo’ang
BST and its stockholders through our wholly owned subsidiary, Hangson, that
allow us to substantially control Suo’ang BST. We cannot assure you, however,
that we will be able to enforce these contracts.
  Although
we believe we comply with current Chinese regulations, and have been advised by
our PRC counsel that, in their opinion, the structure for operating our business
in China (including our corporate structure and contractual arrangements with
Suo’ang BST) complies with all applicable PRC laws, rules and regulations, and
does not violate, breach, contravene or otherwise conflict with any applicable
PRC laws, rules or regulations, we cannot assure you that the Chinese government
would agree that these operating arrangements comply with Chinese licensing,
registration or other regulatory requirements, with existing policies or with
requirements or policies that may be adopted in the future. If the Chinese
government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we may
not be able to comply, impose restrictions on our business operations or on our
customers, or take other regulatory or enforcement actions against us that could
be harmful to our business.
  12
 Our
contractual arrangements with Suo’ang BST may not be as effective in providing
control over it as direct ownership.
  Since PRC
law limits foreign equity ownership in certain industries in China, we operate
our business through contractual arrangements with Suo’ang BST. Neither we nor
our wholly owned subsidiary, Hangson, have equity ownership interest in Suo’ang
BST, and we rely on contractual arrangements to control and operate its
business. These contractual arrangements may not be as effective in providing
control over Suo’ang BST as direct ownership. For example, Suo’ang BST could
fail to take actions required for our business despite its contractual
obligation to do so. If Suo’ang BST fails to perform under the contractual
arrangements, we may have to rely on legal remedies under PRC law, which may not
be effective. In addition, we cannot assure you that Suo’ang BST’s
stockholders will always act in our best interests.
 
 Because
we rely on the consulting services agreement with Suo’ang BST for our revenue,
the termination of this agreement will severely and detrimentally affect our
continuing business viability under our current corporate
structure.
 
 We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between Hangson and Suo’ang BST and the
minority interest in Suo’ang New Energy through Hangson. As a result, we
currently rely entirely for our revenues on dividends payments from Hangson
after it receives payments from Suo’ang BST pursuant to the consulting services
agreement which forms a part of the contractual arrangements between Hangson and
Suo’ang BST. The consulting services agreement may be terminated by written
notice of Hangson or Suo’ang BST in the event that: (a) one party causes a
material breach of the agreement, provided that if the breach does not relate to
a financial obligation of the breaching party, that party may attempt to remedy
the breach within 14 days following the receipt of the written notice; (b) one
party becomes bankrupt, insolvent, is the subject of proceedings or arrangements
for liquidation or dissolution, ceases to carry on business, or becomes unable
to pay its debts as they become due; (c) Hangson terminates its operations; (d)
Suo’ang BST’s business license or any other license or approval for its business
operations is terminated, cancelled or revoked; or (e) circumstances arise which
would materially and adversely affect the performance or the objectives of the
agreement.
 
 Additionally,
Hangson may terminate the consulting services agreement without cause. Because
neither we nor Hangson own equity interests of Suo’ang BST, the termination of
the consulting services agreement would sever our ability to continue receiving
payments from Suo’ang BST under our current holding company structure. While we
are currently not aware of any event or reason that may cause the consulting
services agreement to terminate, we cannot assure you that such an event or
reason will not occur in the future. In the event that the consulting services
agreement is terminated, this may have a severe and detrimental effect on our
continuing business viability under our current corporate structure, which, in
turn, may affect the value of your investment.
 
 Members
of Suo’ang BST’s management have potential conflicts of interest with us, which
may adversely affect our business and your ability for recourse.
 
 Mr.
Baowen Ren, our Chief Executive Officer, is also the Chairman of the Board of
Directors of Suo’ang BST and Suo’ang New Energy. Mr. Peng Zhou, who is Suo’ang
New Energy’s director, is a member of our board of directors. Conflicts of
interests between their respective duties to our Company and Suo’ang BST may
arise. As our directors and executive officer (in the case of Mr. Ren), they
have a duty of loyalty and care to us under U.S. and British Virgin Islands laws
when there are any potential conflicts of interests between our company and
Suo’ang BST. We cannot assure you, however, that when conflicts of interest
arise, each of them will act completely in our interests or that conflicts of
interests will be resolved in our favor. For example, they may determine that it
is in Suo’ang BST’s interests to sever the contractual arrangements with
Hangson, irrespective of the effect such action may have on us. In addition, any
one of them could violate his legal duties by diverting business opportunities
from us to others, thereby affecting the amount of payment Suo’ang BST is
obligated to remit to us under the consulting services agreement.
 
 Our board
of directors is comprised of a majority of independent directors (including one
based in the United States). These independent directors may be in a position to
deter and counteract the actions of our officers or non-independent directors
that are against our interests, as the independent directors do not have any
position with, or interests in, our affiliate entities, and should therefore not
have any conflicts of interests such as those potential conflicts of
interest of our officers and directors who are also management members
of our affiliated companies in the PRC. Additionally, the independent directors
have fiduciary duties to act in our best interests, and failure on their part to
do so may subject them to personal liabilities for breach of such duties. We
cannot, however, give any assurance as to how the independent directors will
act. Further, if we or the independent directors cannot resolve any conflicts of
interest between us and those of our officers and directors who are management
members of our affiliated companies in the PRC, we would have to rely on legal
proceedings, which could result in the disruption of our business.
 
 In the
event that you believe that your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against Suo’ang BST
or our officers or directors who are members of its management, all of whom
reside within China. Even if you are successful in bringing an action, the laws
of China may render you unable to enforce a judgment against the assets of
Suo’ang BST and its management, all of which are located in China.
 
 13
 Risks
Related to Doing Business in China
  Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
  Substantially
all of our business operations are conducted
in China.  Accordingly, our results of operations, financial
condition and prospects are subject to a significant degree to economic,
political and legal developments in China.  China’s economy differs
from the economies of most developed countries in many respects, including with
respect to the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources.  While
the PRC economy has experienced significant growth in the past 20 years, growth
has been uneven across different regions and among various economic sectors
of China.  The PRC government has implemented various measures to
encourage economic development and guide the allocation of resources. Some of
these measures benefit the overall PRC economy, but may also have a negative
effect on us.  For example, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to
us.  Since early 2004, the PRC government has implemented certain
measures to control the pace of economic growth.  Such measures may
cause a decrease in the level of economic activity in China, which, in turn,
could adversely affect our results of operations and financial
condition.
 
 If
Suo’ang New Energy loses its existing preferential tax benefits, we would have
to pay more taxes, which could have a material and adverse effect on our
financial condition and results of operations.
  Under PRC
laws and regulations, an enterprise may enjoy preferential tax benefits if it is
registered in a high-tech zone and also qualifies as “new or high-technology
enterprise”.  As a certified “new or high-technology enterprise”
located in a high-technology zone in X’ian, Suo’ang New Energy enjoyed a
two-year exemption from enterprise income tax that ended in 2008, and will
continue to enjoy a 50% reduction of its enterprise income tax for the next
three years. If Suo’ang New Energy is unable to qualify for additional
preferential tax treatments at the end of such period, we would have to pay more
taxes, which could have a material and adverse effect on our financial condition
and results of operations.
  Suo’ang
BST is subject to restrictions on making payments to us.
  We are a
holding company incorporated in Nevada and do not have any assets or conduct any
business operations other than the contractual arrangements between Hangson and
Suo’ang BST and the minority interest in Suo’ang New Energy through Hangson. As
a result of our holding company structure, we rely entirely on payments from
Suo’ang BST under our contractual arrangements. The Chinese government also
imposes controls on the conversion of RMB into foreign currencies and the
remittance of currencies out of China. We may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign
currency. See “Government control of currency conversion may affect the value of
your investment.” Furthermore, if our affiliated entity in China incurs debt on
their own in the future, the instruments governing the debt may restrict their
ability to make payments. If we are unable to receive all of the revenues from
Suo’ang BST’s operations through the contractual arrangements between Hangson
and Suo’ang BST, we may be unable to pay dividends on our ordinary
shares.
 
 Uncertainties
with respect to the PRC legal system could adversely affect us.
  We
conduct our business primarily through Hangson and Suo’ang BST.  Our
operations in China are governed by PRC laws and regulations.  We are
generally subject to laws and regulations in China.  The PRC
legal system is based on written statutes. Prior court decisions may be cited
for reference but have limited precedential value.
  However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China.  In particular, because these laws and
regulations are relatively new, and because of the limited volume of published
decisions and their nonbinding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties.  In addition, the
PRC legal system is based in part on government policies and internal rules
(some of which are not published on a timely basis or at all) that may have a
retroactive effect.  As a result, we may not be aware of our violation
of these policies and rules until some time after the violation.  In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
 
 You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us and our management.
  We are a
holding company incorporated in Nevada and do not have any assets or conduct any
business operations other than the contractual arrangements between Hangson and
Suo’ang BST and the minority interest in Suo’ang New Energy through Hangson. In
addition, all of Suo’ang BST’s assets are located in, and all of our other
senior executive officers reside within, China. As a result, it may not be
possible to effect service of process within the United States or elsewhere
outside China upon our senior executive officers and directors not residing in
the United States, including with respect to matters arising under U.S. federal
securities laws or applicable state securities laws. Moreover, our Chinese
counsel has advised us that China does not have treaties with the United States
or many other countries providing for the reciprocal recognition and enforcement
of judgment of courts. As a result, our public shareholders may have substantial
difficulty in protecting their interests through actions against our management
or directors than would shareholders of a corporation with assets and management
members located in the United States.
 
 14
 Governmental
control of currency conversion may affect the value of your
investment.
  The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB.  Under our current
structure, our income is primarily derived from payments from Suo’ang BST.
Shortages in the availability of foreign currency may restrict the ability of
our PRC subsidiaries and our affiliated entity to remit sufficient foreign
currency to pay dividends or other payments to us, or otherwise satisfy their
foreign currency denominated obligations.  Under existing PRC foreign
exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the
PRC State Administration of Foreign Exchange by complying with certain
procedural requirements.  However, approval from appropriate
government authorities is required where RMB is to be converted into foreign
currency and remitted out of China to pay capital expenses such as the repayment
of bank loans denominated in foreign currencies.  The PRC government
may also, at its discretion, restrict access in the future to foreign currencies
for current account transactions.  If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders.
  Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
  The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic
conditions.  Our revenues and costs are mostly denominated in RMB,
while a significant portion of our financial assets are denominated in U.S.
dollars.  We rely entirely on fees paid to us by Suo’ang BST. Any
significant fluctuation in value of RMB may materially and adversely affect our
cash flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our stock in U.S. dollars.  For example, an
appreciation of RMB against the U.S. dollar would make any new RMB denominated
investments or expenditures more costly to us, to the extent that we need to
convert U.S. dollars into RMB for such purposes.
 
 We
face risks related to health epidemics and other outbreaks.
  Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April
2004.  Any prolonged recurrence of SARS or other adverse public health
developments in China may have a material adverse effect on our business
operations.  For instance, health or other government regulations
adopted in response may require temporary closure of our production facilities
or of our offices.  Such closures would severely disrupt our business
operations and adversely affect our results of operations.  We have
not adopted any written preventive measures or contingency plans to combat any
future outbreak of SARS or any other epidemic.
  Risks
Related to an Investment in Our Securities
  To
date, we have not paid any cash dividends and no cash dividends are expected to
be paid in the foreseeable future.
 
 We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide not
to pay any dividends. We intend to retain all earnings for our
operations.
  The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
 
 As long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the “penny stock” rules. The
“penny stock” rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser’s written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.
 
 15
 Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
 
 The
Company cannot predict the extent to which an active public market for its
common stock will develop or be sustained. However, the Company does not rule
out the possibility of applying for listing on the Nasdaq National Market or
other exchanges.
  Our
common shares have historically been sporadically or "thinly-traded" on the
“Over-the-Counter Bulletin Board”, meaning that the number of persons interested
in purchasing our common shares at or near bid prices at any given time may be
relatively small or non-existent.  This situation is attributable to a
number of factors, including the fact that we are a small company which is
relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume, and
that even if we came to the attention of such persons, they tend to be
risk-averse and would be reluctant to follow an unproven company such as ours or
purchase or recommend the purchase of our shares until such time as we became
more seasoned and viable.  As a consequence, there may be periods of
several days or more when trading activity in our shares is minimal or
non-existent, as compared to a seasoned issuer which has a large and steady
volume of trading activity that will generally support continuous sales without
an adverse effect on share price.  We cannot give you any assurance
that a broader or more active public trading market for our common stock will
develop or be sustained, or that current trading levels will be
sustained.
  The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share
price.   The price at which you purchase our common stock may not
be indicative of the price that will prevail in the trading
market.  You may be unable to sell your common stock at or above your
purchase price if at all, which may result in substantial losses to
you.
 
 The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite
future.  The volatility in our share price is attributable to a number
of factors.  First, as noted above, our common shares are sporadically
and/or thinly traded.  As a consequence of this lack of liquidity, the
trading of relatively small quantities of shares by our shareholders may
disproportionately influence the price of those shares in either
direction.  The price for our shares could, for example, decline
precipitously in the event that a large number of our common shares are sold on
the market without commensurate demand, as compared to a seasoned issuer
which could better absorb those sales without adverse impact on its share
price.  Secondly, we are a speculative or "risky" investment due to
our lack of revenues or profits to date and uncertainty of future market
acceptance for our current and potential products.  As a consequence
of this enhanced risk, more risk-adverse investors may, under the fear of losing
all or most of their investment in the event of negative news or lack of
progress, be more inclined to sell their shares on the market more quickly and
at greater discounts than would be the case with the stock of a seasoned
issuer.  The following factors may add to the volatility in the price
of our common shares: actual or anticipated variations in our quarterly or
annual operating results; adverse outcomes; the termination of our contractual
agreements with Suo’ang BST; and additions or departures of our key personnel,
as well as other items discussed under this "Risk Factors" section, as well
as elsewhere in this annual report.
 
 Many of
these factors are beyond our control and may decrease the market price of our
common shares, regardless of our operating performance.  We cannot
make any predictions or projections as to what the prevailing market price for
our common shares will be at any time, including as to whether our common shares
will sustain their current market prices, or as to what effect that the sale of
shares or the availability of common shares for sale at any time will have on
the prevailing market price.  However, the Company does not rule out
the possibility of applying for listing on the Nasdaq National Market or other
exchanges.
 
 Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses.  Our management is aware of the abuses
that have occurred historically in the penny stock market.  Although
we do not expect to be in a position to dictate the behavior of the market or of
broker-dealers who participate in the market, management will strive within the
confines of practical limitations to prevent the described patterns from being
established with respect to our securities.  The occurrence of these
patterns or practices could increase the volatility of our share
price.
  16
 Volatility
in our common share price may subject us to securities litigation.
 
 The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite
future.  In the past, plaintiffs have often initiated securities class
action litigation against a company following periods of volatility in the
market price of its securities.  We may, in the future, be the target
of similar litigation. Securities litigation could result in substantial costs
and liabilities and could divert management's attention and
resources.
 
 Our corporate
actions are substantially controlled by our principal shareholders and
affiliated entities.
 
 As of
March 27, 2009, our principal stockholders and their affiliated entities own
approximately 39% of our outstanding common shares, representing approximately
39% of our voting power. These stockholders, acting individually or as a group,
could exert substantial influence over matters such as electing directors and
approving mergers or other business combination transactions. In addition,
because of the percentage of ownership and voting concentration in these
principal stockholders and their affiliated entities, elections of our board of
directors will generally be within the control of these stockholders and their
affiliated entities. While all of our stockholders are entitled to vote on
matters submitted to our stockholders for approval, the concentration of shares
and voting control presently lies with these principal stockholders and their
affiliated entities. As such, it would be difficult for stockholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as stockholders will be viewed favorably by all stockholders of the
company.
 
 The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by our company and
may discourage lawsuits against our directors, officers and
employees.
 
 Our
articles of incorporation contains a provision that eliminates the liability of
our directors for monetary damages to our company and shareholders to the extent
allowed under Nevada law and we are prepared to give such indemnification to our
directors and officers to the extent provided by Nevada law.  We also
have contractual indemnification obligations under our agreements with some of
our directors. The foregoing indemnification obligations could result in our
company incurring substantial expenditures to cover the cost of settlement or
damage awards against directors and officers, which we may be unable to
recoup.  These provisions and resultant costs may also discourage our
company from bringing a lawsuit against directors and officers for breaches of
their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our shareholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
shareholders.
  Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.
  There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other similar rule changes are
likely to increase general and administrative costs and expenses. Additionally,
while we currently do not maintain any insurance policies, we are contractually
obligated to obtain coverage for directors’ and officers insurance. When we do
so, we expect that premiums for such insurance policies may be considerable in
light of the high claims rates in recent years. Additionally, there could be
changes in certain accounting rules. These and other potential changes could
materially increase the expenses we report under generally accepted accounting
principles, and adversely affect our operating results.
 
 Past
company activities prior to the reverse merger may lead to future liability for
the Company.
 
 Prior to
the closing of the Exchange Agreement with Hangson on October 20, 2006, we were
engaged in businesses unrelated to our current operations.  Although
certain prior Company shareholders have provided certain indemnifications
against any loss, liability, claim, damage or expense arising out of or based on
any breach of or inaccuracy in any of their representations and warranties made
in connection with the Exchange Agreement, any liabilities relating to such
prior business against which we are not completely indemnified may have a
material adverse effect on the Company.
 
 17
 The
market price for our stock may be volatile.
  The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
 ·
                  actual
      or anticipated fluctuations in our quarterly operating
      results;  ·
                      changes
      in financial estimates by securities research
      analysts;  ·
                          conditions
      in alternative energy and coal-based product
      markets;  ·
                              changes
      in the economic performance or market valuations of other alternative
      energy and coal-based products
      companies;  ·
                                  announcements
      by us or our competitors of new products, acquisitions, strategic
      partnerships, joint ventures or capital
      commitments;  ·
                                      addition
      or departure of key
      personnel;  ·
                                          intellectual
      property litigation;
      and  ·
                                              general
      economic or political conditions in
      China.  In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our
stock.
  We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.
  We
believe that our current cash and cash equivalents, anticipated cash flow from
operations will be sufficient to meet our anticipated cash needs for the near
future.  We may, however, require additional cash resources due to
changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.  If our resources
are insufficient to satisfy our cash requirements, we may seek to sell equity or
debt securities or obtain a credit facility.  The sale of equity
securities could result in dilution to our shareholders.  The
incurrence of indebtedness would result in increased debt service obligations
and could result in operating and financing covenants that would restrict our
operations.  We cannot assure you that financing will be available in
amounts or on terms acceptable to us, if at all.
 
 Shares
eligible for future sale may adversely affect the market.
 
 From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to amended Rule 144, non-affiliate
stockholders may sell freely after six months subject only to the current public
information requirement (which disappears after one year). Affiliates may sell
after six months subject to the Rule 144 volume, manner of sale (for equity
securities), current public information and notice requirements. Of the
approximately 92 million shares of our common stock outstanding as of March 27,
2009, approximately 14 million shares were freely tradable without restriction,
as of March 27, 2009. Any substantial sale of our common stock pursuant to Rule
144 or pursuant to any resale prospectus may have a material adverse effect on
the market price of our common stock.
 
 If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
  We are
subject to reporting obligations under the U.S. securities laws. The SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting. In addition, beginning with our annual report for fiscal
2009, an independent registered public accounting firm must attest to and report
on management’s assessment of the effectiveness of our internal controls over
financial reporting. In our annual report on Form 10-K for the year ended
December 31, 2007, we reported certain material weaknesses involving control
activities, specifically (1) accounting and finance personnel weaknesses in that
the current staff in the accounting department is relatively inexperienced and
requires substantial training; (2) lack of internal audit function in that we
lack qualified resources to perform the internal audit functions properly, and
the scope and effectiveness of internal audit function are yet been fully
developed; and (3) lack of internal audit system in that we do not have an
internal audit department to prevent and detect control lapses and errors in the
accounting of certain key areas in accordance with the appropriate costing
method used by us.
 
 18


In light
of the foregoing, our management began undertaking steps to address these
issues, including the engagement of a chief financial officer whom management
believes has the requisite financial reporting experience, skills and knowledge
to complement our existing personnel. Additionally, four independent directors
now sit on our board of directors, including a member who is appropriately
credentialed as a financial expert. The independent directors have been tasked
to establish certain internal audit functions within our company, and we have
also established audit and compensation committees comprising entirely of
independent directors. We have also hired additional accounting and operational
personnel. However, there is no assurance that additional remedial measures will
not be necessary, or that after the remediation our management will be able to
conclude that our internal controls over our financial reporting are effective.
Moreover, even if our management concludes that our internal controls over
financial reporting are effective, our independent registered public accounting
firm may still decline to attest to our management’s assessment or may issue a
report that is qualified if it is not satisfied with our controls or the level
at which our controls are documented, designed, operated or reviewed, or if it
interprets the relevant requirements differently from us.


Our
reporting obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price of
our stock. Furthermore, we anticipate that we will incur considerable costs and
use significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.
 
 We
will incur increased costs as a result of being a public company.
  As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company.  In addition, the
Sarbanes-Oxley Act, as well as new rules subsequently implemented by SEC, has
required changes in corporate governance practices of public
companies.  We expect these new rules and regulations to increase our
legal, accounting and financial compliance costs and to make certain corporate
activities more time-consuming and costly. In addition, we will incur additional
costs associated with our public company reporting requirements. We are
currently evaluating and monitoring developments with respect to these new
rules, and we cannot predict or estimate the amount of additional costs we may
incur or the timing of such costs.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  Not
applicable.
 
 ITEM
2. DESCRIPTION OF PROPERTY
 
 The
Company’s headquarters are currently located in approximately 302 square meters
of office space at Room 1605, Suite B, Zhengxin Building, No.5, Gaoxin 1st Road,
Gaoxin District, Xi’an, Shaanxi Province, PRC.  The Company
leases this office space.
 
 In July
2006, Suo’ang BST purchased a land use right for the property located in
Tongchuan City’s Yaozhou District where our CWM plant is situated, and
obtained the land use right certificate for this property in December 2007. The
land use right allows us to lease this property for a period of fifty (50)
years. In June 2007, the first phase of the plant became operational and
CWM production commenced in July 2007.
 
 The table
below provides summary descriptions of the properties used for the Company’s
business operations in 2008:
 
 Property
      Location
              Area
                (square
      meters)
              Lease
                Expiration
      Date
              PurposeRoom
      1605, Suite B, Zhengxin Building No. 5, Gaoxin 1st Road, Gaoxin District,
      Xi’an, Shaanxi Province, PRC
              302
              November
      14, 2009
              Company
      headquartersYaozhou
      District, Tongchuan
                Shaanxi
      Province, PRC
              40,626
              December
      8, 2057
              CWM
      production plant
 
 ITEM 3. LEGAL PROCEEDINGS
  We may be subject to, from time to
time, various legal proceedings relating to claims arising out of our operations
in the ordinary course of our business. We are not currently a party to any
legal proceedings, the adverse outcome of which, individually or in the
aggregate, would have a material adverse effect on the business, financial
condition, or results of operations of the Company.
 
 19
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  We did
not submit any matters to a vote of security holders during the fourth quarter
of the fiscal year covered by this annual report.
  PART II
  ITEM 5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
 Market
Information
 
 Our
common stock is not listed on any stock exchange. The common stock is traded
over-the-counter on the Over-the-Counter Electronic Bulletin Board (“OTCBB”)
under the symbol "SCLX".  The following table sets forth, for the
periods indicated, the high and low bid information for the common stock as
reported by the OTCBB.  The bid prices reflect inter-dealer
quotations, do not include retail markups, markdowns or commissions and do not
necessarily reflect actual transactions.
 2008
                  
                  LOW
                  
                  
                  HIGHFourth
      Quarter
                  
                  $
                  0.11
                  
                  
                  $
                  0.30Third
      Quarter
                  
                  $
                  0.12
                  
                  
                  $
                  0.40Second
      Quarter
                  
                  $
                  0.11
                  
                  
                  $
                  0.30First
      Quarter
                  
                  $
                  0.11
                  
                  
                  $
                  0.452007Fourth
      Quarter
                  
                  $
                  0.12
                  
                  
                  $
                  0.35Third
      Quarter
                  
                  $
                  0.17
                  
                  
                  $
                  1.01Second
      Quarter
                  
                  $
                  0.45
                  
                  
                  $
                  1.01First
      Quarter
                  
                  $
                  0.20
                  
                  
                  $
                  1.05
  As of
March 27, 2009, we had approximately 92,181,750 shares of common stock issued
and outstanding.
 
 Holders
  As of
March 27, 2009, we had approximately 1,632 record holders of our common stock
(not including beneficial owners who hold shares at broker/dealers in “street
name”).
  Dividends
  While
there are no restrictions that limit our ability to pay dividends, we have not
paid, and do not currently intend to pay cash dividends on our common stock in
the foreseeable future. Our policy is to retain all earnings, if any, to provide
funds for operation and expansion of our business. The declaration of dividends,
if any, will be subject to the discretion of our board of directors, which may
consider such factors as our results of operations, financial condition, capital
needs and acquisition strategy, among others.
 
 Securities
Authorized for Issuance under Equity Compensation Plans
 
 Please
see the discussion in Item 12 titled “Equity Compensation Plan Information”
below.
 
 Sales
of Unregistered Securities
 
 Sales of
securities within the past three years which were not registered under the
Securities Act of 1933, as amended (the “Securities Act”) were previously
disclosed in our current reports on Form 8-K filed on October 26, 2006, July 7,
2008, September 17, 2008 and September 22, 2008, and in our annual report on
Form 10-K for the year ended December 31, 2007 filed on April 15,
2008.
 
 Recent
Developments
 
 As
reported in our current report on Form 8-K filed on March 30, 2009, on or about
March 27, 2009, we entered into an agreement with the investors who participated
in our private financing in September 2008. The agreement amends certain terms
of the convertible debentures as well as the warrants that we issued to these
investors.
 
 On March
31, 2009, we issued 1,166,500 shares of restricted common stock to an
independent consultant that we engaged for consultation and advisory services
relating to investor relation. On April 1, 2009, we issued an additional
1,166,500 shares of restricted common stock to the same consultant.
 
 20
 ITEM
6. SELECTED FINANCIAL DATA
 
 Not
applicable.
 
 ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  The following discussion and
analysis of our results of operations and financial condition
for  the  fiscal years ended December 31, 2007 and 2006
should be read in conjunction with our financial statements and the notes
to those financial statements that are included elsewhere in this annual report.
Our discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
the “Risk Factors”, “Cautionary Notice Regarding Forward-Looking Statements” and
“Description of Business” sections and elsewhere in this prospectus. We use
words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,”
“predict,” and similar expressions to identify forward-looking
statements. Although we
believe the expectations expressed in these forward-looking statements are based
on reasonable assumptions within the bound of our knowledge of our business, our
actual results could differ materially from those discussed in these statements.
Factors that could contribute to such differences include, but are not limited
to, those discussed in the “Risk Factors” section of this report. We undertake
no obligation to update publicly any forward-looking statements for any reason
even if new information becomes available or other events occur in the
future.
 
 Our
financial statements are prepared in US Dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange
Rates” below for information concerning the exchanges rates at which Renminbi
(“RMB”) were translated into US Dollars (“USD”) at various pertinent dates and
for pertinent periods.
 
 Overview
 
 Sino
Clean Energy, Inc. is engaged in the research, development, production and sale
of coal water mixture (CWM) in the PRC. We were originally incorporated in Texas
as “Discount Mortgage Services, Inc.” on July 11, 2000. We changed our name to
“Endo Networks, Inc.” on November 5, 2001 and re-domiciled to the State of
Nevada on December 13, 2001. We changed our name again on January 4, 2007 to
“China West Coal Energy Inc.” and again on August 15, 2007 to our current name,
“Sino Clean Energy, Inc.” to better reflect our current business
operations.
 
 On
October 20, 2006, we acquired Hangson by way of exchanging 26,000,000 shares of
our common stock for 100% of the issued and outstanding equity of Hangson. We
accounted for this share exchange transaction as a reverse acquisition and
recapitalization and, as a result, our consolidated financial statements are, in
substance, those of Hangson, with our assets and liabilities, and revenues and
expenses, being included effective from the date of the stock exchange
transaction. Please see Note 1 to our consolidated financial statements included
in this annual report for further details of this stock exchange
transaction.
 
 Having no
substantive operation of its own, Hangson, through its VIE, Suo’ang BST, and
Suo’ang BST’s subsidiary, Suo’ang New Energy, engages in research, development,
production, marketing and sales of CWM in China. Please see “Contractual
Arrangements with Suo’ang BST and its Stockholders” above and Note 1 to our
consolidated financial statements included in this annual report for a
description of the contractual arrangements between Hangson and Suo’ang BST, and
their impact on our consolidated financial statements.
 
 Critical
Accounting Policies and Estimates
 
 Impairment
 
 The
Company accounts for impairment of long-lived assets including property, plant
and equipment, and amortizable intangible assets in accordance with SFAS No.144,
Accounting for the Impairment
or Disposal of Long-Lived Assets, which requires an impairment loss to be
recognized when the carrying amount of a long-lived asset or asset group exceeds
its fair value and is not recoverable (when carrying amount exceeds the gross,
undiscounted cash flows from use and disposition). The impairment loss is
measured as the excess of the carrying amount over the asset’s (or asset
group’s) fair value.
 
 21
 Revenue
recognition
 
 Revenues
of the Company include sales of coal water mixture.
 
 Sales are
recognized in accordance with Securities and Exchange Commission (“SEC”) Staff
Accounting Bulletin ("SAB") No. 104, when the following four revenue criteria
are met: persuasive evidence of an arrangement exists, delivery has occurred,
the selling price is fixed or determinable, and collectibility is reasonably
assured.  Revenues are presented net of value added tax
(VAT).  No return allowance is made as products are normally not
returnable upon acceptance by the customers.
 
 Foreign
currency translation
 
 The
reporting currency of the Company is the United States Dollars. All assets and
liabilities accounts have been translated into United States Dollars using the
current exchange rate at the balance sheet date. Capital stock is recorded at
historical rates. Revenue and expenses are translated using the average exchange
rate in the year. The resulting gain and loss has been reported as other
comprehensive income (loss) within the shareholder’s equity.
 
 Use
of estimates
 
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates. Significant
estimates include estimates of accruals and determination of fair values for
assets disposal.
 
 Stock
based compensation
 
 The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs. The Company adopted SFAS No. 123R effective January 1, 2006, and is using
the modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No. 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of SFAS No. 123R for all awards granted to employees prior to
the effective date of SFAS No. 123R that remain unvested on the effective
date.  The Company accounts for stock option and warrant grants issued
and vesting to non-employees in accordance with EITF No. 96-18: “Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF No. 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees” whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.
 
 Recently
issued accounting pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Accounting
and Reporting of Non-Controlling Interest in Consolidated Financial
Statements, an Amendment of ARB No. 51. These new standards will
significantly change the financial accounting and reporting of business
combination transactions and non-controlling (or minority) interests in
consolidated financial statements. We will be required to adopt SFAS No. 141(R)
and SFAS No. 160 on or after December 15, 2008.  The adoption of
SFAS 141(R) and SFAS No. 160 will, among other things, effect the Company’s
presentation of minority interest, which will now be included in equity in our
consolidated financial statements.
 
 In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP 157-2”).
FSP 157-2 delays the implementation of SFAS 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. This statement
defers the effective date to fiscal years beginning after November 15, 2008
and interim periods within those fiscal years, which is fiscal year 2010 for the
Company.  The Company does not believe that the adoption of FSP 157-2
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.
 
 In April
2008, the FASB issued Staff Position No. FAS 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3
is effective beginning on January 1, 2009. The Company does not believe
that the adoption of Staff Position No. FAS 142-3 will have a material effect on
the Company’s consolidated results of operations, financial position, or cash
flows.
 
 In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-05,
“Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock” (“EITF 07-05”). EITF 07-05 mandates a two-step process for
evaluating whether an equity-linked financial instrument or embedded feature is
indexed to the entity’s own stock. Warrants that a company issues that contain a
strike price adjustment feature, upon the adoption of EITF 07-05, results in the
instruments no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-05 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-05 is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The Company is currently
evaluating the impact the adoption of EITF 07-05 will have on its financial
statement presentation and disclosures.
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.
 
 22
 RESULT
OF OPERATIONS
 
 Fiscal
year ended December 31, 2008 as compared to fiscal year ended December 31,
2007
 
 Revenues.  Our
revenues are derived from our sales of CWM.  For the year ended
December 31, 2008, we had revenues of $13,785,125 as compared to revenues of
$2,802,750 for the year ended December 31, 2007, an increase of
392%.  This significant increase resulted primarily because CWM sales
in 2007 did not commence until the third quarter, whereas the 2008 revenues
represent a full year of CWM sales.   Additionally, we had more
customers in 2008 than in 2007.
 
 Cost of Goods Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing
overhead, were $9,266,832 for the year ended December 31, 2008, as compared to
$1,785,601 for the year ended December 31, 2007, an increase of 419%. The large
increase in cost of sales sold is in line with the increase in
sales.
 
 Selling Expenses. Selling
expenses totaled $13,128 for the year ended December 31, 2008, as compared to
$46,628 for the year ended December 31, 2007, a decrease of 72%.  This
decrease is mainly due to effective cost control as our business became more
established in 2008, and we did not have to incur certain marketing-related
expenses that we incurred in 2007.
 
 General and Administrative
Expenses. General and administrative expenses totaled $554,766 for the
year ended December 31, 2008, as compared to $607,733 for the year ended
December 31, 2007, a decrease of approximately 9%.  This decrease is
primarily attributable to improved cost control measures.
 
 Other Income
(Expenses).  Other income consists primarily of rental income,
interest income and commission income, and is net of stock-based compensation
interest expenses, and expenses related to the shares of common stock held by
our Chief Executive Officer and placed in escrow in connection with our
September 2008 financing transaction (the "Escrowed Shares").  For the
year ended December 31, 2008, other expenses were $493,696, as compared to other
income of $956,713 for the year ended December 31, 2007, a decrease of
152%.  The decrease in other income is attributable to the loss of
rental income after May 2008, when we disposed of the underlying leasehold
properties. The treatment as stock-based compensation of the
Escrowed Shares also attributed to the decrease in other income.
Additionally, the Company incurred $566,752 of interest expense and amortization
of valuation discount in 2008 related to our issuance of convertible debentures
in September 2008.
 
 Net Income. We had a
net income of $2,999,605 for the year ended December 31, 2008, as compared
to $1,016,938 for the year ended December 31, 2007, an increase of
195%.  The increase in net income is attributable to the increase in
sales in 2008.
 
 LIQUIDITY AND CAPITAL
RESOURCES
 
 For the
year ended December 31, 2008, we generated $4,412,227 from operating activities,
as compared to $349,014 that we generated from operating activities for the year
ended December 31, 2007.  This increase is due mainly to the increase
in sales proceeds.
  For the
year ended December 31, 2008, we used $5,200,554 in investing activities, as
compared to $2,017,532
that we used ininvesting activities for the
year endedDecember 31, 2007.This increaseof cash used in investing
activitiesis
due mainly to ourpurchases of equipments and
machinery for our plant.
 
 For the
year ended December 31, 2008, we generated $1,683,061 from financing activities,
as compared to $206,439that weusedfor financing
activities
during the year
ended December 31, 2007.This increase is due mainly
toproceeds from
disposal of propertyandfrom our private financing
inSeptember
2008, as well as our receipt of a government grant.
 
 As of
December 31, 2008, the Company had cash of $3,914,306.  Our total
current assets were $8,870,804 and our total current liabilities were
$2,159,441, which resulted in a net working capital of $6,711,363.
 
 In
September 2008, we sold to several institutional and accredited investors $1.3
million in aggregate principal amount of 18% convertible debentures due
September 2009, and warrants to purchase up to 8,904,334 shares of common stock,
in a private placement pursuant to Regulation D and Regulation S under the
Securities Act of 1933.
 
 We had
capital expenditure commitments outstanding as of December 31, 2008 in the
amount of $279,193 in relation to the purchase of machinery.
 
 We
believe that we have sufficient cash flow to meet our obligations on a
timely basis in the foreseeable future.
 
 23
 Contractual
Obligations
 
 We have
certain commitments that include future payments. We have presented below a
summary in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
  Payments
      Due by PeriodTotal
                                          
                                          Less
      than 1 year
                                          
                                          1-3
      Years
                                          
                                          3-5
      Years
                                          
                                          5
      Years +Contractual
      obligations:Capital
      expenditure commitment
                                          
                                          $
                                          279,183
                                          
                                          279,183
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -Operating
      Leases
                                          
                                          $
                                          46,965
                                          
                                          37,308
                                          
                                          
                                          9,657
                                          
                                          -
                                          
                                          
                                          -Coal
      inventory purchase agreement
                                          
                                          $
                                          7,947,000
                                          
                                          7,947,000
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -Debt
      repayment and interest on debt
                                          
                                          $
                                          1,576,067
                                          
                                          1,576,067
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -Total
      contractual obligations:
                                          
                                          $
                                          9,849,215
                                          
                                          9,839,558
                                          
                                          
                                          9,657
                                          
                                          -
                                          
                                          
                                          -
 
 Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for office premises and production plants of Hangson.  The
amounts presented are consistent with contractual terms and are not expected to
differ significantly, unless a substantial change in our headcount needs
requires us to exit an office facility early or expand our occupied
space.
 
 Capital
commitments include capital contribution to a subsidiary and the purchase of
machinery for our production of  CWM.
 
 Off-Balance
Sheet Arrangements
 
 We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our
investors.
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
 
 Not
applicable.
 
 ITEM 8. FINANCIAL STATEMENTS
 
 The
Consolidated Financial Statements and Financial Statement Schedule are included
in Part III, Item 15 (a) (1) and (2) of this annual
report.
  24


SINO
CLEAN ENERGY, INC. AND SUBSIDIARIES
 CONSOLIDATED
FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED
 DECEMBER
31, 2008 AND 2007
 
 CONTENTS
 
 PAGE
      F-2
                      
                      Report
      of Independent Registered Public Accounting Firm-Weinberg & Company,
      P.A.PAGE
      F-3
                      
                      Report
      of Independent Registered Public Accounting Firm-Yu and Associates CPA
      CorporationPAGE
      F-4
                      
                      Consolidated
      Balance Sheets as of December 31, 2008 and 2007PAGE
      F-5
                      
                      Consolidated
      Statements of Income and Other Comprehensive Incomefor
      the years ended December 31, 2008 and 2007PAGE
      F-6
                      
                      Consolidated
      Statements of Changes in Shareholders' Equityfor
      the years ended December 31, 2008 and December 31, 2007PAGE
      F-7
                      
                      Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007PAGE
      F-9
                      
                      Notes
      to Consolidated Financial Statements for the years ended December 31, 2008
      and 2007
  
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 To the
Board of Directors and Shareholders of
 Sino
Clean Energy Inc.
 
 We have
audited the accompanying consolidated balance sheet of Sino Clean Energy Inc.
and Subsidiaries as of December 31, 2008, and the related consolidated
statements of income and other comprehensive income, changes in shareholders'
equity, and cash flows for the year then ended.  These consolidated
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
 
 We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sino Clean
Energy Inc. and Subsidiaries as of December 31, 2008 and the results of their
operations and their cash flows for the year ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
  
  WEINBERG
& COMPANY, P.A.
  Los
Angeles, California.
 April 1,
2009
  F-2
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
the Board of Directors and Stockholders of
 Sino
Clean Energy Inc. (formerly known as China West Coal Energy, Inc.)
 
 We
have audited the accompanying balance sheets of Sino Clean Energy Inc. (formerly
known as China West Coal Energy, Inc.) and subsidiaries as of December 31, 2007
and 2006, and the related statements of income and comprehensive income,
stockholders’ equity, and cash flows for the years then ended.  Sino
Clean Energy Inc. (formerly known as China West Coal Energy, Inc.)’s management
is responsible for these financial statements.  Our responsibility is
to express an opinion on these financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Sino Clean Energy Inc. (formerly
known as China West Coal Energy, Inc.) and subsidiaries as of December 31, 2007
and 2006, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
 
 As
described in Note 2 to the accompanying consolidated financial statements, the
Company has restated the consolidated balance sheet as of December 31, 2006 and
the related statements of income and comprehensive income, stockholders’ equity,
and cash flows for the year then ended which were previously audited by other
independent accountants, to correct certain accounting errors that were detected
after the original issuance of those consolidated financial
statements.
 
 
 (Signed)
Yu and Associates CPA Corporation
 
 
 Arcadia,
California
 March
26, 2008
 
 F-3
 Sino Clean Energy, Inc. and
    SubsidiariesConsolidated
      Balance SheetsASSETSDecember
      31,
                                            
                                            
                                            December
      31,2008
                                            
                                            
                                            2007Current
      assetsCash
      and cash equivalents
                                            
                                            $
                                            3,914,306
                                            
                                            
                                            $
                                            2,832,132Accounts
      receivable, net
                                            
                                            
                                            899,629
                                            
                                            
                                            
                                            1,068,303Inventories
                                            
                                            
                                            45,068
                                            
                                            
                                            
                                            40,959Prepaid
      inventories
                                            
                                            
                                            1,996,584
                                            
                                            
                                            
                                            1,609,750Deposits
      and prepayments
                                            
                                            
                                            1,813,214
                                            
                                            
                                            
                                            933,179Government
      grant receivable
                                            
                                            
                                            146,314
                                            
                                            
                                            
                                            411,000Other
      receivables
                                            
                                            
                                            16,986
                                            
                                            
                                            
                                            138,523Land
      use right - current portion
                                            
                                            
                                            38,703
                                            
                                            
                                            
                                            36,285Asset
      of discontinued operations-Other related receivable
                                            
                                            
                                            -
                                            
                                            
                                            
                                            141,795Total
      current assets
                                            
                                            
                                            8,870,804
                                            
                                            
                                            
                                            7,211,926Property,
      plant and equipment, net
                                            
                                            
                                            9,394,416
                                            
                                            
                                            
                                            5,437,282Land
      use right - non current portion
                                            
                                            
                                            1,804,277
                                            
                                            
                                            
                                            1,718,744Goodwill
                                            
                                            
                                            762,018
                                            
                                            
                                            
                                            -Deferred
      debt issuance costs, net
                                            
                                            
                                            274,278
                                            
                                            
                                            
                                            -Total
      assets
                                            
                                            $
                                            21,105,793
                                            
                                            
                                            $
                                            14,367,952LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesConvertible
      notes, net
                                            
                                            $
                                            383,490
                                            
                                            
                                            $
                                            -Accounts
      payable and accrued expenses
                                            
                                            
                                            1,004,999
                                            
                                            
                                            
                                            935,559Taxes
      payable
                                            
                                            
                                            305,903
                                            
                                            
                                            
                                            130,332Amount
      due to directors
                                            
                                            
                                            465,049
                                            
                                            
                                            
                                            8,527Deposit
      on sales of leasehold
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,507,000Total
      current liabilities
                                            
                                            
                                            2,159,441
                                            
                                            
                                            
                                            2,581,418Minority
      interest
                                            
                                            
                                            -
                                            
                                            
                                            
                                            352,789Commitments
      and ContingenciesShareholders'
      EquityPreferred
      stock, $0.001 par value,50,000,000
      shares authorized,none
      issued and outstanding
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Common
      stock, $0.001 par value,200,000,000
      shares authorized,92,181,750
      and 84,681,750 issued and
                                              outstanding
      as of December 31, 2008 and 2007, respectively92,182
                                            
                                            
                                            
                                            84,682Additional
      paid-in capital
                                            
                                            
                                            12,696,549
                                            
                                            
                                            
                                            9,153,174Retained
      earnings
                                            
                                            
                                            3,686,087
                                            
                                            
                                            
                                            686,482Statutory
      reserves
                                            
                                            
                                            348,309
                                            
                                            
                                            
                                            348,309Accumulated
      other comprehensive income
                                            
                                            
                                            2,123,225
                                            
                                            
                                            
                                            1,161,098Total
      shareholders' equity
                                            
                                            
                                            18,946,352
                                            
                                            
                                            
                                            11,433,745Total
      liabilities and shareholders' equity
                                            
                                            $
                                            21,105,793
                                            
                                            
                                            $
                                            14,367,952
 
 See
accompanying notes to the consolidated financial statements.
  F-4
  Sino
      Clean Energy, Inc. and SubsidiariesConsolidated
      Statements of Income and Other Comprehensive IncomeFor
      the years ended December 31, 2008 and 2007Year
      ended December 31,2008
                            
                            
                            2007Revenue
                            
                            $
                            13,785,125
                            
                            
                            $
                            2,802,750Cost
      of goods sold
                            
                            
                            (9,266,832
                            )
                            
                            
                            (1,785,601
                            )Gross
      profit
                            
                            
                            4,518,293
                            
                            
                            
                            1,017,149Selling
      expenses
                            
                            
                            13,128
                            
                            
                            
                            46,628General
      and administrative expenses
                            
                            
                            554,766
                            
                            
                            
                            607,733Income
      from operations
                            
                            
                            3,950,399
                            
                            
                            
                            362,788Other
      income (expense)Interest
      expense
                            
                            
                            (566,752
                            )
                            
                            
                            -Expense
      related to escrow shares
                            
                            
                            (676,466
                            )
                            
                            
                            -Commission
      income
                            
                            
                            468,864
                            
                            
                            
                            281,077Rental
      income, net
                            
                            
                            78,691
                            
                            
                            
                            257,462Interest
      income
                            
                            
                            27,397
                            
                            
                            
                            16,747Government
      grant
                            
                            
                            141,501
                            
                            
                            
                            397,001Gain
      on sale of leasehold
                            
                            
                            33,069
                            
                            
                            
                            -Other
      income
                            
                            
                            -
                            
                            
                            
                            4,426Total
      other income (expenses)
                            
                            
                            (493,696
                            )
                            
                            
                            956,713Income
      before income taxes and minority interest
                            
                            
                            3,456,703
                            
                            
                            
                            1,319,501Provision
      for income taxes
                            
                            
                            105,249
                            
                            
                            
                            59,668Income
      before minority interest
                            
                            
                            3,351,454
                            
                            
                            
                            1,259,833Minority
      interest
                            
                            
                            (351,849
                            )
                            
                            
                            (242,895
                            )Net
      income
                            
                            
                            2,999,605
                            
                            
                            
                            1,016,938Other
      comprehensive incomeForeign
      currency translation adjustment
                            
                            
                            962,127
                            
                            
                            
                            728,786Comprehensive
      income
                            
                            $
                            3,961,732
                            
                            
                            $
                            1,745,724Weight
      average number of shares-
      Basic
                            
                            
                            87,169,614
                            
                            
                            
                            84,681,750-
      Diluted
                            
                            
                            88,162,076
                            
                            
                            
                            84,681,750Income
      per common share-
      Basic
                            
                            $
                            0.03
                            
                            
                            $
                            0.01-
      Diluted
                            
                            $
                            0.03
                            
                            
                            $
                            0.01
  See
accompanying notes to the consolidated financial statements.
  F-5
  Sino-Clean
      Energy, Inc. and SubsidiariesConsolidated
      Statements of Changes in Shareholders' EquityFor
      the years ended December 31, 2008 and
2007
 AccumulatedAdditional
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    otherCommon
      stock
                                                                    
                                                                    
                                                                    paid-in
                                                                    
                                                                    
                                                                    Statutory
                                                                    
                                                                    
                                                                    Retained
                                                                    
                                                                    
                                                                    comprehensiveShares
                                                                    
                                                                    
                                                                    Amount
                                                                    
                                                                    
                                                                    capital
                                                                    
                                                                    
                                                                    reserves
                                                                    
                                                                    
                                                                    earnings
                                                                    
                                                                    
                                                                    income
                                                                    
                                                                    
                                                                    TotalBalance,
      January 1, 2007
                                                                    
                                                                    
                                                                    84,681,750
                                                                    
                                                                    
                                                                    $
                                                                    84,682
                                                                    
                                                                    
                                                                    $
                                                                    9,153,174
                                                                    
                                                                    
                                                                    $
                                                                    348,309
                                                                    
                                                                    
                                                                    $
                                                                    (330,456
                                                                    )
                                                                    
                                                                    $
                                                                    432,312
                                                                    
                                                                    
                                                                    $
                                                                    9,688,021Foreign
      currency translation gain
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    728,786
                                                                    
                                                                    
                                                                    
                                                                    728,786Net
      income
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,016,938
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,016,938Balance,
      December 31, 2007
                                                                    
                                                                    
                                                                    84,681,750
                                                                    
                                                                    
                                                                    
                                                                    84,682
                                                                    
                                                                    
                                                                    
                                                                    9,153,174
                                                                    
                                                                    
                                                                    
                                                                    348,309
                                                                    
                                                                    
                                                                    
                                                                    686,482
                                                                    
                                                                    
                                                                    
                                                                    1,161,098
                                                                    
                                                                    
                                                                    
                                                                    11,433,745Fair
      value of shares issued for acquisition of minority
interest
                                                                    
                                                                    
                                                                    7,500,000
                                                                    
                                                                    
                                                                    
                                                                    7,500
                                                                    
                                                                    
                                                                    
                                                                    1,492,500
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,500,000Fair
      value of warrant issued for debt issuance fee
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    30,759
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    30,759Fair
      value of warrants issued with convertible notes
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,335,650
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,335,650Expense
      related to escrow shares
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    676,466
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    676,466Fair
      value of vested stock options
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    8,000
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    8,000Foreign
      currency translation gain
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    962,127
                                                                    
                                                                    
                                                                    
                                                                    962,127Net
      income
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    2,999,605
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    2,999,605Balance,
      December 31, 2008
                                                                    
                                                                    
                                                                    92,181,750
                                                                    
                                                                    
                                                                    $
                                                                    92,182
                                                                    
                                                                    
                                                                    $
                                                                    12,696,549
                                                                    
                                                                    
                                                                    $
                                                                    348,309
                                                                    
                                                                    
                                                                    $
                                                                    3,686,087
                                                                    
                                                                    
                                                                    $
                                                                    2,123,225
                                                                    
                                                                    
                                                                    $
                                                                    18,946,352
  See
accompanying notes to the consolidated financial statements. 
 F-6
 Sino Clean Energy, Inc. and
    SubsidiariesConsolidated
      Statements of Cash FlowsFor
      the years ended December 31, 2008 and 2007Year
      ended December 31,2008
                                                          
                                                          
                                                          2007Cash
      flows from operating activities:Net
      income
                                                          
                                                          $
                                                          2,999,605
                                                          
                                                          
                                                          $
                                                          1,016,938Adjustments
      to reconcile net income to cashprovided
      by operating activities:Minority
      interest
                                                          
                                                          
                                                          351,849
                                                          
                                                          
                                                          
                                                          242,895Depreciation
      and amortization
                                                          
                                                          
                                                          253,826
                                                          
                                                          
                                                          
                                                          138,130Amortization
      on fair value of warrant issued with convertible notes
                                                          
                                                          
                                                          383,490
                                                          
                                                          
                                                          
                                                          -Amortization
      of deferred debt issuance costs
                                                          
                                                          
                                                          114,234
                                                          
                                                          
                                                          
                                                          -Fair
      value of vested stock options
                                                          
                                                          
                                                          8,000
                                                          
                                                          
                                                          
                                                          -Gain
      on sale of leasehold
                                                          
                                                          
                                                          (33,069
                                                          )
                                                          
                                                          
                                                          -Expense
      related to escrow shares
                                                          
                                                          
                                                          676,466
                                                          
                                                          
                                                          
                                                          -Change
      in operating assets and liabilitiesAccounts
      receivable
                                                          
                                                          
                                                          233,367
                                                          
                                                          
                                                          
                                                          (1,031,916
                                                          )Deposits
      and prepayments
                                                          
                                                          
                                                          (1,059,963
                                                          )
                                                          
                                                          
                                                          (566,006
                                                          )Other
      receivables
                                                          
                                                          
                                                          154,861
                                                          
                                                          
                                                          
                                                          (132,839
                                                          )Assets
      on discontinued operationAccounts
      receivables, net
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          775,444Other
      receivables
                                                          
                                                          
                                                          141,795
                                                          
                                                          
                                                          
                                                          168,064Inventories
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          14,079Others
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          89,670Inventories
                                                          
                                                          
                                                          (1,281
                                                          )
                                                          
                                                          
                                                          (38,197
                                                          )Accounts
      payable
                                                          
                                                          
                                                          (21,593
                                                          )
                                                          
                                                          
                                                          40,403Accounts
      payable - discontinued operations
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          (893,369
                                                          )Accrued
      expenses and other payable
                                                          
                                                          
                                                          49,414
                                                          
                                                          
                                                          
                                                          495,634Taxes
      payables
                                                          
                                                          
                                                          161,226
                                                          
                                                          
                                                          
                                                          30,084Net
      cash provided from operating activities
                                                          
                                                          
                                                          4,412,227
                                                          
                                                          
                                                          
                                                          349,014Cash
      flows from investing activities:Repayment
      of loan from related party
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          411,970Proceeds
      from sale of leasehold
                                                          
                                                          
                                                          1,024,465
                                                          
                                                          
                                                          
                                                          --Payment
      for prepaid land use right
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          (112,908
                                                          )Purchase
      of property, plant and equipment
                                                          
                                                          
                                                          (6,225,019
                                                          )
                                                          
                                                          
                                                          (2,316,594
                                                          )Net
      cash used in investing activities
                                                          
                                                          
                                                          (5,200,554
                                                          )
                                                          
                                                          
                                                          (2,017,532
                                                          )Cash
      flows from financing activities:Repayment
      from a director
                                                          
                                                          
                                                          370,478
                                                          
                                                          
                                                          
                                                          220,511Advance
      from a director
                                                          
                                                          
                                                          70,000
                                                          
                                                          
                                                          
                                                          -Payment
      to a director
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          (15,950
                                                          )Government
      grant receivable
                                                          
                                                          
                                                          264,686
                                                          
                                                          
                                                          
                                                          (411,000
                                                          )Deferred
      debt issuance costs
                                                          
                                                          
                                                          (357,753
                                                          )
                                                          
                                                          
                                                          -Issuance
      of convertible notes
                                                          
                                                          
                                                          1,335,650
                                                          
                                                          
                                                          
                                                          -Net
      cash provided by financing activities
                                                          
                                                          
                                                          1,683,061
                                                          
                                                          
                                                          
                                                          (206,439
                                                          )
 (continued) 
 F-7
 Sino
      Clean Energy, Inc. and SubsidiariesConsolidated
      Statements of Cash Flows (continued)For
      the years ended December 31, 2008 and
2007  Year
      ended December 31,2008
                                        
                                        
                                        2007Effect
      of foreign currency translation
                                        
                                        $
                                        187,440
                                        
                                        
                                        $
                                        256,532Net
      increase (decrease) in cash and cash equivalents
                                        
                                        
                                        1,082,174
                                        
                                        
                                        
                                        (1,618,425
                                        )Cash
      and cash equivalents, beginning of year
                                        
                                        
                                        2,832,132
                                        
                                        
                                        
                                        4,450,557Cash
      and cash equivalents, end of year
                                        
                                        $
                                        3,914,306
                                        
                                        
                                        $
                                        2,832,132Supplemental
      Disclosure InformationInterest
      paid
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Income
      taxes paid
                                        
                                        $
                                        24,760
                                        
                                        
                                        $
                                        92,654Supplemental
      noncash investing and financing activitiesFair
      value of warrants and beneficial conversion featurerelated
      to issuance of convertible notes
                                        
                                        $
                                        1,335,650
                                        
                                        
                                        $
                                        -Fair
      value of warrant issued for debt issuance fee
                                        
                                        
                                        30,759
                                        
                                        
                                        
                                        -Issuance
      of shares for minority interest
                                        
                                        
                                        1,500,000
                                        
                                        
                                        
                                        -
  See
accompanying notes to the consolidated financial statements.
  F-8
  Sino
Clean Energy, Inc. and Subsidiaries
 Notes to
Consolidated Financial Statements
 For the
Years Ended December 31, 2008 and 2007
 
 1.
                    ORGANZATION
      AND BUSINESS
      ACTIVITIES
 
 Sino
Clean Energy, Inc. (the “Company”) was originally incorporated in Texas as
“Discount Mortgage Services, Inc.” on July 11, 2000.  In November
2001, the Company changed its name to Endo Networks, Inc. and was redomiciled to
the State of Nevada in December 2002.  On January 4, 2007, the Company
changed its name to “China West Coal Energy Inc.”  Further on August
15, 2007, the Company changed its name to “Sino Clean Energy Inc.” The Company
engages in research, development, production, marketing and sales of coal-water
mixture (“CWM”), a coal-based fuel substitute for coal, oil and gas. All current
operations of the Company are in Shaanxi Province, People’s Republic of China
(the “PRC” or “China”).
 
 All of
the Company’s operations are carried out by Shaanxi Suo’ang Biological Science
& Technology Co., Ltd. (“Suo’ang BST”), a PRC company which the Company
controls, and Suo’ang BST’s subsidiary, Shaanxi Suo’ang New Energy Enterprise
Co., Ltd. (“Suo’ang New Energy”). Suo’ang New Energy was formed with 80% of the
registered capital, representing 80% of its equity interests, from Suo’ang BST,
and the remaining 20% from a member of the Company’s board of directors. On June
30, 2008, the Company entered into a securities purchase agreement with the
director and Suo’ang New Energy, pursuant to which the Company issued 7,500,000
common shares to the director in exchange for transferring his 20% equity
interests of Suo’ang Energy to Hangson Limited (“Hangson”), a British Virgin
Islands company and the Company’s wholly owned subsidiary (see Note
3).
 The
Company controls Suo’ang BST through a series of contractual arrangements
between Suo’ang BST and Hangson. The contractual arrangements between Hangson
and Suo’ang BST enables the Company to substantially influence the daily
operations and financial affairs of Suo’ang BST, appoint its senior executives
and approve all matters requiring shareholder approval. As a result of these
contractual arrangements, which obligates Hangson to absorb a majority of
the risk of loss from the activities of Suo’ang BST and enables Hangson to
receive a majority of its expected residual returns, the Company accounts for
Suo’ang BST as a variable interest entity (“VIE”) under FASB Interpretation No.
46R (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51”. Accordingly, the Company consolidates the results, assets and
liabilities of Suo’ang BST.
  2.
                      SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES
  Basis of presentation and
consolidation
 
 
 The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.
 
 The
consolidated financial statements include the financial statements of the
Company, its wholly subsidiary Hangson Limited, its VIE Suo’ang BST and Suo’ang
BST’s subsidiary, Suo’ang New Energy. The
Company has concluded that because the Company’s wholly owned subsidiary,
Hangson, absorbs a majority of the risk of loss from Suo’ang BST’s activities
and receives a majority of its expected residual returns,  Suo’ang BST is a
VIE.Intercompany accounts and transactions have been eliminated in
consolidation.
 
 Use of
estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period.  Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.
 
 Revenue
  recognition
 
 Revenues
of the Company are from sales of CWM.
 
 Sales are recognized in accordance with
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin("SAB")No.104, when the following four revenue
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable, and collectibility is
reasonably assured.  Revenues are presented net of value
added tax (VAT).  No return allowance is made as products are
normally not returnable upon acceptance by the customers.
 
 Cash and cash
  equivalents
 
 Cash and
cash equivalents consist of cash on hand and bank deposits.  For
financial reporting purpose, the Company considers all highly liquid investments
purchased with original maturity of three months or less to be cash
equivalents.
 
 Cash
denominated in Renminbi (“RMB”) with a US dollar equivalent of $3,887,595 and
$2,832,132 at December 31, 2008 and 2007, respectively, was held in accounts at
financial institutions located in the PRC.  The Company and its
subsidiary and VIE have not experienced any losses in such accounts and do not
believe the cash is exposed to any significant risk.
  F-9
  Accounts
  receivable
 
 Accounts
receivables are recognized and carried at original invoiced amount less an
allowance for any uncollectible accounts. The Company uses the aging method to
estimate the valuation allowance for anticipated uncollectible receivable
balances.  Under the aging method, bad debts determined by management
are based on historical experience as well as the current economic climate and
are applied to customers' balances categorized by the number of months the
underlying invoices have remained outstanding.  The
valuation allowance balance is adjusted to the amount computed as a result
of the aging method.  When facts subsequently become available to
indicate that an adjustment to the allowance should be made, this is recorded as
a change in estimate in the current year. As of December 31, 2008 and 2007,
accounts receivable were net of allowances of zero and $5,368,
respectively.
 
 Inventories
 
 Inventories
are stated at the lower of cost, as determined on a weighted average basis, or
net realizable value.  Costs of inventories include purchase and
related costs incurred in bringing the products to their present location and
condition.
 
 Property, plant and
    equipment
 
 Property,
plant and equipment are recorded at cost less accumulated depreciation and
amortization. Gains or losses on disposals are reflected as gain or loss in the
year of disposal.  The cost of improvements that extend the life of
plant, property and equipment are capitalized. These capitalized costs may
include structural improvements, equipment and fixtures.  All ordinary
repair and maintenance costs are expensed as incurred.
  Depreciation
or amortization for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the assets as
follows:
 
 Buildings
                        20-40
      yearsLeasehold
      improvements
                        the
      shorter of the useful life or the lease termPlant and machinery
                        10
      yearsOffice
      equipment
                        5
      yearsMotor
      vehicles
                        3
      years
 
 Construction in
  progress
 
 Construction
in progress includes direct costs of factory buildings.  Construction
in progress is not depreciated until such time as the assets are completed and
put into operational use.
 
 Land use
rights
 
 According
to the law of China, the government owns all the land in China. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by the Chinese government. Land use rights are being amortized
using the straight-line method over the related lease term of 50
years.
 
 Goodwill
 
 The
Company accounts for acquisition of business in accordance with SFAS No. 141
“Business Combinations”, which may result in the recognition of goodwill.
Goodwill is related to the Company's acquisition of 20% minority interest in
Suo’ang New Energy on June 30, 2008 (see Note 3).  Goodwill and other
intangible assets are accounted for in accordance with the provisions of SFAS
No. 142, “Goodwill and Other Intangible Assets”. Under SFAS 142,
goodwill is not amortized. Rather, goodwill is assessed for impairment at least
annually.  The Company tests goodwill by using a two-step
process.  In the first step, the fair value of the reporting unit is
compared with the carrying amount of the reporting unit, including
goodwill.  If the carrying amount of the reporting unit exceeds its
fair value, goodwill is considered impaired and a second step is performed to
measure the amount of impairment loss, if any.  Based on management’s
assessment, there were no indicators of impairment of recorded goodwill at
December 31, 2008.
 
 Long-lived
Assets
 
 The
Company reviews and evaluated its long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying amounts may not
be recoverable. Impairment is considered to exist if the total estimated future
cash flows on an undiscounted basis are less than the carrying amount of the
assets, including goodwill, if any. An impairment loss is measured and recorded
based on discounted estimated future cash flows. In estimating future cash
flows, assets are grouped at the lowest level for which there is identifiable
cash flows that are largely independent of future cash flows from other asset
groups.
 
 F-10
 Based
upon management’s assessment, there were no indicators of impairment of the
Company’s long lived assets as of December 31, 2008 or 2007.
 
 Comprehensive
  income
 
 SFAS No.
130, Reporting Comprehensive Income, requires disclosure of all components of
comprehensive income and loss on an annual and interim
basis.  Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners.  The Company had other comprehensive income of $962,127 and
$728,786 for the years ended December 31, 2008 and 2007, respectively, from
foreign currency translation adjustments.
 
 Fair value of financial
      instruments
 
 Fair
Value Measurements are determined by the Company's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 157, “Fair Value Measurements”
("SFAS 157") as of January 1, 2008, with the exception of the
application of the statement to non-recurring, non-financial assets and
liabilities as permitted. The adoption of SFAS 157 did not have a material
impact on the Company's fair value measurements. SFAS 157 defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the
measurement date. SFAS 157 establishes a fair
value hierarchy, which prioritizes the inputs used in measuring fair value into
three broad levels as follows:
 
 Level 1—Quoted
prices in active markets for identical assets or liabilities.
 Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly
or indirectly.
 Level 3—Unobservable
inputs based on the Company's assumptions.
 
 SFAS 157
requires the use of observable market data if such data is available without
undue cost and effort.
 
 Stock based
  compensation
 
 The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs. The Company adopted SFAS No. 123R effective January 1, 2006, and is using
the modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No. 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of SFAS No. 123R for all awards granted to employees prior to
the effective date of SFAS No. 123R that remain unvested on the effective
date.  The Company accounts for stock option and warrant grants issued
and vesting to non-employees in accordance with EITF No. 96-18: “Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF No. 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees” whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.
 
 Income per common
  share
 
 SFAS No.
128, “Earnings Per Share”, requires presentation of basic earnings per share
(“Basic EPS”) and diluted earnings per share (“Diluted EPS”).  Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period. The diluted earnings per share calculation gives effect to all
potentially dilutive common shares outstanding during the period using the
treasury stock method for warrants and options and the if-converted method for
convertible debentures.
  As of
December 31, 2008, common stock equivalents were composed of options convertible
into 100,000 shares of the Company's common stock, warrants convertible into
9,261,434 shares of the Company's common stock, and debentures convertible into
8,904,334 shares of the  Company's common stock. As of December 31, 2007,
there were no common stock equivalents outstanding. The conversion of the
debentures into 8,904,334 shares of common stock has been excluded from the
calculation of dilutive earnings per share, as the effects of such conversion
would be anti-dilutive.
 
 F-11
 
 The
following is a reconciliation of the numerator and denominator used in the
calculation of basic and diluted earnings per share.
 
 Year
      Ended December 31,2008
                                            
                                            
                                            2007NumeratorNet
      income
                                            
                                            $
                                            2,999,605
                                            
                                            
                                            $
                                            1,016,938DenominatorWeighted
      average shares outstanding-basic
                                            
                                            
                                            87,169,614
                                            
                                            
                                            
                                            84,681,750Effect
      of dilutive instruments:Warrants
                                            
                                            
                                            992,462
                                            
                                            
                                            
                                            -Weighted
      average shares outstanding-diluted
                                            
                                            
                                            88,162,076
                                            
                                            
                                            
                                            84,681,750
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 requires an asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of
tax benefits in future years.  Under the asset and liability approach,
deferred taxes are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  A valuation
allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain.
 
 Foreign currency
  translation
  The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company is the Renminbi (RMB). Capital
accounts of the consolidated financial statements are translated into United
States dollars from RMB at their historical exchange rates when the capital
transactions occurred. Assets and liabilities are translated at the exchange
rate as of balance sheet date. Income and expenditures are translated at the
average exchange rate of the year.
  2008
                                  
                                  
                                  2007Year
      end RMB : US$ exchange rate
                                  
                                  
                                  6.8346
                                  
                                  
                                  
                                  7.3046Average
      yearly RMB : US$ exchange rate
                                  
                                  
                                  7.0671
                                  
                                  
                                  
                                  7.5567
 
  The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation.
 
 Concentration of credit
risk
 
 Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and unsecured trade accounts
receivable.
 
 F-12
 
 Details
      of the customers accounting for 10% or more of the Company’s total sales
      are as follows for the year ended December
31:
  2008
                                
                                
                                2007Company
      A
                                
                                $
                                1,991,158
                                
                                
                                $
                                321,289Company
      B
                                
                                
                                1,837,416
                                
                                
                                
                                499,252Company
      C
                                
                                
                                1,637,342
                                
                                
                                
                                576,221Company
      D
                                
                                
                                1,429,188
                                
                                
                                
                                -Company
      E
                                
                                
                                -
                                
                                
                                
                                361,373Company
      F
                                
                                
                                -
                                
                                
                                
                                865,056
  For 2008,
the accounts receivable from the four customers with the largest receivable
balance represent 23%, 19%, 18% and 16%, respectively, of the balance of the
account receivable at December 31, 2008. For 2007, the accounts receivable from
the three customers with the largest receivable balance represent 25%, 25% and
24%, respectively, of the balance of the account receivable at December 31,
2007.
  Economic and Political
Risks
 
 The
Company’s operations are conducted in the PRC.  Accordingly, the
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environment in the PRC, and by
the general state of the PRC economy.
 
 The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
 
 Recently issued accounting
      pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Accounting
and Reporting of Non-Controlling Interest in Consolidated Financial
Statements, an Amendment of ARB No. 51. These new standards will
significantly change the financial accounting and reporting of business
combination transactions and non-controlling (or minority) interests in
consolidated financial statements. We will be required to adopt SFAS No. 141(R)
and SFAS No. 160 on or after December 15, 2008.  The adoption of
SFAS 141(R) and SFAS No. 160 will, among other things, effect the Company’s
presentation of minority interest, which will now be included in equity in our
consolidated financial statements.
 
 In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP 157-2”).
FSP 157-2 delays the implementation of SFAS 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. This statement
defers the effective date to fiscal years beginning after November 15, 2008
and interim periods within those fiscal years, which is fiscal year 2010 for the
Company.  The Company does not believe that the adoption of FSP 157-2
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.
 
 In April
2008, the FASB issued Staff Position No. FAS 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3
is effective beginning on January 1, 2009. The Company does not believe
that the adoption of Staff Position No. FAS 142-3 will have a material effect on
the Company’s consolidated results of operations, financial position, or cash
flows.
 
 In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-05,
“Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock” (“EITF 07-05”). EITF 07-05 mandates a two-step process for
evaluating whether an equity-linked financial instrument or embedded feature is
indexed to the entity’s own stock. Warrants that a company issues that contain a
strike price adjustment feature, upon the adoption of EITF 07-05, results in the
instruments no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-05 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-05 is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The Company is currently
evaluating the impact the adoption of EITF 07-05 will have on its financial
statement presentation and disclosures.
  Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.
  F-13
  3.
                    ACQUISITION
 
 Through
June 30, 2008, the Company controlled 80% of Suo’ang New Energy, and a member of
the Company’s board of directors owned the remaining 20% minority
interest.  On June 30, 2008, the Company purchased the 20% minority
interest in Suo’ang New Energy in exchange for 7,500,000 shares of the Company’s
restricted common stock valued at $1,500,000.  The acquisition has
been accounted for as a purchase in accordance with SFAS No. 141 Business Combinations. As
such, the Company has reported 100% of results of Suo’ang New Energy operations
in the consolidated financial statements since July 1, 2008. The components of
the purchase price and the allocation of the purchase price are as
follows:
 
 Purchase priceValue
      of shares issued at close
                                
                                $
                                1,500,000Purchase price allocationFair
      value of 20% of net assets
                                
                                
                                737,982Goodwill
                                
                                
                                762,018Net
      purchase price
                                
                                $
                                1,500,000
 Allocation
of the purchase price was determined by management who utilized a valuation
prepared by independent valuation experts as part of their assessment. Goodwill
represents the excess of the purchase price of the 20% interest in Suo’ang New
Energy over the fair value of the identifiable assets acquired and liabilities
assumed.
 
 The
minority interest’s share of income for the year ended December 31, 2007 was
$242,895, and through June 30, 2008 (date of acquisition) was
$351,849.  The following table sets forth the unaudited pro forma
results of operations of the Company as if the additional acquisition of the 20%
interest in Suo’ang New Energy had occurred at the beginning of the earliest
fiscal period presented.  These pro forma amounts do not purport to be
indicative of the results that would have actually been obtained if the
acquisition occurred as of the beginning of the periods presented or that
not be obtained in the future.
 
 Pro
      forma combined2008
                            
                            2007(Unaudited)
                            
                            (Unaudited)Proforma
      net income
                            
                            $
                            3,351,454
                            
                            
                            $
                            1,259,833Net
      income per share-basic
                            
                            $
                            0.03
                            
                            
                            $
                            0.01Net
      income per share-diluted
                            
                            $
                            0.03
                            
                            
                            $
                            0.01Weighted
      average shares-basic
                            
                            
                            94,669,614
                            
                            
                            
                            92,181,750Weighted
      average shares-diluted
                            
                            
                            95,662,076
                            
                            
                            
                            92,181,750
 
 Revenues and costs are not affected by the
minority interest purchase.
 
 4.            
DEPOSITS AND
PREPAYMENTS
 
 Deposits
and prepayments consist of the following at December 31,
 2008
                          
                          
                          2007Prepayment
      for construction in progress and machinery purchases
                          
                          $
                          994,395
                          
                          
                          $
                          908,561Prepaid
      expenses for operating purpose
                          
                          
                          87,247
                          
                          
                          
                          22,600Prepayment
      for coal water mixture research and development
                          
                          
                          731,572
                          
                          
                          
                          -Other
                          
                          
                          -
                          
                          
                          
                          2,018$
                          1,813,214
                          
                          
                          $
                          933,179
  F-14
  5.
                      GOVERNMENT GRANT
  RECEIVABLE
 
 The
central government of the PRC has established national standards to reduce
pollution.  The municipal government of Tongchuan, where the Company’s
plant is located, is attempting to meet the national pollution standards
through, in part, promotion and use of CWM technology.  For the years
ended December 31, 2008 and 2007, the Tongchuan municipal government granted
Suo’ang New Energy unconditional grants of $141,501 and $397,001,
respectively.  The grants have no conditions that the Company must
meet to receive the grants.  Accordingly, for the years ended December
31, 2008 and 2007, the Company recognized these grants as other
income.  Amounts receivable under these grants were $146,314 and
$411,000 as of December 31, 2008 and 2007, respectively.
 
 6.
                      INVENTORIES
 
 Inventories
      consist of the following at December
31,
 
 2008
                            
                            
                            2007Raw
      materials
                            
                            $
                            18,290
                            
                            
                            $
                            22,615Packing
      materials
                            
                            
                            2,193
                            
                            
                            
                            1,751Finished
      goods
                            
                            
                            24,585
                            
                            
                            
                            16,593$
                            45,068
                            
                            
                            $
                            40,959
 
 Prepaid
inventories
 
 The
Company has a contract with a coal mine to deliver coal to the Company for use
in the production of CWM.  At times, the Company may make payments in
advance of delivery and accounts for these prepayments as prepaid
inventory.  The prepaid inventory is usually received within 48 hours
of any prepayment.  At December 31, 2008 and 2007, prepaid inventories
totaled $1,996,584 and $1,609,750, respectively.
 
 7.            
PROPERTY, PLANT AND
EQUIPMENT
 
 Property,
plant and equipment consists of the following at December 31,
 
 2008
                            
                            
                            2007Construction
      in progress
                            
                            $
                            153,169
                            
                            
                            $
                            119,169Buildings
                            
                            
                            1,783,894
                            
                            
                            
                            3,806,628Leasehold
      improvements
                            
                            
                            -
                            
                            
                            
                            232,900Plant
      and machinery
                            
                            
                            7,697,128
                            
                            
                            
                            1,596,161Office
      equipment
                            
                            
                            71,953
                            
                            
                            
                            67,373Motor
      vehicles
                            
                            
                            179,519
                            
                            
                            
                            127,9359,885,663
                            
                            
                            
                            5,950,166Less:
      Accumulated depreciation and amortization
                            
                            
                            (491,247
                            )
                            
                            
                            (512,884
                            )$
                            9,394,416
                            
                            
                            $
                            5,437,282
 
 Construction
in progress included above was the construction of buildings, production lines
and machinery for the CWM business.
 
 The
depreciation expenses on property, plant and equipment for the year ended
December 31, 2008 and 2007 were $207,674 and $99,427, respectively.
 
 F-15
 
 8.
                    LAND USE
      RIGHT
 
 The
Company has recorded as land use rights the costs paid to acquire a long-term
interest to utilize the land underlying the building and production facility for
its CWM business.  The land use rights are amortized on the
straight-line method over the term of the land use rights of 50
years.
 
 Land use
right consists of the following at December 31,
 
 2008
                                
                                
                                2007Cost
                                
                                $
                                1,936,465
                                
                                
                                $
                                1,807,680Less
      accumulated amortization
                                
                                
                                (93,485
                                )
                                
                                
                                (52,651
                                )Net
      land use rights
                                
                                $
                                1,842,980
                                
                                
                                $
                                1,755,029
  The
expected amortization of the land use right over each of the next five years and
thereafter is summarized as follows:
 
 Year ending December 31,
                                    
                                    Amount2009
                                    
                                    $
                                    38,7032010
                                    
                                    
                                    38,7032011
                                    
                                    
                                    38,7032012
                                    
                                    
                                    38,7032013
                                    
                                    
                                    38,703Thereafter
                                    
                                    
                                    1,649,465$
                                    1,842,980
 
 The lease
expenses on land use right for the years ended December 31, 2008 and 2007 was
$35,759 and $36,285, respectively.
 
 9.
                    ACCOUNTS PAYABLE ANDACCRUED
      EXPENSES
  
 Accounts
payable and accrued expenses consist of the following at December
31,
 2008
                            
                            
                            2007Accounts
      payable
                            
                            $
                            22,344
                            
                            
                            $
                            41,827Accrued
      operating expenses
                            
                            
                            417,598
                            
                            
                            
                            471,988Land
      use right payable
                            
                            
                            -
                            
                            
                            
                            133,731Accrued
      staff welfare
                            
                            
                            153,334
                            
                            
                            
                            71,706Construction
      in progress payable
                            
                            
                            338,381
                            
                            
                            
                            90,140Non-interest
      bearing loan
                            
                            
                            -
                            
                            
                            
                            68,627Advance
      from customer
                            
                            
                            58,525
                            
                            
                            
                            54,800Other
      payables
                            
                            
                            14,817
                            
                            
                            
                            2,740$
                            1,004,999
                            
                            
                            $
                            935,559
  10.
                    CONVERTIBLE
NOTES
  Convertible
notes consist of the following at December 31,
 2008
                              
                              
                              2007Convertible
      notes payable
                              
                              $
                              1,335,650
                              
                              
                              $
                              -Valuation
      discount
                              
                              
                              (952,160
                              )
                              
                              
                              -Convertible
      notes, net
                              
                              $
                              383,490
                              
                              
                              $
                              -
  F-16
 On
September 16, 2008 and September 19, 2008, the Company issued an aggregate of
$1,335,650 of 18% convertible debentures (the “Debentures”) and issued warrants
to purchase up to 8,904,334 shares of common stock of the Company in a private
placement.  The Debentures bear interest at 18% per annum, mature in
one year, are unsecured, and are personally guaranteed by the Company’s Chief
Executive Officer.  The holders of the Debentures have the right at
any time to convert all or part of the outstanding principal amount of the
Debentures and any accrued and unpaid interest into common shares of the Company
at the then effective conversion price, initially set at $0.15 per
share.  The Debentures are due one year from their issuance
date.
 
 The
initial conversion price is subject to adjustments should the Company issue more
shares of common stock or securities convertible into common stock, including
rights, options or warrants for common shares, for less than the initial
conversion price and without offering the same to the investors in the
transaction.  In the case of adjustments, the conversion price shall
be adjusted to the consideration received or receivable by the Company for each
share of common stock issued or issuable, and is limited to a floor of $0.05 per
share.  If the Company completes a qualifying financing transaction
(as defined in the Debentures) or listing of its common stock on a subsequent
market (as defined in the Debentures) before the Debentures mature, all
interests due under the Debentures will be waived and all outstanding principal
will automatically convert into common shares.
 
 The
Warrants entitle the investors to purchase up to 8,904,334 shares of common
stock (the “Warrant Shares”) in the aggregate.  The Warrants have an
initial exercise price of $0.15 per share, subject to adjustments and limited to
no lower than $0.05 per share.  The Warrants are exercisable three
years from the date issued.  25% of the Warrant Shares vested
immediately, and 5% of the Warrant Shares vest monthly beginning on October 31,
2008.
 
 The
8,904,334 warrants were valued at $1,501,555 using the Black-Scholes option
valuation model with the following assumptions: risk-free interest rate of 1.6%
to 2%; dividend yield of 0%; volatility factors of 86.6% to 91.7%; and an
expected life of three years (statutory term).  The Company also
determined that the Debentures contained a beneficial conversion feature of
$1,667,752.  The value of the Debentures and conversion option are
considered as debt discount.  Pursuant to EITF 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features”, total recorded debt
discount cannot be greater than the face amount of the notes
issued.  Accordingly, the Company recorded a discount of $1,335,650
which is being amortized over the life of the Debentures on the effective
interest method.  For the year ended December 31, 2008, $383,490 of
discount amortization is included in interest expense.  At December
31, 2008, the unamortized balance of the discount is $952,160 and is offset
against the Debentures’ aggregate principal balance of $1,335,650.
 
 The
Company incurred cost of $357,753 directly associated with the issuance of the
Debentures.  The Company also issued warrants to purchase 357,100
shares of common stock as finder’s fee, exercisable for two years at $0.25 per
share, which vested immediately on the issuance date.  The 357,100
warrants were valued at $30,759 using the Black-Scholes option valuation model
with the following assumptions: risk-free interest rate of 1.6% to 2%; dividend
yield of 0%; volatility factors of 86.6% to 91.7%; and an expected life of two
years (statutory term).  The costs directly associated with the
issuance of the Debentures and the fair value of the warrants issued for
finder’s fee total $388,512 and have been recorded by the Company as debt
issuance costs.  These costs are capitalized and are being amortized
over the term of the Debentures.  For the year ended December 31,
2008, amortization charged to interest expense was $114,234, and the unamortized
balance at December 31, 2008 was $274,278.
 
 Escrow shares related to
convertible note transaction
 
 In
connection with the issuance of the Debentures and Warrants, the Company’s Chief
Executive Officer entered into an escrow agreement pursuant to which he
transferred 4,452,168 shares of the Company’s common stock owned by him into an
escrow account for the benefit of the investors as a guarantee of the Company
meeting certain performance targets.  Pursuant to the escrow
agreement, the Chief Executive Officer agreed to transfer 50% of the escrowed
shares to the holders of the Debentures if the Company does not meet its
performance targets for the year ended December 31, 2008.  The
remaining 50% of the escrowed shares will be transferred to the holders of the
Debentures if the Company does not meet its performance targets for the year
ended December 31, 2009.  The performance target for 2008 is the
achievement of net income and cash flow (as defined in the Debentures) of at
least $3,500,000.  The performance target for the 2009 is the
achievement of net income and cash flow (as defined in the Debentures) of at
least $6,000,000. The escrowed shares revert back to the Chief Executive Officer
if the Company meets its performance targets.
 
 The
Company considered the guidance in paragraph 11 of SFAS 123(R) and SAB Topic 5:T
in determining whether the escrow agreement represents a compensatory
arrangement that is, in substance, a capital contribution of common shares by
the Chief Executive Officer and then a share-based payment to him for services
rendered.  The agreement to release the shares from escrow upon the
achievement of certain criteria was presumed to be a separate compensatory
arrangement between the Company and the Chief Executive Officer.  As
such, the Company valued the escrowed shares as if the Chief Executive Officer
had provided the Company an option to acquire these shares.  The
aggregate value of the 4,452,168 shares were valued at $1,157,132 using the
Black-Scholes option valuation model with the following assumptions: risk-free
interest rate of 1.6% to 2%; dividend yield of 0%; volatility factors of 86.6%
to 91.7%; and an expected life of 3 months (for 2008) and 15 months (for
2009).  For the year ended December 31, 2008, the Company recognized
$676,466 of expense related to the escrow shares.  At December 31,
2008, the Company achieved the performance target for 2008 and 50% of the
escrowed shares will be returned to the Chief Executive Officer.
  F-17
 11.
                      WARRANTS AND
  OPTIONS
 
 In
addition to the warrants issued in conjunction with the Debentures (see
Note 10), on December 15, 2008, the Company granted its Chief Financial Officer
an option to purchase 100,000 shares of common stock.  The options
vested immediately when granted, with an exercise price of $0.24 per share and
an expiration date 2 years from the grant date.  The fair value of the options was
$8,000 at the grant date, which was determined using the Black-Scholes option
valuation model with the following assumptions: risk-free interest rate of 1.6%,
dividend yield of 0%; volatility factors of 86.6%; and an expected life of 2
years.  A total of $8,000 was charged to compensation at the grant
date.
 
 At
December 31, 2008 and 2007, outstanding warrants and options were as
follows:
  
 Number
      of
                                  Shares
      under Warrants
                                  and
      Options
                                
                                
                                Weighted
                                  Average
      Exercise PriceWarrants
      and options outstanding at January 1, 2007
                                
                                
                                -
                                
                                
                                $
                                --
                                
                                
                                
                                -Warrants
      and options granted
                                
                                
                                -
                                
                                
                                
                                -Warrants
      and options expired
                                
                                
                                -
                                
                                
                                
                                -Warrants
      and options outstanding at December 31, 2007
                                
                                
                                -
                                
                                
                                
                                -Warrants
      and options granted
                                
                                
                                9,361,434
                                
                                
                                $
                                0.15Warrants
      and options expired
                                
                                
                                -
                                
                                
                                
                                -Warrants
      and options outstanding at December 31, 2008
                                
                                
                                9,361,434
                                
                                
                                $
                                0.15
 
 The following table summarizes
information about warrants and options outstanding at December 31,
2008:
  Outstanding
      Warrants and Options
                            
                            Exercisable
      Warrants and OptionsExercise
      price
                            
                            Number
      of shares under warrants and options
                            
                            Weighted
      average remaining contractual life (years)
                            
                            Number
      of shares under warrants and options exercisable
                            
                            Weighted
      average exercise price$0.15
                            
                            8,904,334
                            
                            2.9
                            
                            3,561,734
                            
                            $0.15$0.25
                            
                            357,100
                            
                            1.9
                            
                            357,100
                            
                            $0.25$0.24
                            
                            100,000
                            
                            2.0
                            
                            100,000
                            
                            $0.24$0.15
                            
                            9,361,434
                            
                            
                            
                            4,018,834
                            
                            $0.15
 
 At
December 31, 2008, the aggregate intrinsic value of the warrants outstanding and
exercisable was $801,390 and $200,347, respectively.  At December 31,
2007, there were no warrants or options outstanding.
  12.
                    STATUTORY
      RESERVES
 
 Statutory
reserves represent restricted retained
earnings.As stipulated by the PRC's Company
Law, net income after taxation can only be distributed as dividends after: (a)
appropriation has been made to make up cumulative losses from prior years, if
any, (b) allocations to the statutory capital reserve of at least 10% the
after-tax income, as determined under PRC accounting rules and regulations,
until the reserve amounts to 50% of the Company's registered capital, (c)
allocations of 5-10% of after-tax income, as determined under PRC accounting
rules and regulations, to the Company's statutory common welfare fund, which is
restricted to capital expenditure for the collective benefits of the Company's
employees, and (d) allocations to the discretionary surplus reserve, if approved
at the general meeting of the shareholders.
  F-18
  Statutory
reserves consist of the following as ofDecember 31:
 2008
                            
                            
                            2007Statutory
      capital reserve
                            
                            $
                            232,206
                            
                            
                            $
                            232,206Statutory
      common welfare fund
                            
                            
                            116,103
                            
                            
                            
                            116,103$
                            348,309
                            
                            
                            $
                            348,309
 
 13.INCOME
TAXES
 
 Companies
in the PRC are generally subject to PRC Enterprise Income Tax at a uniform tax
rate of 25% under the China’s Unified Enterprise Income Tax Law (“New EIT Law”),
which took effect from January 1, 2008. The New EIT Law provides a five-year
transition period from its effective date for those enterprises which were
established before the promulgation date of the New EIT Law and which were
entitled to a preferential EIT treatment. Accordingly, Suo’ang BST is subject to
the uniform tax rate of 25%. Suo’ang New Energy is entitled to two years tax
holiday for the years ended December 31, 2007 and 2008 and 50% reduction on its
EIT rate for the three years ended December 31, 2009, 2010 and
2011.
 
 The
Company has not recorded a provision for U.S. federal income tax for the years
ended December 31, 2008 and 2007 due to a net operating loss carry forward
in the United States of America.  The net operating loss carry forward
in the United States of America as of December 31, 2008 was approximately
$188,000 and expires through 2014.
 
 Income
tax expense consist of the following for the years ended December
31,
 2008
                            
                            
                            2007Current
      – PRC Enterprise Income Tax
                            
                            $
                            105,249
                            
                            
                            $
                            59,668Deferred
                            
                            
                            -
                            
                            
                            
                            -Total
      income tax expenses
                            
                            $
                            105,249
                            
                            
                            $
                            59,668
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate at December 31,
 
 2008
                            
                            
                            2007U.S.
      statutory rate
                            
                            
                            34%
                            
                            
                            
                            34%Foreign
      income not recognized in U.S.
                            
                            
                            (34%
                            )
                            
                            
                            (34%
                            )Non-deductible
      expenses and other
                            
                            
                            3%
                            
                            
                            
                            -Tax
      holiday
                            
                            
                            (25%
                            )
                            
                            
                            (10%
                            )PRC
      preferential income tax rate
                            
                            
                            25%
                            
                            
                            
                            15%Effective
      tax rate
                            
                            
                            3%
                            
                            
                            
                            5%
 
 No
significant deferred tax liabilities or assets existed as of either December 31,
2008 or 2007.
 
 Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN
48”) — an interpretation of FASB Statement No. 109, Accounting for Income
Taxes.” The Interpretation addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, we may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. At the date of adoption, and as of December 31,
2008, the Company does not have a liability for unrecognized tax uncertainties.
The Company and its Chinese subsidiaries have never been subject to a tax
examination and all years are open to examination by the tax
authorities.
 
 F-19
  Tax
holiday
 
 Income
before income tax expense and minority interest was $3,456,703 and $1,319,501
for 2008 and 2007 and was mainly attributed to Suo’ang New Energy’s
operations in China which were subject to a tax holiday.  The
following unaudited pro forma statement of operations reflects the effect on
income tax expense and net income had the tax holiday not been available to
us:
 
 2008
                                (unaudited)
                              
                              
                              2007
                                (unaudited)Income
      taxes:As
      reported
                              
                              $
                              105,249
                              
                              
                              $
                              59,668Proforma
                              
                              $
                              1,235,000
                              
                              
                              $
                              460,000Net
      income:As
      reported
                              
                              $
                              2,999,605
                              
                              
                              $
                              1,016,938Proforma
                              
                              $
                              1,869,854
                              
                              
                              $
                              616,606Proforma-basic
      income per common share
                              
                              $
                              0.02
                              
                              
                              $
                              0.01
 14.
                    RELATED PARTY
      TRANSACTIONS
 
 Due to
directors
  Amount
due to directors are summarized as follows at December 31,
 2008
                                      
                                      
                                      2007Due
      to:Mr. Peng Zhou
                                      
                                      $
                                      395,049
                                      
                                      
                                      $
                                      8,527Mr.
      Baowen Ren, Chief Executive Officer
                                      
                                      70,000
                                      
                                      
                                      -$
                                      465,049
                                      
                                      
                                      $
                                      8,527
 
 Amounts
due to directors are non-interest bearing, unsecured, and due on
demand.
 
 Disposal of
patent
 
 In 2006,
the Company sold the patent related to its discontinued COPO resin product
operations to a related company for $256,200.  At December 31, 2007,
$141,795 was due from the sale of the patent, which was received on March 3,
2008.
 
 Sale of
leasehold
 
 On June
13, 2006, the Company agreed to sell certain of the Company’s leasehold
properties with a book value of $2,417,000, to a company controlled by a
shareholder of the Company for approximately $2,450,000.  The Company
recorded the transaction under the deposit method, and as of December 31,
2007, $1,507,000 was received and recorded as deposit.  The sale was
completed on July 9, 2008, and a gain of $33,069 was recorded.
 
 15.
                    COMMITMENTS
      AND CONTINGENCIES
 
 Coal inventory purchase
commitment
 
 During
2008, the Company entered into a coal inventory purchase contract with a
supplier.  At December 31, 2008, the Company’s commitment to purchase
coal related to this contact is approximately $7,947,000.
 
 Capital expenditure
commitments
 
 During
      the year ended December 31, 2008, the Company entered into various
      contracts to purchase machinery in connection with its CWM production
      plant.  At December 31, 2008, the Company's capital expenditure
      commitment totaled $279,193 for the purchase of
  machinery.
  F-20
  Operating lease commitments
  As of
December 31, 2008, the Company’s total future minimum lease payments under
non-cancelable operating leases to be paid in each of the five succeeding years
are as follows:
 
 Year
      ending December 31,2009
                          
                          $
                          37,3082010
                          
                          
                          9,6572011
      and thereafter
                          
                          
                          -Total
      Operating Lease Commitments
                          
                          $
                          46,965
 
 Social insurance of
    Employees
 
 According
to the prevailing laws and regulations of the PRC, the Company is required to
cover its employees with medical, retirement and unemployment insurance
programs.  Management believes that due to the transient nature of its
employees, the Company does not need to provide all employees with such social
insurance.  In the event that any current or former employee files a
complaint with the PRC government, the Company may be required to make up the
social insurance as well as to pay administrative fines.  As the
Company believes that these fines would not be material, no provision has been
made in this regard.
 
 16.
                    SUBSEQUENT
      EVENT
 
 Subsequent
to December 31, 2008, the Company entered into an agreement with a consultant to
provide the Company with services from January 1, 2009 to June 30, 2009 for
2,333,000 shares of common stock.  1,166,500 shares of common stock
were issued on March 31, 2009 and the remaining 1,166,500 shares will be issued
in the second quarter of 2009.  The Company will recognize the fair
value of these shares in 2009 in the quarters the shares are
issued.
 F-21
 ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
  None.
 
 ITEM 9A(T). CONTROLS AND
PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 The term
“disclosure controls and procedures” is defined in Rule 13a-14(c) of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  This term refers to the controls and procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of December 31,
2008, and have concluded that as of that date, our disclosure controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act, subject
to certain material weaknesses in our internal control over financial reporting
discussed immediately below under the caption “Management’s Report on Internal
Control over Financial Reporting”.
 
 25
 Management’s
Report on Internal Control over Financial Reporting
 
 Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America. The Company's internal control over financial
reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
 
 Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be detected
in a timely manner. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.
 
 Management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2008. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in "Internal Control-Integrated Framework." Based on
that evaluation, our management concluded that as of December 31, 2008, our
internal control over financial reporting was not effective because of the
material weaknesses described below.  A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of the registrant's annual or interim financial statements will not
be prevented or detected on a timely basis.  In its assessment of the
Company’s internal control over financial reporting as of December 31,
2008, our management concluded that our internal control over financial
reporting was subject to the following material weaknesses, which we identified
in our annual report for the year ended December 31, 2007:
 
 1.
                    The
      operations of the affiliated entities is in China, hence the
      presentation of their financial statements, do not fully comply with
      the U.S. GAAP.  The Company had insufficient personnel to
      perform the accounting and financial reporting functions and existing
      personnel lacked the appropriate level of accounting knowledge,
      experience and training in the application of accounting principles
      generally accepted in the United States and were inadequately
      supervised.  The lack of sufficient and adequately trained
      accounting and finance personnel resulted in an ineffective
      segregation of duties relative to key financial reporting functions;
      and
 
 2.
                    Lack
      of timely identification, research and resolution of accounting issues and
      lack of documentation of consideration of recent accounting
      pronouncements.
 
 Since the
2007 annual report, the Company has taken steps to address these material
weaknesses as follows:
 
 1.
                    We
      hired additional accounting and operations personnel to ensure that
      accounting personnel with adequate experience, skills and knowledge
      relating to complex, non-routine transactions are directly involved in the
      review and accounting evaluation of our complex, non-routine
      transactions;
 
 2.
                    In
      December 2008, we appointed Mr. Hon Wan Chan, whom our management believes
      has the requisite financial reporting experience, skills and knowledge to
      complement our existing personnel, as our new Chief Financial
      Officer;
 
 3.
                    Our
      internal accounting and operations personnel are now required early in the
      evaluation of a complex, non-routine transaction to obtain additional
      guidance as to the application of generally accepted accounting principles
      to such a proposed
transaction;
 
 4.
                    Our
      senior accounting personnel has established standards to review, analysis
      and related conclusions with respect to complex, non-routine transactions;
      and
 
 5.
                    Our
      senior accounting personnel and the Chief Financial Officer are now
      required to review complex, non-routine transactions to evaluate and
      approve the accounting treatment for such
  transactions.
 
 This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only this management’s report in this annual
report.
 
 26
 Changes
in Internal Control Over Financial Reporting
  There
were no changes in our internal controls over financial reporting that occurred
during the year ended December 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
 
 ITEM
9B. OTHER INFORMATION
 
 None.
  PART
III
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
 
 Current
Executive Officers and Directors
 
 The
following tables set forth information regarding the Company’s current executive
officers and directors of the Company. The Board of Directors is comprised of
only one class. Except as otherwise described below, all of the directors will
serve until the next annual meeting of stockholders or until their successors
are elected and qualified, or until their earlier death, retirement, resignation
or removal. Also provided herein are brief descriptions of the business
experience of each director and executive officer during the past five years and
an indication of directorships held by each director in other companies subject
to the reporting requirements under the federal securities laws.
  Name
                    
                    Age
                    
                    PositionsBaowen
      Ren
                    
                    
                    40
                    
                    CEO,
      President and Chairman of the BoardHon
      Wan Chan
                    
                    
                    48
                    
                    Chief
      Financial OfficerWenjie
      Zhang
                    
                    
                    37
                    
                    DirectorPeng
      Zhou
                    
                    
                    41
                    
                    DirectorBennet
      P. Tchaikovsky
                    
                    
                    40
                    
                    DirectorZidong
      Cao
                    
                    
                    59
                    
                    Director
  Baowen Ren is the Director of
Hangson Limited and has been Chairman of the Board of Shaanxi BST since January
2003.  Mr. Ren
is a senior economic engineer who graduated from the Business Management
Department of Hanzhong Normal University in 1992.  He had been the
president of Shaanxi Lanchao Group Clothe Group Co. Ltd. from January 2001 to
December 2002 and had been conferred honorable titles of “Pacemaker in the New
Long March”, “Shaanxi Outstanding Young Entrepreneur”, “Shaanxi Top 100
Entrepreneur”, and “National Model Township Entrepreneur of Ministry of
Agriculture”.  Under his leadership, Suo’ang BST has convened a batch
of excellent management personnel for products technology development, market
strategy and sales, and capital operations for the expansion and development of
our CWM business.
 
 Hon Wan Chanwas appointed as
our Chief Financial Officer on December 15, 2008. Mr. Chan is a principal of CC
Alliance CPA & Co. He served as the Business Director for Texwood Group,
from November 2006 to February 2008, overseeing the company’s business
administration, finance and accounting, and as an in-house accountant from April
2000 to June 2005. Between his stints at Texwood Group, Mr. Chan was the Chief
Financial Officer of South China Media Group from July 2005 to October 2006. Mr.
Chan holds a masters degree in accountancy from the Hong Kong Polytechnic
University, and a bachelor’s degree in economics from Macquarie University in
Australia. He is an associate member of both The Institute of Chartered
Accountants in Australia and The Hong Kong Institute of Certified Public
Accountants.
 
 Peng Zhou is the General
Manager of Suo’ang BST. Mr. Zhou is an accountant who graduated from the
Statistics Department of Shaanxi Institute of Finance in 1992. Mr. Zhou started
at Suo’ang BST as a Project Manager in May 2002 and was promoted to his
current position as General Manager in May 2005. Mr. Zhou has also been engaged
in industries such as finance, media, foreign trade, real estate and had held
the posts of manager of credit department, editor, financial supervisor, and
deputy manager. From June 1997 until March 2002, Mr. Zhou was the Vice President
of Hanzhong Ruisen Real Estate Company. Mr. Zhou was also in charge of compiling
and reporting work for a number of projects such as Industrial Park Project
of 3,000-thousand Sets of Clothes, New Construction Material Project-Shale Brick
Manufacturing Demonstration Base with Annual Output of 6000-Thousand Pieces, and
Erlang Dam Downstream Hydropower Station Cascade Development
Project.
 
 27
 Wenjie Zhang has been the
General Manager of Hanzhong Minsheng Guomao Department Store since January 2004.
Mr. Zhang graduated with a degree in administration from the Xi’an Science
Institution in 1995. From January 2001 until December 2003, Mr. Zhang was the
Sales Manager at Shaanxi Jingyi Wood Group Company.
  Bennet P. Tchaikovsky joined
our Company on December 15, 2008 and is the chairman of our audit committee and
member of our compensation and nominating committees. Mr. Tchaikovsky is
presently the Chief Financial Officer of Skystar Bio-Pharmaceutical Company. He
is also currently serving on the board of directors of Ever-Glory International
Group, Inc., as chairman of the audit committee and member of the
compensation committee. From July 2004 through October 2007, Mr. Tchaikovsky
served as the chief financial officer of Innovative Card Technologies,
Inc. Mr. Tchaikovsky acted as a consultant to Innovative Card
Technologies from November 2007 until July 2008. From January 2003 through
November 2003, Mr. Tchaikovsky served as the Vice President, Finance of TJR
Industries, Inc. From December 2000 through June 2002, Mr. Tchaikovsky served as
Interim Chief Financial Officer and Chief Financial Officer of Digital Lava,
Inc. Mr. Tchaikovsky is a licensed Certified Public Accountant and an inactive
member of the California State Bar. He received a B.A. in Business Economics
from the University of California at Santa Barbara, and a J.D. from Southwestern
University School of Law.
 
 Zidong Cao joined our Company
on December 15, 2008 and is a member of our audit, compensation and nominating
committees. Dr. Cao is a scientist with substantial knowledge of the coal and
related industries in China. He is presently the Assistant Dean of the School of
Energy & Power Engineering and Associate Director of the Research Center on
Environmental Science & Engineering at Xi’an Jiaotong University (the
“University”). Dr. Cao was previously the Director of the University’s Boiler
Laboratory and the Boiler Teaching & Research Office. He is a member of the
National Committee of Boiler Standardization and is the Vice Chairman of the
Xi’an Association of Thermal Energy & Dynamics. Dr. Cao is a graduate of the
University’s School of Energy and Power Engineering, focusing on boiler
research.
 
 Family
Relationships
 
 There are
no family relationships between or among any of our current directors, executive
officers or persons nominated or charged by the Company to become directors or
executive officers. There are no family relationships among our officers and
directors and the officers and directors of our direct and indirect
subsidiaries.
 
 Involvement
in Certain Legal Proceedings
  None of
our directors or executive officers has, during the past five
years:
 
 (a)
                    Had
      any bankruptcy petition filed by or against any business of which such
      person was a general partner or executive officer either at the time of
      the bankruptcy or within two years prior to that
  time;
 
 (b)
                    Been
      convicted in a criminal proceeding or subject to a pending criminal
      proceeding;
 
 (c)
                    Been
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction or any
      federal or state authority, permanently or temporarily enjoining, barring,
      suspending or otherwise limiting his involvement in any type of business,
      securities, futures, commodities or banking activities;
  and
 
 (d)
                    Been
      found by a court of competent jurisdiction (in a civil action), the
      Securities and Exchange Commission or the Commodity Futures Trading
      Commission to have violated a federal or state securities or commodities
      law, and the judgment has not been reversed, suspended, or
      vacated.
 
 Compliance
with Section 16(a) of the Exchange Act
 
 Based
solely on review of the copies of such forms furnished to the Company, or
written representations that no reports were required, the Company believes that
for the year ended December 31, 2008, our directors and executive officers
complied with Section 16(a) filing requirements applicable to them, except
that Mr. Hon Wan Chan, Mr. Bennet Tchaikovsky and Dr. Zidong Cao did not file
their Form 3s or Form 5s in connection with transactions that occurred during
2008.
  Code
of Ethics
 
 On December 15, 2008, we adopted a code
of ethics that applies to our officers, directors and employees, including our
chief executive officer, senior executive officers, principal accounting
officer, and other senior financial officers. Our code of ethics is available on
our website atwww.sinocei.com. A copy of our code of ethics will
also be provided to any person without charge, upon written request sent to us
at our offices located at Room 1605, Suite B, Zhengxin Building, No. 5, Gaoxin 1st Road, Gaoxin
District, Xi’an, Shaanxi
Province, People’s Republic of China.
 
 28
 Material
Changes to the Procedures by which Security Holders May Recommend Nominees to
the Board of Directors
  On
December 15, 2008, we adopted a nominating committee charter. Under such
charter, while there have been no material changes to the procedures by which
our shareholders may recommend nominees to the board of directors, the board of
directors may take into consideration as one of the factors in its evaluation of
shareholder-recommended nominees, the size and duration of the share holdings of
the recommending shareholder or shareholder group in relation to the total
outstanding shares of the Company. The board of directors may also consider the
extent to which the recommending shareholder intends to continue holding its
interest in the Company, including, in the case of nominees recommended for
election at an annual meeting of shareholders, whether the recommending
shareholder intends to continue holding its interest at least through the time
of such annual meeting.
  Audit Committee
 
 Although
we are not a “listed company” under SEC rules and are therefore not required to
have an audit committee, we have an audit committee comprised of independent
directors. Our audit committee is comprised of three independent directors: Mr.
Bennet Tchaikovsky, Mr. Wenjie Zhang and Dr. Zidong Cao. Our board of directors
has determined, based on information furnished by Mr. Tchaikovsky and other
available information, that Mr. Tchaikovsky meets the requirements of an “audit
committee financial expert” as such term is defined in the rules promulgated
under the Securities Act and the Exchange Act. On December 15, 2008, Mr.
Tchaikovsky was appointed to serve as chairman of the audit committee, and to
serve as our audit committee financial expert.
  ITEM 11. EXECUTIVE COMPENSATION
 
 Summary
of Compensation
 
 The
following summary compensation table indicates the cash and non-cash
compensation earned for years ended December 31, 2008 and 2007 by our Chief
Executive Officer and each of our other two highest paid executives, whose total
compensation exceeded $100,000 (if any) for the years ended December 31,
2008 and 2007.
 
 SUMMARY
      COMPENSATION TABLEName
      and Principal Position
                                    
                                    Year
                                    
                                    Salary
                                      ($)
      (2)
                                    
                                    Bonus
                                      ($)
                                    
                                    Stock
                                      Awards
                                      (
      $)
                                    
                                    Option
                                      Awards
                                      ($)
                                    
                                    Non-Equity
                                      Incentive
      Plan
                                      Compensation
                                      ($)
                                    
                                    Nonqualified
                                      Deferred
                                      Compensation
      Earnings
                                      ($)
                                    
                                    All
      Other
                                      Compensation
                                      (
      $)
                                    
                                    Total
                                      ($)Baowen
      Ren,
                                    
                                    
                                    2008
                                    
                                    15,282
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    15,282current
      CEO (1)
                                    
                                    
                                    2007
                                    
                                    5,600
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    5,600
 
 (1)
                  Mr.
      Ren received no other form of compensation in the years shown, other than
      the salary set forth in this table.
 
 (2)
                  Mr.
      Ren’s compensation for the years shown was paid in RMB which, for
      reporting purposes, has been converted to U.S. dollars at the conversion
      rate of 7.0671 RMB to one U.S. dollar for 2008 and 7.58 RMB to one U.S.
      dollar for 2007.
 
 Employment
Agreements, Termination of Employment and Change-in-Control Arrangements with
our Executive Officers
 
 Except as
described below, we currently have no employment agreements with any of our
executive officers, nor any compensatory plans or arrangements resulting from
the resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer’s
responsibilities following a change-in-control.
 
 Employment
Agreement with Hon Wan Chan
 
 On
December 15, 2008, we entered into an employment agreement with Mr. Chan for a
term of one year with an annualized compensation of 180,000 Renminbi (“RMB”).
Under the terms of the employment agreement, the Company also agreed to grant
him an option to purchase shares of the Company’s common stock pursuant to a
non-qualified stock option agreement. Mr. Chan is also entitled to reimbursement
of reasonable business expenses incurred in connection with his employment. The
Company may terminate the employment agreement for cause or if Mr. Chan becomes
disabled or dies. The employment agreement may also be terminated by the Company
or Mr. Chan upon a 30-day written notice. The employment agreement contains
certain restrictive covenants applicable during his employment and thereafter
preventing both competition with the Company and disclosure of the Company’s
confidential information.
 
 29
 Concurrently
with the employment agreement, we granted Mr. Chan an option to purchase up to
100,000 shares of the Company’s common stock pursuant to a non-qualified stock
option agreement, at an exercise price equal to the last reported sale price per
share in the over-the-counter market on the grant date. The option is
exercisable for a period of two years from the grant date, unless Mr. Chan’s
employment is terminated. If the termination arises from Mr. Chan’s disability
or death, the option is exercisable for up to a period of 12 months following
the disability or death; and if we terminate Mr. Chan’s employment for cause,
the option is terminated immediately. For any other termination, the option is
exercisable for up to 3 months following such termination. With respect to
shares of common stock that Mr. Chan acquires from exercise of the option, the
Company has a 30-day right of first refusal if Mr. Chan proposes to dispose them
in any manner.
 
 Outstanding
Equity Awards at Fiscal Year-End
 
 With the
exception of Mr. Hon Wan Chan, our current Chief Financial Officer, there are no
unexercised options, unvested stock awards or equity incentive plan awards for
any of the above-named executive officers outstanding as of December 31, 2008.
Pursuant to the terms of his employment agreement, we granted Mr. Chan an option
to purchase up to 100,000 shares of the Company’s common stock for a period of
two years, The option was not granted, and the shares that the option is
exercisable for will not issued pursuant to, any equity incentive plans in
effect. The fair value of the option granted to Mr. Chan, $8,000, was charged to
compensation at the grant date.
 
 Compensation
of Directors
 
 The
following director compensation disclosure reflects all compensation awarded to,
earned by or paid to the directors below for the year ended December 31,
2008.
 
 DIRECTOR COMPENSATION
      TABLEName
                                    
                                    Year
                                    
                                    Fees
                                      Earned
                                      or
                                      Paid
      in
                                      Cash
                                      ($)
                                    
                                    Stock
                                      Awards
                                      ($)
                                    
                                    Option
                                      Awards
                                      ($)
                                    
                                    Non-Equity
                                      Incentive
      Plan
                                      Compensation
                                      ($)
                                    
                                    Nonqualified
                                      Deferred
                                      Compensation
      Earnings
                                      ($)
                                    
                                    All
      Other
                                      Compensation
                                      ($)
                                    
                                    Total
                                      ($)Baowen
      Ren (1)
                                    
                                    
                                    2008
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-Peng
      Zhou (1)
                                    
                                    
                                    2008
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-Wenjie
      Zhang (1)
                                    
                                    
                                    2008
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-Bennet
      Tchaikovsky (2)
                                    
                                    
                                    2008
                                    
                                    2,377
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    2,377Zidong
      Cao (3)
                                    
                                    
                                    2008
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
                                    
                                    
                                    -0-
                                    
                                    -0-
 
 (1)
                  These
      persons became our directors in connection with the share exchange
      transaction (described in the Description of Business above under the
      heading "Corporate Organization and History") that closed on October 20,
      2006. We do not have any compensation arrangements with these
      directors.(2)
                  Mr.
      Tchaikovsky was appointed to our board of directors effective December 15,
      2008, and is entitled to receive annual compensation of $39,000 for his
      services rendered as a director, as well as chairman of the audit
      committee and member of the compensation and nominating
      committees.(3)
                  Dr.
      Cao was appointed to our board of directors effective December 15, 2008,
      and is entitled to receive annual compensation of $10,000 for his services
      rendered as a director, as well as member of the audit, compensation and
      nominating committees.
 
 There
were no stock or option awards issued to any directors and outstanding as of
December 31, 2008.
 
 Director
Agreements
 
 In connection with the appointments
of Mr. Tchaikovsky and Dr. Cao to our board of directors, we entered into
agreements with each of them as follows:
 
 Under the
agreement with Mr. Tchaikovsky, in addition to duties as a director, he will
serve as chairman of the audit committee as well as member of the compensation
committee and/or the nominating committee, for annual compensation of $39,000.
We have also agreed to include Mr. Tchaikovsky under a directors and officers
insurance policy. Additionally, we entered into a separate indemnification
agreement with Mr. Tchaikovsky pursuant to which we have agreed to indemnify Mr.
Tchaikovsky against any expense, liability, or loss paid or incurred in
connection with any event relating to his directorship.
 
 30
 Under the
agreement with Dr. Cao, in addition to duties as a director, he will serve on
the audit committee, compensation committee and the nominating committee as a
member, for annual compensation of $10,000. We have
also agreed to include Dr. Cao under a directors and officers insurance
policy.
 
 Indemnification
of Officers and Directors
 
 We are a
Nevada corporation, and accordingly, we are subject to the corporate laws under
the Nevada Revised Statutes. Pursuant to Article 7 of our articles of
incorporation and Nevada’s Revised Business Statutes, our bylaws contain the
following indemnification provision for our directors and officers:
 
 “The
corporation shall indemnify directors, officers, employees, and agents of the
corporation to the extent required by the Nevada Revised Statutes and shall
indemnify such individuals to the extent permitted by the Nevada Revised
Statutes. The corporation may purchase and maintain liability insurance, or make
other arrangements for such obligations or otherwise, to the extent permitted by
the Nevada Revised Statutes.”
 
 Such
indemnification provision may be sufficiently broad to permit indemnification of
our executive officers and directors for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act. We do not currently carry
directors’ and officers’ liability insurance covering our directors and
officers, but we have plans to do so. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. No pending material litigation or proceeding involving our
directors, executive officers, employees or other agents as to which
indemnification is being sought exists, and we are not aware of any pending or
threatened material litigation that may result in claims for indemnification by
any of our directors or executive officers.
 
 ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
  Equity
Compensation Plan Information
 
 We do not
have any equity compensation plans in effect as of the date of this annual
report.
 
 Security
Ownership of Certain Beneficial Owners and Management
 
 The
following table sets forth certain information regarding our common stock
beneficially owned on March 27, 2009, for (i) each stockholder known to be the
beneficial owner of 5% or more of our outstanding common stock, (ii) each
executive officer and director, and (iii) all executive officers and directors
as a group. In general, a person is deemed to be a "beneficial owner" of a
security if that person has or shares the power to vote or direct the voting of
such security, or the power to dispose or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within 60
days.  Shares of common stock subject to options, warrants or
convertible securities exercisable or convertible within 60 days of March 27,
2009 are deemed outstanding for computing the percentage of the person or entity
holding such options, warrants or convertible securities but are not deemed
outstanding for computing the percentage of any other person. To the best of our
knowledge, subject to community and martial property laws, all persons named
have sole voting and investment power with respect to such shares, except as
otherwise noted.
 
 Title of
      Class
                              
                              Name and
      Address
                                of  Beneficial
      Owners (1)
                              
                              Amount
                                of Beneficial
      Ownership
                              
                              Percent
                                of Class (2)Common
      Stock
                              
                              
                              Baowen
      Ren, Director and Chief Executive Officer
                              
                              
                              27,991,699
                              
                              
                              30
                              %Common
      Stock
                              
                              
                              Hon
      Wan Chan, Chief Financial Officer (3)
                              
                              
                              -
                              
                              
                              0
                              %Common
      Stock
                              
                              
                              Peng
      Zhou, Director
                              
                              
                              7,500,000
                              
                              
                              9
                              %Common
      Stock
                              
                              
                              Wenjie
      Zhang, Director
                              
                              
                              202
                              
                              
                              *
                              %Common
      Stock
                              
                              
                              Bennet
      P. Tchaikovsky, Director (4)
                              
                              
                              -0-
                              
                              
                              0
                              %Common
      Stock
                              
                              
                              Zidong
      Cao, Director (5)
                              
                              
                              -0-
                              
                              
                              0
                              %Common
      Stock
                              
                              
                              All
      officers and directors as a group  (6 total)
                              
                              
                              35,491,901
                              
                              
                              39
                              %
 __________
 * less
than 1%
 
 (1)
                    Unless
      otherwise noted, the address for each of the named beneficial owners is:
      Room 1605, Suite B, Zhengxin Building,No. 5, Gaoxin 1st Road,
      Gaoxin District,Xi’an, Shaanxi Province, People’s Republic of
  China.
 
 (2)
                    Unless
      otherwise noted, the number and percentage of outstanding shares of our
      common stock is based upon 92,181,750 shares outstanding as of March 27,
      2009.
 
 (3)
                    Mr.
      Chan’s address is: Flat F, 26/Floor, Block 1, Tung Chung Crescent, Tung
      Chung, N.T., Hong Kong.
 
 (4)
                    Mr.
      Tchaikovsky’s address is: 6571 Morningside Drive, Huntington Beach, CA
      92648.
 
 (5)
                    Dr.
      Cao’s address is: 28 West Xianning Road, Xi'an, Shaanxi Province, People's
      Republic of China.
 
 31
 ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
 
 Hangson’s
Contractual Arrangements with Suo’ang BST and Its Stockholders
  PRC law
currently limits foreign equity ownership of Chinese companies.  To
comply with these foreign ownership restrictions, we operate our business in
China through a series of contractual arrangements between Hangson, our wholly
owned subsidiary, and Suo’ang BST and its majority stockholders, which give
Hangson the ability to substantially influence Suo’ang BST’s daily operations
and financial affairs, appoint its senior executives and approve all matters
requiring shareholder approval.  For a description of these
contractual arrangements, please see the section under Item 1 above titled
“Contractual Arrangements with Suo’ang BST and Its Stockholders.”
 
 Related
Party Transactions
 
 Set forth
below are the Company’s related party transactions and the related party
transactions between Suo’ang BST and its stockholders, officers and/or
directors.
 
 Related party receivables
and payables
 
 Amount
payable to a director as of December 31, are summarized as follows:
 December
      31,2008
                                        
                                        2007Amount
      due to a director:Mr.
      Peng Zhou, also a former minority shareholder of Suo’ang New
      Energy
                                        $
                                        395,049
                                        
                                        $
                                        8,527Mr.
      Baowen Ren, who is also our Chief Executive Officer
                                        70,000
                                        
                                        -465,049
                                        
                                        8,527
 
 The
amounts due to Mr. Zhou and Mr. Wen are advances from them to Suo’ang BST to
facilitate its operations. The amounts are interest free and unsecured and have
no fixed repayment date.
  Sale of leasehold
properties
 
 On June
13, 2006, the Company agreed with a company which is controlled by a shareholder
of the Company to sell certain of the Company’s leasehold properties, with a
book value of $2,417,000, to a company controlled by a shareholder of the
Company for approximately $2,450,000.  The Company has recorded the
transaction under the deposit method, and as of December 31, 2007,
$1,507,000 was received and recorded as deposit.  The sale was
completed on July 9, 2008, and a gain of $33,069 on sale of the leasehold
properties was recorded.
 
 Acquisition of minority
interest
 
 On June
30, 2008, the Company entered into a Securities Purchase Agreement with Mr. Peng
Zhou, who is one of our directors, to acquire his 20% equity ownership interest
in Suo’ang New Energy. Pursuant to the terms of our agreement with Mr. Zhou, he
transferred the 20% to Hangson, our wholly owned subsidiary, in exchange
7,500,000 shares of common stock. Additionally, Mr. Zhou agreed to waive any and
all right he may have to any distributions and/or payments from Suo’ang New
Energy beginning January 1, 2008.
 
 Other
than the above transactions or otherwise set forth in any reports filed by the
Company with the SEC, neither we, our subsidiary or VIEs have entered into any
material transactions with any director, executive officer, and nominee for
director, beneficial owner of five percent or more of our common stock, or
family members of such persons. We are not a subsidiary of any
company.
  Director Independence
 
 Based
upon information submitted by Mr. Wenjie Zhang, Mr. Bennet P. Tchaikovsky and
Dr. Zidong Cao, our board of directors has determined that each of them is
“independent” under the listing standards of NYSE Alternext US LLC (formerly the
American Stock Exchange).
 
 32
 ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 Our
current principal independent auditor is Weinberg & Company, P.A.
(“Weinberg”), whom we engaged on December 5, 2008, after dismissal of our prior
principal independent auditor, Yu & Associates CPA Corporation (“Yu &
Associates”).  Yu & Associates performed the audit for the
fiscal year ended December 31, 2007 and reviewed the Company’s unaudited
financial statements through the quarter ended September 30,
2008.  The following are the services provided and the amounts
billed.
 
 Audit
Fees
 
 The
aggregate fees billed by Weinberg for professional services rendered for the
audit of the Company’s annual financial statements for the fiscal year ended
December 31, 2008, was $Nil.
 
 The
aggregate fees billed by Yu & Associates for professional services rendered
for the review of the Company’s interim financial statements for the fiscal year
ended December 31, 2008, was $36,000. The aggregate fees billed by Yu &
Associates for the audit of the Company’s annual financial statements and review
of interim financial statements for the fiscal year ended December 31, 2007, was
$125,000.
 
 Audited-Related
Fees
 
 For the
year ended December 31, 2008, there were no fees billed by Weinberg for services
reasonably related to the performance of the audit or review of the financial
statements outside of those fees disclosed above under “Audit
Fees”.
 
 For the
year ended December 31, 2007, there were no fees billed by Yu & Associates
for services reasonably related to the performance of the audit or review of the
financial statements outside of those fees disclosed above under “Audit
Fees”.
 
 Tax
Fees
 
 For the
year ended December 31, 2008, the Company incurred no fees from Weinberg for
services for tax compliance, tax advice and tax planning work.
 
 For the
year ended December 31, 2007, the Company incurred no fees from Yu &
Associates for services for tax compliance, tax advice and tax planning
work.
 
 All
Other Fees
 
 For the
year ended December 31, 2008 and December 31, 2007, there were no other fees
billed by either Weinberg or Yu & Associates for products and services
outside of those fees disclosed above under “Audit Fees”, “Audit-Related Fees”
and “Tax Fees”.
  Pre-Approval
Policies and Procedures of the Audit Committee
 
 Our audit
committee approves the engagement of our independent auditors and is also
required to pre-approve all audit and non-audit expenses.  In the year
ended December 31, 2008, no audit and non-audit expenses were pre-approved by
our audit committee as such committee was not formed until December 15,
2008.
 
 33
 ITEM 15.   EXHIBITS
 
 (1) Financial
Statements
 
 The
following consolidated financial statements of the Company are included in Part
II, Item 8 of this Report:
 
 Report of
Weinberg & Company, P.A., Independent Auditors
 
 Report of
Yu & Associates CPA Corporation, Independent Auditors
  Consolidated
Balance Sheets at December 31, 2008 and 2007
  Consolidated
Statements of Operations and Comprehensive Income for the Years Ended December
31, 2008 and 2007
  Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2008 and
2007
  Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2007
  Notes to
Consolidated Financial Statements
 
 (2)
Financial Statement Schedules
  Schedules
are omitted because the required information is not present or is not present in
amounts sufficient to require submission of the schedule or because the
information required is given in the consolidated financial statements or the
notes thereto.
  (3)
Exhibits
 
 EXHIBIT INDEX
 Exhibit
      Number
                            
                            Description2.1
                            
                            Share
      Exchange Agreement by and between Endo Networks, Inc. (“Endo”), the
      Majority Shareholders of Endo, Hangson Ltd. (“Hangson”) and the
      Shareholders of Hangson dated October 18, 2006 (1)3.1
                            
                            Articles
      of Incorporation of Endo Networks, Inc., a Nevada corporation, as amended.
      (3)3.2
                            
                            Bylaws
      of Endo (3)3.3
                            
                            Text
      of Amendment to our Bylaws (4)3.4
                            
                            Articles
      of Merger filed with the Secretary of State of Nevada with an effective
      date of August 15, 2007 (6)4.1
                            
                            Form
      of Registrant’s 18% Secured Convertible Debenture (9)4.2
                            
                            Form
      of Registrant’s Warrant (9)4.3
                            
                            Form
      of Warrant issued to Ancora Securities, Inc. (9)4.4
                            
                            Non-statutory
      Stock Option Agreement by and between Registrant and Hon Wan Chan dated
      December 15, 2008 (11)10.1
                            
                            Asset
      and Share Purchase Agreement by and between Registrant and Peter B. Day
      (for Endo Canada) (2)10.2
                            
                            Securities
      Purchase Agreement by and among Registrant, Peng Zhou and Shaanxi Suo’ang
      New Energy Enterprise Co., Ltd. dated June 30, 2008 (8)10.3
                            
                            Securities
      Purchase Agreement by and among Registrant and two institutional and
      accredited investors dated September 16, 2008 (9)10.4
                            
                            Securities
      Purchase Agreement by and among Registrant and four institutional and
      accredited investors dated September 19, 2008 (10)10.5
                            
                            Employment
      Agreement by and between Registrant and Hon Wan Chan dated December 15,
      2008 (11)10.6
                            
                            Form
      of Director Offer Letter (11)10.7
                            
                            Indemnity
      Agreement  by and between Registrant and Bennet P. Tchaikovsky
      dated December 15, 2008 (11)10.8
                            
                            Form
      of Exchange and Amendment Agreement by and among Registrant and six
      institutional and accredited investors (12)14
                            
                            Code
      of Business Conduct and Ethics (11)21
                            
                            List
      of Subsidiaries (7)31.1
                            
                            Section
      302 Certification by the Corporation’s Chief Executive Officer
      *31.2
                            
                            Section
      302 Certification by the Corporation’s Chief Financial Officer
      *32.1
                            
                            Section
      906 Certification by the Corporation’s Chief Executive Officer
      *32.2
                            
                            Section
      906 Certification by the Corporation’s Chief Financial Officer
      *99.1
                            
                            Consulting
      Services Agreement by and between Hangson and Shaanxi Suo’ang Biological
      Science & Technology Co., Ltd. (“Suo’ang BST”) dated August 18, 2006
      (3)99.2
                            
                            Equity
      Pledge Agreement by and among Hangson, Suo’ang BST and Suo’ang BST’s
      Majority Shareholders dated August 18, 2006 (3)99.3
                            
                            Operating
      Agreement by and among Hangson, Suo’ang BST and Suo’ang BST’s Majority
      Shareholders dated August 18, 2006 (3)99.4
                            
                            Proxy
      Agreement by and between Hangson and Suo’ang BST’s Majority Shareholders
      dated August 18, 2006 (3)99.5
                            
                            Option
      Agreement between Hangson and Suo’ang BST’s Majority Shareholders dated
      August 18, 2006 (3)99.6
                            
                            Agreement
      by and between Suo’ang BST and Hanzhong Si Xiong Ke Chuang Business Co.
      Ltd. (“Hangzhong”) (3)99.7
                            
                            Supplementary
      Agreement by and between Suo’ang BST and Hanzhong dated March 25, 2007
      (5)99.8
                            
                            Contract
      for Technology Transfer between Suo’ang BST and HanZhongWeiDa Commercial
      Company Limited (“HangZhongWeiDa”) dated December 25, 2006
    (5)99.9
                            
                            Contract
      for Technology Transfer between Suo’ang BST and HanZhongWeiDa dated
      January 10, 2007
(5)
 ____________
 *
Filed herewith
 (1)
                    Filed
      as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with
      the SEC on October 18, 2006 and incorporated herein by
      reference.(2)
                    Filed
      as Exhibit A of Registrant’s Schedule 14A filed with the SEC on August 8,
      2006 and incorporated herein by reference.(3)
                    Filed
      as Exhibits to the Registrant’s Current Report on Form 8-K filed with the
      SEC on October 26, 2006 and incorporated herein by
    reference.(4)
                    Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on November 17, 2006 and incorporated herein by
      reference.(5)
                    Filed
      as Exhibits to the Registrant’s Annual Report on Form 10-KSB filed with
      the SEC on May 3, 2007 and incorporated herein by
    reference.(6)
                    Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on August 17, 2007 and incorporated herein by
      reference.(7)
                    Filed
      as an Exhibit to the Registrant’s Annual Report on Form 10-KSB filed with
      the SEC on May 3, 2007 and incorporated herein by
    reference.(8)
                    Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on July 7, 2008 and incorporated herein by
    reference.(9)
                    Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on September 17, 2008 and incorporated herein by
      reference.(10)
                    Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on September 22, 2008 and incorporated herein by
      reference.(11)
                    Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on December 16, 2008 and incorporated herein by
      reference.(12)
                    Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on March 30, 2009 and incorporated herein by
      reference.
  34
 SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Dated:
      April 3, 2009
                    
                    
                    SINO
      CLEAN ENERGY INC.
                      (Registrant)By:
                    /s/
      Baowen RenBaowen
      Ren
                      Chief
      Executive Officer
 
 
 KNOW ALL
THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Baowen Ren and Hon Wan Chan, and each of them, jointly
and severally, his attorneys in fact, each with full power of substitution, for
him in any and all capacities, to sign any and all amendments to this annual
report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue
hereof.
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
  Signature
                          
                          Title
                          
                          Date/s/
      Baowen Ren
                          
                          Chief
      Executive Officer, President and Chairman of the Board
                          
                          April
      3, 2009Baowen
      Ren/s/
      Hon Wan Chan
                          
                          Chief
      Financial Officer
                          
                          April
      3, 2009Hon
      Wan Chan/s/
      Wenjie Zhang
                          
                          Director
                          
                          April
      3, 2009Wenjie
      Zhang/s/
      Peng Zhou
                          
                          Director
                          
                          April
      3, 2009Peng
      Zhou/s/
      Bennet P. Tchaikovsky
                          
                          Director
                          
                          April
      3, 2009Bennet
      P. Tchaikovsky/s/
      Zidong Cao
                          
                          Director
                          
                          April
      3, 2009Zidong
      Cao
 
 35