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, 2009




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, PRC
                  
                  N/A(Address
      of principal executive offices)
                  
                  (Zip
      Code)





Registrant’s telephone number:
+86-29-82091099





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
      companyþ





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, 2009, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $11,596,908 based on a
closing price of $0.33 per share of common stock as reported on the
Over-the-Counter Bulletin Board on such date.





On March
31, 2010, we had 165,562,494 shares of common stock issued and
outstanding.











TABLE OF CONTENTS


TO
ANNUAL REPORT ON FORM 10-K


FOR
YEAR ENDED DECEMBER 31, 2009





PagePART
      IItem
      1.
                      Business
                      
                      3Item
      1A.
                      Risk
      Factors
                      
                      12Item
      2.
                      Properties
                      
                      26Item
      3.
                      Legal
      Proceedings
                      
                      26PART
      IIItem
      4.
                      Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      
                      27Item
      5.
                      Selected
      Financial Data
                      
                      29Item
      6.
                      Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
                      
                      29Item
      7.
                      Financial
      Statements and Supplementary Data
                      
                      F-1Item
      8.
                      Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                      
                      38Item
      8A(T).
                      Controls
      and Procedures
                      
                      39Item
      8B.
                      Other
      Information
                      
                      40PART
      IIIItem
      9.
                      Directors,
      Executive Officers and Corporate Governance
                      
                      40Item
      10.
                      Executive
      Compensation
                      
                      46Item
      11.
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      
                      51Item
      12.
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      
                      53Item
      13.
                      Principal
      Accounting Fees and Services
                      
                      54PART
      IVItem
      14.
                      Exhibits,
      Financial Statement Schedules
                      
                      55Signatures
                      
                      
                      59




2





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 subsidiaries, is a
leading third party commercial producer and distributor of coal-water slurry
fuel (“CWSF”) in China. CWSF is a clean fuel that consists of fine coal
particles suspended in water.  Our CWSF products are mainly used to
fuel boilers and furnaces to generate steam and heat for residential and
industrial applications.  We sell our products in China and our
customers include industrial, commercial, residential and government
organizations. Our strong reputation in the CWSF industry in China, together
with our established track record for consistently delivering products in large
quantities, has enabled us to expand our customer base.  We primarily
use washed coal to produce CWSF. We acquire the raw materials for each of our
production facilities primarily from three nearby coal mines.  We have
established strong relationships with our suppliers and our ability to purchase
large quantities of raw materials has allowed us to achieve favorable pricing
and delivery terms.




3




Until
November 12, 2009, all of our business operations were conducted through Shaanxi
Suo’ang Biological Science & Technology Co., Ltd., a PRC company (“Suo’ang
BST”) that we controlled through contractual arrangements designed to comply
with the law of People’s Republic of China (“PRC” or “China”) and Suo’ang BST’s
PRC subsidiary, Shaanxi Suo’ang New Energy Enterprise Co., Ltd. (“Suo’ang New
Energy”).  Beginning in June 2009, we effected a reorganization of our
corporate structure in order to make Suo’ang New Energy wholly
owned.  Pursuant to such reorganization, our business is now operated
by Suo’ang New Energy through our indirect wholly-owned subsidiary Tongchuan
Suoke Clean Energy Co., Ltd., a PRC limited liability company(“Suoke Clean Energy”),
which is incorporated under PRC law and wholly owned by Wiscon Holdings Limited,
a Hong Kong company(“Wiscon”), our directly owned Hong Kong subsidiary/holding company,
which was incorporated in 2006 and acquired by us in June 2009.  On
September 27, 2009, we received approval from the Tongchuan Bureau of Commerce
for the transfer of all of Suo’ang New Energy’s equity interests to Suoke Clean
Energy.  With the approval, Suo’ang New Energy has become a “domestic
PRC enterprise wholly-owned by a wholly-foreign owned
enterprise.”  Registration of the approval with the Tongchuan
Administration of Industry and Commerce, the final step in completing this
reorganization, was completed on November 12, 2009.  On October 12,
2009, Suo’ang New Energy established Shenyang Sou’ang Energy Co., Ltd., a
wholly-owned PRC subsidiary(“Shenyang Energy”), to
conduct the CWSF business in Shenyang, Liaoning Province.





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 we consummated a share exchange transaction with Hangson, a
British Virgin Islands company, the stockholders of Hangson and a majority of
our stockholders.  We issued a total of 26,000,000 shares of our
common stock to the Hangson Stockholders and a consultant in the transaction, in
exchange for 100% of the common stock of Hangson.  As a result of the
transaction we became engaged in the CWSF business, through the operations of
Suo’ang BST and Suo’ang New Energy.  On January 4, 2007, we changed
our name from “Endo Networks, Inc.” to “China West Coal Energy Inc.”, and then
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




Hangson
did not conduct any substantive business operations of its own, but from August
2006 to June 30, 2009, controlled Suo’ang BST, a PRC company and Suo’ang BST’s
80%-owned subsidiary Suo’ang New Energy.  From June 30, 2008 to
November 12, 2009 Hangson owned 20% of Suo’ang New Energy.  Hangson
controlled Suo’ang BST through a series of contractual arrangement.




Beginning
in June 2009, we effected a reorganization of our corporate structure in order
to make Suo’ang New Energy a wholly-owned subsidiary (the “2009
Reorganization”).  On June 30, 2009, we were a party to a series of
agreements (collectively the “Transfer Agreements”) transferring the contractual
arrangements, through which Hangson controlled Suo’ang BST, to Suoke Clean
Energy.




On
September 15, 2009, Suo’ang BST and Hangson entered into a share transfer
agreement with Suoke Clean Energy pursuant to which Suo’ang BST and Hangson
transferred 100% of the equity interests in Suo’ang New Energy to Suoke Clean
Energy.  On September 27, 2009, the Tongchuan Bureau of Commerce
approved the transfer of all of Suo’ang New Energy’s equity interests to Suoke
Clean Energy.  Registration of the approval of the equity transfer
with the Tongchuan Administration of Industry and Commerce, which was a
condition to the closing of the Share Transfer, was completed on November 12,
2009.  As a result of receiving the required approval and registration
the share transfer transaction was closed and we were able, through Suoke Clean
Energy to own 100%of the equity interests of  Suo’ang New
Energy.  On October 12, 2009, Suo’ang New Energy established a
wholly-owned subsidiary to conduct the CWSF business in Shenyang, Liaoning
Province.




4




On
December 31, 2009, we entered into a series of termination agreements to
terminate the contractual arrangements by and among Suoke Clean Energy, Suo’ang
BST and certain stockholders of Suo’ang BST.  We no longer needed to
keep such contractual arrangements in place due to the fact that Suo’ang BST was
no longer engaged in any substantial business operations. In connection with the
termination agreements, certain assets held by Suo’ang BST, such as, office
equipment, vehicles, bank deposits, accounts receivable, were transferred to
Suoke Clean Energy. Employees of Suo’ang BST signed new employment contracts
with Suoke Clean Energy. All rights and obligations under certain business
operation agreements and technology cooperation contracts between
Suo’ang BST and third parties were assigned to Suo’ang New Energy.




On
December 31, 2009, Hangson transferred all of its equity interests in Wiscon to
us.  Since Hangson had no substantive operations of its own after the
transfer and termination of the contractual arrangements, we dissolved Hangson
on December 31, 2009.




Wiscon Holdings
Limited




Wiscon is
a limited liability company incorporated in Hong Kong under the Companies
Ordinance on September 4, 2006 and Hangson acquired all of its issued and
outstanding equity interests on June 30, 2009. On December 31, 2009, Hangson
transferred all of its equity interests in Wiscon to Sino Clean Energy Inc. As a
result, Wiscon became a direct wholly-owned subsidiary of Sino Clean Energy
Inc.





5




Current
Corporate Structure




Prior to
the 2009 Reorganization, our corporate structure was as follows:









6




As a
result of the 2009 Reorganization, our current organizational structure is as
below:









Our
Products





Coal
water mixture, or CWSF, is a viscous, heavy liquid fuel that is produced by
mixing grounded coal, water and chemical additives.  CWSF can be
stored, pumped and burned as a substitute for oil or gas in properly modified
furnaces or boilers.  In general, CWSF is cheaper than, but has
combustion thermal efficiency similar to, oil or gas. CWSF burns cleaner than
coal, and is free of coal dust or the danger of spontaneous combustion during
transportation and storage.





7




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. CWSF 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 CWSF furnaces or other clean energy furnaces
by 2012, and requiring all new furnaces to use CWSF 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
CWSF, 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
CWSF.  Other cities that are actively promoting CWSF 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 CWSF.
Additionally, both of these cities seek to establish and foster a CWSF
production industry within their borders.





Suo’ang
BST began studying market demands for CWSF and the feasibility of a CWSF
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 CWSF in January 2007, and commenced CWSF production in July
2007.





Our
Production Plant





Our CWSF
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 CWSF by mixing coal with water and certain chemical additives as
follows:








8


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 CWSF 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 CWSF 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 CWSF, 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 CWSF under
the traditional production method, which can impact its combustion and heating
proficiencies. The system is now operational.





Our
Customers





CWSF is
sold and distributed directly to our customers. Suo’ang New Energy entered into
its first sales contracts for CWSF in January 2007, and as of December 31, 2009,
we had over 30 customers, one of which is in Shenyang and accounted for
approximately 14% of our total sale. None of our other customers accounted for
more than 10% of our total sales.





We sell
CWSF 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 one major customer, Shenyang
Haizhong, for a substantial portion of our revenues, nonrenewal or termination
of our contract with this customer would have a materially adverse effect on our
revenues. In the event that our major customer 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 CWSF,
and receives commission for sales of such boilers.





As CWSF
is still a relatively new industry, we look for opportunities to participate in
energy-related tradeshows and government-sponsored events to promote CWSF
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 CWSF 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 participated in the Investment & Trade Forum for Cooperation
between Eastern & Western China in Xi’an.





Competition




We are
the third largest CWSF producer in China, as measured by CWSF production
capacity, with an early-mover advantage and strong business
relationships.  We believe that we are able to differentiate ourselves
from our competitors by building track records and reputation for high quality
of product and services, by securing long-term customer contracts in each of the
target markets, and by selectively expanding into new regional
markets.




Currently there are 40 to
50 active CWSF suppliers in the Chinese CWSF market. Most CWSF suppliers had a
commercialized sales volume of lower than 100,000 tons in 2008 and in
2009.




9




Competition
is mainly based on establishing a large and stable customer base, building
capacity near large customers, maintaining good, long-term relationship with
large customers, and gaining more market share as most suppliers are not
competing on a regional level.




The CWSF
industry is still at an early stage in China and we have thus far experienced
limited competition from domestic CWSF producers.




China
represents a potentially lucrative market for international competitors, many of
whom may seek to enter the PRC market. We believe that there are currently no
foreign competitors with a material presence in the CWSF industry in
China.





Sources
and Availability of Raw Materials and Our Principal Suppliers




CWSF is
made from coal, water and additives. We provide additive suppliers with coal
samples and additive suppliers in turn change and adjust the formula in
accordance with our instructions.




Coal is
the primary raw material used to produce CWSF and accounted for approximately
82% of our cost of goods sold as of December 31, 2009.




We source
raw materials from nearby coal suppliers for each of our production facilities.
Coal is widely available in China and we maintain long-term relationships with
three key suppliers.  To minimize purchasing and logistics costs, we
source coal from suppliers as close as possible to our production
facilities.  We generally enter into one-year contracts with these
suppliers that set forth the purchase volume but not the pricing terms. We
determine raw material prices based on arm’s-length negotiations with our
suppliers shortly prior to delivery with reference to market
prices.  Our reputation as a dependable counterparty enables us to
obtain a stable and low-cost supply of raw material coal for our production
facilities. Our long-standing supplier relationships provide us with a
competitive advantage in China, and we intend to broaden these relationships to
parallel our efforts to increase the scale of our production facilities, thereby
maintaining a diverse supplier network while leveraging our purchasing power to
obtain favorable pricing and delivery terms.




The
following table sets forth a summary, for the periods indicated, of the
aggregate amounts of coal used in our operations:




Year ended December 31,2008
                  
                  
                  2009(in
      tons)Coal
                  
                  
                  10,8824.34
                  
                  
                  
                  321,958.89





For 2008
and 2009, we have four coal suppliers. Our two largest coal suppliers accounted
for 85 % and 12 % of coal purchase, respectively. Suppliers are generally paid
upon delivery with a varying level of deposit.




Intellectual
Properties and Licenses
  We
currently do not own any intellectual property rights.  We may, however,
enter into confidentiality, non-compete and invention assignment agreements with
our employees and consultants and nondisclosure agreements with third
parties.  While CWSF 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.


10




Government
Approval and Regulation of Our Principal Products or Services




The
Environmental Protection Law of the PRC governs us and our CWSF
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.




The
Company endeavors to ensure the safe and lawful operation of its facilities in
manufacturing and distribution of CWSF 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 and
Shenyang Energy currently have the requisite approval and licenses from the
Ministry of Commerce in order to operate our production facilities.





Research
and Development




Our CWSF
manufacturing technology was developed in-house by our research and development
department. Our research and development team comprises of three (3)
professionals, one of whom is an external expert.  We have engaged two
university institutes for CWSF research projects and we plan to continue our
research and development efforts to strengthen our leading position in the CWSF
market in China.  We are currently developing new specialty CWSF
products and we have also conducted research on and implemented new CWSF
production methods by adopting new additives.




We have
entered into two technology cooperation agreements with School of Chemistry and
Chemical Engineering of Shaanxi Normal University (“Normal University”) and
School of Energy and Power Engineering of Xi’an Jiao Tong University (“Jiao Tong
University”) in 2009.  Normal University agreed to develop two types
of CWSF additive for the Company prior to March 31, 2012; the total amount of
development fee was RMB2,000,000.  We entrusted Jiao Tong University
to develop three types of special CWSF prior to September 30, 2010; the total
amount of development fee was RMB3,000,000. Both agreements indicate that any
intellectual property arising from such developments shall belong to
us.




11




Our
research and development efforts have generated technological improvements that
have been instrumental in lowering our production costs and increasing our
operational efficiency.  We believe our emphasis on research and
development, innovation, and continuous improvement will enable us to maintain
and expand our leading position in the industry.





Costs
and Effects of Compliance with Environmental Laws





We had no
environmental compliance costs in 2009 and 2008, 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




As of
December 31, 2009, we had 138 employees, all of which were full time employees.
During our peak season, generally from October through March, we hire
approximately 40 additional temporary employees. In 2008, we had 68 employees,
all of which were full time employees.




The
following table shows a breakdown of our employees by functions:




Functions
                      
                      Number
      of
                        employeesManufacturing
                      
                      68Sales
      and Marketing
                      
                      15General
      Administration, Purchasing
                      
                      52Research
      & Development
                      
                      3Total
                      
                      138





None of
these employees are represented by any collective bargaining agreements. We have
not experienced a work stoppage. Management believes our employees have loyalty
to the Company.





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.





12




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.  We commenced operations of our
CWSF business in 2007.  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. Our limited history for producing CWSF may not serve
as an adequate basis to judge our future prospectus and results of operations.
Our operations are subject to all of the risks, challenges, complications and
delays frequently encountered in connection with the operation of any new
business, as well as those risks that are specific to the CWSF industry.
Investors should evaluate us in light of the problems and uncertainties
frequently encountered by companies attempting to develop markets for new
products, and technologies. Despite best efforts, we may never overcome these
obstacles to financial success.




Our
production and sale of CWSF is dependent upon the implementation of our business
plan, as well as our ability to enter into agreements with third parties for the
provision of coal on terms that will be commercially viable for us. There can be
no assurance that our efforts will be successful or result in sales or profit.
If we fail to execute on our business plan, there could be a material adverse
effect on our operations.




If
we require additional financing to execute our business plan, we may not be able
to find such financing on satisfactory terms or at all.




The
revenues from the sales of CWSF may not be adequate to support the expansion of
our business. We may still 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.




Our
business and results of operations are dependent on the PRC coal markets, which
may be cyclical.




As all of
our revenue is derived from sales of CWSF, 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
results of operations.




13




We
rely on a limited number of third-party suppliers for our supply of coal and the
loss of any such supplier could have a material adverse effect on our
operations.




We are
dependent upon our relationships with local third parties for our supply of
coal.  Five suppliers provided 100% of the coal we used to produce
CWSF in 2007, 2008 and 2009 and our single largest supplier provided 70%, 93%,
and 85%, respectively.  Suppliers are generally paid upon delivery
with a varying level of deposit up to 2 months and we generally enter into
one-year contracts with our suppliers.  While we expect to increase
the number of suppliers we use as our business expands, if any of these
suppliers, and in particular our largest supplier, terminate their supply
relationship with us we may be unable to procure sufficient amounts of coal to
fulfill our demand.  If we are unable to obtain adequate quantities of
coal to meet the demand for our CWSF product, our customers could seek to
purchase products from other suppliers, which could have a material adverse
effect on our revenues.




In
the past we have derived a significant portion of our sales from a few large
customers.  If we were to lose any such customers, our business,
operating results and financial condition could be materially and adversely
affected




Our
customer base has been highly concentrated.  As of December 31, 2009,
we had 27 customers all within Shaanxi Province.  In 2007, 2008 and
2009, our five largest customers contributed 94%, 59% and 37.36% of our total
revenues, respectively, while our largest customer contributed 31%, 14% and 14%
of our total revenues, respectively.  Our total number of customers is
still relatively concentrated and limited, and any adverse developments to any
one of their business operations could have an adverse impact on our business,
operating results and financial condition.




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
CWSF in Shaanxi Province where we are based, there are other CWSF 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, natural 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
depend on our key executives, and our business and growth may be severely
disrupted if we lose their services.




Our
future success depends substantially on the continued services of our key
executives. In particular, we are highly dependent upon Mr. Baowen Ren, our
chairman, chief executive officer and president, who has established
relationships within the industries we operate. If we lose the services of one
or more of our current executive officers, we may not be able to replace them
readily, if at all, with suitable or qualified candidates, and may incur
additional expenses to recruit and retain new officers with industry experience
similar to our current officers, which could severely disrupt our business and
growth. In addition, if any of our executives joins a competitor or forms a
competing company, we may lose some of our suppliers or customers. Furthermore,
as we expect to continue to expand our operations and develop new products, we
will need to continue attracting and retaining experienced management and key
research and development personnel.




Competition
for qualified candidates could cause us to offer higher compensation and other
benefits in order to attract and retain them, which could have a material
adverse effect on our financial condition and results of operations. We may also
be unable to attract or retain the personnel necessary to achieve our business
objectives, and any failure in this regard could severely disrupt our business
and growth.




14




Our
business will suffer if we cannot obtain, maintain or renew necessary permits or
licenses.




All PRC
enterprises in the CWSF industry are required to obtain from various PRC
governmental authorities certain permits and licenses, including, without
limitation, a business license. We have obtained permits and licenses required
for the production and distribution of CWSF. Failure to obtain all necessary
approvals/permits may subject us to various penalties, such as fines or being
required to vacate from the facilities where we currently operate our
business.




These
permits and licenses are subject to periodic renewal and/or reassessment by the
relevant PRC government authorities and the standards of compliance required in
relation thereto may from time to time be subject to change. We intend to apply
for renewal and/or reassessment of such permits and licenses when required by
applicable laws and regulations, however, we cannot assure you that we can
obtain, maintain or renew the permits and licenses or accomplish the
reassessment of such permits and licenses in a timely manner. Any changes in
compliance standards, or any new laws or regulations that may prohibit or render
it more restrictive for us to conduct our business or increase our compliance
costs may adversely affect our operations or profitability. Any failure by us to
obtain, maintain or renew the licenses, permits and approvals, may have a
material adverse effect on the operation of our business. In addition, we may
not be able to carry on business without such permits and licenses being renewed
and/or reassessed.




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
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.





Although
some of our production line equipments and vehicles are covered by property
insurance, we do not currently maintain fire, casualty or other property
insurance covering our properties, equipment or inventories.  In
addition, we do not maintain any business interruptioninsurance
or any third party liability insurance to cover claims relatedto 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.




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 CWSF. 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 CWSF
      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;




15




·
            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 our shares and dividends payable thereon 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 any foreign
      currency-denominated obligations;
and




·
            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, the 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 CWSF 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 CWSF. Over time, CWSF
may become obsolete or uncompetitive, which would have a material adverse effect
on our results of operations.




The
commercial success of CWSF depends on the degree of its market acceptance among
industrial and civil heating customers and if CWSF does not attain market
acceptance, our operations and profitability would be adversely
affected.




Despite
the central government’s push for clean-coal technology and the support for CWSF
amongst a number of municipal governments, CWSF 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 CWSF or competitive
products.




16




To
establish wide market acceptance of CWSF, 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 CWSF. 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 CWSF 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.




We
may be unable to maintain an effective system of internal control over financial
reporting, and as a result we may be unable to accurately report our financial
results.




Our
reporting obligations as a public company place a significant strain on our
management, operational and financial resources and systems. If we fail to
maintain an effective system of internal control over financial reporting, we
could experience delays or inaccuracies in our reporting of financial
information, or non-compliance with the Securities and Exchange Commission, or
the SEC, reporting and other regulatory requirements. This could subject us to
regulatory scrutiny and result in a loss of public confidence in our management,
which could, among other things, adversely affect our stock price.




Our
business may be harmed because we do not carry any business insurance
coverage.




The
insurance industry in the PRC is still at an early stage of development.
Insurance companies in the PRC offer limited business insurance products. We do
not have any business liability or disruption insurance coverage for our
operations. 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.




17




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 CWSF will be primarily driven by the return on
investment resulting from the energy savings from CWSF. 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 CWSF to decline and have a
material adverse affect on our business and results of operations. Although we
believe that current levels of retail energy prices support a reasonable return
on investment for CWSF, 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 CWSF, which may significantly
affect the demand for our products.




CWSF 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 CWSF is emerging and rapidly evolving, and its future success remains
uncertain. If CWSF is not suitable for widespread adoption or sufficient demand
for CWSF 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 CWSF 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 CWSF
and demand for our products, including:




·
            cost-effectiveness
      of CWSF as compared with conventional and other alternative energy
      products and technologies;




·
            performance
      and reliability of CWSF as compared with conventional and other
      alternative energy products and
technologies;




·
            capital
      expenditures by customers used to buy CWSF boilers tend to decrease if the
      PRC or global economy slows down;
and




·
            availability
      of government subsidies and
incentives.




Risks
Related to Doing Business in China




Our
business operations are conducted entirely in the PRC. Because of China’s
economy and its laws, regulations and policies are different from those
typically found in western countries and are continually changing, we will face
risks including those summarized below.




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.


18




Uncertainties
with respect to the PRC legal system could adversely affect us.




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.




We
must comply with the Foreign Corrupt Practices Act.




We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these
prohibitions. Certain of our customers are PRC government entities and our
dealings with them are likely to be considered to be with government officials
for these purposes. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices, they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business or from government officials who might give them priority in
obtaining new licenses, which would put us at a disadvantage. We could suffer
severe penalties if our employees or other agents were found to have engaged in
such practices.




The
payment of dividends in the PRC is subject to limitations. We may not be able to
pay dividends to our stockholders.




We
conduct all of our business through our subsidiaries incorporated in the PRC. We
rely on dividends paid by these consolidated subsidiaries for our cash needs,
including the funds necessary to pay any dividends and other cash distributions
to our stockholders, to service any debt we may incur and to pay our operating
expenses. The payment of dividends by entities established in the PRC is subject
to limitations. Regulations in the PRC currently permit payment of dividends
only out of accumulated profits as determined in accordance with accounting
standards and regulations in the PRC, subject to certain statutory procedural
requirements. Each of our PRC subsidiaries, including wholly foreign owned
enterprises is also required to set aside at least 10.0% of their after-tax
profit based on PRC accounting standards each year to their general reserves or
statutory reserve fund until the aggregate amount of such reserves reaches 50.0%
of their respective registered capital. Our statutory reserves are not
distributable as loans, advances or cash dividends. In addition, if any of our
PRC subsidiaries incurs debt on its own behalf in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
distributions to us. Any limitations on the ability of our PRC subsidiaries to
transfer funds to us could materially and adversely limit our ability to grow,
make investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.


19




Adverse
changes in political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
materially and adversely affect our business.




All of
our operations are conducted in China and all of our sales are made in China.
Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:




·
            the
      amount of government involvement;




·
            the
      level of development;




·
            the
      growth rate;




·
            the
      control of foreign exchange; and




·
            the
      allocation of resources.




While the
PRC economy has grown significantly since the late 1970s, the growth has been
uneven, both geographically and among various sectors of the economy. The PRC
government has implemented various measures to encourage economic growth 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.




The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has in recent years implemented measures
emphasizing the utilization of market forces for economic reform, the reduction
of state ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of the productive
assets in China is still owned by the PRC government. The continued control of
these assets and other aspects of the national economy by the PRC government
could materially and adversely affect our business. The PRC government also
exercises significant control over economic growth in China through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. Efforts by the PRC government to slow the
pace of growth of the PRC economy could result in decreased capital expenditure
by energy users, which in turn could reduce demand for our
products.




Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
energy investments and expenditures in China, which in turn could lead to a
reduction in demand for our products and consequently have a material adverse
effect on our business and prospects.




The
PRC economic cycle may negatively impact our operating results.




The rapid
growth of the PRC economy before 2008 generally led to higher levels of
inflation. The PRC economy has more recently experienced a slowing of its growth
rate. A number of factors have contributed to this slow-down, including
appreciation of the Renminbi, or RMB, the currency of China, which has adversely
affected China’s exports. In addition, the slow-down has been exacerbated by the
recent global crisis in the financial services and credit markets, which has
resulted in significant volatility and dislocation in the global capital
markets. It is uncertain how long the global crisis in the financial services
and credit markets will continue and the significance of the adverse impact it
may have on the global economy in general, or the Chinese economy in particular.
Slowing economic growth in China could result in slowing growth and demand for
our services which could reduce our revenues. In the event of a recovery in the
PRC, renewed high growth levels may again lead to inflation. Government attempts
to control inflation may adversely affect the business climate and growth of
private enterprise. In addition, our profitability may be adversely affected if
prices for our products rise at a rate that is insufficient to compensate for
the rise in inflation.


20




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.




All of
the assets of Suoke Clean Energy, Suo’ang New Energy and Shenyang Energy are
located in, and all of our 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
stockholders may have substantial difficulty in protecting their interests
through actions against our management or directors than would stockholders of a
corporation with assets and management members located in the United
States.




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 all
of our revenues in RMB.  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.  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.




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. 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 outbreak of contagious
disease.




Our
business could be materially and adversely affected by the effects of H1N1 flu
(swine flu), avian flu, severe acute respiratory syndrome or other epidemics or
outbreaks. In April 2009, an outbreak of H1N1 flu (swine flu) first occurred in
Mexico and quickly spread to other countries, including the U.S. and the PRC. In
the last decade, the PRC has suffered health epidemics related to the outbreak
of avian influenza and severe acute respiratory syndrome. Any prolonged
occurrence or recurrence of H1N1 flu (swine flu), avian flu, severe acute
respiratory syndrome or other adverse public health developments in the PRC may
have a material adverse effect on our business and operations. These health
epidemics could result in severe travel restrictions and closures that would
restrict our ability to ship our products. Potential outbreaks could also lead
to temporary closure of our production facilities, our suppliers’ facilities
and/or our end-user customers’ facilities, leading to reduced production,
delayed or cancelled orders, and decrease in demand for our products. Any future
health epidemic or outbreaks that could disrupt our operations and/or restrict
our shipping abilities may have a material adverse effect on our business and
results of operations.


21




Risks
Related to an Investment in Our Securities




The full
conversion of certain outstanding convertible notes and the full exercise of
certain outstanding warrants could result in the substantial dilution of the
company in terms of a particular percentage ownership in the company as well as
the book value of common stock. The sale of a large amount of common stock
received upon conversion of the notes and exercise of the warrants on the public
market, or the perception that such sales could occur, could substantially
depress the prevailing market prices for our stock.




There are
over 9 million warrants outstanding from the financings that closed in September
2008. Additionally, the convertible notes that we issued in July 2009 may
currently be converted into approximately 61 million shares of common stock, and
there are also over 34 million warrants that we issued in connection with the
convertible notes. In the event of conversion or exercise of these securities,
as their conversion and exercise prices are less than the then current market
price for our common stock, a stockholder will suffer substantial dilution of
his, her or its investment in terms of the percentage ownership in us as well as
the book value of the shares of common stock held.




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.




Our
common stock 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.




.  Our
common stock has historically been sporadically or “thinly-traded” on the OTCBB,
meaning that the number of persons interested in purchasing our common stock 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 on the Nasdaq Capital
Market 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.


22




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.  The volatility in our share price is attributable to a number
of factors.  First, as noted above, our common stock are sporadically
and/or thinly traded.  As a consequence of this lack of liquidity, the
trading of relatively small quantities of shares by our stockholders 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 stock 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.




Many of
these factors are beyond our control and may decrease the market price of our
common stock, regardless of our operating performance.  We cannot make
any predictions or projections as to what the prevailing market price for our
common stock will be at any time, including as to whether our common stock will
sustain their current market prices, or as to what effect that the sale of
shares or the availability of common stock for sale at any time will have on the
prevailing market price.




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 stockholders and
affiliated entities.




As of
March 24, 2010, our management and their affiliated entities own approximately
59% of our outstanding common stock, representing approximately 59% 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 liability of 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 to our company and stockholders 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 stockholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
stockholders.


23




Past
company activities prior to the reverse merger may lead to future liability for
the Company.




Prior to
the closing of the reverse merger transaction on October 20, 2006, we were
engaged in businesses unrelated to our current operations.  Although
certain prior Company stockholders 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.





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 stockholders.




We
believe that our current cash and cash equivalents, and 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 stockholders.  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.


24




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 165,462,494
shares of our common stock outstanding as of March 23, 2010, 33,094,417 shares
were freely tradable without restriction. 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 this annual report on Form 10-K, we are
reporting certain material weaknesses involving control activities,
specifically:





1.
            Although during 2009 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, we still
      lack expertise in US GAAP and
taxation.





2.
            As a small company, we do not
      have sufficient personnel to set up adequate review function at each
      reporting level.





3.
            As
      of December 31, 2009, we have not kept a complete set of ledgers
      of the parent, shell company. The parent company has no physical operation
      and has been mainly functioning as a pass-through legal entity for
      financing subsidiary companies that are operating
      overseas.




Our
management ndertaken 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 and in October,
2009, we engaged the Beijing office of Ernst & Young as outside consultant
to assist with evaluating and improving accounting system and working process
(including internal audit and material transaction review and verification
process) to strengthen the timeliness and efficiency of our disclosure and
internal controls and procedures.  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.




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.


25





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, we purchased a land use right for the property located in Tongchuan City’s
Yaozhou District where our CWSF 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 CWSF production commenced in
July 2007.




The table
below provides summary descriptions of the properties used for the Company’s
business operations as at December 31 2009:




Property Location
                                    
                                    Area (sq m)
                                    
                                    Expiration Date
                                    
                                    PurposeRoom
      1605, Suite B, Zhengxin Building No. 5, Gaoxin 1st Road, Gaoxin District,
      Xi’an, Shaanxi Province, PRC
                                    
                                    302
                                    
                                    May
      15, 2010
                                    
                                    Company
      headquartersWangjiabian
      Village, Dongjiahe Town, Yaozhou District, Tongchuan Shaanxi Province,
      PRC
                                    
                                    43,956
                                    
                                    December
      8, 2057
                                    
                                    CWSF
      production plantWenguantun,
      Qianjin Town, Dongling District, Shenyang, Liaoning Province,
      PRC
                                    
                                    7,400
                                    
                                    August
      1, 2019
                                    
                                    CWSF
      production plant and raw materials
warehouse





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.


26





We are
not currently a party to any other 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.





PART
II





ITEM
4. 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.





LOW
                                      
                                      
                                      HIGH2010First
      Quarter
                                      
                                      
                                      0.37
                                      
                                      
                                      
                                      0.952009Fourth
      Quarter
                                      
                                      $
                                      0.37
                                      
                                      
                                      $
                                      0.69Third
      Quarter
                                      
                                      $
                                      0.3
                                      
                                      
                                      $
                                      0.59Second
      Quarter
                                      
                                      $
                                      0.16
                                      
                                      
                                      $
                                      0.68First
      Quarter
                                      
                                      $
                                      0.14
                                      
                                      
                                      $
                                      0.242008Fourth
      Quarter
                                      
                                      $
                                      0.11
                                      
                                      
                                      $
                                      0.30Third
      Quarter
                                      
                                      $
                                      0.12
                                      
                                      
                                      $
                                      0.40Second
      Quarter
                                      
                                      $
                                      0.11
                                      
                                      
                                      $
                                      0.30First
      Quarter
                                      
                                      $
                                      0.11
                                      
                                      
                                      $
                                      0.45




As of
March 31, 2010, we had 165,562,494shares
of common stock issued and outstanding.





Holders




As of
March 31, 2010, we had approximately 2983 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.


27





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




The
following are all issuances of securities by the registrant during the past
three years which were not registered under the Securities Act of 1933, as
amended (the “Securities Act”). In each of these issuances the recipient
represented that he or it was acquiring the shares for investment purposes only,
and not with a view towards distribution or resale except in compliance with
applicable securities laws. No general solicitation or advertising was used in
connection with any transaction, and the certificate evidencing the securities
that were issued contained a legend restricting their transferability absent
registration under the Securities Act or the availability of an applicable
exemption therefrom. Unless specifically set forth below, no underwriter
participated in the transaction and no commissions were paid in connection with
the transactions.




On July
20, 2009, we entered into a securities purchase agreement with several
institutional and/or accredited investors (collectively the “Purchasers”)
pursuant to which the Company sold and issued to the Purchasers $6.177 million
in aggregate principal amount of 10% senior secured convertible notes initially
due July 16, 2012, and warrants to purchase up to approximately 16.26
million shares of common stock in a private placement pursuant to Regulation D
under the Securities Act of 1933, as amended (the “Securities
Act”).




On July
1, 2009, we entered into a Securities Purchase Agreement with several
institutional and/or accredited investors pursuant to which the Company
sold and issued to the Purchasers $5.415 million in aggregate principal amount
of 10% senior secured convertible notes initially due June 30, 2012, and
warrants to purchase up to 14.25 million shares of common stock in a
private placement pursuant to Regulation D under the Securities
Act.




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.




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
September 19, 2008, we entered into a Securities Purchase Agreement with four
institutional and/or accredited investors pursuant to which the Company sold to
the purchasers $535,000 in aggregate principal amount of 18% convertible
debentures due September 18, 2009, and warrants to purchase up to 3,566,667
shares of the common stock of the Company, in a private placement pursuant to
Regulation S under the Securities Act. We also issued a warrant to Ancora
Securities, Inc., as finder’s fee, to purchase up to 90,000 shares of common
stock at an exercise price of $0.25 per share and to expire on September 18,
2010.




On
September 16, 2008, we entered into a Securities Purchase Agreement
with two institutional and accredited investors pursuant to which the
Company sold to the purchasers $800,650 in aggregate principal amount of 18%
secured convertible debentures due September 15, 2009, and warrants to
purchase up to 5,337,667 shares of the common stock of the Company, in a
private placement pursuant to Regulation D under the Securities Act. The Company
also issued a warrant to Ancora Securities, Inc., as finder’s fee, to purchase
up to 267,100 shares of common stock at an exercise price of $0.25 per share and
to expire on September 15, 2010.


28




On June
30, 2008, we entered into a Securities Purchase Agreement with Mr. Peng Zhou, a
member of our board of directors, and Suo’ang New Energy, a limited liability
company in the PRC. Pursuant to the terms of the Securities Purchase Agreement,
we agreed to acquire from Mr. Zhou his 20% equity ownership interest in Suo’ang
New Energy in exchange for the issuance of 7,500,000 shares of our restricted
common stock to Mr. Zhou pursuant to Regulation S of the Securities
Act.





ITEM
5. SELECTED FINANCIAL DATA





Not
applicable.





ITEM
6. 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, 2009 and 2008
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. (sometimes referred to in this annual report as “Company”,
“we” or “our”) is a holding company that, through its subsidiaries, is a
leading third party commercial producer and distributor of coal-water slurry
fuel (“CWSF”) in China. CWSF is a clean fuel that consists of fine coal
particles suspended in water.  Our CWSF products are mainly used to
fuel boilers and furnaces to generate steam and heat for residential and
industrial applications.  We sell our products in China and our
customers include industrial, commercial, residential and government
organizations. Our strong reputation in the CWSF industry in China, together
with our established track record for consistently delivering products in large
quantities, has enabled us to expand our customer base.  We primarily
use washed coal to produce CWSF. We acquire the raw materials for each of our
production facilities primarily from three nearby coal mines.  We have
established strong relationships with our suppliers and our ability to purchase
large quantities of raw materials has allowed us to achieve favorable pricing
and delivery terms.
  29
  Until
November 12, 2009, all of our business operations were conducted through Shaanxi
Suo’ang Biological Science & Technology Co., Ltd., a PRC company (“Suo’ang
BST”) that we controlled through contractual arrangements designed to comply
with the law of People’s Republic of China (“PRC” or “China”) and Suo’ang BST’s
PRC subsidiary, Shaanxi Suo’ang New Energy Enterprise Co., Ltd. (“Suo’ang New
Energy”).  Beginning in June 2009, we effected a reorganization of our
corporate structure in order to make Suo’ang New Energy wholly
owned.  Pursuant to such reorganization, our business is now operated
by Suo’ang New Energy through our indirect wholly-owned subsidiary Tongchuan
Suoke Clean Energy Co., Ltd., a PRC limited liability company(“Suoke Clean Energy”),
which is incorporated under PRC law and wholly owned by Wiscon Holdings Limited,
a Hong Kong company(“Wiscon”), our directly owned Hong Kong subsidiary/holding company,
which was incorporated in 2006 and acquired by us in June 2009.  On
September 27, 2009, we received approval from the Tongchuan Bureau of Commerce
for the transfer of all of Suo’ang New Energy’s equity interests to Suoke Clean
Energy.  With the approval, Suo’ang New Energy has become a “domestic
PRC enterprise wholly-owned by a wholly-foreign owned
enterprise.”  Registration of the approval with the Tongchuan
Administration of Industry and Commerce, the final step in completing this
reorganization, was completed on November 12, 2009.  On October 12,
2009, Suo’ang New Energy established Shenyang Sou’ang Energy Co., Ltd., a
wholly-owned PRC subsidiary(“Shenyang Energy”), to
conduct the CWSF business in Shenyang, Liaoning province.
 
 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 we consummated a share exchange transaction with Hangson, a
British Virgin Islands company, the stockholders of Hangson and a majority of
our stockholders.  We issued a total of 26,000,000 shares of our
common stock to the Hangson Stockholders and a consultant in the transaction, in
exchange for 100% of the common stock of Hangson.  As a result of the
transaction we became engaged in the CWSF business, through the operations of
Suo’ang BST and Suo’ang New Energy.  On January 4, 2007, we changed
our name from “Endo Networks, Inc.” to “China West Coal Energy Inc.”, and then
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.
  Hangson
did not conduct any substantive business operations of its own, but from August
2006 to June 30, 2009, controlled Suo’ang BST, a PRC company and Suo’ang BST’s
80%-owned subsidiary Suo’ang New Energy.  From June 30, 2008 to
November 12, 2009 Hangson owned 20% of Suo’ang New Energy.  Hangson
controlled Suo’ang BST through a series of contractual arrangement.
  Beginning
in June 2009, we effected a reorganization of our corporate structure in order
to make Suo’ang New Energy a wholly-owned subsidiary (the “2009
Reorganization”).  On June 30, 2009, we were a party to a series of
agreements (collectively the “Transfer Agreements”) transferring the contractual
arrangements, through which Hangson controlled Suo’ang BST, to Suoke Clean
Energy.
  30
  On
September 15, 2009, Suo’ang BST and Hangson entered into a share transfer
agreement with Suoke Clean Energy pursuant to which Suo’ang BST and Hangson
transferred 100% of the equity interests in Suo’ang New Energy to Suoke Clean
Energy.  On September 27, 2009, the Tongchuan Bureau of Commerce
approved the transfer of all of Suo’ang New Energy’s equity interests to Suoke
Clean Energy.  Registration of the approval of the equity transfer
with the Tongchuan Administration of Industry and Commerce, which was a
condition to the closing of the Share Transfer, was completed on November 12,
2009.  As a result of receiving the required approval and registration
the share transfer transaction was closed and we were able, through Suoke Clean
Energy to own 100%of the equity interests of  Suo’ang New
Energy.  On October 12, 2009, Suo’ang New Energy established a
wholly-owned subsidiary to conduct the CWSF business in Shenyang, Liaoning
province.
  On
December 31, 2009, we entered into a series of termination agreements to
terminate the contractual arrangements by and among Suoke Clean Energy, Suo’ang
BST and certain stockholders of Suo’ang BST.  We no longer needed to
keep such contractual arrangements in place due to the fact that Suo’ang BST was
no longer engaged in any substantial business operations. In connection with the
termination agreements, certain assets held by Suo’ang BST, such as, office
equipment, vehicles, bank deposits, accounts receivable, were transferred to
Suoke Clean Energy. Employees of Suo’ang BST signed new employment contracts
with Suoke Clean Energy. All rights and obligations under certain business
operation agreements and research and development contracts between Suo’ang BST
and third parties were assigned to Suo’ang New Energy.
  On
December 31, 2009, Hangson transferred all of its equity interests in Wiscon to
us.  Since Hangson had no substantive operations of its own after the
transfer and termination of the contractual arrangements, we dissolved Hangson
on December 31, 2009.
  Wiscon Holdings
Limited
  Wiscon is
a limited liability company incorporated in Hong Kong under the Companies
Ordinance on September 4, 2006 and Hangson acquired all of its issued and
outstanding equity interests on June 30, 2009. On December 31, 2009, Hangson
transferred all of its equity interests in Wiscon to Sino Clean Energy Inc. As a
result, Wiscon became a direct wholly-owned subsidiary of Sino Clean Energy
Inc.
 
 Critical
Accounting Policies and Estimates
 
 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.
 
 31
  Revenue
Recognition
 
 Sales are
recognized in 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”). In
our revenue arrangements, physical delivery is the point in time when customer
acceptance occurs since title and risk of loss are transferred to the
customer.  No return allowance is made as products are normally not
returnable upon acceptance by the customers.
 
 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, 2009 and 2008,
accounts receivable were net of allowances of zero and zero,
respectively.
 
 Derivative
Financial Instruments
 
 The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported in the condensed consolidated statements of
operations. For stock-based derivative financial instruments, the Company uses
both the Black-Scholes-Merton and Binomial option pricing models to value the
derivative instruments at inception and on subsequent valuation dates. The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period.  Derivative instrument liabilities are classified in
the balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.
 
 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. Stock-based compensation is measured at the grant date, based on the fair
value of the award, and is recognized as expense over the requisite service
period. Options vest and expire according to terms established at the grant
date.
 
 We
estimate the fair value of stock options and warrants using the Black-Scholes
option-pricing model, which was developed for use in estimating the fair value
of options that have no vesting restrictions and are fully transferable. This
model requires the input of subjective assumptions, including the expected price
volatility of the underlying stock and the expected life of stock options.
Projected data related to the expected volatility of stock options is based on
the average volatility of the trading prices of comparable companies and the
expected life of stock options is based upon the average term and vesting
schedules of the options. Changes in these subjective assumptions can materially
affect the fair value of the estimate, and therefore the existing valuation
models do not provide a precise measure of the fair value of our employee stock
options.
 
 32
  We
estimate the fair value of shares of common stock issued for services based on
the closing price of our common stock on the date shares are
granted.  For periods prior to the consummation of the Merger
Transaction, there was no readily available market quotations for our shares of
common stock and, as such, we used alternative methods to value shares of our
common stock including valuations based upon the conversion price per share of
common stock of our convertible notes and the sale price of units consisting of
one share of our common stock and warrants to purchase one share of common
stock, which management believes were the best indicators of the fair value of
our common stock.
 
 Recent
accounting pronouncements
 
 In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles
(“GAAP") effective for interim and annual reporting periods ending after
September 15, 2009.  The FASB accounting standards codification (“ASC,
“Codification”) has become the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in accordance with GAAP. All existing
accounting standard documents are superseded by the Codification and any
accounting literature not included in the Codification will not be
authoritative. However, rules and interpretive releases of the SEC issued under
the authority of federal securities laws will continue to be sources of
authoritative GAAP for SEC registrants.   Beginning with the
quarter ending September 30, 2009, all references made by the Company to GAAP in
its condensed consolidated financial statements use the Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore,
it does not have an impact on our financial position, results of operations and
cash flows.
 
 In
June 2009, the FASB made an updated the principle for the consolidation of
variable interest entities.  Among other things, the update replaces the
calculation for determining which entities, if any, have a controlling financial
interest in a variable interest entity (VIE) from a quantitative based risks and
rewards calculation, to a qualitative approach that focuses on identifying which
entities have the power to direct the activities that most significantly impact
the VIE’s economic performance and the obligation to absorb losses of the VIE or
the right to receive benefits from the VIE. The update also requires ongoing
assessments as to whether an entity is the primary beneficiary of a VIE
(previously, reconsideration was only required upon the occurrence of specific
events), modifies the presentation of consolidated VIE assets and liabilities,
and requires additional disclosures about a company’s involvement in VIE’s. This
update will be effective for fiscal years beginning after November 15,
2009. The Company does not currently believe that the adoption of this update
will have any effect on its consolidated financial position and results of
operations.
 
 33
  In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition.   We believe the adoption of this new guidance will
not have a material impact on our financial statements.
 
 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.
  RESULT
OF OPERATIONS
 
 Fiscal
year ended December 31, 2009 as compared to fiscal year ended December 31,
2008
 
 Revenues.  Our
revenues are derived from our sales of CWSF.  For the year ended
December 31, 2009, we had revenues of $46,012,353 as compared to revenues of
$14,253,989 for the year ended December 31, 2008, an increase of
222%.  This significant increase is primarily attributable to the
increased production from the production line added in late 2009 , which led to
an increase in sales to existing customers .The annual production capacity as at
December 31, 2009 was 650,000 tonnes after the commencement of our new CWSF
production plant in Shenyang with annual output capacity of 300,000 tonnes , as
compared to 100,000 tones as at December 31 2008 . At December 31 , 2009 we had
30 customers under CWSF supply agreements totaling approximately 600,000 tonnes
per year , as compared to 27 customers totaling approximately 400,000 tonnes of
CWSF per year as at December 31 , 2008. Our sales and number of customers in the
2009 as compared to 2008 are indicative of the growing market acceptance of
CWSF.
 
 Cost of Goods Sold. Cost of
goods sold, consisting of raw materials, direct labor and manufacturing
overhead, were $28,922,846 for the year ended December 31, 2009, as compared to
$9,266,832 for the year ended December 31, 2008, an increase of 212%. The large
increase in cost of goods sold is in line with the increase in sales. Gross
profit margin improved from 35% in 2008 to 37% in 2009 as a result of better
pricing in CWSF . As a result of the new production line added in 2009,
depreciation of plant and machinery for the year 2009 was $ 1,530,238 as
compared to $ 253,826 in 2008 .
 
 Selling Expenses. Selling
expenses totaled $1,125,884 for the year ended December 31, 2009, as compared to
$13,128 for the year ended December 31, 2008, an increase of 8476%
..  This increase is mainly in transportation cost which amounted to $
1,071,046 due to the growth of our business in 2009.
 
 34
  General and Administrative
Expenses. General and administrative expenses totaled $1,796,032 for the
year ended December 31, 2009, as compared to $554,766 for the year ended
December 31, 2008, an increase of approximately 224%.  This increase
is primarily attributable to the expansion of our operating size .
 
 Other Income
(Expenses).  Other income consists primarily of rental income,
interest income and is net of stock-based cost of our private placement, changes
in the fair value and extinguishment of certain derivative liabilities, 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,
2009, other expenses were $46,749,191, as compared to $962,560 for the year
ended December 31, 2008, an increase of 4756%.  The increase in other
expenses is attributable to the derivative liability of convertible notes and
warrants and cost of private placement of $37,747,227 related to the fund raised
in July 2009.
 
 Net Income. We had a
net loss of $34,824,668 for the year ended December 31, 2009, as compared
to a net income of $2,999,605 for the year ended December 31,
2008.  The decrease in net income is primarily attributable to
incurrence of derivative liability in other expenses related to fund raised in
July 2009 discussed above .
 
 Reconciliation
of net income (loss) to adjusted earnings
 
 The
following table provides a reconciliation of net income (loss) to adjusted
earnings
  2009
                      
                      
                      2008Net
      (loss) income
                      
                      $
                      (34,824,688
                      )
                      
                      $
                      3,351,454Non-GAAP
      adjustmentExpense
      related to escrow shares
                      
                      
                      11,125,071
                      
                      
                      
                      676,466Extinguishment
      of derivative liability
                      
                      
                      (7,046,556
                      )
                      
                      
                      0Change
      in fair value of warrants and embedded conversion feature
                      
                      
                      12,770,113
                      
                      
                      
                      0Cost
      of private placement
                      
                      
                      24,977,114
                      
                      
                      
                      0Amortization
      of notes discount
                      
                      
                      3,942,185
                      
                      
                      
                      0Adjusted
      earnings
                      
                      $
                      10,943,239
                      
                      
                      $
                      4,027,920
  35
  This
table excludes from Net Income (loss) certain items related to the cost of
escrow shares put in escrow by our chairman as a guarantee on the issuance of
our convertible notes, the cost related to the issuance of our private placement
(primarily related to the fair value of the derivatives created upon issuance
related to the conversion feature of the notes and the fair value of the
warrants issued to the convertible note holders), the change in fair value of
these derivatives during the period as well as the extinguishment of a portion
of the derivative upon conversion of the notes, and amortization of the
valuation discount recorded as interest expense relating to these convertible
notes.The Company believes that these non-GAAP financial measures are useful to
investors because they exclude non-cash charges that our management excludes
when it internally evaluates the performance of the Company’s business and makes
operating decisions, including internal budgeting, and performance measurement,
because these measures provide a consistent method of comparison to historical
periods. Moreover, management believes these non-GAAP measures reflect the
essential operating activities of Sino Clean Energy.  Accordingly,
management excludes these items when making operational decisions. The Company
believes that providing the non-GAAP measures that management uses to its
investors is useful to investors for a number of reasons. The non-GAAP measures
provide a consistent basis for investors to understand the Company’s financial
performance in comparison to historical periods. In addition, it allows
investors to evaluate the Company’s performance using the same methodology and
information as that used by our management. Non-GAAP measures are subject to
inherent limitations because they do not include all of the expenses included
under GAAP and because they involve the exercise of judgment of which charges
are excluded from the non-GAAP financial measure. However, our management
compensates for these limitations by providing the relevant disclosure of the
items excluded.
 
 LIQUIDITY AND CAPITAL
RESOURCES
 
 For the
year ended December 31, 2009, we generated $9,691,888 from operating activities,
as compared to $4,795,905 that we generated from operating activities for the
year ended December 31, 2008.
  For the
year ended December 31, 2009, we used $4,389,843 in investing activities, as
compared to $5,319,546that we used in investing
activities forthe year ended December 31,
2008.  Thisdecrease of cash
used in
investing activities ismainlydueto thefact that most of our payment
forpurchases of
equipments and
machinery for ournew production line was
in2008.
 
 For the
year ended December 31, 2009, we generated $9,082,787 from financing activities,
as compared to $1,418,375that wegenerated infinancing activities duringthe year ended
December 31, 2008. This increase is due mainly
to proceeds fromissuance ofconvertiblenotes
 
 As of
December 31, 2009, the Company had cash of $18,302,558.  Our total
current assets were $28,806,180 and our total current liabilities were
$21,075,784, which resulted in a net working capital of $7,730,396.
 
 We had
capital expenditure commitments outstanding as of December 31, 2009 in the
amount of $4,654,910 in relation to the purchase of machinery.
 
 36
  We
believe that we have sufficient cash flow to meet our obligations on a
timely basis in the foreseeable future.
 
 As of
December 31, 2009, the Company had outstanding $10,217,000 of its 10% Senior
Secured Convertible Notes.   Subsequent to December 31, 2009, and
by March 5, 2010, all the convertible notes holders converted these notes into
53,773,684 shares of common stock of the Company pursuant to the original
Securities Purchase Agreement and Form of Note.
 
 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 Period
 
 Total
                  
                  
                  Less than 1
                    year
                  
                  
                  1-3 Years
                  
                  
                  3-5
                    Years
                  
                  
                  5 Years +Contractual
      obligations:Capital
      expenditure commitment
                  
                  $
                  4,008,377
                  
                  
                  
                  4,008,377
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Operating
      Leases
                  
                  $
                  339,795
                  
                  
                  
                  38,229
                  
                  
                  
                  70,268
                  
                  
                  
                  70,268
                  
                  
                  
                  161,030Coal
      inventory purchase agreement
                  
                  $
                  1,633,926
                  
                  
                  
                  1,633,926
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Debt
      repayment and interest on debt (1)
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      contractual obligations:
                  
                  $
                  5,982,098
                  
                  
                  
                  5,680,532
                  
                  
                  
                  70,268
                  
                  
                  
                  70,268
                  
                  
                  
                  161,030
  Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for office premises and production plants.  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 purchase of machinery for our production
of CWSF.
 
 (1) We
have excluded from this table $10, 217,000 of convertible notes that existed on
December 31, 2009 and have been subsequently converted into 53,773,684 shares of
the Company’s common stock
 
 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.
  37




ITEM
7. 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.
  SINO
CLEAN ENERGY, INC. AND SUBSIDIARIES
 CONSOLIDATED
FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED
 DECEMBER
31, 2009 AND 2008
 
 CONTENTS
 
 PAGE
      F-2
                
                Report
      of Independent Registered Public Accounting Firm-Weinberg & Company,
      P.A.PAGE
      F-3
                
                Consolidated
      Balance Sheets as of December 31, 2009 and 2008PAGE
      F-4
                
                Consolidated
      Statements of Operations and Other Comprehensive Income (Loss) for the
      years ended December 31, 2009 and 2008PAGE
      F-5
                
                Consolidated
      Statements of Changes in Shareholders' Equity (Deficiency) for the
      years ended December 31, 2009 and December 31, 2008PAGE
      F-6
                
                Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008PAGE
      F-7
                
                Notes
      to Consolidated Financial Statements for the years ended December 31, 2009
      and 2008
  F-1
  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 sheets of Sino Clean Energy Inc.
and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations and other comprehensive income (loss), changes in
shareholders' equity (deficiency), and cash flows for the years 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
audits.
 
 We
conducted our audits 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 audits 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 audits provide 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, 2009 and 2008 and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.
 
 As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for noncontrolling interests and for
determining if certain instruments (or embedded features) are indexed to its own
stock effective January 1, 2009.
 
 WEINBERG
& COMPANY, P.A.
  /s/
WEINBERG & COMPANY, P.A.
 Los
Angeles, California
 April 5,
2010


F-2


Sino
Clean Energy Inc. and Subsidiaries
 Consolidated
Balance Sheets
 (Amounts
expressed in U.S. Dollars)
 
 Pro
      FormaDecember
      31,
                                              
                                              
                                              December
      31,
                                              
                                              
                                              December
      31,2009
                                              
                                              
                                              2009
                                              
                                              
                                              2008(Unaudited)(Note
      16)ASSETSCurrent
      assetsCash
      and cash equivalents
                                              
                                              $
                                              18,302,558
                                              
                                              
                                              $
                                              18,302,558
                                              
                                              
                                              $
                                              3,914,306Accounts
      receivable, net
                                              
                                              
                                              3,655,473
                                              
                                              
                                              
                                              3,655,473
                                              
                                              
                                              
                                              899,629Inventories
                                              
                                              
                                              892,609
                                              
                                              
                                              
                                              892,609
                                              
                                              
                                              
                                              45,068Prepaid
      inventories
                                              
                                              
                                              5,453,095
                                              
                                              
                                              
                                              5,453,095
                                              
                                              
                                              
                                              1,996,584Prepaid
      expenses
                                              
                                              
                                              259,627
                                              
                                              
                                              
                                              259,627
                                              
                                              
                                              
                                              86,958Refundable
      advance
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              731,861Government
      grant receivable
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              146,314Other
      receivables
                                              
                                              
                                              65,584
                                              
                                              
                                              
                                              65,584
                                              
                                              
                                              
                                              16,986Tax
      recoverable
                                              
                                              
                                              138,495
                                              
                                              
                                              
                                              138,495
                                              
                                              
                                              
                                              -Prepaid
      land use right - current portion
                                              
                                              
                                              38,739
                                              
                                              
                                              
                                              38,739
                                              
                                              
                                              
                                              38,703Total
      current assets
                                              
                                              
                                              28,806,180
                                              
                                              
                                              
                                              28,806,180
                                              
                                              
                                              
                                              7,876,409Property,
      plant and equipment, net
                                              
                                              
                                              12,557,691
                                              
                                              
                                              
                                              12,557,691
                                              
                                              
                                              
                                              9,394,416Land
      use right - non current portion
                                              
                                              
                                              1,778,562
                                              
                                              
                                              
                                              1,778,562
                                              
                                              
                                              
                                              1,804,277Prepayments
      and deposits
                                              
                                              
                                              729,328
                                              
                                              
                                              
                                              729,328
                                              
                                              
                                              
                                              994,395Goodwill
                                              
                                              
                                              762,018
                                              
                                              
                                              
                                              762,018
                                              
                                              
                                              
                                              762,018Deferred
      debt issuance cost
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              274,278Total
      assets
                                              
                                              $
                                              44,633,779
                                              
                                              
                                              $
                                              44,633,779
                                              
                                              
                                              $
                                              21,105,793LIABILITIES
      AND SHAREHOLDERS' EQUITY (DEFICIENCY)Current
      liabilitiesConvertible
      notes net of discount
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              383,490Accounts
      payable and accrued expenses
                                              
                                              
                                              2,672,211
                                              
                                              
                                              
                                              2,672,211
                                              
                                              
                                              
                                              1,004,999Taxes
      payable
                                              
                                              
                                              1,577,249
                                              
                                              
                                              
                                              1,577,249
                                              
                                              
                                              
                                              305,903Amount
      due to directors
                                              
                                              
                                              73,466
                                              
                                              
                                              
                                              73,466
                                              
                                              
                                              
                                              465,049Derivative
      liabilities
                                              
                                              
                                              16,752,858
                                              
                                              
                                              
                                              16,752,858
                                              
                                              
                                              
                                              -Total
      current liabilities
                                              
                                              
                                              21,075,784
                                              
                                              
                                              
                                              21,075,784
                                              
                                              
                                              
                                              2,159,441Convertible
      notes, net of discount
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,615,025
                                              
                                              
                                              
                                              -Derivative
      liabilities
                                              
                                              
                                              -
                                              
                                              
                                              
                                              28,404,181
                                              
                                              
                                              
                                              -Total
      liabilities
                                              
                                              
                                              21,075,784
                                              
                                              
                                              
                                              51,094,990
                                              
                                              
                                              
                                              2,159,441Commitments
      and ContingenciesShareholders'
      Equity (Deficiency)Preferred
      stock, $0.001 par value,50,000,000
      shares authorized,none
      issued and outstanding
                                              
                                              
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Common
      stock, $0.001 par value,300,000,000
      shares authorized,108,498,625
      and 92,181,750 issuedand
      outstanding as of December 31 , 2009and
      2008 respectively , and 162,272,309as
      of December 31 , 2009 on proforma basis
                                              
                                              
                                              162,273
                                              
                                              
                                              
                                              108,499
                                              
                                              
                                              
                                              92,182Additional
      paid-in capital
                                              
                                              
                                              35,498,381
                                              
                                              
                                              
                                              25,335,155
                                              
                                              
                                              
                                              12,696,549(Accumulated
      deficit) Retained earnings
                                              
                                              
                                              (16,000,781
                                              )
                                              
                                              
                                              (35,802,987
                                              )
                                              
                                              
                                              3,686,087Statutory
      reserves
                                              
                                              
                                              1,758,553
                                              
                                              
                                              
                                              1,758,553
                                              
                                              
                                              
                                              348,309Accumulated
      other comprehensive income
                                              
                                              
                                              2,139,569
                                              
                                              
                                              
                                              2,139,569
                                              
                                              
                                              
                                              2,123,225Total
      shareholders' equity (Deficiency)
                                              
                                              
                                              23,557,995
                                              
                                              
                                              
                                              (6,461,211
                                              )
                                              
                                              
                                              18,946,352Total
      liabilities and shareholders' equity
                                              
                                              $
                                              44,633,779
                                              
                                              
                                              $
                                              44,633,779
                                              
                                              
                                              $
                                              21,105,793
 
 See
accompanying notes to the consolidated financial statements
  F-3
 
 Sino
Clean Energy Inc. and Subsidiaries
 Consolidated
Statements of Operations and Other Comprehensive Income (Loss)
 For the
years ended December 31, 2009 and 2008
 (Amounts
expressed in U.S. Dollars)
 
 Years
      Ended December 31,2009
                  
                  
                  2008Revenue
                  
                  $
                  46,012,353
                  
                  
                  $
                  14,253,989Cost
      of goods sold
                  
                  
                  (28,922,846
                  )
                  
                  
                  (9,266,832
                  )Gross
      profit
                  
                  
                  17,089,507
                  
                  
                  
                  4,987,157Selling
      expenses
                  
                  
                  1,125,884
                  
                  
                  
                  13,128General
      and administrative expenses
                  
                  
                  1,796,032
                  
                  
                  
                  554,766Income
      from operations
                  
                  
                  14,167,591
                  
                  
                  
                  4,419,263Other
      income (expenses)Interest
      expense
                  
                  
                  (4,937,441
                  )
                  
                  
                  (566,752
                  )Expense
      related to escrow shares
                  
                  
                  (11,125,071
                  )
                  
                  
                  (676,466
                  )Rental
      income, net of outgoings
                  
                  
                  -
                  
                  
                  
                  78,691Interest
      income
                  
                  
                  43,285
                  
                  
                  
                  27,397Extinguishment
      of derivative liability
                  
                  
                  7,046,556
                  
                  
                  
                  -Change
      in fair value of derivative liabilities
                  
                  
                  (12,770,113
                  )
                  
                  
                  -Cost
      of private placement
                  
                  
                  (24,977,114
                  )
                  
                  
                  -Sundry
      income (expenses)
                  
                  
                  (29,293
                  )
                  
                  
                  -Gain
      on disposal of property
                  
                  
                  -
                  
                  
                  
                  33,069Government
      grant
                  
                  
                  -
                  
                  
                  
                  141,501Total
      other income (expenses)
                  
                  
                  (46,749,191
                  )
                  
                  
                  (962,560
                  )(Loss)
      Income before provision for income taxes
                  
                  
                  (32,581,600
                  )
                  
                  
                  3,456,703Provision
      for income taxes
                  
                  
                  2,243,088
                  
                  
                  
                  105,249Net
      (loss) income
                  
                  
                  (34,824,688
                  )
                  
                  
                  3,351,454Net
      income allocated to non-controlling interest
                  
                  
                  -
                  
                  
                  
                  (351,849
                  )Net
      (loss) income allocated to Sino Clean Energy, Inc.
                  
                  
                  (34,824,688
                  )
                  
                  
                  2,999,605Other
      comprehensive (loss) incomeForeign
      currency translation adjustment
                  
                  
                  16,344
                  
                  
                  
                  962,127Comprehensive
      (loss) income
                  
                  $
                  (34,808,344
                  )
                  
                  $
                  3,961,732Weight
      average number of shares-Basic
                  
                  
                  97,929,217
                  
                  
                  
                  87,169,614-Diluted
                  
                  
                  97,929,217
                  
                  
                  
                  88,162,076(Loss)
      Income per common share-
      Basic
                  
                  $
                  (0.36
                  )
                  
                  $
                  0.03-
      Diluted
                  
                  $
                  (0.36
                  )
                  
                  $
                  0.03
 
 See
accompanying notes to the consolidated financial statements
  F-4
 
 Sino-Clean
Energy, Inc. and Subsidiaries
 Consolidated
Statements of Changes in Shareholders' Equity (Deficiency)
 For the
years ended December 31, 2009 and 2008
 
 AccumulatedAdditional
                              
                              
                              
                              
                              
                              
                              
                              
                              otherCommon
      Stock
                              
                              
                              paid-in
                              
                              
                              Statutory
                              
                              
                              Retained
                              
                              
                              comprehensiveShare
                              
                              
                              Amount
                              
                              
                              capital
                              
                              
                              reserve
                              
                              
                              earnnings
                              
                              
                              income
                              
                              
                              TotalBalance
      , January 1 , 2008
                              
                              
                              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 warrant 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
                              
                              
                              
                              18,946,352Reclassification
      of warrants and conversion feature to derivative liability
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,335,650
                              )
                              
                              
                              -
                              
                              
                              
                              (3,254,142
                              )
                              
                              
                              -
                              
                              
                              
                              (4,589,792
                              )Balance
      , January 1 , 2009 as adjusted
                              
                              
                              92,181,750
                              
                              
                              
                              92,182
                              
                              
                              
                              11,360,899
                              
                              
                              
                              348,309
                              
                              
                              
                              431,945
                              
                              
                              
                              2,123,225
                              
                              
                              
                              14,356,560Fair
      value of shares issued for service
                              
                              
                              2,333,000
                              
                              
                              
                              2,333
                              
                              
                              
                              452,602
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              454,935Common
      stock issued upon conversion of convertible notes and accrued
      interest
                              
                              
                              13,983,875
                              
                              
                              
                              13,984
                              
                              
                              
                              2,396,583
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,410,567Expense
      related to escrow shares
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              11,125,071
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              11,125,071Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,410,244
                              
                              
                              
                              (36,234,932
                              )
                              
                              
                              -
                              
                              
                              
                              (34,824,688
                              )Foreign
      currency translation gain
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              16,344
                              
                              
                              
                              16,344Balance
      , December 31 , 2009
                              
                              
                              108,498,625
                              
                              
                              $
                              108,499
                              
                              
                              $
                              25,335,155
                              
                              
                              $
                              1,758,553
                              
                              
                              $
                              (35,802,987
                              )
                              
                              $
                              2,139,569
                              
                              
                              $
                              (6,461,211
                              )
 
 See
accompanying notes to the consolidated financial statements
  F-5
 
 Sino
Clean Energy Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows
 For the
years ended December 31, 2009 and 2008
 (Amounts
expressed in U.S. Dollars)
 
 Year
      ended December 31,2009
                  
                  
                  2008Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  (34,824,688
                  )
                  
                  $
                  3,351,454Adjustments
      to reconcile net income (loss) to cash provided by operating activities
      :Depreciation
      & amortization
                  
                  
                  1,530,238
                  
                  
                  
                  253,826Amortization
      of discount on convertible notes
                  
                  
                  3,942,185
                  
                  
                  
                  383,490Amortization
      of deferred debt issuance costs
                  
                  
                  274,278
                  
                  
                  
                  114,234Fair
      value of vested stock options
                  
                  
                  -
                  
                  
                  
                  8,000Gain
      on sale of leasehold
                  
                  
                  -
                  
                  
                  
                  (33,069
                  )Fair
      value of shares issued for services
                  
                  
                  454,935
                  
                  
                  
                  -Expense
      related to escrow shares
                  
                  
                  11,125,071
                  
                  
                  
                  676,466Cost
      of private placement
                  
                  
                  24,977,114
                  
                  
                  
                  -Change
      in fair value of derivative liabilities
                  
                  
                  12,770,113
                  
                  
                  
                  -Extinguishment
      of derivative liability
                  
                  
                  (7,046,556
                  )
                  
                  
                  -Change
      in operating assets and liabilities :Accounts
      receivable
                  
                  
                  (2,755,844
                  )
                  
                  
                  233,367Receipt
      of government grants
                  
                  
                  146,314
                  
                  
                  
                  264,686Inventories
                  
                  
                  (847,541
                  )
                  
                  
                  (1,282
                  )Prepaid
      inventories
                  
                  
                  (3,456,511
                  )
                  
                  
                  (271,210
                  )Prepaid
      expenses
                  
                  
                  (172,669
                  )
                  
                  
                  25,256Refundable
      advance
                  
                  
                  731,861
                  
                  
                  
                  (695,017
                  )Other
      receivables
                  
                  
                  (48,598
                  )
                  
                  
                  154,861Tax
      recoverable
                  
                  
                  (138,495
                  )
                  
                  
                  -Accounts
      payable and accrued expenses
                  
                  
                  1,759,335
                  
                  
                  
                  27,822Taxes
      payable
                  
                  
                  1,271,346
                  
                  
                  
                  161,226Assets
      on discontinued operationOther
      receivables
                  
                  
                  -
                  
                  
                  
                  141,795Net
      cash provided by operating activities
                  
                  
                  9,691,888
                  
                  
                  
                  4,795,905Cash
      flows from investing activities:Prepayments
      and deposits
                  
                  
                  265,067
                  
                  
                  
                  (118,992
                  )Proceeds
      from sale of leasehold
                  
                  
                  -
                  
                  
                  
                  1,024,465Purchase
      of property , plant and equipment
                  
                  
                  (4,654,910
                  )
                  
                  
                  (6,225,019
                  )Net
      cash used in investing activities
                  
                  
                  (4,389,843
                  )
                  
                  
                  (5,319,546
                  )Cash
      flows from financing activities:Repayment
      of amount due to a director
                  
                  
                  (391,583
                  )
                  
                  
                  -Repayment
      from a director
                  
                  
                  -
                  
                  
                  
                  370,478Advance
      from a director
                  
                  
                  -
                  
                  
                  
                  70,000Deferred
      debt issuance costs
                  
                  
                  -
                  
                  
                  
                  (357,753
                  )Proceeds
      from issuance of convertible notes
                  
                  
                  9,874,370
                  
                  
                  
                  1,335,650Payment
      of convertible notes
                  
                  
                  (400,000
                  )
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  9,082,787
                  
                  
                  
                  1,418,375Effect
      of foreign currency translation
                  
                  
                  3,420
                  
                  
                  
                  187,440Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  14,388,252
                  
                  
                  
                  1,082,174Cash
      and cash equivalents, beginning of year
                  
                  
                  3,914,306
                  
                  
                  
                  2,832,132Cash
      and cash equivalents, end of year
                  
                  $
                  18,302,558
                  
                  
                  $
                  3,914,306Supplemental
      Disclosure InformationInterest
      paid
                  
                  $
                  640,406
                  
                  
                  $
                  -Income
      taxes paid
                  
                  
                  1,161,346
                  
                  
                  
                  24,760Supplemental
      non-cash investing and financing activitiesConversion
      of convertible notes and accrued interest into common
stock
                  
                  
                  2,410,567
                  
                  
                  
                  -Allocation
      of derivative liability to note discount
                  
                  
                  11,592,000Cumulative
      effect of change in accounting  principle upon adoption of new
      accounting pronouncement on January 1, 2009, reclassification of warrants
      and conversion feature to derivative liability
                  
                  
                  4,589,792
                  
                  
                  
                  -Fair
      value of warrants and beneficial conversion feature related to issuance of
      convertible notes
                  
                  
                  -
                  
                  
                  
                  1,335,650Fair
      value of warrant issued for debt issuance fee
                  
                  
                  -
                  
                  
                  
                  30,759Issuance
      of common stock for minority interest
                  
                  
                  -
                  
                  
                  
                  1,500,000
 
 See
accompanying notes to the consolidated financial statements
  F-6




1. ORGANIZATION AND BUSINESS
ACTIVITIES
 
 Overview
  Sino
Clean Energy Inc. (sometimes referred to in this annual report as “Company”,
“we” or “our”) is a holding company that, through its subsidiaries, is a
leading third party commercial producer and distributor of coal-water slurry
fuel (“CWSF”) in China. CWSF is a clean fuel that consists of fine coal
particles suspended in water.  Our CWSF products are mainly used to
fuel boilers and furnaces to generate steam and heat for residential and
industrial applications.  We sell our products in China and our
customers include industrial, commercial, residential and government
organizations. Our strong reputation in the CWSF industry in China, together
with our established track record for consistently delivering products in large
quantities, has enabled us to expand our customer base.  We primarily
use washed coal to produce CWSF. We acquire the raw materials for each of our
production facilities primarily from three nearby coal mines.  We have
established strong relationships with our suppliers and our ability to purchase
large quantities of raw materials has allowed us to achieve favorable pricing
and delivery terms.
  Until
November 12, 2009, all of our business operations were conducted through Shaanxi
Suo’ang Biological Science & Technology Co., Ltd., a PRC company (“Suo’ang
BST”) that we controlled through contractual arrangements designed to comply
with the law of People’s Republic of China (“PRC” or “China”) and Suo’ang BST’s
PRC subsidiary, Shaanxi Suo’ang New Energy Enterprise Co., Ltd. (“Suo’ang New
Energy”).  Beginning in June 2009, we effected a reorganization of our
corporate structure in order to make Suo’ang New Energy wholly
owned.  Pursuant to such reorganization, our business is now operated
by Suo’ang New Energy through our indirect wholly-owned subsidiary Tongchuan
Suoke Clean Energy Co., Ltd., a PRC limited liability company(“Suoke Clean Energy”),
which is incorporated under PRC law and wholly owned by Wiscon Holdings Limited,
a Hong Kong company(“Wiscon”), our directly owned Hong Kong subsidiary/holding company,
which was incorporated in 2006 and acquired by us in June 2009.  On
September 27, 2009, we received approval from the Tongchuan Bureau of Commerce
for the transfer of all of Suo’ang New Energy’s equity interests to Suoke Clean
Energy.  With the approval, Suo’ang New Energy has become a “domestic
PRC enterprise wholly-owned by a wholly-foreign owned
enterprise.”  Registration of the approval with the Tongchuan
Administration of Industry and Commerce, the final step in completing this
reorganization, was completed on November 12, 2009.  On October 12,
2009, Suo’ang New Energy established Shenyang Sou’ang Energy Co., Ltd., a
wholly-owned PRC subsidiary(“Shenyang Energy”), to
conduct the CWSF business in Shenyang, Liaoning province.
 
 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.
  F-7
  On
October 20, 2006 we consummated a share exchange transaction with Hangson, a
British Virgin Islands company, the stockholders of Hangson and a majority of
our stockholders.  We issued a total of 26,000,000 shares of our
common stock to the Hangson Stockholders and a consultant in the transaction, in
exchange for 100% of the common stock of Hangson.  As a result of the
transaction we became engaged in the CWSF business, through the operations of
Su’ang BST and Suo’ang New Energy.  On January 4, 2007, we changed our
name from “Endo Networks, Inc.” to “China West Coal Energy Inc.”, and then on
August 15, 2007, we changed our name again to our present name, Sino Clean
Energy Inc.
  Hangson
did not conduct any substantive business operations of its own, but from August
2006 to June 30, 2009, controlled Suo’ang BST, a PRC company and Suo’ang BST’s
80%-owned subsidiary Suo’ang New Energy.  From June 30, 2008 to
November 12, 2009 Hangson owned 20% of Suo’ang New Energy.  Hangson
controlled Suo’ang BST through a series of contractual arrangement.
  Beginning
in June 2009, we effected a reorganization of our corporate structure in order
to make Suo’ang New Energy a wholly-owned subsidiary (see above).
  On
December 31, 2009, we entered into a series of termination agreements to
terminate the contractual arrangements by and among Suoke Clean Energy, Suo’ang
BST and certain stockholders of Suo’ang BST.  We no longer needed to
keep such contractual arrangements in place due to the fact that Suo’ang BST was
no longer engaged in any substantial business operations. In connection with the
termination agreements, certain assets held by Suo’ang BST, such as, office
equipment, vehicles, bank deposits, accounts receivable, were transferred to
Suoke Clean Energy. Employees of Suo’ang BST signed new employment contracts
with Suoke Clean Energy. All rights and obligations under certain business
operation agreements and research and development contracts between Suo’ang BST
and third parties were assigned to Suo’ang New Energy.
  On
December 31, 2009, Hangson transferred all of its equity interests in Wiscon to
us.  Since Hangson had no substantive operations of its own after the
transfer and termination of the contractual arrangements, we dissolved Hangson
on December 31, 2009.
 
 2.
                SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
 
 Change in accounting
principle
 
 On
January 1, 2009, the Company adopted authoritative guidance issued by the FASB
which affects the accounting for warrants and many convertible
instruments.  The Company determined the warrants and convertible debt
issued in 2008 and 2009 contained re-set provisions that preclude them from
being indexed to the Company’s own stock.  As a result, the warrants
and conversion feature previously classified in equity were reclassified to
derivative liabilities (see Note 9).
  F-8
  On
January 1, 2009, the Company adopted authoritative guidance issued by the FASB
on noncontrolling interests in consolidated financial
statements.  This guidance establishes accounting and reporting
standards for a noncontrolling (minority) interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement clarifies that a noncontrolling
interest in a subsidiary is an ownership in the consolidated entity that should
be reported as equity in the consolidated financial statements. The adoption of
this did not have any material impact on the Company’s financial condition and
results of operations. However, it did impact the presentation and disclosure of
noncontrolling (minority) interests in the Company’s consolidated financial
statements. The presentation and disclosure requirements were retrospectively
applied to the consolidated financial statements.  As such, all prior
periods presented have been conformed to current year’s
presentation.
 
 Basis of presentation and
consolidation
 
 The
accompanying consolidated financial statements have been 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 owned subsidiaries Wiscon, Tongchuan Suoke Clean
Energy, Shaanxi Suo’ang New Energy and Shenyang Suo’ang New Energy.
 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 CWSF.
 
 Sales are
recognized 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”). In our revenue arrangements, physical
delivery is the point in time when customer acceptance occurs since title and
risk of loss are transferred to the customer.  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.
  F-9
  Cash
denominated in Renminbi (“RMB”) with a US dollar equivalent of $18,275,847 and
$3,887,595 at December 31, 2009 and 2008, 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.
 
 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, 2009 and 2008,
accounts receivable were net of allowances of zero and zero,
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
 
 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.
  F-10
  Goodwill
 
 The
Company accounts for acquisition of business in accordance with guidance issued
by the Financial Accounting Standards Board (“FASB)., 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.  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, 2009.
 
 Long-lived
Assets
 
 The
Company reviews and evaluates 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 are identifiable
cash flows that are largely independent of future cash flows from other asset
groups.
 
 Based
upon management’s assessment, there were no indicators of impairment of the
Company’s long lived assets as of December 31, 2009 or 2008.
 
 Comprehensive
income
 
 Under
authoritative guidance of the FASB on reporting comprehensive income, disclosure
of all components of comprehensive income and loss on an annual and interim
basis is required.  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
$16,344 and $962,127 for the years ended December 31, 2009 and 2008,
respectively, from foreign currency translation adjustments.
 .
 Fair value of financial
instruments
 
 Effective
January 1, 2008, fair value measurements are determined by the Company's
adoption of authoritative guidance issued by the FASB, with the exception of the
application of the statement to non-recurring, non-financial assets and
liabilities as permitted. The adoption of the authoritative guidance did not
have a material impact on the Company's fair value measurements. Fair value is
defined in the authoritative guidance 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. A fair value hierarchy was
established, which prioritizes the inputs used in measuring fair value into
three broad levels as follows:
  F-11
  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.
 
 The
Company is required to use observable market data if such data is available
without undue cost and effort.
 
 The
following table presents certain investments and liabilities of the Company’s
financial assets measured and recorded at fair value on the Company’s
consolidated balance sheets on a recurring basis and their level within the fair
value hierarchy as of December 31, 2009 :
 
 Level
      1
                                                    
                                                    
                                                    Level
      2
                                                    
                                                    
                                                    Level
      3
                                                    
                                                    
                                                    TotalFair
      value of convertible note conversion feature
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    28,404,181
                                                    
                                                    
                                                    $
                                                    28,404,181Fair
      value of warrants
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    16,752,858
                                                    
                                                    
                                                    $
                                                    16,752,858-
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    45,157,039
                                                    
                                                    
                                                    $
                                                    45,157,039
 
 See Notes
8 and 9 for more information on these financial instruments.
 
 Derivative financial
instruments
 
 The
Company evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair
value and is then re-valued at each reporting date, with changes in the fair
value reported in the consolidated statements of operations. For stock-based
derivative financial instruments, the Company uses both the Black-Scholes-Merton
and Binomial option pricing models to value the derivative instruments at
inception and on subsequent valuation dates. The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting
period.  Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.
  F-12
  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.  Stock-based compensation is measured at the grant date, based on
the fair value of the award, and is recognized as expense over the requisite
service period.  Options vest and expire according to terms established at
the grant date.
 
 Income (loss) per common
share
 
 Basic
earnings (loss) 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 (loss) per share calculation give 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, 2009, common stock equivalents were composed of options convertible
into 100,000 shares of the Company's common stock, warrants convertible into
44,037,433 shares of the Company's common stock, and debentures convertible into
53,773,684 shares of the Company’s common stock.  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 8,904,333 shares
of the Company's common stock.
 
 The
following is a reconciliation of the numerator and denominator used in the
calculation of basic and diluted earnings per share.
  Year Ended December 31,2009
                                
                                
                                2008NumeratorNet
      income (loss)
                                
                                $
                                (34,736,689)
                                
                                
                                $
                                2,999,605DenominatorWeighted
      average shares outstanding-basic
                                
                                
                                97,929,217
                                
                                
                                
                                87,169,614Effect
      of dilutive instruments:Warrants
                                
                                
                                -
                                
                                
                                
                                992,462Weighted
      average shares outstanding-diluted
                                
                                
                                97,929,217
                                
                                
                                
                                88,162,076
 
 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 period.
  F-13
 
 2009
                                      
                                      
                                      2008Year
      end RMB : US$ exchange rate
                                      
                                      
                                      6.8172
                                      
                                      
                                      
                                      6.8346Average
      yearly RMB : US$ exchange rate
                                      
                                      
                                      6.8259
                                      
                                      
                                      
                                      7.0671
 
 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.
 
 Income
taxes
 
 The
Company uses asset and liability approach for financial accounting and reporting
for income taxes that 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.
 
 Concentrations
 
 Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and unsecured trade accounts
receivable.
 
 Details
of the customers accounting for 10% or more of the Company’s total sales for the
year ended December 31 are as follows:
 
 2009
                        
                        
                        2008Company
      A
                        
                        $
                        6,275,100
                        
                        
                        $
                        1,991,158Company
      B
                        
                        
                        2,776,282
                        
                        
                        
                        1,837,416Company
      C
                        
                        
                        2,708,304
                        
                        
                        
                        1,637,342Company
      D
                        
                        
                        2,571,036
                        
                        
                        
                        1,429,188
 
 For 2009,
the accounts receivable from the four customers with the largest receivable
balance represent 9%, 7%, 6% and 5%, respectively, of the balance of the account
receivable at December 31, 2009. 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 the
year ended December 31, 2009, 2 vendors accounted for 97% of total purchases
(85% and 12% respectively).  At December 31, 2009, three vendors
accounted for 92% of accounts payable (_12%, 24% and 56%,
respectively).  For the year ended December 31, 2008, a_vendor
accounted for 81% of total purchases.  At December 31, 2009, this
vendor accounted for 99% of accounts payable.
  F-14
  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.
 
 Reclassifications
 
 In
presenting the Company’s consolidated balance sheet at December 31, 2008, and
statement of cash flows for the year ended December 31, 2008, the Company
presented $994,395 of prepayments and other deposits as current assets and their
cash flows of $188,332 as operating cash flows.  In presenting the
Company’s consolidated balance sheet at December 31, 2009, and statement of cash
flows for the year ended December 31, 2009, the Company has reclassified the
prepayments and other deposits as long term assets and their cash flows as
investing cash flows in the accompanying December 31, 2008 financial
statements.
 
 In
presenting the Company’s consolidated balance sheet at December 31, 2008, the
Company presented $731,861 refundable advance receivable as a prepayment
and other deposit.  In presenting the Company’s consolidated balance
sheet at December 31, 2009, the Company has reclassified the balance of $731,861
to refundable advance in the accompanying December 31 , 2008 financial
statements
 
 In
presenting the Company’s consolidated statement of operations for the year
ending December 31, 2008, the Company presented $468,864 of commission income as
part of Other Income (Expense).  In presenting the Company’s
consolidated statement of operations for the year ending December 31, 2009, the
Company has reclassified the $468,864 to revenue in the accompanying
consolidated statement of operations for the year ending December 31,
2008.
  F-15




Recently issued accounting
pronouncements
 
 In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles
(“GAAP") effective for interim and annual reporting periods ending after
September 15, 2009.  The FASB accounting standards codification (“ASC,
“Codification”) has become the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in accordance with GAAP. All existing
accounting standard documents are superseded by the Codification and any
accounting literature not included in the Codification will not be
authoritative. However, rules and interpretive releases of the SEC issued under
the authority of federal securities laws will continue to be sources of
authoritative GAAP for SEC registrants.   Beginning with the
quarter ending September 30, 2009, all references made by the Company to GAAP in
its condensed consolidated financial statements use the Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore,
it does not have an impact on our financial position, results of operations and
cash flows.
 
 In
June 2009, the FASB made an updated the principle for the consolidation of
variable interest entities.  Among other things, the update replaces the
calculation for determining which entities, if any, have a controlling financial
interest in a variable interest entity (VIE) from a quantitative based risks and
rewards calculation, to a qualitative approach that focuses on identifying which
entities have the power to direct the activities that most significantly impact
the VIE’s economic performance and the obligation to absorb losses of the VIE or
the right to receive benefits from the VIE. The update also requires ongoing
assessments as to whether an entity is the primary beneficiary of a VIE
(previously, reconsideration was only required upon the occurrence of specific
events), modifies the presentation of consolidated VIE assets and liabilities,
and requires additional disclosures about a company’s involvement in VIE’s. This
update will be effective for fiscal years beginning after November 15,
2009. The Company does not currently believe that the adoption of this update
will have any effect on its consolidated financial position and results of
operations.
 
 In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition.   We believe the adoption of this new guidance will
not have a material impact on our financial statements.
 
 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-16
 
 3.   INVENTORIES
 
 Inventories
consist of the following at:
 
 December
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008Raw
      materials
                    
                    $
                    634,751
                    
                    
                    $
                    18,290Packing
      materials
                    
                    
                    785
                    
                    
                    
                    2,193Finished
      goods
                    
                    
                    257,073
                    
                    
                    
                    24,585$
                    892,609
                    
                    
                    $
                    45,068
 
 Prepaid
Inventories
 
 The
Company has a contract with a coal mine to deliver coal for use in the
production of coal-water mixture. At times, the Company may make
payments in advance of delivery and accounts for these prepayments as prepaid
inventory.  At December 31, 2009 and December 31, 2008, prepaid inventories
totaled $5,453,095 and $1,996,584, respectively.
 
 4.  PREPAYMENTS AND LONG TERM
DEPOSITS
 
 Long term
Deposits consist of the following at December 31,
 
 2009
                      
                      
                      2008Prepayment
      for construction in progress and machinery purchases
                      
                      $
                      51,258
                      
                      
                      $
                      306,075Deposit
      for boiler purchases
                      
                      
                      678,070
                      
                      
                      
                      688,320$
                      729,328
                      
                      
                      $
                      994,395
 
 The
Company is an agent for Haizhong Boiler, which manufactures boilers to use with
CWSF and receives commission from sales of boilers. The deposit for boiler
purchases is to guarantees the purchases of boilers by the third party
customers. Subsequent to December 31, 2009, all purchases subject to the
guarantee had been collected by Haizhong.
  F-17
 
 5  PROPERTY, PLANT AND
EQUIPMENT
  Property,
plant and equipment consists of the following at December 31,
 
 2009
                        
                        
                        2008Construction
      in progress
                        
                        $
                        —
                        
                        
                        $
                        153,169Buildings
                        
                        
                        2,564,638
                        
                        
                        
                        1,783,894Plant
      and machinery
                        
                        
                        11,762,449
                        
                        
                        
                        7,697,128Office
      equipment
                        
                        
                        76,639
                        
                        
                        
                        71,953Motor
      vehicles
                        
                        
                        148,020
                        
                        
                        
                        179,51914,551,746
                        
                        
                        
                        9,885,663Less:
      Accumulated depreciation and amortization
                        
                        
                        (1,994,055
                        )
                        
                        
                        (491,247
                        )$
                        12,557,691
                        
                        
                        $
                        9,394,416
 
 The
depreciation expenses on property, plant and equipment for the year ended
December 31, 2009 and 2008 were $1,504,559 and $207,674,
respectively.
 
 6   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 CWSF 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,
 
 2009
                        
                        
                        2008Cost
                        
                        $
                        1,936,976
                        
                        
                        $
                        1,936,465Less
      accumulated amortization
                        
                        
                        (119,675
                        )
                        
                        
                        (93,485
                        )Net
      land use rights
                        
                        $
                        1,817,301
                        
                        
                        $
                        1,842,980
  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,
                        
                        Amount2010
                        
                        $
                        38,7392011
                        
                        
                        38,7392012
                        
                        
                        38,7392013
                        
                        
                        38,7392014
                        
                        
                        38,739Thereafter
                        
                        
                        1,623,606$
                        1,817,301
  F-18
 
 The lease
expenses on land use right for the years ended December 31, 2009 and 2008 was
$25,679 and $35,759 respectively.
 
 7   ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
 
 Accounts
payable and accrued expenses consist of the following at December
31,
 2009
                        
                        
                        2008Accounts
      payable
                        
                        $
                        132,852
                        
                        
                        $
                        22,344Accrued
      operating expenses
                        
                        
                        847,975
                        
                        
                        
                        417,598Accrued
      staff welfare
                        
                        
                        235,167
                        
                        
                        
                        153,334Construction
      in progress payable
                        
                        
                        —
                        
                        
                        
                        338,381Accrued
      interest
                        
                        
                        22,112
                        
                        
                        
                        —Advance
      from customer
                        
                        
                        —
                        
                        
                        
                        58,525Due
      to contractors
                        
                        
                        1,434,105
                        
                        
                        
                        14,817$
                        2,672,211
                        
                        
                        $
                        1,004,999
 
 8.   CONVERTIBLE
NOTES
 
 Convertible
notes consist of the following at:
  December
      31,
                      
                      
                      December
      31,2009
                      
                      
                      200818%
      convertible debentures
                      
                      $
                      -
                      
                      
                      $
                      1,335,65010%
      convertible notes
                      
                      
                      10,217,000
                      
                      
                      
                      -Valuation
      discount
                      
                      
                      (8,601,975
                      )
                      
                      
                      (952,160
                      )Convertible
      notes, net
                      
                      
                      1,615,025
                      
                      
                      
                      383,490Less
      current portion
                      
                      
                      -
                      
                      
                      
                      (383,490
                      )Long
      term portion
                      
                      $
                      1,615,025
                      
                      
                      $
                      -
  F-19
 
 18% convertible
debentures
 
 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
(the “Warrants”) to purchase up to 8,904,334 shares of common stock of the
Company in a private placement to six investors. The Debentures bore interest at
18% per annum, matured in one year, were unsecured, and were personally
guaranteed by the Company’s Chief Executive Officer. The holders of the
Debentures had 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.
 
 During
the second and third quarters of 2009, five investors converted $935,650
principal balance of Debentures at the stated conversion price of $0.15 per
share plus accrued interest of $76,405 into 6,747,036 shares of the Company’s
common stock. The Company paid off one investor with a $400,000 principal
balance which was not converted.  The balance of the related
derivative for the conversion feature and warrants was recorded as
extinguishment of derivative.
 
 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 for 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
warrants vested in full upon the conversion or payment of the Debentures in the
second and third quarters of 2009.
 
 The
8,904,334 Warrants were valued at $2,418,685 using the Black-Scholes option
valuation model with the following assumptions: risk-free interest rate of 0.62%
to 1.21%; dividend yield of 0%; volatility factors of 94.67% to 99.91%; and an
expected life of three years (statutory term). The Company also determined that
the Debentures contained a conversion feature of $1,667,752.  The
value of the Debentures and conversion option are considered as debt
discount.  Total recorded debt discount cannot be greater than the
face amount of the notes issued, and accordingly, the Company recorded a
discount of $1,335,650 which was being amortized over the life of the Debentures
on the effective interest method.  For the year ended December 31,
2009, $753,025 of discount amortization is included in interest expense.
The balance of the unamortized debt discount of $199,135 at the date
the related Notes were converted or paid off was recorded as additional
interest expense. At December 31, 2009 and 2008, the unamortized balance of the
discount was zero and $952,160, repeectively.
 
 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 $82,287 using the Black-Scholes option valuation model with the following
assumptions: risk-free interest rate of 0.62% to 1.21%; dividend yield of 0%;
volatility factors of 94.67% to 99.91%; 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 were recorded by the Company as debt issuance costs. These costs
were capitalized and were being amortized over the term of the
Debentures.  For the year ended December 31, 2009, amortization
charged to interest expense was $274,278 and the unamortized balance at December
31, 2009 was zero.
  F-20
 
 Escrowed
shares related to the Debentures
 
 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 did not meet its
performance targets for the year ended December 31, 2009. The performance target
for 2008 was 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 authoritative guidance 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 was valued at $1,152,137 using the
Black-Scholes option valuation model with the following assumptions: risk-free
interest rate of 0.62% to 1.21%; dividend yield of 0%; volatility factors of
94.67% to 99.91%; and an expected life of 3 months (for 2008) and 15 months (for
2009).  For the year ended December 31, 2009, the Company recognized
$475,671 of expense related to the escrowed shares.  At July 1, 2009,
the 4,452,168 shares were released from escrow when the Debentures were
converted or paid off, and the total value of the escrowed shares had been fully
amortized.
 
 10% senior secured
convertible notes
 
 On July
1, 2009 and July 20, 2009, the Company issued an aggregate of $11,592,000 of 10%
senior secured convertible notes (the “Notes”) and issued warrants (the
“Warrants”) to purchase up to 30,505,263 shares of common stock of the Company
in a private placement. The Notes bear interest at 10% per annum, mature in
three year, are unsecured, and are personally guaranteed by the Company’s Chief
Executive Officer and certain shareholders. The holders of the Notes have the
right at any time to convert all or part of the outstanding principal amount of
the Notes and any accrued and unpaid interest into common shares of the Company
at the then effective conversion price, initially set at $0.19 per share (the
“Conversion Price”).  The Company’s Chief Executive Officer purchased
$350,000 of the Notes issued on July 1, 2009, and $250,000 of the Notes issued
on July 20, 2009.
  F-21
 
 The
initial conversion price will automatically adjust to 75% of the Conversion
Price on January 1, 2010 if the Company does not achieve certain financial
performance targets for the fiscal year ended December 31, 2009, and provided
further that the Conversion Price will automatically adjust to 80% of the
Conversion Price on January 1, 2011 if the Company does not achieve certain
financial performance targets for the fiscal year ended December 31,
2010.  Also, the Conversion Price is subject to a full
ratchet anti-dilution adjustment in the event that the Company issues additional
equity, equity linked securities or securities convertible into equity, at a
purchase price less than the then applicable Conversion Price or the Exercise
Price.
 
 The Notes
bear interest at 10% per year and mature on June 30, 2012 and July 16, 2012 (the
“Maturity Date”). Interest is payable quarterly in cash on the first day of
January, April, July and October of each year and on the Maturity Date,
commencing October 1, 2009.
 
 During
the forth quarter of 2009, four investors converted $1,375,000 principal balance
of 10% convertible notes at the stated conversion price of $0.19 per share
into 7,236,842 shares of the Company’s common stock. The balance of the related
derivative for the conversion feature of the notes was recorded as
extinguishment of derivative.
 
 The
Warrants entitle the investors to purchase up to 30,505,263 shares of common
stock (the “Warrant Shares”) in the aggregate. The Warrants have an initial
exercise price of $0.285 per share, subject to a full ratchet anti-dilution
adjustment in the event that the Company issues additional equity, equity linked
securities or securities convertible into equity, at a purchase price less than
the then applicable Conversion Price or the Exercise Price.
 
 Effective
January 1, 2009, the Company adopted authoritative guidance issued by the
FASB  that indicates any adjustment to the fixed amount (either
conversion price or number of shares) of the instrument (or embedded feature),
regardless of the probability or whether or not within the issuers’ control,
means the instrument is not indexed to the issuers own
stock.  Accordingly, the embedded conversion feature of the notes and
the conversion feature of the warrants resulted in a derivative liability being
recorded by the Company when the Notes and Warrants were
issued.    The Company determined the conversion feature of
the Notes was $24,987,313 based on a binominal valuation.  The
Company determined the conversion feature of the 30,505,263 Warrants was
$8,479,263 using the Black-Scholes option valuation model with the following
assumptions: risk-free interest rate of 1.5%; dividend yield of 0%; volatility
factor of 149%; and an expected life of three years (statutory term), resulting
in total derivative at issuance of $33,466,576.  $11,592,000 of this
amount was allocated to debt discount (i.e. up to face amount of the Notes) and
will be amortized over the term of the Notes.   For the year
ended December 31, 2009, $2,921,819 of discount amortization is included in
interest expense.  At Dcember 31, 2009, the unamortized balance of the
discount is $8,670,181.  The balance of the derivative of $21,874,576
represents the excess of the fair value of the derivatives over cash
received.
 
 The
Company incurred $1,725,424 of costs directly associated with the issuance
of the Notes and also issued 4,270,736 warrants valued at $1,377,114 as finder’s
fees exercisable for three years at $0.228 per share, which vested immediately
on the issuance date.  The 4,270,736 warrants were valued
using the Black-Scholes option valuation model with the following assumptions:
risk-free interest rate of 1.5%; dividend yield of 0%; volatility factor of
149%; and an expected life of three years (statutory term).  The costs
directly associated with the issuance of the Notes of $1,725,424, plus the fair
value of the warrants issued for finder’s fee of $1,377,114, plus the
$21,874,576 excess fair value of derivative over cash received, total
$24,977,114 and are recorded as cost of private placement in the accompanying
statement of operations.
  F-22
 
 Escrow
shares related to the Notes
 
 In
connection with the issuance of the Notes and Warrants, the Company’s Chief
Executive Officer and a director of the Company (collectively the
“Pledgors”) entered into a pledge agreement pursuant to which they transferred
28,744,299 shares of the Company’s common stock owned by them into an escrow
account for the benefit of the investors as a guarantee against an event of
default (as defined in the Notes) by the Company.  Pursuant to the
pledge agreement, the Pledgors agreed to transfer all the escrowed shares
to the holders of the Notes if the Company defaults on the Notes.  The
escrowed shares revert back to the Pledgors at the expiration of the
Notes.
 
 The
Company considered authoritative guidance issued by the FASB and determined the
escrow shares represented a cost of the 10% senior secured convertible
notes.  The aggregate value of the 28,744,299 shares was valued at
$10,649,400 using the Black-Scholes option valuation model with the following
assumptions: risk-free interest rate of 1.5%; dividend yield of 0%; volatility
factor of 147%; and an expected life of three years.  As a discount of
100% of the face amount of the notes was already recorded, the Company expensed
the $10,649,400.
 
 9.    DERIVATIVE
LIABILITY
  In June
2008, the FASB issued authoritative guidance on determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock.
 Under the authoritative guidance, effective January 1, 2009, instruments
which do not have fixed settlement provisions are deemed to be derivative
instruments.  The conversion feature of the Company’s Debentures (described
in Note 8), and the related warrants, do not have fixed settlement provisions
because their conversion and exercise prices, respectively, may be lowered if
the Company issues securities at lower prices in the future.  The Company
was required to include the reset provisions in order to protect the holders of
the Debentures from the potential dilution associated with future financings. In
accordance with the FASB authoritative guidance, the conversion feature of the
Notes was separated from the host contract (i.e., the Notes) and recognized as a
derivative instrument.  Both the conversion feature of the
Notes and the related warrants have been characterized as derivative
liabilities to be re-measured at the end of every reporting period with the
change in value reported in the statement
of operations.
  F-23
 
 The
derivative liabilities were valued using both the Black-Scholes-Merton and
Binomial valuation techniques with the following assumptions:
 
 December 31,
                        2009
                      
                      
                      December 31,
                        2008Conversion
      feature:Risk-free
      interest rate
                      
                      
                      1.5
                      %
                      
                      
                      0.33
                      %Expected
      volatility
                      
                      
                      148.47
                      %
                      
                      
                      152.26
                      %Expected
      life (in years)
                      
                      2.75
      years
                      
                      
                      0.70
      yearExpected
      dividend yield
                      
                      
                      0
                      
                      
                      
                      0Warrants:Risk-free
      interest rate
                      
                      
                      1.32
                      %
                      
                      
                      0.33
                      %Expected
      volatility
                      
                      
                      148.47
                      %
                      
                      
                      152.26
                      %Expected
      life (in years)
                      
                      2.81
      years
                      
                      
                      2.70
      yearsExpected
      dividend yield
                      
                      
                      0
                      
                      
                      
                      0Fair
      Value:Conversion
      feature
                      
                      $
                      28,404,181
                      
                      
                      $
                      2,899,790Warrants
                      
                      
                      16,752,858
                      
                      
                      
                      1,690,002$
                      45,157,039
                      
                      
                      $
                      4,589,792
 
 The
risk-free interest rate was based on rates established by the Federal Reserve
Bank. The Company uses the volatility of five comparable guideline
companies to estimate volatility for its common stock. The expected life of the
conversion feature of the notes was based on the term of the notes and the
expected life of the warrants was determined by the expiration date of the
warrants. The expected dividend yield was based on the fact that the Company has
not paid dividends to common shareholders in the past and does not expect to pay
dividends to common shareholders in the future.
 
 The FASB
authoritative guidance was implemented in the first quarter of 2009 and is
reported as a cumulative change in accounting principles. The cumulative effect
on the accounting for the conversion feature of the Debentures and the
related warrants at January 1, 2009 is as follows:
 
 Additional
                      Paid-in Capital
                    
                    
                    Retained
                      Earnings
                    
                    
                    Derivative
                      LiabilityDerivative
      Instrument:Conversion
      feature
                    
                    $
                    1,335,650
                    
                    
                    $
                    -
                    
                    
                    $
                    1,335,650Warrants
                    
                    
                    -
                    
                    
                    
                    3,254,142
                    
                    
                    
                    3,254,142$
                    1,335,650
                    
                    
                    $
                    3,254,142
                    
                    
                    $
                    4,589,792
 
 The
warrants were originally recorded at their relative fair value as an increase in
additional paid-in capital. The change in the accumulated deficit includes gains
resulting from decreases in the fair value of the derivative liabilities through
December 31, 2008. The derivative liability amounts reflect the fair value of
each derivative instrument as of the January 1, 2009 date of
implementation.
  F-24
 
 As of
December 31, 2009, the derivative liability was $45,157,039.  For
the year ended December 31, 2009, the Company recorded a change in fair
value of the derivative liabilities of $12,770,113.  At December 31,
2008, no derivative instruments were recorded.
 
 When the
Company adopted the FASB authoritative guidance, the fair value of the warrants
and the conversion feature of the notes were bifurcated from the convertible
debt contracts and accounted for as a liability, and the gain on
extinguishment of the bifurcated derivative is shown separately from the
conversion of the debt.
  10.    COMMON STOCK
 
 During
the year ended December 31, 2009, the Company issued 2,333,000 shares of common
stock in exchange for investor relations consulting services valued at $454,935,
based on the closing price of the Company’s stock on the date of
issuance.
  On
September 21, 2009, an amendment to increase the number of authorized shares of
the Company’s common stock from 200,000,000 to 300,000,000 shares was approved
by the Company's shareholders at the annual meeting of
shareholders.
  11.    WARRANTS AND
OPTIONS
 
 At
December 31, 2009 and December 31, 2008, outstanding warrants and options
were as follows:
  Number of
                      Shares under
                      Warrants
                      and Options
                    
                    
                    Weighted
                      Average
                      Exercise PriceWarrants
      and options outstanding at January 1, 2009
                    
                    
                    9,361,434
                    
                    
                    $
                    0.15Warrants
      and options granted
                    
                    
                    34,775,999
                    
                    
                    $
                    0.285Warrants
      and options expired
                    
                    
                    -
                    
                    
                    
                    -Warrants
      and options outstanding at December 31, 2009
                    
                    
                    44,137,433
                    
                    
                    $
                    0.25
 
  F-25
 
 The
following table summarizes information about warrants and options outstanding at
December 31, 2009:
  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
                                
                                
                                
                                9,239,798
                                
                                
                                
                                1.96
                                
                                
                                
                                9,239,798
                                
                                
                                $
                                0.15$
                                0.228
                                
                                
                                
                                4,270,736
                                
                                
                                
                                3.00
                                
                                
                                
                                4,270,736
                                
                                
                                $
                                0.228$
                                0.24
                                
                                
                                
                                121,636
                                
                                
                                
                                1.10
                                
                                
                                
                                121,636
                                
                                
                                $
                                0.24$
                                0.285
                                
                                
                                
                                14,250,000
                                
                                
                                
                                2.75
                                
                                
                                
                                14,250,000
                                
                                
                                $
                                0.285$
                                0.285
                                
                                
                                
                                16,255,263
                                
                                
                                
                                2.81
                                
                                
                                
                                16,255,263
                                
                                
                                $
                                0.285$
                                0.25
                                
                                
                                
                                44,137,433
                                
                                
                                
                                
                                
                                
                                
                                44,137,433
                                
                                
                                $
                                0.25
 
 At
December 31, 2009, the aggregate intrinsic value of the warrants and options
outstanding and exercisable was $8,768,738.
 
 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.
  Statutory
reserves consist of the following as ofDecember 31:
 2009
                      
                      
                      2008Statutory
      capital reserve
                      
                      $
                      1,642,369
                      
                      
                      $
                      232,206Statutory
      common welfare fund
                      
                      
                      116,103
                      
                      
                      
                      116,103$
                      1,758,472
                      
                      
                      $
                      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.
  F-26
 
 The
Company has not recorded a provision for U.S. federal income tax for the years
ended December 31, 2009 and 2008 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, 2009 was approximately
$188,000 and expires through 2024.
 
 Income
tax expense consist of the following for the years ended December
31,
 2009
                        
                        
                        2008Current
      – PRC Enterprise Income Tax
                        
                        $
                        2,243,088
                        
                        
                        $
                        105,249Deferred
                        
                        
                        -
                        
                        
                        
                        -Total
      income tax expenses
                        
                        $
                        2,243,088
                        
                        
                        $
                        105,249
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate at December 31,
  2009
                              
                              
                              2008U.S.
      statutory rate
                              
                              
                              34
                              %
                              
                              
                              34
                              %Foreign
      income not recognized in U.S.
                              
                              
                              (34
                              )%
                              
                              
                              (34
                              )%Non-deductible
      expenses and other
                              
                              
                              3
                              %
                              
                              
                              3
                              %Tax
      holiday
                              
                              
                              (25
                              )%
                              
                              
                              (25
                              )%PRC
      preferential income tax rate
                              
                              
                              25
                              %
                              
                              
                              25
                              %Effective
      tax rate
                              
                              
                              3
                              %
                              
                              
                              3
                              %
 No
significant deferred tax liabilities or assets existed as of either December 31,
2009 or 2008.
 
 Effective
January 1, 2007, the Company adopted authoritative guidance issued by the
FASB for uncertainty in 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, 2009, 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-27
  14.    RELATED PARTY
TRANSACTIONS
 
 Amounts
due to related parties at December 31, 2009 and December 31, 2008 consisted of
the following:
  December 31,
                        2009
                      
                      
                      December 31,
                        2008Due
      to directors:Mr.
      Peng Zhou
                      
                      $
                      -
                      
                      
                      $
                      395,049Mr.
      Baowen Ren
                      
                      
                      73,466
                      
                      
                      
                      70,000$
                      73,466
                      
                      
                      $
                      465,049
  Amounts
due to directors are non-interest bearing, unsecured, and due on
demand.
 
 15
              COMMITMENTS
      AND CONTINGENCIES
  Coal inventory purchase
commitment
 
 During
2009, the Company entered into a coal inventory purchase contract with a
supplier.  At December 31, 2009, the Company’s commitment to purchase
coal related to this contract is approximately $1,633,926
 
 Capital expenditure
commitments
 
 During
the year ended December 31, 2009, the Company entered into various contracts to
purchase machinery in connection with its CWSF production plant.  At
December 31, 2009, the Company's capital expenditure commitment totaled
$4,008,377 for the purchase of machinery
  Operating lease
commitments
  As of
December 31, 2009, 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 31,2010
                      
                      $
                      38,2292011
                      
                      
                      35,1342012
                      
                      
                      35,1342013
                      
                      
                      35,1342014
                      
                      
                      35,1342015
      and thereafter
                      
                      
                      161,030Total
      Operating Lease Commitments
                      
                      $
                      339,795
  F-28
 
 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.
 
 Research and development
contracts
 
 The
Company entered into two technology cooperation agreements with School of
Chemistry and Chemical Engineering of Shaanxi Normal University (“Normal
University”) and School of Energy and Power Engineering of Xi’an Jiao Tong
University (“Jiao Tong University”) in 2009.  Normal University agreed
to develop two types of CWSF additive for the Company prior to March 31, 2012;
the total amount of development fee is approximately $292,900.  The
Company entrusted Jiao Tong University to develop three types of special CWSF
prior to September 30, 2010; the total amount of development fee is
approximately $439,300. Both agreements indicate that any intellectual property
arising from such developments shall belong to us.  As of December 31,
2009, no research or development activity had occurred.
 
 16 SUBSEQUENT
EVENT
 
 As of December 31, 2009, the Company had outstanding
$10,217,000 of its 10% Senior Secured Convertible
Notes.   Subsequent to December 31, 2009, and by March 5, 2010,
all the convertible notes holders converted these notes into 53,773,684 shares
of common stock of the Company pursuant to the original Securities Purchase
Agreement and Form of Note.
 
 As of
December 31, 2009, the Company had reflected a valuation discount of $8,601,975
against these convertible notes payable, and had recorded a derivative liability
of $28,404,181 relating to the fair value of the conversion feature of these
notes.    The unamortized portion of the valuation discount
will be treated as additional interest expense on the date of conversion, and
the fair value of the derivative liability will be recognized as a gain on
extinguishment on the date of conversion.
 
 The
effects of the above conversion and extinguishment of the derivative liability
on the recorded assets, liabilities and shareholders equity of the Company as if
the conversion had occurred on December 31, 2009 are reflected in the “pro
forma” column in the accompanying balance sheet.
  F-29




ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES




None.


38




ITEM 8A(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,
2009, 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”.





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, 2009. 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, 2009, 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,
2009, our management concluded that our internal control over financial
reporting was subject to the following material weaknesses:





1.
            Although
      during 2009 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, we still lack expertise in US GAAP and
      taxation.





2.
            As a small company, we do not
      have sufficient personnel to set up adequate review function at each
      reporting level.




39




3. As of
December 31, 2009, we have not kept a complete set of ledgers of the
parent, shell company. The parent company has no physical operation and has been
mainly functioning as a pass-through legal entity for financing subsidiary
companies that are operating overseas.





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.





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, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





ITEM
8B. OTHER INFORMATION





None.





PART III




ITEM 9. 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.




Directors and Executive Officers
            
            Position/Title
            
            Age
            
            Director SinceBaowen
      Ren
            
            Chief Executive Officer,
      President and Chairman of the Board
            
            40
            
            October
      2006Wen
      (Wendy) Fu
            
            Chief
      Financial Officer
            
            41Hon
      Wan Chan
            
            Vice
      President of Finance
            
            48Wenjie
      Zhang (1)(2)(3)
            
            Director
            
            37
            
            October
      2006Peng
      Zhou
            
            Director
            
            41
            
            October
      2006Albert
      Ching-Hwa Pu (1)(2)(3)
            
            Director
            
            51
            
            November
      24, 2009Zidong
      Cao (1)
            
            Director
            
            59
            
            December
      15, 2008Yong
      Li (2)(3)
            
            Director
            
            42
            
            August
      3, 2009




40




(1)
Serves as a member of the Audit Committee.


(2)
Serves as a member of the Compensation Committee.


(3)
Serves as a member of the Nominating and Corporate Governance
Committee.




Baowen Ren was appointed as
the Chief Executive Officer of the Company on October 2006.  From
January 2003 to December 2009, Mr. Ren served as the Chairman of the Board and
Chief Executive Officer of Suo’ang BST.  He had been the Chief
Executive Officer of Shaanxi Lanchao Group Clothe Group Co. Ltd. from April 1995
to June 2003. He 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 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 CWSF business. In 1992, Mr. Ren
graduated from Shaanxi Normal University in Chinese Language and
Literature.




Wen (Wendy) Fuwas appointed
as the Chief Financial Officer on February 12, 2010. Prior to joining the
Company as its Chief Financial Officer, Ms. Fu served as the Chief Financial
Officer of China Shenghuo Pharmaceutical Holdings Inc., a NYSE-AMEX listed
company from September 2008 to August 2009. From August 2007 to March 2008, Ms.
Fu served as VP-Finance of Shengdatech, Inc., a China based NASDAQ listed
company and chemical manufacturer in China. From December 2005 to June 2007, Ms.
Fu worked for Deloitte & Touche, LLP (USA), a Big-Four accounting firm, as a
Senior Consultant. Ms. Fu served as Assistant Finance Controller at Wal-Mart
China, a subsidiary of Wal-Mart Inc., a Fortune 500 company, listed on the New
York Stock Exchange from May 1999 to May 2004. From 1997 to 1999, Ms. Fu was the
Regional Finance Manager at Asia Pulp & Paper (APP) Co., Ltd., the second
largest paper company in Asia, listed on New York Stock Exchange. In 1989, Ms.
Fu graduated from Wuhan Jianghan University in International Trade and in 2005
she obtained her Masters in Professional Accounting from the University of Texas
at Austin. Ms. Fu has also been a CPA since 2007.




Hon Wan Chanwas appointed as
the Vice President of Finance on February 12, 2010. He served as the Chief
Financial Officer of the Company from December 15, 2008 to February 12, 2010.
Mr. Chan was a principal of CC Alliance CPA & Co from March 2008 to December
2008. 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 Accounting 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 was appointed as a
director of the Company on October 2006. He served as the Chief Operating
Officer of the Company from October 2006 to December 2009. He served as the
General Manager of Suo’ang BST from January 2005 to December 15, 2009. From
April 2000 to December 2004, Mr. Zhou served as the General Manger of Shaanxi
Pengyuan Technology Co., Ltd.  He was a credit analyst of Hangzhong
branch of Industrial and Commercial Bank of China from September 1992 to
February 1999.  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. Mr. Zhou
graduated from the Statistics Department of Xi’an Jiao Tong University in
1992.




41




Wenjie Zhang was appointed as
a director of the Company on October 2006. He has been the General Manager of
Hanzhong Huaxia Real Estate Co., Ltd. since 2005. Mr. Zhang was the Manager of
Engineering Department of Hanzhong International Trade Co., Ltd. from January
2002 to December 2005. From July 1998 to December 2001, Mr. Zhang was the Sales
Manager at Hangzong Jingyi Wood Co., Ltd.  Mr. Zhang graduated with a
degree in administration from the Xi’an Science Institution in 1995. Mr. Zhang
graduated with a college diploma in Business and Trade from Shaanxi Hanzhong
Business College in 1997.




Albert Ching-Hwa Pu joined the
Company as a director on November 24, 2009 and is the chairman of our audit
committee and member of our compensation and nominating committees.  Mr. Pu
has served as the Chief Financial Officer of China Integrated Energy Inc., a
U.S. publicly traded energy company since February 2009. From February 2005 to
January 2009, Mr. Pu was the Global Controller of Amphenol Corporation
Industrial Operations, a division of Amphenol Corporation (NYSE: APH), a U.S.
based multi-national manufacturing company specializing in interconnect systems,
where he managed and directed finance teams of China and North American
operations in all financial activities and policies implementations. From 2004
through 2005, Mr. Pu was the director of finance of Endicott Interconnect
Technologies, Inc., a U.S. based company specializing in high-end interconnect
technologies for industrial and military applications.  Mr. Pu
received a B.S. in Accounting from the State University of New York, Institute
of Technology in 1990. He is a New York State Certified Public
Accountant.




Zidong Cao joined the Company
as a director 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 Jiao Tong
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
obtained a Ph.D. degree from the University’s School of Energy and Power
Engineering in 1985, focusing on boiler research.




Yong Li was appointed as a
director of the Company in March 3, 2009. Mr. Li has been a partner at
Investwide LLC and Investwide Capital LLC since January 2005, where he oversees
investment strategies. He is also in charge of risk management of Midway Group
LP as its Managing Director, and has been with the firm since February 2003. Mr.
Li graduated from China’s Sichuan University in 1987 with a B.S. in computer
science. He also received a M.S. in mathematics and computer science in 1989 and
a Ph.D. degree in Operations Research in 1992 from Pennsylvania State
University.





Board
Leadership Structure




The Board
of Directors believes that Mr. Ren’s service as both Chairman of the Board and
Chief Executive Officer is in the best interest of the Company and its
stockholders. Mr. Ren possesses detailed and in-depth knowledge of the issues,
opportunities and challenges facing the Company and its business and is thus
best positioned to develop agendas that ensure that the Board’s time and
attention are focused on the most critical matters. His combined role enables
decisive leadership, ensures clear accountability, and enhances the Company’s
ability to communicate its message and strategy clearly and consistently to the
Company’s shareholders, employees, customers and suppliers.




42





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 ten 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, 2009, our directors and executive officers
complied with Section 16(a) filing requirements applicable to them, except
that:





Mr.
Yong Li did not timely file a Form 4 reflecting the conversion of
$750,000 Senior Secured Convertible Note of the Company and obtaining
3,947,368 and 11,228,071 shares of common stock of the Company on October 29,
2009 and March 5, 2010, respectively. Mr. Li subsequently filed a Form 4 on
April 1, 2010 reflecting the exercise of his Senior Secured Convertible
Note.





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 at www.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.




43





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.





Board
of Directors





Director
Qualifications





We seek
directors with established strong professional reputations and experience in
areas relevant to the strategy and operations of our businesses.  We
also seek directors who possess the qualities of integrity and candor, who have
strong analytical skills and who are willing to engage management and each other
in a constructive and collaborative fashion.  We also seek directors
who have the ability and commitment to devote significant time and energy to
service on the Board and its committees.  We believe that all of our
directors meet the foregoing qualifications.




Certain
of our directors have strong technological backgrounds that are relevant to our
industry.  Certain of our directors have backgrounds in accounting,
public company reporting, compliance and management.  We believe that
the backgrounds and skills of our directors bring a diverse range of
perspectives to the Board.




Meetings
of the Board of Directors and Committees





During
the fiscal year ended December 31, 2009, the Board of Directors did not meet but
took action by unanimous written consent four (4) times.   The
Audit Committee did not meet but took action by unanimous written consent four
(4) times.  The Compensation Committee and the Nominating and
Corporate Governance Committee did not meet and did not take any action by
unanimous written consent during the fiscal year ended December 31,
2009.  Each director is expected to attend meetings of our Board of
Directors and meetings of committees of our Board of Directors of which he is a
member, and to spend the time necessary to properly discharge his respective
duties and responsibilities.




Board
Committees




The Board
of Directors has an audit committee, a nominating committee and a compensation
committee. The Board created the three committees and adopted charters for all
of such committees on December 15, 2008. The Board has determined that Albert
Ching-Hwa Pu, Wenjie Zhang, Zidong Cao and Yong Li are independent
directors within the meaning of Nasdaq Listing Rule 5605(a)(2). Accordingly, all
of the members of the Audit Committee are independent within the meaning of
Nasdaq Listing Rule 5605(a)(2).




44




Nominating
and Corporate Governance Committee




The
purpose of the Nominating and Corporate Governance Committee is to assist the
Board of Directors in identifying qualified individuals to become members of our
Board of Directors, in determining the composition of the Board of Directors and
in monitoring the process to assess Board effectiveness. Each of Albert
Ching-Hwa Pu, Wenjie Zhang and Yong Li are members of the Nominating and
Corporate Governance Committee. On November 24, 2009, Mr. Pu was appointed to
serve as a member of the Nominating and Corporate Governance Committee to
replace Mr. Bennet P. Tchaikovsky, who voluntarily resigned from his position as
a director of the Company and as a result ceased to serve as a member of the
Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee operates under a written charter. Mr. Zhang is the Chairman
of Nominating Committee.




Compensation
Committee




The
compensation committee is responsible for overseeing and, as appropriate, making
recommendations to the Board regarding the annual salaries and other
compensation of the Company’s executive officers and general employees and other
policies, and for providing assistance and recommendations with respect to the
compensation policies and practices of the Company. Each of Albert Ching-Hwa Pu,
Wenjie Zhang and Yong Li are members of the Compensation Committee. On November
24, 2009, Mr. Pu was appointed to serve as a member of the Compensation
Committee to replace Mr. Bennet P. Tchaikovsky, who voluntarily resigned from
his position as a director of the Company and as a result ceased to serve as a
member of the Compensation Committee. The Compensation Committee operates under
a written charter. Mr. Zhang is the Chairman of Compensation
Committee.





Audit
Committee




Our Audit
Committee consists of Albert Ching-Hwa Pu, Wenjie Zhang and Zidong Cao, each of
whom is considered “independent” under Rule 5605(a)(2) of the NASDAQ Marketplace
Rules as determined by our Board of Directors. On November 24, 2009, Mr. Pu was
appointed to serve as the chairman of the audit committee to replace Mr. Bennet
P. Tchaikovsky, who voluntarily resigned from his position as a director of the
Company and as a result ceased to serve as a member of the Audit Committee. The
Audit Committee assists Board oversight of (i) the integrity of the Company’s
financial statements, (ii) the Company’s compliance with legal and regulatory
requirements, (iii) the independent auditor’s qualifications and independence,
and (iv) the performance of the Company’s internal audit function and
independent auditor, and prepares the report that the Securities and Exchange
Commission requires to be included in the Company’s annual proxy statement. The
audit committee operates under a written charter. Mr. Pu is the Chairman of our
audit committee.




The Board
of Directors determined that Mr. Pu possesses accounting or related financial
management experience that qualifies him as financially sophisticated within the
meaning of Rule 4350(d)(2)(A) of the Nasdaq Marketplace Rules and Section 803 of
the NYSE Amex Company Guide and that he is an “audit committee financial expert”
as defined by the rules and regulations of the SEC.





REPORT
OF THE AUDIT COMMITTEE




The role
of the Audit Committee is to assist the Board of Directors in its oversight of
the Company’s financial reporting process. As set forth in the Audit Committee
charter, management of the Company is responsible for the preparation,
presentation and integrity of the Company’s financial statements, accounting and
financial reporting principles and internal controls and procedures designed to
assure compliance with accounting standards and applicable laws and regulations.
The independent auditors are responsible for auditing the Company’s financial
statements and expressing an opinion as to their conformity with generally
accepted accounting principles.




45





In the performance of this
oversight function, the Audit Committee has reviewed and discussed the audited
financial statements for the fiscal year ended December 31, 2009 with
management, and has discussed with the independent auditors the matters required
to be discussed by Statement of Auditing Standards No. 61, Communication with
Audit Committee, as currently in effect. The Audit Committee has received the
written disclosures and the letter from the independent auditors required by
Independence Standards Board Standard No. 1, Independence Discussions with Audit
Committees, as currently in effect, and has discussed with the independent
auditors the independent auditors’ independence; and based on the review and
discussions referred above, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2009 for
filing with the SEC.




The
members of the Audit Committee are not professionally engaged in the practice of
auditing or accounting, are not experts in the fields of accounting or auditing,
including in respect of auditor independence. Members of the Committee rely
without independent verification on the information provided to them and on the
representations made by management and the independent accountants. Accordingly,
the Audit Committee’s oversight does not provide an independent basis to
determine that management has maintained appropriate accounting and financial
reporting principles or appropriate internal control and procedures designed to
assure compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committee’s consideration and discussions referred to
above do not assure that the audit of the Company’s financial statements has
been carried out in accordance with generally accepted accounting principles or
that the Company’s auditors are in fact “independent”.




Based
upon the reports, review and discussions described in this report, and subject
to the limitations on the role and responsibilities of the Committee referred to
above and in the Charter, the Committee recommended to the Board that the
audited financial statements be included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2009, be filed with the Securities and
Exchange Commission.




THE
AUDIT COMMITTEE




Albert
Ching-Hwa Pu (Chairman)


Wenjie
Zhang


Zidong
Cao




ITEM 10. EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis





We strive
to provide our named executive officers with a competitive base salary that is
in line with their roles and responsibilities. We believe that other peer
companies in China which are listed on U.S. stock markets would be the most
appropriate to use for salary comparison purposes. However, none of our direct
competitors are public companies in the U.S. We believe that the compensation of
our executive officers is appropriate.





The base
salary level is established and reviewed based on the level of responsibilities,
the experience and tenure of the individual and the current and potential
contributions of the individual. The base salary is compared to similar
positions within comparable peer companies and with consideration of the
executive’s relative experience in his or her position. Based on an evaluation
of available information with respect to the base salaries of executives of our
competitors located in China, the base salary paid to our named executive
officers is in line with our domestic competitors Base salaries are reviewed
periodically and at the time of promotion or other changes in
responsibilities.




46





Pursuant
to our employment agreement with Hon Wan Chan, our former CFO, we granted Mr.
Chan stock options to purchase 100,000 shares of our common
stock.  However we have not adopted an equity incentive
plan.





We will
consider other elements of compensation, including without limitation, short-
and long-term compensation, cash and non-cash, and other equity-based
compensation. We believe our current compensation package is comparable to our
peers in the industry and is aimed to retain and attract talented
individuals.





Summary
of Compensation




The following summary compensation table indicates the
cash and non-cash compensation earned for years ended December 31, 2009 and
2008 by our Chief Executive Officer and Chief Financial Officer and each of our
other three highest paid executives, whose total compensation exceeded $100,000
(if any) for the years ended December 31, 2009 and 2008.


SUMMARY COMPENSATION TABLEName and
                                                                Principal
                                                                Position
                                                              
                                                              Year
                                                              
                                                              Salary
                                                                ($)(1)
                                                              
                                                              Bonus
                                                                ($)
                                                              
                                                              Stock
                                                                Awards
                                                                ( $)
                                                              
                                                              Option
                                                                Awards
                                                                ($)
                                                              
                                                              Non-Equity
                                                                Incentive Plan
                                                                Compensation
                                                                ($)
                                                              
                                                              Nonqualified
                                                                Deferred
                                                                Compensation
                                                                Earnings
                                                                ($)
                                                              
                                                              All Other
                                                                Compensation
                                                                ( $)
                                                              
                                                              Total
                                                                ($)Baowen
      Ren,
                                                              
                                                              2009
                                                              
                                                              
                                                              17,518
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              17,518CEO
                                                              
                                                              2008
                                                              
                                                              
                                                              15,282
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              15,282Hon
      Wan Chan
                                                              
                                                              2009
                                                              
                                                              
                                                              26,277
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              26,277(CFO)(2)
                                                              
                                                              2008
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              8,000
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              
                                                              -0-
                                                              
                                                              8,000
 
 (1)
              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 6.85RMB to one U.S. dollar for 2009,
      7.0671 RMB to one U.S. dollar for 2008 and 7.58 RMB to one U.S. dollar for
      2007.
 
  (2)
              Mr.
      Chan served as our CFO from December 15, 2008 to February 12,
      2010.


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.




47




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 RMB180,000. Mr. Chan was
also entitled to reimbursement of reasonable business expenses incurred in
connection with his employment.




Concurrent
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 was
exercisable for a period of two years from the grant date, unless Mr. Chan’s
employment was terminated. Mr. Chan resigned from his position as the Chief
Executive Officer of the Company, effective February 12, 2010. Mr. Chan exercise
his options in March 2009. Mr. Chan remains with the Company and is serving as
the Vice President of Finance.




Employment
Agreement with Wen (Wendy) Fu




On
February 12, 2010, we entered into an employment agreement with Ms. Fu for a
term of one year with a monthly salary of $5,000. Under the terms of the
employment agreement, the Company also agreed to grant her an option to purchase
shares of the Company’s common stock pursuant to a non-qualified stock option
agreement. Ms. Fu was also entitled to reimbursement of reasonable business
expenses incurred in connection with her employment. The Company may terminate
the employment agreement for cause or if Ms. Fu becomes disabled or dies. The
employment agreement may also be terminated by the Company or Ms. Fu upon a
30-day written notice. The employment agreement contains certain restrictive
covenants applicable during her employment and thereafter preventing both
competition with the Company and disclosure of the Company’s confidential
information.




Concurrently
with the employment agreement, we granted Ms. Fu 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 Ms Fu.’s
employment is terminated. If the termination arises from Ms. Fu’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 Ms. Fu’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 Ms. Fu acquires from exercise of the option, the
Company has a 30-day right of first refusal if Ms. Fu proposes to dispose them
in any manner.




Outstanding
Equity Awards at Fiscal Year-End




With the
exception of Mr. Hon Wan Chan, our former 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, 2009.
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 fair value of the option granted to Mr. Chan, $8,000, was charged
to compensation at the grant date.


48




Outstanding
Equity Awards at Fiscal Year Ended




December
31, 2009




Option Awards
                                      
                                      Stock AwardsName
                                      
                                      Number of
                                        Securities
                                        Underlying
                                        Unexercised
                                        Options
                                        Exercisable
                                      
                                      Number of
                                        Securities
                                        Underlying
                                        Unexercised
                                        Options
                                        Unexercisable
                                      
                                      Equity
                                        Incentive
                                        Plan
                                        Awards:
                                        Number
                                        of
                                        Securities
                                        Underlying
                                        Unexercised
                                        Unearned
                                        Options
                                      
                                      Option
                                        Exercise
                                        Price
                                        ($)
                                      
                                      Option
                                        Expiration
                                        Date
                                      
                                      Number
                                        of
                                        Shares or
                                        Units of
                                        Stock
                                        That
                                        Have Not
                                        Vested
                                      
                                      Market
                                        Value
                                        of Shares
                                        or
                                        Units of
                                        Stock
                                        ThatHave
                                        Not
                                        Vested
                                        ($)
                                      
                                      Equity
                                        Incentive
                                        Plan
                                        Awards:
                                        Number of
                                        Unearned
                                        Shares,
                                        Units or
                                        Other
                                        Rights
                                        That
                                        Have Not
                                        Vested
                                      
                                      
                                      Equity
                                        Incentive
                                        Plan
                                        Awards:
                                        Market or
                                        Payout
                                        Value of
                                        Unearned
                                        Shares,
                                        Units or
                                        Other
                                        Rights
                                        That Have
                                        Not
                                        Vested
                                        ($)Hon
      Wan Chan
                                      
                                      100,000
                                      
                                      0
                                      
                                      0
                                      
                                      $
                                      0.24
                                      
                                      12/15/2010
                                      
                                      
                                      
                                      –
                                      
                                      –
                                      
                                      
                                      –





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,
2009.





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)
                        
                        2009
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-Peng
      Zhou (1)
                        
                        2009
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-Wenjie
      Zhang (1)
                        
                        2009
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-Bennet
      Tchaikovsky (2)
                        
                        2009
                        
                        35,750
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        35,750Zidong
      Cao (3)
                        
                        2009
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-Albert
      China-Hwa Pu (4)
                        
                        2009
                        
                        3,250
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        3,250Yong
      Li
                        
                        2009
                        
                        13,000
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        -0-
                        
                        
                        -0-
                        
                        13,000




49







(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 was 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. Mr. Tchaikovsky resigned from his
      position as a director of the Company and as a result ceased to be the
      chairman of the audit committee on November 24,
    2009.





(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.





(4)
            Mr.
      Pu was appointed to our board of directors effective November 24, 2009,
      and is entitled to receive annual compensation of $39,000for his services
      as a director, as well as a 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, 2009.





Director
Agreements





In
connection with the appointments of Mr. Tchaikovsky, Dr. Cao and Mr. Pu 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. Mr. Tchaikovsky resigned
from his position as a director of the Company and as a result ceased to be the
chairman of the audit committee on November 24, 2009.





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.





Under the
director offer letter with Mr. Pu, he is entitled to receive annual compensation
of $39,000 for his services rendered as a director, as well as the chairman of
the audit committee and member of the compensation committee and nominating
committee. We also agree to include Mr. Pu as an insured under our directors and
officers insurance, and will reimburse Mr. Pu for reasonable expenses incurred
in connection with the performance of duties as a director of the Company,
including travel expenses.


50


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
11. 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 23, 2010, 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 23,
2010 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.




51




Name and Address of Beneficial Owners (1)
              
              Amount of
                  Beneficial
                  Ownership(2)(3)
              
              
              Percent of ClassBaowen
      Ren, Director and Chief Executive Officer
              
              
              31,149,594
              
              
              
              18.82
              %Wen
      (Wendy) Fu, Chief Financial Officer (4)
              
              
              100,000
              
              
              
              *Hon
      Wan Chan, Vice President of Finance
              
              
              100,000
              
              
              
              *Peng
      Zhou, Director
              
              
              7,500,000
              
              
              
              4.53
              %Wenjie
      Zhang, Director
              
              
              202
              
              
              
              *Albert
      Ching-Hwa Pu, Director
              
              
              -0-
              
              
              
              0
              %Zidong
      Cao, Director
              
              
              -0-
              
              
              
              0
              %Yong
      Li (5)
              
              
              15,175,439
              
              
              
              9.17
              %All
      officers and directors as a group  (8 total)
              
              
              85,174,829
              
              
              
              51.4
              %







* 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)
            As
      of March 23, 2010 there were 165,462,494shares
      of our common stock issued and outstanding. In determining beneficial
      ownership of our common stock as of that date, the number of shares shown
      includes shares of our common stock which may be acquired within 60 days
      of that date on exercise of warrants or options or conversion of
      convertible securities. Unless otherwise stated, each beneficial owner has
      sole power to vote and dispose of its shares. None of the persons named in
      the table own any shares of preferred stock or
  warrants.




(3)
            Includes
      31,452,631 shares underlying 10% senior secured convertible notes and
      warrants which are convertible and exercisable within 60 days of March 20,
      2010.




(4)
              Includes
      options to acquire 100,000 shares of common stock exercisable on
      February 12, 2010.





(5)
            Investwide
      LLC and Investwide Capital LLC share common control and they are deemed
      affiliates of each other. Mr. Li is the natural person who has voting
      power and the power to sell, transfer or otherwise dispose of the notes
      and warrants, as well as the underlying shares of common stock
      thereto.





Compensation
Committee Interlocks and Insider Participation




Members
of our Compensation Committee of the Board of Directors were Albert China-Hwa
Pu, Wenjie Zhang and Yong Li. No member of our Compensation Committee was, or
has been, an officer or employee of the Company or any of our
subsidiaries.




No member
of the Compensation Committee has a relationship that would constitute an
interlocking relationship with executive officers or directors of the Company or
another entity.




Compensation
Committee Report




The goal
of the Company’s executive compensation policy is to ensure that an appropriate
relationship exists between executive compensation and the creation of
stockholder value, while at the same time attracting, motivating and retaining
experienced executive officers.


52





The
Compensation Committee has reviewed and discussed the discussion and analysis of
the Company’s compensation which appears above with management, and, based on
such review and discussion, the Compensation Committee recommended to the
Company’s Board of Directors that the above disclosure be included in this
Annual Report on Form 10-K for the year ended December 31, 2009.




The
members of the Compensation Committee are:




Wenjie
Zhang, Chairman


Albert
Ching-Hwa Pu


Yong
Li





ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





There
have been no transactions during 2009, or any currently proposed transaction, or
series of similar transactions, to which the Company was or is to be a party, in
which the amount involved exceeds $120,000 and in which any current or former
director of officer of the Company, any 5% or greater shareholder of the Company
or any member of the immediate family of any such persons had, or will have, a
direct or indirect material interest other than as disclosed below.




Acquisition
of minority interest




On June
30, 2008, we 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 our 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 former 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.




Procedures
for Approval of Related Party Transactions




Our board
of directors is charged with reviewing and approving all potential related party
transactions.  All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other procedures for
review, or standards for approval, of such transactions, but instead review them
on a case-by-case basis.





Director
Independence




The Board
has determined that Albert Ching-Hwa Pu, Wenjie Zhang, Zidong Cao and Yong
Li are independent directors within the meaning of Nasdaq Listing Rule
5605(a)(2). Accordingly, all of the members of the Audit Committee are
independent within the meaning of Nasdaq Listing Rule
5605(a)(2).


53


ITEM
13. 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, AGCA (formerly known as Yu & Associates CPA
Corporation),.  AGCA 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, 2009, was $262,890. 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 AGCA 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.





Audited-Related
Fees





For the
year ended December 31, 2009, 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, 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”.





Tax
Fees





For the
year ended December 31, 2009, the Company incurred no fees from Weinberg for
services for tax compliance, tax advice and tax planning work.





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.





All
Other Fees





For the
year ended December 31, 2009 and December 31, 2008, there were no other fees
billed by either AGCA 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 services by the independent
auditors as required by applicable law and the rules of any securities exchange
upon which our securities may be listed.


54


ITEM 14.   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 AuditorsConsolidated
      Balance Sheets at December 31, 2009 and 2008Consolidated
      Statements of Operations and Comprehensive Income for the Years Ended
      December 31, 2009 and 2008Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2009
      and 2008Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009 and
      2008Notes
      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)4.5
                
                Form
      of 10% Senior Secured Convertible Note issued to the Purchasers
      (14)4.6
                
                Form
      of Warrant issued to the Purchasers (14)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)


55





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)10.9
                
                Amendment
      to Consulting Services Agreement by and between Hangson and Shaanxi
      Suo’ang Biological Science & Technology Co., Ltd. (“Suo’ang BST”)
      dated June 30, 2009 (14)10.10
                
                Amendment
      to Equity Pledge Agreement by and among Hangson, Suo’ang BST and Suo’ang
      BST’s Majority Stockholders dated June 30, 2009 (14)10.11
                
                Agreement
      to Transfer of Operating Agreement among Hangson, Suoke SCE, Suo’ang BST,
      Suo’ang BST’s Majority Stockholders and Sino Clean dated June 30, 2009
      (14)10.12
                
                Designation
      Agreement among Hangson, Suoke SCE, Suo’ang BST, Suo’ang BST’s Majority
      Stockholders and Sino Clean dated June 30, 2009 (14)10.13
                
                Agreement
      to Transfer of Option Agreement among Hangson, Suoke SCE, Suo’ang BST,
      Suo’ang BST’s Majority Stockholders and Sino Clean dated June 30, 2009
      (14)10.14
                
                Form
      of Securities Purchase Agreement, dated as of July 1, 2009 by and among
      the Company and certain Purchasers (15)10.15
                
                Form
      of Amendment Agreement to the Securities Purchase Agreement by and among
      the Company and certain Purchasers dated as of August 2009.
      (16)10.16
                
                Land
      Lease Contract by and between No. 3 Company of Shenyang Lumber General
      Corporationand
      Shaanxi Suo’ang New Energy Enterprise Co,. Ltd., dated July 21, 2009
      *10.17
                
                Employment
      Agreement by and between Registrant and Hon Wan Chan dated
      December 15, 2008 (17)10.18
                
                Employment
      Agreement by and between Registrant and Wen (Wendy) Fu dated February 12,
      2010 (18)14
                
                Code
      of Business Conduct and Ethics (11)21
                
                List
      of Subsidiaries *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)


56





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)99.10
              
              Agreement
      to Terminate the Consulting Service Agreement by and between Tongchuan
      Suoke Clean Energy Co., Ltd. and Shaanxi Suo’ang Biological Science &
      Technology Co., Ltd. dated as of December 31, 2009 (19)99.11
              
              Agreement
      to Terminate the Equity Pledge Agreement by and between Tongchuan Suoke
      Clean Energy Co., Ltd., Shaanxi Suo’ang Biological Science &
      Technology Co., Ltd. and certain shareholders listed thereto, dated as of
      December 31, 2009 (19)99.12
              
              Agreement
      to Terminate the Operating Agreement by and between Tongchuan Suoke Clean
      Energy Co., Ltd., Shaanxi Suo’ang Biological Science & Technology Co.,
      Ltd. and certain shareholders listed thereto, dated as of December 31,
      2009 (19)99.13
              
              Agreement
      to Terminate the Voting Rights Proxy Agreement by and between Tongchuan
      Suoke Clean Energy Co., Ltd., Shaanxi Suo’ang Biological Science &
      Technology Co., Ltd. and certain shareholders listed thereto, dated as of
      December 31, 2009 (19)99.14
              
              Agreement
      to Terminate the Option Agreement by and between Tongchuan Suoke Clean
      Energy Co., Ltd., Shaanxi Suo’ang Biological Science & Technology Co.,
      Ltd. and certain shareholders listed thereto, dated as of December 31,
      2009 (19)








*
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.


57





(13)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on July 8, 2009 and incorporated herein by
    reference.(14)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on July 7, 2009 and incorporated herein by
    reference.(15)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on July 8, 2009 and incorporated herein by
    reference.(16)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on August 20, 2009 and incorporated herein by
      reference.(17)
              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.(18)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on February 19, 2010 and incorporated herein by
      reference.(19)
              Filed
      as an Exhibit to the Registrant’s Current Report on Form 8-K filed with
      the SEC on January 7, 2010 and incorporated herein by
      reference.


58





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.





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.





Dated:
      April
      9, 2010
                    
                    SINO
      CLEAN ENERGY INC.By:
                    /s/
      Baowen RenBaowen
      Ren
                      Chief
      Executive
Officer





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.





Name and Title
                
                Date/s/ Baowen
      Ren
                
                April
      9, 2010Baowen
      Ren
                  Chief
      Executive Officer and Director
                  (principal
      executive officer)/s/
      Wen (Wendy) Fu
                
                April
      9, 2010Wen
      (Wendy) Fu
                  Chief
      Financial Officer/s/
      Wenjie Zhang
                
                April
      9, 2010Wenjie
      Zhang
                  Director/s/
      Peng Zhou
                
                April
      9, 2010Peng
      Zhou
                  Director/s/
      Albert Ching-Hwa Pu
                
                April
      9, 2010Albert
      Ching-Hwa Pu
                  Director/s/
      Zidong Cao
                
                April
      9, 2010Zidong
      Cao
                  Director/s/ Yong
      Li
                
                April
      9, 2010Yong
      Li
                  Director




59