U.S.
Securities and Exchange Commission


Washington,
DC 20549





Form
10-K





x ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
fiscal year ended September 30, 2009





o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition
period from ________ to _________





Commission
File Number 000-30017





Sinoenergy
Corporation


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





Nevada
            
            84-1491682(State
      or other jurisdiction of incorporation)
            
            (I.R.S.
      Employer Identification No.)








1603-1604,
Tower B Fortune Centre Ao City, Beiyuan Road, Chaoyang District,


Beijing
China, 100107


(Address
of principal executive offices)


Issuer’s
telephone number: 011 86-10-84928149





Securities
registered pursuant to Section 12(b) of the Exchange Act:





Title of
Each Class: Common Stock, $ 0.001 par value.





Securities
registered pursuant to Section 12(g) of the Exchange Act: None.





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes oNo x





Indicated
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes oNo x





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
past 90 days. Yes xNo o





Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by referenced 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,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
Accelerated Filer oAccelerated Filer o  
Non-Accelerated Filer o   Smaller
Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x





As of
December 23, 2009, there were 15,922,391 shares of Common Stock
outstanding.








Documents
incorporated by reference





Part
III (Items 10, 11, 12, 13 and 14) is incorporated by reference from the Issuer’s
definitive proxy statement to be filed pursuant to Regulation 14A.





1





INDEX








PagePART
      IITEM
      1.
            Business
            4ITEM
      1A.
            Risk
      Factors
            10ITEM
      1B.
            Unresolved Staff
      Comments
            17ITEM
      2.
            Properties
            17ITEM
      3.
            Legal
      Proceedings
            18ITEM
      4.
            Submission of Matters to a Vote
      of Security Holders
            19PART
      IIITEM
      5.
            Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
            19ITEM
      6.
            Selected Financial
      Data
            20ITEM
      7.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            20ITEM
      7A
            Quantitativeand Qualitative Disclosure About Market
    Risk
            31ITEM
      8.
            Financial Statements and
      Supplemental Data
            31ITEM
      9.
            Changes in and Disagreements with
      Accountants on Accounting and Financial
      Disclosure
            31ITEM
      9A.
            Controls and
      Procedures
            31ITEM
      9B.
            Other
      Information
            32PART
      III
            Incorporated by reference from definitive proxy
      statement
            32PART
      IVITEM
      15.
            Exhibits and Financial Statement
      Schedules
            32





SIGNATURES


FINANCIAL
STATEMENTS






2








Forward-Looking
Statements





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





Availability
of SEC Filings





We file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy and information statements and amendments to reports filed or
furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended. The public may read and copy these materials at the Securities
and Exchange Commission’s (“SEC”) Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding the Company and other
companies that file materials with the SEC electronically. These reports are
also available on our website at http://www.sinoenergycorporation.com/c2465/c2721/default.html.





Currency
References





Our
business is conducted in China, using RMB, the currency of China, and our
financial statements are presented in United States dollars.  In this
annual report, we refer to obligations, commitments and liabilities, as well as
items from our financial statements in United States dollars.  These
dollar references are based on the exchange rate of RMB to United States
dollars, determined as of a specific date.  Changes in the exchange
rate will affect the amount of our obligations and the value of our assets in
terms of United States dollars which may result in an increase or decrease in
the amount of our obligations (expressed in dollars) and the value of our
assets, including accounts receivable (expressed in dollars).  Our
balance sheet accounts are translated using the closing exchange rate in effect
at the balance sheet date and operating accounts are translated using the
average exchange rate prevailing during the year. Equity accounts are
translated using the historical rate as incurred.





3





PART
I





ITEM 1.   BUSINESS.





Summary





We are
engaged in four operating segments:





•            The
manufacture of customized pressure containers and compressed natural gas (CNG)
facilities and equipment, which has until recently been our principal
business.  In this segment, we design and manufacture pressure
containers which are used in a number of industries, including the petroleum and
chemical, metallurgy and electricity generation, and the brewing industries
using technology acquired from a former related party.





•            The
manufacture of CNG storage and transportation products and the construction of
CNG stations for third parties. In this segment we manufacture and install CNG
trailers, which are used to transport CNG to a filling station, CNG deposit
systems for use in CNG gas stations, and other products used in the CNG
business.   We also design and construct CNG stations and install
CNG station equipment and related systems.





•            The
operation of CNG filling stations, which involves the design, construction and
operation of CNG stations.  As of December 10, 2009, we were operating
twenty-one CNG stations, of which sixteen are located in Wuhan, two in
Pingdingshan and three in Xuancheng.  An additional four stations are
in the final stages of construction located in Wuhan, and fourwere in the preliminary
planning stage in Wuhan.





•            Vehicle
fuel conversion equipment, which involves the manufacture of kits which are used
to enable a gasoline-powered vehicle to operate using CNG.





CNG is
gas, principally methane, which has been compressed. Natural gas is compressed
during transportation and storage and, thus, requires pressurized
containers.





Organization





We are a
Nevada corporation organized in 1999 under the name Franklyn Resources III, Inc.
On September 28, 2006, our corporate name was changed to Sinoenergy Corporation.
On June 2, 2006, we acquired the stock of Sinoenergy Holding Limited, a British
Virgin Islands corporation. We and Sinoenergy Holding are holding companies and
our business is operated by our subsidiaries.  At the time of our
acquisition of Sinoenergy Holding, we were a blank check corporation which was
not engaged in any business activities.  Sinoenergy Holding Limited
was the sole stockholder Qingdao Sinogas General Machinery Limited Corporation
(“Sinogas”), a wholly foreign-owned enterprise (“WFOE”) registered under laws of
the People’s Republic of China (“China” or the “PRC”). Sinoenergy Holding had no
business other than its ownership of Sinogas. As a result of this transaction,
Sinoenergy Holding and its subsidiary, Sinogas, became subsidiaries of the
Company and the business of Sinogas became the business of the Company. The
transaction was treated as a reverse acquisition, with Sinogas being treated as
the acquiring party for accounting purposes.





During
2008, we sold a 24.95% interest in Sinogas to third parties.  Sinogas
operates the customized pressure container and CNG station facilities and
construction and owns 75% of Jiaxing Lixun, the subsidiary that operates the
vehicle conversion kit segment.  The only segment that is wholly-owned
by us is the CNG station operation.  During
2009, in conjunction with a long-term strategy offurther
developing these operating segments and exploiting growthpotential,
we transferred our interest in Qingdao Sinoenergy to Sinogas.The
transaction resulted in a significant loss during fiscal year
2009. All of
our operations are conducted in China.  Our executive offices are
located at 1603-1604, Tower B Fortune Centre Ao City, Beiyuan Road, Chaoyang
District, Beijing China, 100107, telephone 011-86-10-84928149.  Our
website is located at www. Sinoenergycorporation.com. Information on our website
and any other website does not constitute a portion of this annual
report.





References
to “we,” “us,” “our” and words of like import refer to Sinoenergy Corporation
and its subsidiaries.  The following table sets forth information as
to our subsidiaries and the equity ownership of each subsidiary at September 30,
2009.




4




Company
            
            Ownership
      %
            
            Business
      activitiesSinoenergy
      Holding Limited
            
            100%
            
            Holding
      companyQingdao
      Sinogas General
                Machinery
      Limited Corporation (“Sinogas”)
            
            75.05%
            
            Production
      of compressed natural gas (CNG) facilities, technical consulting in CNG
      filling station construction, manufacturing of CNG vehicle conversion
      kitQingdao
      Sinogas Yuhan
                Chemical
      Equipment Company Limited (“Yuhan”)
            
            81%*
            
            Manufacturing
      of customized pressure containersWuhan
      Sinoenergy Gas Company Limited (“Wuhan Sinoenergy”)
            
            90%
            
            Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsPingdingshan
      Sinoenergy Gas
                Company
      Limited (“Pingdingshan Sinoenergy”)
            
            90%
            
            Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsJiaxing
      Lixun Automotive
                Electronic
      Company Limited (“Lixun”)
            
            81%*
            
            Design
      and manufacturing of electric control devices for alternative
      fuelHubei
      Gather Energy
                Company
      Limited (“Hubei Gather”)
            
            80%
            
            Construction
      and operating of natural gas processing plantsXuancheng
      Sinoenergy
                Vehicle
      Gas Company Limited
                (“Xuancheng
      Sinoenegy”)
            
            100%
            
            Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsQingdao
      Jingrun General
                Machinery
      Company Limited (“Jingrun”)
            
            100%
            
            Design
      and manufacturing of petroleum refinery equipment and petroleum
      machineryQingdao
      Sinoenergy General
                Machinery
      Company Limited
                (“Qingdao
      Sinoenergy”)
            
            75.05%
            
            Manufacturing
      and installation of general machinery equipmentNanjing
      Sinoenergy Gas Company Limited (“Nanjing
Sinoenergy”)
            
            90%
            
            Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsQingdao
      Sinoenergy General Gas Company Limited (“Sinoenergy
      Gas”)
            
            90%**
            
            Construction
      and operating of CNG and LNG stations and the manufacturing and sales of
      automobile conversion kitsWuhan
      Sinoenergy Changfeng Gas Company Limited
            
            45.9%***
            
            Operation
      of CNG stations and the sales of automobile conversion
      kits





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


**        This
subsidiary is owned 40% by Sinogas and 60% by Sinoenergy.


***      This
subsidiary is owned 51% by Wuhan Sinoenergy, which is owned 90% by
Sinoenergy.





Reverse
Split





On July
9, 2008, we effected a one-for-two reverse split of the common stock and reduced
our authorized shares of common stock from 100,000,000 shares to 50,000,000
shares without changing the par value. All share and per share information in
this annual report retroactively reflects the reverse split for all periods
presented.





Merger
Agreement with Related Party





On
October 12, 2009, we entered into an agreement and plan of merger with and into
Skywide Capital Management Limited, a corporation which is wholly owned by Mr.
Tianzhou Deng, our chairman, and Mr. Bo Huang, our chief executive officer, both
of whom are also directors. Pursuant to the merger agreement, at the effective
time of the merger, we will be merged into Skywide, with Skywide being the
surviving entity, and each shares of common stock, other than shares owned by
us, Skywide, Mr. Deng and Mr. Huang, will become and be converted into the right
to receive, upon presentation of the certificates for their common stock, the
sum of $1.90. The merger is subject to shareholder approval.





Our
Business





The
government of the PRC is now encouraging the use of CNG as a method of combating
air pollution, which is increasingly viewed as a major problem throughout the
PRC. We believe that the need to reduce air pollution, among other factors, is
creating a growing demand and increasing market for CNG powered vehicles,
notwithstanding the recent decline in the worldwide price of oil. Since June
2006, we have been developing our CNG wholesale and retail business by building
our own natural gas processing plants and CNG filling stations in Central and
East China to meet this need, and are engaged in the construction and
equipping of CNG stations that are both Company owned and operated as well as
owned and operated by third parties.  In addition, since the second
quarter of 2007, we have been manufacturing and selling electronic devices to
enable a vehicle to use CNG, which allow a standard gasoline powered vehicle to
operate using natural gas.





We are
engaged in four business segments:





(i)
Customized pressure containers





Historically,
our business has been the manufacture of pressure containers and compressed
natural gas (CNG) facilities and equipment.  Our customized equipment
and pressure container business is the business originally conducted by our
subsidiary, Qingdao Sinogas General Machinery Limited Corporation (“Sinogas”),
prior to the reverse acquisition in June 2006.  This business includes
design and manufacturing of various types of pressure containers.





(ii)
CNG storage, transportation products and CNG station service construction (“CNG
Station Facilities and Construction”)





Our CNG
station construction business includes:





•      The
manufacture, sale and installation of CNG vehicle and gas station equipment,
which we provide to other companies that operate CNG station; and





•      The
construction of CNG stations, for which we design the CNG station construction
plans, construct CNG stations, and install CNG station equipment and related
systems.




5




(iii)
CNG station operations





In 2006,
we entered the CNG station business, which involves the design, construction and
equipping of CNG stations and the operation of those stations. We opened our
first CNG filling station in October 2007. As of December 10, 2009, we were
operating twenty-one CNG stations, of which sixteen are located in Wuhan, two in
Pingdingshan and three in Xuancheng. An additional four stations in Wuhan are in
the final stages of construction, and four more stations in Wuhan were in the
preliminary planning stage.





(iv)
Vehicle fuel conversion equipment





We
manufacture CNG vehicle conversion kits and electronic control devices that
enable vehicles manufactured for gasoline to operate on CNG.





These
segment operations are further explained below.





Customized
pressure containers





We
manufacture and sell customized pressure containers to companies in a wide range
of industries, including the petroleum, chemical, metallurgy, electricity
generation, beverage and other industries requiring customized
containers.  We do not maintain an inventory of these products;
rather, we manufacture products pursuant to purchase orders which set forth the
customers’ specifications.





The
principal raw materials for customized containers are steel and steel
vessels.  In the past, we have purchased the steel vessels
principally from an Italian supplier. Commencing in May 2007, we also began
purchasing steel tubes in the PRC domestic market and engaged a Korean company
to manufacture the bottles from the steel tubes, and in August 2007, we engaged
a PRC company to manufacture these bottles. We believe we have adequate supply
sources, both domestic and foreign, to fulfill our production needs for the
foreseeable future. We are not dependent upon any single supplier, although the
steel vessels are available from a small number of suppliers.





Since our
products are, in general, designed and manufactured pursuant to purchase orders
for a specific product to be manufactured in accordance with the customer’s
specification, our revenue from this segment is dependent upon our developing a
continuing stream of business so that we will not incur a significant lag
between the time we complete one contract and start another.  Further,
because those products have a relatively long useful life, and are not
consumables, once we fulfill our customer’s orders, there is generally little
ongoing business from one period to the next with any customer.





In
marketing our pressure containers, we rely primarily on an internal sales force,
that directly contacts and builds relationship with end user customers, and we
sell to the end users. We market our products through business connections,
trade shows and conferences. We believe that the advanced equipment that we
offer, our technology and our ability to produce high value added pressure
containers help us market our products in the Chinese market.





CNG
Station Facilities and Construction





In this
segment, we manufacture, sell and install CNG vehicle and gas station equipment,
including the following:





•
            CNG
      trailers for mobile distribution•
            CNG
      deposited system for gas station usage•
            CNG
      compressor skid•
            CNG
      dispenser (retail measurement
system)





We
provide these products for third party companies that operate fixed and/or
mobile CNG filling stations.





The
second aspect of this business is the CNG station construction service
business.  We design the CNG station construction plans, construct CNG
stations, and install CNG station equipment and related systems for our
clients.





In order
to provide for a supply of raw materials, Sinogas signed a joint venture
agreement with LuXi Chemical Group, a Chinese chemical company, to set up a
company, Sinogas General Luxi Natural Gas Equipment Co., Ltd. (“Sinogas Luxi”),
located in Liaocheng City, Shandong province.  Sinogas has a 40%
interest in Sinogas Luxi, which has a proposed annual production capacity of
4,000 steel bottles for use in CNG trailer manufacturing.  The
registered capital is RMB 50 million (equivalent to $7.32 million based on the
exchange rate on September 30, 2009).  Sinogas Luxi commenced
operation in July 2009. At September 30, 2009, Sinogas had contributed $2.93
million in full satisfaction of its obligations to this enterprise.




6




Our
products and services are designed to meet the customer
specifications.  Our revenue in this segment is dependent upon our
developing a continuing stream of business so that we will not incur a
significant lag between the time we complete one contract and start
another.  Although we do not have a long history of operations in this
business, we anticipate that our major customers will vary from period to
period.  In the year ended September 30, 2009, one customer of our
station facilities and construction segment accounted for more than 10% of our
total sales, and in the year ended September 30, 2008, two customers of our
station facilities and construction segment each accounted for more than 10% of
our total sales.  These customers, who purchased CNG truck trailers,
accounted for approximately 19.2% and 32.0% of total sales in the year ended
September 30, 2009 and 2008, which, in each year, represented most of our
revenue from this division.  At September 30, 2009 and 2008,
approximately 55.7% and 71.0%, respectively, of our accounts receivable were
from these customers.  The following table sets forth information as
to the revenue generated from each of these customers for the year ended
September 30, 2009 and 2008 (dollars in thousands):





Name
            
            Year
      Ended September 30, 2009
            
            
            Year
      Ended September 30, 2008Dollars
            
            
            Percent
            
            
            Dollars
            
            
            PercentWuhan
      Lvneng Gas Transportation Co.,
            
            
            8,040
            
            
            
            19.2
            %
            
            
            8,824
            
            
            
            21.6
            %Xuancheng
      Anjie Gas Transportation Co.,
            
            
            *
            
            
            
            *
            
            
            
            4,260
            
            
            
            10.4
            %





* Less
than 10%








In
marketing these services, we rely primarily on our internal salesmen, who
directly contact and build relationships with customers. We market our products
through personal contact, as well as business connections, trade shows and
conferences.





We are
aware of two companies which may be considered as competitors of us in the
manufacture of CNG deposit and transportation equipment – Shijiazhuang Enric Gas
Equipment and Handan Xinxing Petrochemical Equipment.





CNG
station operations





In 2006,
we entered the CNG station business, which involves the design, construction and
equipping CNG stations and operating those stations.  As of December
10, 2009, we were operating twenty-one CNG stations, of which sixteen are
located in Wuhan, two in Pingdingshan and three in Xuancheng.  An
additional four stations in Wuhan are in the final stages of
construction.  We anticipate that these stations could be operational
by the end of March 2010.  We have an additional four stations in
Wuhan which are in the preliminary stage. However, we need government approval
before we can open a station, and the procedure for obtaining government
approval may delay the opening of one or more of these stations.  In
the past, we have not opened stations on schedule because additional time was
required for us to obtain government approval.  Each of our stations
has four filling outlets, and is open 24 hours a day, seven days a
week.





We
believe that there is a large and expanding market for CNG in
Wuhan.  Wuhan is the capital of Hubei Province and the biggest city in
Central China, with a population of more than 9 million people.





We formed
two joint ventures with China New Energy Development Investment Co., Inc., an
unaffiliated party, to operate natural gas processing plants.  These
plants are the mother stations that supply CNG to our stations.  At
September 30, 2009, we had an 80% interest in the joint venture for Wuhan and a
20% interest in the joint venture that is located in
Wuhu City.





Natural
gas is available from a limited number of suppliers, principally China Petroleum
and Chemical Corporation, known as Sinopec and PetroChina or affiliated
companies of PetroChina. These companies supply the natural gas and operate the
pipeline which is the only commercially reasonable way to deliver the natural
gas.





Each of
the joint ventures for Wuhan and Wuhu City has an agreement with Sinopec. The
agreements provide for an initial annual volume of 50 million cubic meters per
year, increasing to not more than 200 million cubic meters per
year.  The service is subject to the completion of a natural gas
pipeline between Sichuan and Shanghai. The pipeline was completed in December
2009 and is in the trial stage to satisfy the applicable authorities that it is
able to supply natural gas. The sales volume is subject to annual natural gas
purchase agreements and the price is subject to future determination. We also
have a supply agreement with PetroChina, which provides us with 88 million cubic
meters of natural gas per year.  We will continue to purchase our
natural gas from PetroChina until Sinogas’ Sichuan – Shanghai pipeline is
operational.  The success of our CNG station business is dependent
upon our ability to have a continuous supply of natural gas at our
stations.  We are dependent upon Sinogas and PetroChina to provide us
with sufficient CNG to enable us to operate our CNG filling
stations.  If, for any reason, we are unable to obtain a reliable
supply of natural gas, we will be unable to generate revenue from this
business.





The
construction of the CNG filling stations and the storage, transportation and
distribution of CNG, are subject to PRC regulations, and the price at which we
both buy and sell CNG is subject to government price controls, and the suppliers
of CNG are government-owned companies. The price controls over
the purchase and sale of CNG limits our potential profit from the sale of CNG as
our gross margin is effectively dependent upon the government’s pricing
policies.





7




The
procedure for obtaining the land use rights as well as the right to use the land
for the construction and operation of a CNG station involves a lengthy and labor
intensive process, involving numerous steps through the municipal government,
including satisfying environmental, hazardous chemical, noise abatement, soil
suitability, health and other regulations.  Most of these processes
involve an application, an on-site inspection and the performance of any
necessary remediation before a permit is granted, which can take nine to
twelve months.  Most recently, as a result of both our experience
in navigating through the regulatory procedure and our record in successfully
opening CNG stations in accordance with the terms of our applications, we have
been able to reduce the time to between six and ninemonths.  While
the need to meet all the required regulations can be considered a barrier to
entry into the CNG station business, we believe that our success in meeting our
obligations will help us as we compete with other potential competitors in
seeking locations and permits for new stations.





The two
largest state-owned energy companies, CNPC China National Petroleum Corporation,
referred to as CNPC Group, and Sinopec are engaged in the sale and supply of
energy and are major companies in exploration and transportation of oil and gas.
They build much of the PRC’s high pressure pipeline infrastructure. Natural gas
is distributed to smaller regional firms that redistribute the gas to the end
user. Although these major companies supply natural gas rather than sell the
natural gas to end users, they have the capability of establishing their own
natural gas distribution networks.





We are
aware of two companies which may be considered to be direct competitors in the
business of CNG station business: Xin’ao Gas Field Ltd. and China Natural Gas.
Xin’ao Gas Field distributes natural gas via pipeline, doing business in 13
provinces and municipalities that have a combined population of 31 million.
China Natural Gas distributes natural gas to commercial, industrial and
residential customers of Xi’an City, and distributes CNG as a vehicular fuel to
retail end users of Xi’an City. We believe that neither of the two companies is
approved to supply natural gas to any area in which we are constructing or plan
to construct CNG stations.





We have
two direct competitors in Wuhan – Jiang Han Petro Drill Corp., which has eight
stations, and Da Long Investment Corp, which has two stations.  In
Pingdingshan, one gas company has one station.  There are no other
companies that sell CNG in Xuancheng.  None of these companies are
considered major companies, and we believe that we are considered the leading
CNG company in the three cities in which we have stations.





Our CNG
stations compete with gasoline stations as well as other CNG stations. The
ability of CNG stations to operate profitably is largely dependent upon the
acceptance of CNG by individual drivers as well as taxis and buses. We expect
that our principal customers, at least initially, will be taxis and bus
companies, which are presently the largest users of CNG.  As more
companies seek to fill the need for CNG stations, our competition will
increase.  Since the prices that we charge are fixed by the
government, competition is based on factors other than price, including the
location and appearance of the stations, the reliability of the stations and the
quality of service provided by our employees.  We believe that our
stations are located in well-traveled roads so that drivers can have easy access
to our stations.





PetroChina,
China’s largest oil and gas producer by capacity and our present supplier of
natural gas, has recently announced its intention to enter the CNG distribution
business in the next couple of years.  These plans may present a
competitive threat to companies such as us.  We cannot assure you that
we will be able to compete successfully with PetroChina if PetroChina enters the
markets in which we operate CNG stations.  PetroChina presently
delivers natural gas to the cities, and companies, such as ours, purchase the
natural gas from PetroChina or another supplier, such as Sinopec, and sell the
natural gas in the city.  Because of PetroChina’s size, it may be in a
better position than we to enter into contacts with the city governments to
supply natural gas to those cities.





Vehicle
fuel conversion equipment





We
believe that, with the government of the PRC encouraging the use of CNG as a
method of reducing pollution, there is a market for a device that enables a
vehicle to use CNG.  In March 2007, we purchased a 60% interest in
Jiaxing Lixun Automotive Electronic Co, Ltd. (“Lixun”) from its
stockholders for $390,000. In July 2007, we paid an additional $400,000 to
increase our equity ownership in Lixun to 70%, and in April 2008 we acquired the
remaining 30%.  Our interest in Lixun is owned 75% by Sinogas, a
75.05% owned subsidiary, and 25% by us.  Through Lixun, we design and
manufacture electric control devices for alternative fuel, such as compressed
natural gas and liquefied petroleum gas vehicles, as well as a full range of
electric devices, such as computer controllers, conversion switches, spark
advancers, tolerance sensors and emulators for use in multi-powered
vehicles.





We sell
these conversion kits primarily to manufacturers in the PRC who use the kits on
an OEM basis and to companies that market these products for sale in the
aftermarket. We develop and service those customers by our internal salesmen who
market the products through business connections, trade show and
conferences.   We also plan to market the conversion kits at our
CNG stations. As a result of the recent worldwide economic downturn and the
lower price of oil, which has affected the CNG market generally, the demand for
conversion equipment has decreased.





We are
aware of three Italian companies that are our competitors in vehicle gas
conversion business -- Lovato Spa, LANDI Spa, and OMVL Spa. Because those
companies are not Chinese companies, we believe that our familiarity with the
Chinese markets gives us a competitive advantage.




8




Intellectual
Property





Although
we hold certain patent rights relating to the manufacture of pressure
containers, our CNG station construction service business is more dependent upon
our know-how than on any patent rights that we have.





We have
an agreement with Beijing Sanhuan pursuant to which Beijing Sanhuan granted us
the right to use Beijing Sanhuan’s technology and software relating to the
integration, installation and maintenance of CNG station
systems.  Under this agreement, we pay Beijing Sanhuan for the
technology and software at the rate of $12,800 for each CNG substation and
$23,051 for each CNG mother station. The license agreement has a ten-year term
commencing January 1, 2006. We also pay Beijing Sanhuan $64 per hour for
engineers provided by Beijing Sanhuan.





As the
designer and manufacturer of automotive alternate fuel (CNG/LPG) electronic
devices, Lixun has applied for a series of Chinese patents for the technical
know-how relating to these products, however, we cannot assure you that the
patents will be granted or, if granted, that we will be able to enforce our
rights against an alleged infringer.





Research
and Development





We do not
engage in research and development. We have worked from time to time with our
customers to design a product, typically a pressure container for the customer’s
product. However, those services are included in the service for the customer’s
product, and the cost of the services is included in cost of sales.





Employees





On
September 30, 2009, we had 857 full-time employees, of whom 172 are in executive
and administrative positions, 40 employees are in marketing and sales, 163 are
technical engineers in pressure container and CNG deposit and transportation
manufacturing, quality control as well as CNG station construction, 280
persons are manufacturing personnel and 202 are operating our retail CNG station
business. We believe that our employee relations are good.




Executive
Officers of the Registrant





Name
            
            Age
            
            PositionBo
      Huang
            
            39
            
            Chief
      executive officer and directorShiao
      Ming Sheng
            
            60
            
            Chief
      financial officerAnlin
      Xiong
            
            30
            
            Vice
      president and secretaryCindy
      Ye
            
            34
            
            Financial
      controller





Bo Huang
has been our chief executive officer and a director since the completion of the
reverse acquisition in June 2006. He has been chief executive officer and
chairman of Sinogas since its organization in 2005. He and Mr. Deng are the
founders of Sinogas. He was president of Beijing Tricycle Technology Development
Co., Ltd., a company engaged in the development of natural gas conversion kits
from 2003 to 2005, and vice president of Chengchen Group, an investment and
trading company from 1997 to 2003. Mr. Huang graduated from Renmin University of
China in Beijing in 1993 with a bachelor’s degree in international
finance.





Shiao
Ming Sheng has been chief financial officer since October 2008. From 2003 until
October 2008, Mr. Sheng served as a principal of Intelligent Genesis, which was
engaged in corporate consulting and venture formation, and from 1996 until 2002,
Mr. Sheng was founder and chief executive officer of Intelligent Paradigm, a
computer video technology developer. Mr. Sheng received a degree in biochemistry
from Dartmouth College and has authored numerous scientific papers and editorial
articles for trade journals and magazines.





Anlin
Xiong has been vice president in charge of financing and investment activities
since February 2008 and secretary since June 2008. Mr. Xiong was a senior
manager at BOE Technology Group Co., Ltd., a leading Chinese LCD (Liquid Crystal
Display) manufacturer listed on Shenzhen Stock Exchange, from October 2005 until
February 2008. From May 2005 until October 2005, Mr. Xiong was a senior engineer
at Alpha & Omega Semiconductor (Shanghai) Co. Ltd. in China. Mr. Xiong
received a MS in Electrical Engineering from the University of Illinois at
Urbana-Champaign in 2004, a MS in Physics from West Virginia University in 2003,
and a BS in Electronic Engineering from Tsinghua University in China in 2000.
Mr. Xiong also holds a Certificate of China Legal Professional, which is the
lawyer qualification certificate in China.





Cindy Ye
has been financial controller since June 2008. Ms. Ye was vice president in
charge of accounting activities from January to June 2008.  Ms. Ye was
a senior manager at Beijing Yongtuo Certified Public Accountants Co., Ltd. from
September 2001 until December 2007. Ms. Ye received an MS in international trade
from the Capital University of Economics and Business in China in 2001, and a BS
in material science from the Northwest Institute of Light Industry in China in
1998.




9




ITEM 1A.   RISK FACTORS





An
investment in our securities involves a high degree of risk. In determining
whether to purchase our securities, you should carefully consider all of the
material risks described below, together with the other information contained in
this annual report before making a decision to purchase our securities. You
should only purchase our securities if you can afford to suffer the loss of your
entire investment.





RISKS
ASSOCIATED WITH OUR BUSINESS





The
Merger agreement with Skywide will limit your ability to participate in any
improvement in our business and operations.





The
merger agreement with Skywide, which is wholly owned by Mr. Tianzhou Deng, our
chairman, and Mr. Bo Huang, our chief executive officer, both of whom are also
directors, provides that, subject to shareholder approval, we will be merged
with and into Skywide, and all shareholders, other than Skywide, Mr. Deng and
Mr. Huang, will receive in respect to each share owned at the effective time of
the merger the right to receive $1.90 per share.  As a result, upon
completion of the merger, you will cease to have any interest in us other than
the right to receive $1.90 per share upon delivery of the certificates for your
common stock.  We cannot assure you that the merger will be completed
or that, if the merger is not completed, the price of our common stock will not
decline significantly.





Because
we have a deficiency in working capital and sustained a significant loss for the
year ended September 30, 2009, and our losses are continuing, we cannot assure
you that we will continue as a going concern or operate profitably in the
future.





At
September 30, 2009, we had a deficiency in working capital of approximately $9.1
million, and for the year ended September 30, 2009, we sustained a loss of
approximately $13.1 million on sales of $41.8 million, as compared with net
income of approximately $16.1 million on sales of $40.9 million for the year
ended September 30, 2008, and our losses have continued subsequent to September
30, 2009. Our working capital deficiency resulted from our loss and the
reclassification of notes from long-term to short term as a result of amendments
to the underlying instruments.  Our loss resulted from a significantly
lower gross margin and significantly higher operating expenses and
interest.  These factors are continuing to affect our operations and
we cannot assure you that we will be able to operate profitably in the future.
As of September 30, 2009, we have limited financial resources with which to
achieve our objectives and obtain profitability and positive cash flows.
Achievement of our objectives will be dependent upon our ability to obtain
additional financial, to generate revenue from our current and planned business
operations, and control costs. However, there is no assurance that we will be
able to achieve these objectives.





Our
independent auditors have included a going concern qualification in their report
on our financial statements.





Because
of our recurring losses from operations and our working capital deficiency, our
auditors have included a going concern qualification in their report on our
financial statements.  As a result, our financial statements do not
reflect any adjustment which would result from our failure to continue to
operate as a going concern.  Any such adjustment, if necessary, would
materially affect the value of our assets.





We
may have difficulty collecting our receivables.





At
September 30, 2008, our accounts receivable were outstanding for an average of
124 days, and at September 30, 2009, our accounts receivable were
outstanding for an average of 225 days.  A significant amount of
receivables that were outstanding at September 30, 2008 remained outstanding on
September 30, 2009.  In addition, at September 30, 2008, we had a
rental receivable of $2.6 million pertaining to a land use sublease.  
We established a $988,000 reserve for that uncollected note at September 30,
2009.  Our failure to collect our trade and notes receivables in the
normal course of business could impair our ability to continue in
business.





We
are required to pay our convertible notes upon completion of the merger with
Skywide.





In
September 2007, we issued our 12% guaranteed senior notes due 2012 in the
principal amount of $16 million and 3.0% guaranteed senior convertible notes due
2012 in the principal amount of $14 million.  The 12% senior notes
have been paid in full since September 30, 2009. Pursuant to a December 2009
agreement with the holders of the 3% convertible notes, we agreed to pay the $14
million principal amount of convertible notes in two installments following the
completion of the merger with Skywide, together with interest to generate a
yield to maturity of 13.8%, net of payments made on account. The Company may not
have the resources to repay the debt and the noteholders may exert certain
rights to the detriment of the Company.





Because
we are dependent upon a small number of customers in one or more of our
segments, which varies from year to year, the inability to generate new business
could impair our ability to operate profitably.





In
general, in our customized pressure container business and our CNG station
construction business, we do not have long-term contracts with our customers,
and major contracts with a small number of customers account for a significant
percentage of our revenue from these segments. Our contracts relate to specific
projects. As a result, a customer can account for significant revenue in one
year and little, if any, in the next.  One customer of our station
facilities and construction segment accounted for approximately 19.2% of our
sales in the year ended September 30, 2009 and 21.6% of our sales in the year
ended September 30, 2008.  Another customer from this segment
accounted for 10.4% of our sales in the year ended September 30,
2008.  Our failure to develop new customers in this and our other
segments could materially impair our ability to operate these segments
profitably.




10




Our
CNG stations are dependent upon two government-owned suppliers.





We
purchase our CNG from one of two government-owned companies.  The
failure or inability of these companies to provide us with CNG could materially
impair our ability to operate CNG stations.





Our
CNG station business has risks that are different from our manufacturing and
construction/installation business.





We have
commenced and are planning the expansion of our CNG service station business.
The operation of the CNG gas station business is subject to significant
additional risks which are not related to our other segments. In addition to the
normal risks associated with our business, there are additional risks that
relate to the CNG station business. These risks include, but are not limited
to:





We lack experience in operating CNG
stations. Although we have manufactured and installed equipment for use
by CNG stations, we have limited experience in operating stations, and we cannot
assure you that we will be successful in operating CNG stations.





We require significant additional
funds to enable us to develop and expand the CNG station business. The
construction of CNG stations is very capital intensive, and we will require
significant additional funds for this purpose. Although we raised $30,000,000
through the sale of our debt securities in September 2007, we may require
additional financing to equip and construct our proposed CNG stations, and we
cannot assure you that we will be able to obtain any financing which we may
require, either for our CNG station business or our equipment manufacture and
supply business.





The CNG station business is highly
regulated and is subject to price controls. The storage, transportation
and distribution of CNG are subject to PRC regulations, including the price at
which we both buy and sell CNG.  The price controls
over the purchase and sale of CNG limits our potential profit from the sale of
CNG. In addition, before we construct a CNG station in many regions, we need to
obtain government approvals. Other regulations may result in increased costs in
order to comply with these regulations.  Before we are able to open a
CNG filling, we must obtain government approval.  In the past, we have
had to postpone the opening of our CNG stations because of delays in obtaining
government approval.





Because of the nature of CNG, we
could be exposed to liability from gas leaks or explosions. Any leaks or
explosions from our CNG stations could cause severe property damage as well as
loss of life, which may not be covered by insurance. Any such loss could result
in a termination of our business and could subject us to regulatory
actions.





The market for CNG stations is
dependent upon the increased use of CNG powered vehicles. CNG-powered
vehicles represent only a small fraction of motor vehicles in the PRC, and most
vehicles are powered by gasoline or diesel fuel. For us to be successful in the
CNG gas station business, a market for CNG must be developed in the area which
we propose to enter. Car and truck owners must either buy a CNG powered vehicle
or pay to have a gasoline or diesel powered vehicle converted for CNG use. The
current economic downturn has materially decreased the market for CNG vehicles,
and we cannot assure you that the market for CNG will improve in the near
future, if at all. In order for a market to develop for CNG vehicles, there must
be a network of CNG stations on major highways throughout the PRC. The failure
of such a network to develop could hinder the development of a market for CNG
vehicles which would in turn limit the market for our CNG stations.





We must secure enough CNG resources
to supply our filling stations in future. Natural gas is limited in
China, especially in central and eastern China where we are operating and
developing our CNG retail business. Although we have agreements to provide us
with a fixed amount of natural gas, we cannot assure you that these agreements
will be sufficient to satisfy our CNG needs and we cannot assure that such CNG
will be delivered on a timely basis. These agreements are subject to annual
allocations and a major pipeline which is expected to provide us with
CNG.  Although the construction of the pipeline has been completed,
the pipeline is undergoing completion testing, and we cannot assure you that we
will be able to receive significant gas from this pipeline in the near
future.  Further, it is possible that we may experience shortages,
particularly in the winter months when gas demand peaks. We have no recourse
against any party in the event that the pipeline is not able to deliver the
natural gas that we may require.





We may not be able to meet our
scheduled station openings. We have already encountered delays in opening
our stations, and we cannot assure you that we will not encounter delays in the
future. These delays can result from a range of factors, including adverse
weather conditions, delays in obtaining government approvals, delays in receipt
of materials for the construction of the stations, and other causes which may or
may not be within our control. Any delays may impair our ability to operate this
business profitably.




11




Competition is increasing for CNG
distribution. Our CNG stations compete with gasoline stations as well as
other CNG stations. The ability of our CNG stations to operate profitably is
largely dependent upon the acceptance of CNG by individual drivers as well as
taxis and buses, which are presently the largest users of CNG. As more companies
seek to fill the need for CNG stations, our competition will increase.
PetroChina Co., China’s largest oil and gas producer by capacity and our present
supplier of natural gas, has recently announced its intention to enter the CNG
distribution business. These plans present a competitive threat to companies
such as us. Because of PetroChina’s size, it may be in a better position than we
to enter into contacts with the city governments to supply natural gas to those
cities. We cannot assure you that we will be able to compete successfully with
PetroChina if PetroChina enters the markets in which we operate CNG
stations.





We may face liability claims from
users of our products.





As the
manufacturer of equipment that is used to store and transport CNG and other
products, including petroleum, chemicals and food products, we may be subject
both to liability in the event that any property damages or loss of life results
from our products. We may also be liable for damages in the event that our CNG
conversion kits do not function properly. Any liability which results could hurt
our reputation and result in the payment of damages which may not be covered by
insurance.





Our
CNG conversion kit business is subject to the development of a market for
products that can enable gasoline powered vehicles to operate on
CNG.





One
segment of our business is the manufacture and sale of conversion kits that
enable gasoline-powered vehicles to operate on CNG. The customers of these
products are both vehicle manufacturers and vehicle owners. Our ability to
operate this segment profitably is dependent upon a number of factors including
the development of a market for conversion kits, our ability to compete
successfully with other manufacturers or distributors of conversion kits, and
the ability of our products to work properly in a wide range of both old and new
vehicles.  The current economic downturn together with the recent
decline in oil and gasoline prices may have an effect on the market for
conversion kits.





Because
we are dependent on our management, the loss of our key executive officers and
the failure to hire additional qualified key personnel could harm our
business.





Our
business is largely dependent upon the continued efforts of our chief executive
officer, Bo Huang, and our chairman, Tianzhou Deng, who are also directors. We
do not have employment contracts with either Mr. Huang or Mr. Deng. The loss of
either Mr. Huang, Mr. Deng or any of our other key employees could have a
material adverse effect upon our ability to operate profitably. Furthermore, we
require additional qualified management and other key personnel for our CNG
station business.





We
may not be able to continue to grow through acquisitions.





In
addition to our planned growth through the development of our CNG station
business, an important part of our growth strategy has been to expand our
business and to acquire other businesses in related industries or to form joint
ventures with other companies. Such acquisitions may be made with cash or our
securities or a combination of cash and securities. Any joint ventures may
require us to make significant capital contributions in order to develop the
business contemplated by the joint venture. To the extent that we require cash,
we may have to borrow the funds or sell equity securities. We anticipate that if
we acquire other Chinese businesses, the seller would expect to receive all or
substantially all of the sales price in cash, and we expect that we would have
to raise funds in order to consummate any such acquisition. Any issuance of
equity as a portion of the purchase price or any sale of equity, to the extent
that we are able to sell equity, to raise funds to enable us to pay the purchase
price would result in dilution to our stockholders. We have no commitments from
any financing source and we may not be able to raise any cash necessary to
complete an acquisition. If we fail to make any acquisitions, our future growth
may be limited. Further, any acquisition may be subject to government
regulations and approval in the PRC. Further, our recent results of
operations may affect the willingness of a business owner to sell his business
to us and the willingness of any debt or equity financing source to provide us
with acquisition funding.





If
we make any acquisitions, they may disrupt or have a negative impact on our
business.





If we
make acquisitions, we could have difficulty integrating the acquired companies’
personnel and operations with our own. In addition, the key personnel of the
acquired business may not be willing to work for us. We cannot predict the
effect expansion may have on our core business. Regardless of whether we are
successful in making an acquisition, the negotiations could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition to the risks described above, acquisitions are accompanied by a number
of inherent risks, including, without limitation, the following:





•
            the
      difficulty of integrating acquired products, services or
      operations;





•
            the
      potential disruption of the ongoing businesses and distraction of our
      management and the management of acquired
  companies;





•
            the
      difficulty of incorporating acquired rights or products into our existing
      business;





•
            difficulties
      in disposing of the excess or idle facilities of an acquired company or
      business and expenses in maintaining such
  facilities;





•
            difficulties
      in maintaining uniform standards, controls, procedures and
      policies;





12




•
            the
      potential impairment of relationships with employees and customers as a
      result of any integration of new management
  personnel;





•
            the
      potential inability or failure to achieve additional sales and enhance our
      customer base through cross-marketing of the products to new and existing
      customers;





•
            the
      effect of any government regulations which relate to the business
      acquired, including government approval of the acquisition;
      and





•
            potential
      unknown liabilities associated with acquired businesses or product lines,
      or the need to spend significant amounts to retool, reposition or modify
      the marketing and sales of acquired products or the defense of any
      litigation, whether or not successful, resulting from actions of the
      acquired company prior to our
acquisition.





Our
business could be severely impaired if and to the extent that we are unable to
succeed in addressing any of these risks or other problems encountered in
connection with these acquisitions, many of which cannot be presently
identified, these risks and problems could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely
affect our results of operations.





Our
operating results in future periods may vary from quarter to quarter, and, as a
result, we may fail to meet the expectations of our investors and analysts,
which may cause our stock price to fluctuate or decline.





We do not
manufacture our customized pressure containers for inventory, but pursuant to a
specific contract, and our contract flow is not predictable. Similarly, products
and services from our manufacture of CNG storage and transportation products and
the construction of CNG stations segment are also made pursuant to specific
contracts, and after the completion of a project our services may no longer be
required by our customers. To the extent that we do not generate new business,
our revenue from this segment of our business will decline. To the extent that
we expand our facilities to meet present or anticipated increases in sales or
expand our CNG station business and sell our CNG conversion kits, our failure to
generate business could have the effect of significantly reducing the
profitability of our business. Because of these factors, our revenue and
operating results have fluctuated from quarter to quarter. We expect that
fluctuations in both revenue and net income will continue due to a variety of
factors, many of which are outside of our control. Due to the risks discussed in
this annual report, you should not rely on period-to-period comparisons of our
results of operations as an indication of future performance.





Because
certain of our stockholders control a significant amount of our common stock,
they may have effective control over actions requiring stockholder
approval.





As of
December 18, 2009, approximately 40.0% of our outstanding common stock is owned
by Skywide (which is owned by our chairman, Mr. Deng, and our chief executive
officer, Mr. Huang ), which may provide Skywide with effective control over
actions taken by our stockholders.





We
may not be able to comply with the regulations relating to internal controls
over financial reporting.





The SEC
has adopted rules requiring public companies to include a report of management
on our internal controls over financial reporting in our annual reports on Form
10-K. In addition, commencing with the year ending September 30, 2010, our
independent registered public accounting firm must attest to and report on
management’s assessment of the effectiveness of our internal controls over
financial reporting. In connection with the periodic evaluation of our
disclosure controls our chief executive officer and chief financial officer
identified weaknesses related to our accounting personnel’s ability to identify
accounting and disclosure issues, calculate accounting entries, and prepare
financial statements and footnotes in accordance with U.S. GAAP. These officers
have concluded that our disclosure controls and procedures are not effective at
this time. We cannot assure you that we will be successful in addressing these
issues and any other issues which may be raised. If we are unable to address
these issues, unable to conclude that we have effective internal controls over
financial reporting or if our independent auditors are unable to provide us with
an unqualified report as to the effectiveness of our internal controls over
financial reporting as required by Section 404 of the Sarbanes-Oxley Act of
2002, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of our securities. We
have not yet begun a formal process to evaluate our internal controls over
financial reporting. Given the status of our efforts, coupled with the fact that
guidance from regulatory authorities in the area of internal controls continues
to evolve, substantial uncertainty exists regarding our ability to comply by
applicable deadlines.





The
financing agreement gives the investors certain rights relating to our business
which may affect our ability to develop our business.





The
investors in our September 2007 financing have the right of approval with
respect to our budgets in accordance with a schedule set forth in an investor
rights agreement. We are also prohibited from dismissing the auditor without the
investor’s consent unless the dismissal is approved by an audit committee on
which a designee of the investor is a member. These rights may affect our
ability to develop our business and may have a negative impact on our stock
price.




13




RISKS
ASSOCIATED WITH COMPANIES CONDUCTING BUSINESS IN THE PRC





Because
the scope of our business license is limited and subject to review, we may need
government approval to continue or expand our business.





A
business in China can only conduct business within its approved business scope,
which appears on the business license. Our licenses permit us to engage in our
present businesses. Our licenses are subject to the inspection by the government
agencies of our facilities. The government has the power to withdraw a license
from those companies which may be disqualified as a result of these inspections
by the central government. Any change in the scope of our business requires
further application and government approval. Inevitably, there is a negotiation
with the authorities to approve as broad a business scope as is permitted, and
we cannot assure you that we will be able to obtain the necessary government
approval for any change or expansion of our business.  We cannot
provide any assurance that we may be able to maintain our present licenses or
that we will be able to obtain any additional licenses that may be required if
we seek to expand the scope of our business.





If
the PRC enacts regulations which forbid or restrict foreign investment, our
ability to grow may be severely impaired.





We intend
to expand our business both by increasing our product range, operating CNG
stations. Many of the rules and regulations that we would face are not
explicitly communicated, and we may be subject to rules that would affect our
ability to grow, either internally or through acquisition of other Chinese or
foreign companies. There are also substantial uncertainties regarding the proper
interpretation of current laws and regulations of the PRC. New laws or
regulations that forbid foreign investment could severely impair our businesses
and prospects. Additionally, if the relevant authorities find us in violation of
PRC laws or regulations, they would have broad discretion in dealing with such a
violation, including, without limitation:





•
            levying
      fines;





•
            revoking
      our business and other licenses;
and





•
            requiring
      that we restructure our ownership or
operations.





Any
deterioration of political relations between the United States and the PRC could
impair our operations.





The
relationship between the United States and the PRC is subject to sudden
fluctuation and periodic tension. Changes in political conditions in the PRC and
changes in the state of Sino-U.S. relations are difficult to predict and could
adversely affect our operations or cause potential acquisition candidates or
their goods and services to become less attractive. Such a change could lead to
a decline in our profitability. Any weakening of relations between the United
States and the PRC could have a material adverse effect on our operations,
particularly in our efforts to raise capital to expand our CNG station and other
business activities.





Our
operations and assets in the PRC are subject to significant political and
economic uncertainties.





Government
policies are subject to rapid change and the government of the PRC may adopt
policies which have the effect of hindering private economic activity and
greater economic decentralization. There is no assurance that the government of
the PRC will not significantly alter its policies from time to time without
notice in a manner that reduces or eliminates any benefits from its present
policies of economic reform. The recent worldwide economic slowdown, which
affected China, may affect government policies as they relate to the industries
which we serve, which relate to the purchase or capital equipment and the
purchase and sale of natural gas.  In addition, a substantial portion
of productive assets in the PRC remains government-owned. For instance, all land
is state-owned and leased to business entities or individuals through
governmental granting of state-owned land use rights. The granting process is
typically based on government policies at the time of granting, which could be
lengthy and complex. This process may adversely affect our future expansion,
especially as we are seeking both to expand manufacturing operations and to
expand our CNG business. The government of the PRC also exercises significant
control over China’s economic growth through the allocation of resources,
controlling payment of foreign currency and providing preferential treatment to
particular industries or companies. Uncertainties may arise with changing of
governmental policies and measures. In addition, changes in laws and
regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency, the nationalization or other expropriation of private
enterprises, as well as adverse changes in the political, economic or social
conditions in the PRC, could have a material adverse effect on our business,
results of operations and financial condition.





Price
controls may affect both our revenues and net income.





The laws
of the PRC provide for the government to fix and adjust prices. In connection
with our operation of CNG stations, the price at which we both purchase and sell
CNG is subject to government price controls. It is possible that other products
we sell or services that we provide may also become subject to price control. To
the extent that we are subject to price control, our revenue, gross profit,
gross margin and net income will be affected since the revenue we derive from
our sales will be limited and, unless there is also price control on the
products that we purchase from our suppliers, we may face no limitation on our
costs. Further, if price controls affect both our revenue and our costs, our
ability to be profitable and the extent of our profitability will be effectively
subject to determination by the applicable regulatory authorities in the
PRC.  One aspect of the operation of CNG stations is the price
controls, whereby both the price at which we purchase CNG and the price at which
we sell CNG are subject to price controls by central government and municipal
government. As a result of these price controls, our gross margin is effectively
dependent upon the government’s pricing policies. We cannot assure you that one
of the government’s responses to the economic downturn will not be to increase
the adoption of price controls on other segments of our business.





14




Our
operations may not develop in the same way or at the same rate as might be
expected if the PRC economy were similar to the market-oriented economies of
OECD member countries.





The
economy of the PRC has historically been a nationalistic, “planned economy,”
meaning it functions and produces according to governmental plans and pre-set
targets or quotas. In certain aspects, the PRC’s economy has been making a
transition to a more market-oriented economy, although the government imposes
price controls on certain products and in certain industries. However, we cannot
predict the future direction of these economic reforms or the effects these
measures may have. The economy of the PRC also differs from the economies of
most countries belonging to the Organization for Economic Cooperation and
Development (the “OECD”), an international group of member countries sharing a
commitment to democratic government and market economy. For
instance:





•
            the
      level of state-owned enterprises in the PRC, as well as the level of
      governmental control over the allocation of resources is greater than in
      most of the countries belonging to the
OECD;





•
            the
      level of capital reinvestment is lower in the PRC than in other countries
      that are members of the OECD;





•
            the
      government of the PRC has a greater involvement in general in the economy
      and the economic structure of industries within the PRC than other
      countries belonging to the OECD;





•
            the
      government of the PRC imposes price controls on certain products and our
      products may become subject to additional price controls;
    and





•
            the
      PRC has various impediments in place that make it difficult for foreign
      firms to obtain local currency, as opposed to other countries belonging to
      the OECD where exchange of currencies is generally free from
      restriction.





As a
result of these differences, our business may not develop in the same way or at
the same rate as might be expected if the economy of the PRC were similar to
those of the OECD member countries.





Because
our officers and some of our directors reside outside of the United States, it
may be difficult for you to enforce your rights against them or enforce United
States court judgments against them in the PRC.





Most of
our directors and all of our executive officers reside in the PRC and
substantially all of our assets are located in the PRC. It may therefore be
difficult for United States investors to enforce their legal rights, to effect
service of process upon our directors or officers or to enforce judgments of
United States courts predicated upon civil liabilities and criminal penalties of
our directors and officers under federal securities laws. Further, it is unclear
if extradition treaties now in effect between the United States and the PRC
would permit effective enforcement of criminal penalties of the federal
securities laws.





We
may have limited legal recourse under Chinese law if disputes arise under
contracts with third parties.





Almost
all of our agreements with our employees and third parties, including our
supplier and customers, are governed by the laws of the PRC. The legal system in
the PRC is a civil law system based on written statutes. Unlike common law
systems, such as we have in the United States, it is a system in which decided
legal cases have little precedential value. The government of the PRC has
enacted some laws and regulations dealing with matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, their experience in implementing, interpreting and enforcing these laws
and regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. The resolution of these matters
may be subject to the exercise of considerable discretion by agencies of the
PRC, and forces unrelated to the legal merits of a particular matter or dispute
may influence their determination. Any rights we may have to specific
performance or to seek an injunction under Chinese law are severely limited, and
without a means of recourse by virtue of the Chinese legal system, we may be
unable to prevent these situations from occurring. The occurrence of any such
events could have a material adverse effect on our business, financial condition
and results of operations.





Because
we have limited business insurance in the PRC, we may not be protected from
risks that are customarily covered by insurance in the United
States.





We have
and will continue to maintain property insurance for our CNG stations and
manufacturing facilities which are operational to protect us from any damages
caused by the failure or alleged failure of our products. However, business
insurance is not readily available in the PRC. To the extent that we suffer a
loss of a type which would normally be covered by insurance in the United
States, such as product liability and general liability insurance, we would
incur significant expenses in both defending any action and in paying any claims
that result from a settlement or judgment.





15




Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.





We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC. We can make
no assurance, however, that our employees or other agents will not engage in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our
business, financial condition and results of operations.





Exchange
controls that exist in the PRC may limit our ability to utilize our cash flow
effectively.





We are
subject to the PRC’s rules and regulations affecting currency conversion. Any
restrictions on currency exchanges may limit our ability to use our cash flow
for the distribution of dividends to our stockholders or to fund operations we
may have outside of the PRC. Conversion of RMB, the currency of the PRC, for
capital account items, including direct investment and loans, is subject to
governmental approval in the PRC, and companies are required to open and
maintain separate foreign exchange accounts for capital account items. We cannot
be certain that the regulatory authorities of the PRC will not impose more
stringent restrictions on the convertibility of the RMB, especially with respect
to foreign exchange transactions. Because a significant component for many of
our customized pressure containers, the steel vessels, is manufactured outside
of the PRC, our inability to pay our foreign manufacturer may impair our ability
to manufacture our products.





Fluctuations
in the exchange rate could have a material adverse effect upon our
business.





We
conduct our business in RMB. To the extent our future revenue are denominated in
currencies other the United States dollars, we would be subject to increased
risks relating to foreign currency exchange rate fluctuations which could have a
material adverse affect on our financial condition and operating results since
our operating results are reported in United States dollars and significant
changes in the exchange rate could materially impact our reported
earnings.





The
downturn in the economy of the PRC may slow our growth and impair our ability to
generate profits.





The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. Following a period of general economic growth, China, like the
rest of the world, has recently been subject to an economic
downturn.  During the year ended September 30, 2009, the business of
all of segments was negatively affected by the economic downturn, which resulted
in a decreased use of products such as ours or in pressure on us to lower our
prices. Our customized pressure container business and our CNG station
facilities and construction business are dependent upon our customers making
significant capital purchases, either for pressure containers or for new CNG
stations.  The availability of financing to our customers as well as
the capital requirements of our customers could significantly reduce the need
for these products and services.  Since our CNG station business is
dependent upon the development of a market for cars and trucks that run on CNG
rather than gasoline, any economic trends which have the effect of dampening the
market for CNG vehicles could affect our ability both to sell our CNG products
and to sell CNG at our proposed CNG stations. The recent sharp decline in oil
and gasoline prices may affect the need for CNG stations or for conversion kits
to enable gasoline-powered vehicles to operate on CNG.





If
certain tax exemptions within the PRC regarding withholding taxes are removed,
we may be required to deduct corporate withholding taxes from any dividends we
may pay in the future.





Under the
PRC’s current tax laws, regulations and rulings, companies are exempt from
paying withholding taxes with respect dividends paid to stockholders outside of
the PRC. However, if the foregoing exemption is removed, we may be required to
deduct certain amounts from any dividends we pay to our
stockholders.





If our favorable tax treatment is
overturned, we may be subject to significant penalties.





On
March 16, 2007, the PRC’s National People’s Congress passed a new corporate
income tax law, which became effective January 1, 2008. This new income tax
unifies the corporate income tax rate of domestic enterprises and foreign
investment enterprises to 25%. Preferential tax treatments will continue to be
granted to entities that are classified as “high and new technology enterprises
strongly supported by the State” or that conduct business in sectors that are
encouraged by the PRC’s National People’s Congress. This new tax law, however,
does not clearly define the requirements or criteria for receiving these
preferential tax treatments. A significant portion of our net income is derived
from subsidiaries that presently benefit from full or 50% exemptions from
enterprise income tax for up to a total of five years. Because clear
implementation and requirement rules or guidelines for the new tax law have not
yet been promulgated, we cannot assure you that our subsidiaries will maintain
their preferential tax status or that we will not be assessed significant
penalties.





16




If
the PRC tax authorities dispute our method of paying value added taxes, we may
be subject to penalties under the tax laws of the PRC.





Under the
commercial practice of the PRC, we pay value added taxes (“VAT”) and business
tax based on tax invoices issued. We generally issue our tax invoice subsequent
to the date on which revenue is recognized, and there may be a considerable
delay between the date on which the revenue is recognized and the date on which
the tax invoice is issued. In the event that the PRC tax authorities dispute the
date of which revenue is recognized for tax purposes, the PRC tax office has the
right to assess a penalty which can range from zero to five times the tax which
is determined to have been improperly deferred. Although we believe that we are
paying VAT and business taxes in accordance with the common practice in PRC, we
cannot assure you that the PRC tax authorities would not reach a different
conclusion and determine that common practice is not in accordance with the tax
laws of the PRC. If a penalty is ultimately assessed against us, the penalty
could represent a material amount.





RISKS
ASSOCIATED WITH INVESTING IN OUR COMMON STOCK





Our
common stock may be delisted from the NASDAQ Capital Market because of our
failure to hold a meeting of shareholders during 2009.





The
NASDAQ Capital Markets requires us to hold an annual meeting of shareholders at
which proxies are solicited.  Because we failed to hold a meeting
during the year ended September 30, 2009, NASDAQ advised us of its intention to
delist our common stock from the NASDAQ Capital Markets.  As a result
of our appeal, NASDAQ advised us that it would continue the listing of our
common stock on the NASDAQ Capital Market subject to the condition that we hold
our annual shareholders meeting on or before January 19, 2010.  We are
required to report any significant event, including any event which may call
into question our ability to meet this timetable, and NASDAQ may delist our
stock prior to January 19, 2010 if it questions our ability to meet the January
19, 2010 deadline.  Accordingly, we cannot assure you that our common
stock will continue to be listed on the NASDAQ Capital Market, and the failure
to be listed on that market could materially and adversely affect both the
market for and the market price of our stock.





Shares
may be issued pursuant to our stock plans which may affect the market price of
our common stock.





We may
issue stock upon the exercise of options or pursuant to stock grants covering a
total of 1,000,000 shares of common stock pursuant to our 2006 long-term
incentive plan. The exercise of any options we may grant under this plan and the
sale of the underlying shares of common stock and the sale of stock issued
pursuant to stock grants may have an adverse effect upon the price of our stock.
If we issue all of the shares of common stock issuable pursuant to the plan,
these shares will represent approximately 5.9% of the outstanding common stock,
based on the presently outstanding shares of common stock.





Because
we have significant related party transactions, institutional and other
investors may be reluctant to purchase our stock which could affect both the
price and the market for our stock.





During
2005, we purchased land use rights from a former related party, Beijing Sanhuan
Technology Development Co., Ltd (“Beijing Sanhuan”) with an initial purchase
price of $12.3 million, which was increased to $18.6 million. As of September
30, 2009, the Company had paid the purchase price to Beijing Sanhuan in full. We
also license technology from Beijing Sanhuan for $322,000, the Company had paid
in full as of September 30, 2009, and we use Beijing Sanhuan’s services for our
subsidiaries. As a result, investors may be reluctant to invest in our common
stock, which would affect both the stock price and the trading volume in our
stock.





In
October 2009, we entered into the agreement of merger with Skywide pursuant to
which, upon the completion of the merger, our shareholders, other than Skywide,
Mr. Deng, Mr. Huang and their affiliates, would receive $1.90 in respect of each
shares of common stock outstanding.  We believe that the terms of the
merger agreement has a effect upon the market price of our stock.





Because
of our cash requirements and restrictions in our financing we may be unable to
pay dividends.





If we
generate earnings, we expect to retain earnings to finance the growth of our
business, particularly, our proposed CNG station business, which is very capital
intensive. Further, the agreements relating to our $30 million September 2007
financing, of which convertible notes in the principal amount of $14 million are
outstanding as of December 28, 2009, restrict our use of our funds.





ITEM 1B.   UNRESOLVED STAFF COMMENTS





Not
applicable to smaller reporting issuers.





ITEM 2.  PROPERTIES





In China,
there is no private ownership of land. Rather, all real property is owned by the
government. The government issues a certificate of property right, which is
transferable, generally has a term of 50 years and permits the holder to use the
property.  All of our properties are suitable and adequate for the
purposes for which they are used in our business.  The following table
sets forth information relating to land use rights owned by the
Company.





17




Address
            
            Size
      (square meters)
            
            Size
      (square feet)
            
            ExpirationLand
      use right owned by Sinogas
            
            45#
      66# JinHua Road, Qingdao, Shandong
            
            60,860
            
            655,100
            
            May
      2057Land
      use right owned by Jingrun
            
            HanNan
      Community, Hongdao Street, Qingdao, Shandong
            
            59,036
            
            635,460
            
            December
      2056Land
      use right owned by Xuancheng Sinoenergy
            
            XuanHu
      Road, Xuancheng, Anhui
            
            2,683
            
            28,880
            
            June
      2058Land
      use right owned by Qingdao Sinoenergy
            
            JiaoNan,
      Qingdao, Shandong
            
            100,000
            
            1,076,400
            
            June
      2058Land
      use right owned by Lixun
            
            North
      BeiHuanSan Road, DaQiao County, Jiaxing, Zhejiang
            
            8,130
            
            87,511
            
            June
      2058Land
      use right owned by Hubei Gather
            
            MaAn
      Village, AnShan County, Jiangxia District, Wuhan, Hubei
            
            20,069
            
            215,796
            
            June
      2059







Except
for the land use right owned by Xuancheng Sinoenergy, we rent the land used by
our CNG stations.  As of November 30, 2009, we lease thirteen parcels
of land in Wuhan City and two parcels of land in Pingdingshan City for an
aggregate annual rental of approximately $846,000.  Except for one
lease that expires in 2010, one lease that expires in 2015 and one lease that
expires in 2017, all of the leases expire in 2027 or later.





In
addition to the land use rights that we own, as listed in the table, Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval.





We
acquired the capital stock of two companies, Qingdao Jingrun General Machinery
Co. and Qingdao Sinoenergy General Machinery, for the sole purpose of acquiring
land use rights which were the only assets of these companies.  We
acquired additional land as part of our plan to make more effective use of our
facilities.  The land enabled us to sell the land in Qingdao City
where Yuheng and Sinogas are currently located, and provide us with larger
properties so that we can move these operations into expanded
facilities.




We
believe that our present facilities are sufficient to meet our current and near
term requirements.  In connection with the development of our CNG
stations, we will require additional land use rights as we develop and open new
CNG filling stations.




ITEM 3. LEGAL PROCEEDINGS





We are a
defendant in an action filed in the Supreme Court of the State of New York,
Nassau County, by Stephen Trecaso and Linda Watts against the Company and its
directors which purports to be a class action asserting claims of breach of
fiduciary duty and aiding and abetting the breach of fiduciary
duty.  The complaint was dated October 16, 2009 and an amended
complaint was dated November 18, 2009.  Plaintiffs seek injunctive
relief and damages arising out of a potential sale of the company to Skywide by
means of an allegedly unfair process and unfair price.  We believe
that this action is without merit, that we have valid defenses to the action,
and that we will vigorously defend the action.




We are a
defendant in four similar actions against us, our directors and Skywide in the
Eighth Judicial District Court of the State of Nevada in and for Clark
County.  We have removed these four actions to the Federal District
Court for the District of Nevada.  The plaintiffs in those actions are
(i) Robert Grabowski, (ii) Robert E. Guzman, (iii) Carol Karch and (iv) Johan L.
Stoltz.  The Guzman, Karch and Stoltz actions were filed on October
26, 2009 and the Grabowski action was filed on October 30,
2009.  Plaintiffs allege causes of action that sound in breach of
fiduciary duty and aiding and abetting the breach of that fiduciary
duty.  Plaintiffs seek injunctive relief and damages arising out of a
potential sale of the company to Skywide by means of an allegedly unfair process
and unfair price.  We believe that these actions are without merit,
that we have valid defenses to the actions, and that we will vigorously
defend the action.




18








ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITYHOLDERS





None





PART
II





ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS





Market
Price of Common Stock





Our
common stock has been traded on the NASDAQ Capital Market under the symbol SNEN
since July 28, 2008. Prior to February 6, 2007, there was no market for our
common stock. From February 6, 2007 until July 25, 2008, our stock was traded on
the OTC Bulletin Board. The NASDAQ Capital Markets requires us to hold an annual
meeting of shareholders at which proxies are solicited.  Because we
failed to hold a meeting during the year ended September 30, 2009, NASDAQ
advised us of its intention to delist our common stock from the NASDAQ Capital
Markets.  As a result of our appeal, NASDAQ advised us that it would
continue the listing of our common stock on the NASDAQ Capital Market subject to
the condition that we hold our annual shareholders meeting on or before January
19, 2010.  We intend to hold a shareholders’ meeting by January 19,
2010.





The
following table sets forth information as to the price of our stock by calendar
quarter since January 1, 2007.  These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions. The prices reflect the high and low
bid price of our stock during the period it was traded on the OCT Bulletin Board
and the high and low sales prices during the period it was listed on the NASDAQ
Capital Market.  The information is provided by National Quotation
Bureau.





Quarter Ended
            2009
            2008
            2007High
            Low
            High
            Low
            High
            LowMarch
      31
            $5.05
            $1.80
            $8.50
            $4.80
            4.78
            3.18June
      30
            2.73
            0.81
            5.98
            4.94
            5.48
            3.90September
      30
            1.85
            1.12
            7.03
            4.53
            6.44
            4.32December
      31
            2.63
            0.80
            5.01
            1.97
            $10.16
            $6.22





The
information for the fourth quarter of 2009 reflects prices through December 17,
2009.





On
December 17, 2009, we believe we had approximately 1,000 beneficial owners of
our common stock.





We have
not paid dividends since our inception. The indentures relating to our $14
million convertible notes prohibit or restricts our payment of
dividends.





Equity
Compensation Plan Information





The
following table summarizes the equity compensation plans under which our
securities may be issued as of September 30, 2009.





Plan
      Category
            
            Number
      of securities to
              be
      issued upon exercise
              of
      outstanding options
              and
      warrants
            
            
            Weighted-average
              exercise
      price of
              outstanding
      options and
              warrants
            
            
            Number
      of securities
              remaining
      available for
              future
      issuance under
              equity
      compensation
              plansEquity
      compensation plans approved by security holders
            
            
            865,000
            
            
            $
            4.32
            
            
            
            135,000Equity
      compensation plan not approved by security holders
            
            
            100,000
            
            
            
            5.15
            
            
            
            -





The 2006
long-term incentive plan is the equity compensation plan that was approved by
stockholders.





The
equity compensation plan that was not approved by stockholders was the grant of
warrants to purchase 100,000 shares which were granted to an investment
relations firm pursuant to its engagement agreement.





19




ITEM 6.  SELECTED FINANCIAL DATA





Not
Applicable





ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS





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





OVERVIEW





In
September 2007, we issued our 12% senior notes due 2012 in the principal amount
of $16,000,000 and 3.0% senior convertible notes due 2012 in the principal
amount of $14,000,000.  The indentures relating to these notes
included financial covenants, which were amended on May 19, 2009.  We
were not in compliance with these covenants at June 30, 2009 or September 30,
2009, and the note holders waived compliance with the covenants at both of these
dates.  In October 2009, we entered into an agreement with the holders
of the 12% senior notes and the 3% convertible notes, which included a
requirement that we pay the 12% senior notes in full by November 30,
2009.  At November 30, 2009, we had paid approximately $14,000,000 of
the amount due, and the remaining amount was paid on December 23,
2009.  The October agreement also provided that we would amend the
indenture relating to the 3.0% senior convertible notes in a manner acceptable
to the note holders.  On December 17, 2009, we entered into an
agreement with the note holders pursuant to which (i) the remaining payments of
approximately $2,000,000 of the 12% senior notes would be due by December 31,
2009, and this payment was made on December 23, 2009, (ii) the $14,000,000
convertible notes, including interest to provide the holders with a 13.8% yield
to maturity, after given effect to current interest payments made at the annual
rate of 3.0% per annum, would be paid in two installments following completion
of the merger with Skywide, with the first payment of $5,000,000 being due ten
days after the effectiveness of the merger and the balance 30 days thereafter,
(iii) the requirement that we meet certain net income levels for 2008 and 2009
were eliminated, (iv) the provisions that would have resulted in a reduction in
the conversion price of the convertible notes if we sold common stock or
securities convertible into common stock were eliminated and (v) the liquidated
damages due for failing to register the shares of common stock issuable upon
conversion of the notes was reduced to $280,000, which is due by December 31,
2009.  Although the convertible notes have a stated interest rate of
3% per annum, if the notes are not converted prior to maturity, we are required
to pay the holders a yield to maturity of 13.8% per annum, less interest
previously paid.  We have accrued interest at the rate of 13.8% per
annum, of which 3% is treated as current interest and 10.8% as deferred
interest.  As a result of our agreement to pay the convertible notes
upon completion of the merger with Skywide, we have classified the deferred
interest as current at September 30, 2009.




Our
accounts receivable increased from $22.0 million at September 30, 2008 to $29.7
million at September 30, 2009.  At September 30, 2008, our accounts
receivable were outstanding for an average of 124 days, and at September
30, 2009, our accounts receivable were outstanding for an average of 225
days.  A significant amount of receivables that were outstanding at
September 30, 2008 remained outstanding on September 30, 2009.  In
addition, at September 30, 2008, we had a note receivable of $2.6 million
resulting from the termination of a sublease for which no payments had been made
by the tenant.  As of September 30, 2009, no payments had been made on
account of that note, and $659,000 was collected in December 2009.  We
established a $988,000 reserve with respect to that receivable.  Our
failure to collect our receivables in the normal course of business could impair
our ability to continue in business.





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





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





All of
our products and services are manufactured or performed pursuant to agreements
with our customers, which provide the specifications for the products and
services. As a result, our revenue is dependent upon the flow of contracts.
In any fiscal period, a small number of customers may represent a
disproportionately large percentage of our business in one period and a
significantly lower percentage, if any, in a subsequent period.





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




20




In the
year ended September 30, 2009, one customer of our station facilities and
construction segment accounted for more than 10% of our total sales, and in the
year ended September 30, 2008, two customers of our station facilities and
construction segment each accounted for more than 10% of our total
sales.  One of these customers accounted for approximately 19.2% of
our sales in the year ended September 30, 2009 and 21.6% of our sales in the
year ended September 30, 2008.  The other customer accounted for 10.4%
of our sales in the year ended September 30, 2008.  In each year,
these sales represented most of our revenue from this division. We are
continuing to make sales to these customers.





In early
2007, we established a division to sell and manufacture CNG vehicle conversion
kits to OEM and sale in the aftermarket. These kits are designed to enable a
gasoline powered vehicle to operate on CNG. We began to generate revenue from
this business segment in the second quarter of calendar 2007. In March 2007, we
purchased a 60% interest in Lixun from its stockholders for $390,000. In July
2007, we paid an additional $400,000 to increase our equity ownership in
Lixun to 70%, and in April 2008 we acquired the remaining 30% for $1,145,000.
Lixun designs and manufactures electric control devices for alternative fuel,
such as compressed natural gas and liquefied petroleum gas vehicles, as well as
a full range of electric devices, such as computer controllers, conversion
switches, spark advancers, tolerance sensors and emulators for use in
multi-powered vehicles.  The business of manufacturing electronic parts for
vehicle conversion kits as well as producing conversion kits is reported as a
separate segment.





On March
31, 2008, Sinogas entered into an agreement to sublease certain parcels of land
to Qingdao Mingcheng Real Estate Co., Ltd. (“Qingdao Mingcheng”), a
non-affiliated third party, for a term of three years beginning in January 2008
and expiring on December 31, 2010, at an annual rental of RMB40 million,
equivalent to approximately $5.9 million based on the March 31, 2009
exchange rate.  During the year ended September 30, 2008, we
recognized rental income of $3.8 million from this lease.  As a result
of the failure of Qingdao Mingcheng to make the required rental payments, on
March 31, 2009, Sinogas signed a memorandum of understanding with Qingdao
Mingcheng pursuant to which Sinogas agreed to a termination of the
sublease, and reduced the rental receivable by approximately $1.8 million, which
was 40% of the outstanding balance. At September 30, 2009, we reserved an
additional approximately $1.0 million with respect to this
receivable.  As a result, total reserves against these rentals of
approximately $2.8 million are reflected in general and administrative expenses
in the year ended September 30, 2009.








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





•
            the
      manufacture of equipment for CNG vehicles and gas stations,
      and





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





Our
original business was the manufacture and sale of nonstandard equipment and
pressure containers operated by our subsidiary, Qingdao Sinogas Yuhan Chemical
Equipment Co., Ltd. (“Yuhan”), which is owned 75% by Sinogas and a 25% ownership
by us through Sinoenergy Holdings.





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





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





The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. Following a period of general economic growth, China, like the
rest of the world, has recently been subject to an economic
downturn.  There can be no assurance that the downturn will not
continue to have a negative effect on our business especially if it results in
either a decreased use of products such as ours or in pressure on us to lower
our prices. Our customized pressure container business and our CNG station
facilities and construction business are dependent upon our customers making
significant capital purchases, either for pressure containers or for new CNG
stations.  The availability of financing to our customers as well as
the capital requirements of our customers could significantly reduce the need
for these products and services.  Since our CNG station business is
dependent upon the development of a market for cars and trucks that run on CNG
rather than gasoline, any economic trends which have the effect of dampening the
market for CNG vehicles could affect our ability both to sell our CNG products
and to sell CNG at our proposed CNG stations. The recent sharp decline in oil
and gasoline prices may affect the need for both CNG stations and conversion
kits that enable gasoline-powered vehicles to operate on
CNG.  Although the government of China has encouraged the use of CNG
as part of its effort to reduce pollution in China, the factors described above
may affect the development of the CNG industry in China.  We cannot
predict whether or how these factors will affect the market for CNG in the areas
in which we are constructing our CNG filling stations or the market for our
conversion kits. However, these factors were a significant reason for our
reduced gross margin and our net loss for the year ended September 30,
2009.





21




We
purchase CNG from government controlled entities.  During 2007, we
entered into two joint ventures for the operation of natural gas process plants.
We have an 80% interest in one of these ventures and a 20% interest in the
other. At September 30, 2009, our total commitments under these agreements were
approximately $5.0 million, of which we had paid a total of approximately $2.4
million. These two facilities are in the early construction stage, and neither
of these ventures has commenced operations. We also have contracted for the
purchase of natural gas which is to be delivered through a
pipeline.  The pipeline was completed in December 2009, and is
undergoing completion testing prior to being placed in commercial
operation.  These contracts do not have specific delivery quantities
or prices, all of which are to be determined later.





During
2008, we sold a 24.95% interest in Sinogas.  Sinogas operates the CNG
station facilities and construction and owns 75% of the subsidiaries that
operate the vehicle conversion kit segment and customized pressure container
segment. The only segment that is wholly-owned by us is the CNG station
operation.





RESULTS
OF OPERATIONS





We are
engaged in four business segments:





(i)
Customized pressure container business





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





(ii)
CNG Station Facilities and Construction





Our CNG
station construction business represents:





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





▪
            CNG
      station construction service, which includes the design of CNG station
      construction plans, construction of CNG stations, and installation of CNG
      station equipment and related systems. Because of our emergence into the
      CNG filling station business in 2006, we did not receive any CNG station
      construction service orders from the beginning of 2007. Our operating
      results in this segment reflects contracts which we entered into during or
      prior to the beginning of 2007. We anticipate that, at least in the near
      term, we will devote most, if not all, of our CNG construction business to
      the construction of our own CNG filling
  stations.





(iii)
CNG station operations





In 2006,
we entered the CNG station business, which involves the design, construction and
equipping of CNG stations and the operation of those stations.  As of
December 10, 2009, we were operating twenty-one CNG stations, of which sixteen
are located in Wuhan, two in Pingdingshan and three in Xuancheng.  An
additional four stations in Wuhan are in the final stages of construction, and
fourstations in
Wuhanwere in the
preliminary planning stage.





(iv)
Vehicle fuel conversion equipment





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





Years
ended September 30, 2008 and 2009





The
information set forth below has been derived from our audited financial
statements for the year ended September 30, 2009 and 2008.




Year
      Ended September 30, 2009
              ($
      `000)
            
            Customized
              pressure
              containers
            
            CNG
      station
              facilities
      and
              construction
            
            CNG
              station
              operation
            
            
            Vehicle
              conversion
              kits
            
            
            TotalNet
      sales
            
            $
            4,762
            
            $
            9,495
            
            $
            18,584
            
            
            $
            8,959
            
            
            $
            41,800Cost
      of sales
            
            
            3,883
            
            
            5,211
            
            
            16,455
            
            
            
            6,801
            
            
            
            32,350Gross
      profit
            
            
            879
            
            
            4,284
            
            
            2,129
            
            
            
            2,158
            
            
            
            9,450Gross
      margin
            
            
            18
            %
            
            45
            %
            
            11
            %
            
            
            24
            %
            
            
            23
            %Operating
      expenses:Selling
      expenses
            
            
            180
            
            
            84
            
            
            568
            
            
            
            559
            
            
            
            1,391General
      and administrative expenses
            
            
            2,275
            
            
            6,497
            
            
            3,
      205
            
            
            
            745
            
            
            
            12,722Total
      operating expense
            
            
            2,455
            
            
            6,581
            
            
            3,773
            
            
            
            1,304
            
            
            
            14,113Income
      (loss) from operations
            
            $
            (1,576
            )
            $
            (2,297
            )
            $
            (1,644
            )
            
            $
            854
            
            
            $
            (4,663
            )Total
      assets
            
            $
            62,448
            
            $
            58,073
            
            $
            48,134
            
            
            $
            11,991
            
            
            $
            180,646




22







Year
      Ended September 30, 2008
              ($
      `000)
            
            Customized
              pressure
              containers
            
            CNG
      station
              facilities
      and
              construction
            
            CNG
              station
              operation
            
            Vehicle
              conversion
              kits
            
            TotalNet
      sales
            
            $
            9,692
            
            $
            16,237
            
            $
            3,246
            
            $
            11,765
            
            $
            40,940Cost
      of sales
            
            
            5,374
            
            
            9,470
            
            
            2,551
            
            
            8,194
            
            
            25,589Gross
      profit
            
            
            4,318
            
            
            6,767
            
            
            695
            
            
            3,571
            
            
            15,351Gross
      margin
            
            
            45
            %
            
            42
            %
            
            21
            %
            
            30
            %
            
            37
            %Operating
      expenses:Selling
      expenses
            
            
            275
            
            
            52
            
            
            150
            
            
            404
            
            
            881General
      and administrative expenses
            
            
            943
            
            
            1,591
            
            
            1,533
            
            
            822
            
            
            4,889Total
      operating expense
            
            
            1,218
            
            
            1,643
            
            
            1,683
            
            
            1,226
            
            
            5,770Income
      (loss) from operations
            
            $
            3,100
            
            $
            5,124
            
            $
            (988
            )
            $
            2,345
            
            $
            9,581Total
      assets
            
            $
            41,075
            
            $
            45,441
            
            $
            28,654
            
            $
            17,177
            
            $
            132,347




Net Sales. Net sales for the
year ended September 30, 2009 (“2009”) were approximately $41.8 million, an
increase of approximately $0.9 million, or 2.1%, from sales of approximately
$40.9 million for the year ended September 30, 2008 (“2008”).  The
increase resulted from:





•
            A
      decrease of approximately $4.9 million, or 51%, in sales from customized
      pressure containers, reflecting the decrease in demand for these products,
      resulting from the effects of the economic downturn.•
            A
      decrease of approximately $6.7 million, or 42%, in sales from the CNG
      stations facilities and construction, resulting from the decrease in
      demand for the construction and equipping of CNG stations and our change
      in emphasis as we devoted significant efforts to the construction of our
      own stations.•
            An
      increase of approximately $15.3 million, or 473%, in sales from the CNG
      station operation. We commenced operations in this business during fiscal
      year 2008, opening our first station in October 2007. At September 30,
      2009, we operated 21 stations. The increase in revenue is primarily
      attributable to the increase in the number of stations in
      operation.•
            A
      decrease of approximately $2.8 million, or 24%, from the sales of
      conversion kits. The decrease resulted from the global economic crisis,
      which affected most of the exports of our
  products.





During
2009, China experienced an economic downturn. Despite the government’s policy to
encourage the use of CNG, our business was affected by the economic downturn as
businesses were less likely to invest in conversion kits or CNG powered
vehicles. We cannot predict the effect of the economic downturn on our
business in the near future.





Cost of Sales; Gross Margin.
The cost of sales for the 2009 was approximately $32.4 million, an increase of
approximately 26% from approximately $25.6 million for the 2008. Our overall
gross margin decreased significantly from 37% in 2008 to 23% in 2009, because of
the following reasons:





•
            Our
      gross margin for the customized pressure containers decreased from 45% to
      18%. Since these products are customized, with wide range of gross margin
      because of the variety of the products. In addition, an additional charge
      of $340,000 was recorded in cost of sales in 2009 reflecting a writedown
      in the slow-moving inventory (raw materials and work in process) that we
      had held for more than one year.•
            Our
      gross margin for the CNG station facilities and construction includes was
      reasonably consistent from 2008 to 2009. The gross margin for CNG gas
      stations technical consulting service, which is a part of the CNG station
      facilities and construction segment, was more than over 80%, as a result
      of our know-how in CNG system design.•
            Our
      gross margin for the operation of our CNG stations decreased from 21% to
      11%. The cost of natural gas increased approximately 10% and the freight
      costs, which are included in cost of sales, increased approximately 10%,
      which significantly affected the gross margin in this segment. The gross
      margin for this segment reflects the effects of price controls, which
      cover both the price at which we buy and the price at which we sell
      CNG.•
            As
      the market for vehicle conversion kits matured and the demand for these
      kits decreased as a result of the economic downturn, our gross margin in
      this segment decreased from 30% to
24%.





23




Selling
Expenses.  Selling expenses increased approximately $510,000,
or approximately 58%, from 2008 to 2009.  A significant portion of the
increase relates to the CNG station segment. The increase in rent resulting from
the increased number of stations contributed to this increase. In addition,
selling expenses for the vehicle conversion kits segment increased $155,000
because of the expansion of our marketing efforts.





General and Administrative
Expenses.  General and administrative expenses increased
approximately $7.8 million, or 160%.  This increase includes
pre-operational expenses for the CNG station operation segment of $190,000, bad
debts provision of $1.9 million, expenses of $846,000 from the renovation of the
Sinogas plant in its new location, and writeoff of rental income receivable from
Mingcheng of $2,745,000 resulting from a reduction in the rent due under the
March 2009 termination agreement of $1,757,000 and the further reserve of
$988,000 at September 30, 2009. Our general and administrative expenses include,
in addition to the management expenses and depreciation related to the division,
an allocation of corporate expenses, including expensesrelating to our status
as a public company, such as legal, audit and investor relations
costs.  Management overhead was allocated among the segments based on
the relative time devoted by management to the business of the
segments.





Interest
Expense.  Our interest expense for 2009 was approximately $7.3
million, as compared with $3.5 million for 2008.  Although the stated
interest rate on the convertible notes in the principal amount of $14 million is
3% per annum, if the notes are not converted by maturity, we are required to pay
a yield to maturity of 13.8% per annum, less interest previously paid.
Accordingly, we accrue interest at the rate of 13.8% per annum, of which 3% is
treated as current interest and 10.8% as deferred interest. In connection with
the proposed merger with Skywide, we will be required to pay the convertible
notes in full following the merger, with the payments to include the yield to
maturity of 13.8%.  As a result, we have classified interest at 13.8%
as current at September 30, 2009. The registration rights agreement relating to
the shares of common stock issuable upon conversion of the convertible notes
required the registration statement to be declared effective by March 28,
2008.  The indenture relating to the convertible notes requires us to
pay additional interest of 1% (4% per annum) of the principal amount for each
90-day period (quarterly $140,000) thereafter during which we have failed to
have the registration statement declared effective. As a result of our failure
to have a registration statement relating to the shares issuance upon conversion
of the convertible notes declared effective, we incurred additional interest of
$140,000 in 2009.  This amount reflects a reduced amount due under the
December 2009 agreement with the holders of the convertible notes.  In
addition, in 2009, we increased our bank borrowings to expand our CNG station
operation and manufacturing plant, which also increased interest expense by
approximately $733,000. Furthermore, the conversion price of the convertible
notes in the principal amount of $14 million was reset in March 2008 to $5.125
and in March 2009 to $4.20, resulting in the recording of discounts to the
underlying notes, thereby creating non-cash interest charges of $1,519,000 in
2009 and $373,400 in 2008.





Other Income. During 2009,
rental income was approximately $1.3 million, arising from the rental payment
for our land use rights for our former manufacturing facility. In March 2009,
this lease was terminated and we wrote off approximately $1.8 million of the
rent receivable, we reserved an additional $988,000 at September 30, 2009, as
disclosed in the discussion of general and administrative expenses. In July
2009, Sinoenergy Holding transferred its 100% equity in Qingdao Sinoenergy to
Sinogas. Since Sinogas is 75.05% owned by us, this equity transfer resulted in
other expense of $2.4 million representing the value of 24.95% of Qingdao
Sinoenergy’s equity which is no longer owned by us.




During
2008, we generated:


•
            Rental
      income of approximately $3.8 million, arising from the sublease of our
      land use rights for our former manufacturing facility. However, the lease
      was terminated in March 2009, and writeoffs of $2,745,000 relating to the
      receivable generated from the rental income were taken in
      2009.•
            Gain
      of $5.8 million resulting from the sale by Sinogas, a subsidiary, of a
      24.95% interest in Sinogas for RMB124,760,000 (equivalent to $18,297,816
      at the balance sheet date exchange rate). In related transactions, Sinogas
      acquired the remaining 30% interest in Lixun from the former stockholder
      of Lixun and a company owned by the former stockholder of Lixun purchased
      a 3.95% interest in Sinogas.•
            Gain
      on the sale of a subsidiary of approximately $1.7 million. The subsidiary
      was both acquired and sold during
2008.





24




Income Taxes. Our income
taxes decreased from $1,309,000 of 2008 to $748,000 of 2009.  Sinogas
and Yuhan were granted 50% enterprise income tax exemption for 2008 through
2010. Jiaxing Lixun was granted a 100% tax exemption from August 2007 through
December 2008 and a 50% enterprise income tax exemption for 2009 through 2011.
In January 2009, the Chinese tax authorities issued a ruling that a joint
venture enterprise incorporated after March 16, 2007 cannot enjoy the tax
preferences. Since Jiaxing Lixun is a joint venture incorporated in July 2007,
it cannot enjoy the tax preferences. Jiaxing Lixun was recognized as a high-tech
enterprise, and enjoyed the 15% tax rate from January 2008. Since Jiaxing Lixun
is a joint venture and therefore not eligible for the tax exemption, Jiaxing
Lixun incurred income tax of $207,369 based on its taxable income during the
last quarter of calendar 2008. Sinogas incurred income taxes of $132,189 as a
result of an adjustment relating to its 2008 income tax. The income tax for 2009
also reflects adjustments to taxable income required under the Chinese tax
regulations.




Minority
Interest.  The minority interest, of negative $337,000 in 2009
and $1,082,000 in 2008, represents the share of the income or loss of our
subsidiaries allocated to that portion of the subsidiaries’ equity owned by
third parties.





Net
Income(Loss).  As a result of the foregoing, we had a net loss
of approximately $13,103,000 , or $0.82 per share (basic and diluted), for 2009,
as compared with net income of $16,056,000, or $1.02 per share (basic) and $0.97
(diluted) for 2008.





Comprehensive Income
(Loss).  Our comprehensive loss for 2009 was $13,193,000 as
compared with comprehensive income of $19,606,000 for 2008.Other comprehensive
income (loss) items include foreign currency translation adjustments resulting
from changes in the currency rates between the RMB and the United States dollar,
or approximately ($90,000) in 2009 and $3,550,000 in 2008.





Liquidity
and Capital Resources





At
September 30, 2009, we had cash of approximately $19.7 million, an increase of
approximately $9.4 million (including restricted cash of $1.4 million), from
September 30, 2008. At September 30, 2009, we had a working capital deficiency
of approximately $9.1 million and shareholders’ equity of approximately $46.2
million, compared with positive working capital of approximately $35.0 million
and shareholders’ equity of approximately $55.2 million at September 30, 2008.
The following table sets forth information as to the principal changes in the
components of our working capital (dollars in thousands):




Category
              30-Sep-09
              
              30-Sep-08
              
              
              
              Change
              
              
              
              Percent
      ChangeASSETSCURRENT
      ASSETSCash
              
              
              $
              18,237
              
              
              
              $
              8,871
              
              
              
              
              
              9,366
              
              
              
              105.58
              %Restricted
      cash
              
              
              
              1,413
              
              
              
              
              523
              
              
              
              
              
              890
              
              
              
              170.17
              %Accounts
      and notes receivable, net
              
              
              
              29,756
              
              
              
              
              22,008
              
              
              
              
              
              7,748
              
              
              
              35.21
              %Inventories
              
              
              
              4,619
              
              
              
              
              7,303
              
              
              
              
              
              (2,684
              )
              
              
              (36.75
              %)Other
      receivables, net
              
              
              
              17,644
              
              
              
              
              16,939
              
              
              
              
              
              705
              
              
              
              4.16
              %Deposits
      and prepayments
              
              
              
              8,629
              
              
              
              
              7,918
              
              
              
              
              
              711
              
              
              
              8.98
              %Due
      from related party
              
              
              
              426
              
              
              
              
              44
              
              
              
              
              
              382
              
              
              
              868.18
              %Deferred
      expenses
              
              
              
              63
              
              
              
              
              91
              
              
              
              
              
              (28
              )
              
              
              (30.77
              %)CURRENT
      LIABILITIESShort-term
      loans
              
              
              $
              44,223
              
              
              
              $
              11,953
              
              
              
              
              $
              32,270
              
              
              
              269.97
              %Notes
      payable
              
              
              
              4,583
              
              
              
              
              1,633
              
              
              
              
              
              2,950
              
              
              
              180.65
              %Accounts
      payable
              
              
              
              5,193
              
              
              
              
              5,894
              
              
              
              
              
              (701
              )
              
              
              (11.89
              %)Advances
      from customers
              
              
              
              2,100
              
              
              
              
              2,409
              
              
              
              
              
              (309
              )
              
              
              (12.83
              %)Additional
      interest on notes
              
              
              
              280
              
              
              
              
              420
              
              
              
              
              
              (140
              )
              
              
              (33.33
              %)Income
      taxes payable
              
              
              
              475
              
              
              
              
              633
              
              
              
              
              
              (158
              )
              
              
              (24.96
              %)Other
      payables
              
              
              
              5,783
              
              
              
              
              5,341
              
              
              
              
              
              442
              
              
              
              8.28
              %Accrued
      expenses
              
              
              
              538
              
              
              
              
              335
              
              
              
              
              
              203
              
              
              
              60.60
              %Deferred
      income
              
              
              
              38
              
              
              
              
              95
              
              
              
              
              
              (57
              )
              
              
              (60.00
              %)Long-term
      Notes payable (current portion)
              
              
              
              26,667
              
              
              
              
              0
              
              
              
              
              
              26,667Total
      current assets
              
              
              $
              80,787
              
              
              
              $
              63,697
              
              
              
              
              $
              17,090
              
              
              
              26.83
              %Less: total
      current liabilities
              
              
              
              89,880
              
              
              
              
              28,713
              
              
              
              
              
              61,167
              
              
              
              213.03
              %Net
      working capital
              
              
              
              (9,093
              )
              
              
              
              34,984
              
              
              
              
              
              (44,077
              )
              
              
              (125.99
              %)





25





At
September 30, 2009, we require substantial capital to meet the required payments
toward the $16 million senior notes, which were paid in full as of December 23,
2009, and $14 million convertible senior notes and to maintain the level of cash
flows needed for continuing operations.  We can give no assurance that
we will be able to raise such capital.  We have limited financial
resources until such time that we are able to generate additional financing or
cash flow from operations.  Our ability to establish profitability and
positive cash flow is dependent upon our ability both to raise funds to finance
our immediate cash requirements and to market our products in anticipation of a
recovery in China of those industries we serve, including the CNG
market.  If we are unable to raise adequate capital to meet the
payment required to pay the remaining principal and interest on the notes and
cash flows needed for operations, it is likely we would have to substantially
curtail, if not terminate, our business activity.





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.  As reflected in the accompanying
consolidated financial statements we incurred substantial losses during the
fiscal year ended September 30, 2009 and are continuing to incur
losses.  We are also liable for substantial repayment of senior notes
and convertible senior notes. These factors, among others, may indicate that we
will be unable to continue as a going concern for reasonable period of
time.





The
financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going
concern.  Our continuation as a going concern is dependent upon our
ability to obtain additional operating capital, and ultimately, to attain
profitability. There is no assurance that we will be successful in raising
additional funds or that, if we do raise additional funds, that we will be able
to attain profitability or even continue in business.





For the
year ended September 30, 2009, we used net cash of $6.5 million in operating
activities.Working
capital decreased by approximately $44.1 million from 2008 to 2009 primarily as
a result of funding net losses and reclassifying long-term debt to current as a
result of restructuring agreements, as described below





At
September 30, 2009, we were not in compliance with the financial covenants in
the indentures relating to our 12% senior notes due 2012 in the principal amount
of $16,000,000 and 3.0% senior convertible notes due 2012 in the principal
amount of $14,000,000. These covenants had been amended on May 19,
2009.  In October and December 2009, the Company entered into two
agreements that modified the terms of the notes, as follows.





·
            The
      noteholders waived compliance with the covenants at September 30, 2009 and
      through March 31, 2010.




·
            We
      agreed to repay the 12% senior notes in the principal amount of $16
      million.  Initially the payments were due by November 30,
      2009.  We paid approximately $14 million by November 30,
      2009.  As a result of the December agreement, we were required
      to pay the remaining balance of approximately $2 million, by December 31,
      2009. This payment was made on December 23,
  2009.




·
            We
      agreed to pay the convertible notes in the principal amount of $14 million
      in two installments, with an initial payment of $5 million being due ten
      days after the merger with Skywide becomes effective and the balance 30
      days thereafter.  Since the note holders would not be converting
      the notes, we would pay interest to provide the note holders with a yield
      to maturity of 13.8%, net of payments previously
  made.




·
            The
      noteholders reduced our remaining obligation for liquidated damages for
      failure to register the shares of common stock issuable upon conversion of
      the convertible notes to $280,000, which is payable by December 31,
      2009.




·
            The
      provision that would have resulted in a further decrease in the conversion
      price of the convertible notes if we did not meet certain levels of net
      income was eliminated.




·
            The
      provisions of the indenture relating to the reduction in the conversion
      price of the convertible notes if we issue stock at a price, or issue
      convertible securities with a conversion or exercise price, that is less
      than the conversion price (presently $4.20 per share) were
      eliminated.




26




As a
result of these agreements, these notes are classified as current liabilities at
September 30, 2009.  A significant portion of the cash on hand at
September 30, 2009 was used to pay $16 million of the 12% senior
notes.




For the
year ended September 30, 2009, net cash used in operating activities was $6.5
million, primarily related to $8.8 million increase in accounts receivable, a
$3.8 million increase of other receivables, partially offset by a $2.2 million
increase in accounts payable and a $2.3 million decrease in inventories. The
increase in accounts receivable reflects the nature of the competition, with
customers seeking a longer period to make the payment.





We used
approximately $36.0 million in investing activities for the year ended September
30, 2009. This was due primarily to the expansion of our CNG station
operation segment, principally for purchase of property, plant and equipment
($27.5 million) and land use rights ($3.5 million).





Net cash
provided by financing activities was $50.8 million for the year ended September
30, 2009, primarily related to $66.9 million in new loans from domestic banks in
China, which were offset by the repayment of $12.0 million in short-term
borrowings from domestic banks in China.





For the
year ended September 30, 2008, net cash used in operating activities was $20.2
million, primarily related to $15.8 million increase in accounts receivable, a
$18.4 million increase of other receivables, a $4.4 million increase in
inventories, partially offset by a $3.6 million increase in accounts payable and
a $1.5 million increase in other liabilities. The increase in accounts
receivable reflects the nature of the competition, with customers seeking, and
obtaining, a longer period to make the payment.





We used
approximately $27.7 million in investing activities for the year ended September
30, 2008. This was due primarily to the expansion of our CNG station
operation segment, principally for purchase of property, plant and equipment
$16.5 million, purchase of minority interest in subsidiaries ($8 million) and
land use rights ($2.1 million).





Net cash
provided by financing activities was $48.8 million for the year ended September
30, 2008, primarily related to $29.8 million of net proceeds from note
subscription relating to the $16,000,000 principal amount of 12% senior notes
due 2012 and the $14,000,000 principal amount of 3% convertible notes due 2012,
$18.2 million from the sale by Sinogas of a minority equity interest, $15.6
million of new loans from domestic banks in China, which were offset by the
repayment of $14.8 million in short-term borrowings from domestic banks in
China.





We will
continue to incur capital expenditures for the CNG station segment in the
future. Because the CNG business in the PRC is a relatively new industry, it is
necessary for us to plan, construct and equip each CNG station before we can
generate any revenue.





Since
September 30, 2009, we have paid $14 million in principal to the holders of our
12% senior notes, with an additional approximately $2 million being due by
December 31, 2009, and we have agreed to pay the $14,000,000 plus interest on
the 3% convertible notes following the completion of the merger with Skywide. In
the event the merger with Skywide is not completed, we cannot assure you that
our lenders will not require us to accelerate payments of the 3% senior
convertible notes in the principal amount of $14 million.  If we
prepay any of the convertible notes, interest would be due at the rate of 13.8%
per annum on the remaining balances.





Our
agreement relating to the issuance of $16 million principal amount of senior
notes and $14 million principal amount of senior convertible notes have
covenants which could impair our ability to raise additional funds. As of
December 24, 2009, we owed approximately $2 million with respect to the senior
notes and $14 million in the convertible notes.  These covenants
include the following:




27




•
            We
      cannot incur any debt unless, after giving effect to the borrowing, (i)
      the fixed charge coverage ratio would be greater than 3.5 to 1.0, and (ii)
      the leverage ratio would not exceed 3.75 to 1.00, provided, that Sinogas
      continue to maintain debt under credit facilities of not more than
      $10,000,000, and may incur purchase money indebtedness. The fixed charge
      coverage ratio is the ratio of our earnings before interest, taxes,
      depreciation and amortization, which is generally known as EBITDA, to
      consolidated interest expense, as defined. Leverage ratio means the ratio
      of outstanding debt to EBITDA, with the interest component being the
      consolidated interest expense, as defined. At September 30, 2009, our
      fixed charge coverage ratio was negative 0.08 to 1.00.•
            We
      must maintain, as of the last day of each fiscal quarter, (i) a fixed
      charge coverage ratio of at least 2.00 to 1.00 through December 31, 2009
      and 3.0 to 1.00 thereafter, (ii) a leverage ratio of not more than 6.0 to
      1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, and (iii) a
      consolidated subsidiary debt to consolidated net tangible asset ratio of
      not more than 0.35 thereafter. The noteholders agreed that they would not
      take any action to declare an event of default as long as the Company is
      in compliance with the modified covenants.•
            Sinogas
      cannot incur debt under its credit facilities except to the extent that
      such debt does not exceed $10.0 million.•
            We
      are subject to restriction in paying dividends, purchasing its own
      securities or those of our subsidiaries, prepaying subordinated debt, and
      making any investment other any investments in itself and its subsidiaries
      engaged in our business and certain other permitted
      investments.•
            We
      are subject to restrictions on incurring
liens.





As of
September 30, 2009, we were not in compliance with the financial covenants;
however, the note holders agreed to waive the covenants at September 30, 2009
and through March 31, 2010.





On
October 12, 2009, we entered into an agreement and plan of merger with Skywide,
which is owned by Mr. Deng, chairman and a director, and Mr. Huang, chief
executive officer and a director, pursuant to which, subject to shareholder
approval, we would be merged into Skywide and each share our common stock, other
than shares held by us, Skywide, Mr. Deng or Mr. Huang, would be converted into
the right to receive $1.90 per share.





Commitments





The
Company has the following material contractual obligations and capital
expenditure commitments:





The
Company and China New Energy formed Hubei Gather to construct and operate
natural gas processing plants with expected annual processing capacity of
100-300 million cubic meters in Hubei Province. The registered capital is $5
million of which the Company will contribute $4 million as 80% equity owner and
New Energy will contribute $1 million for a 20% interest. The term of the
business of Hubei Gather is from March 23, 2007 to March 22, 2027. As of
September 30, 2009, the Company’s commitment for future funding was
$2,625,000.  In November 2009, the Company signed two agreements with
China New Energy pursuant to which we will transfer a 30% interest in Hubei
Gather to China New Energy for $1.5 million and China New Energy will transfer a
30% interest in Anhui Gather to us for $1.5 million. Upon completion of these
two equity transfers, we and China New Energy would each own 50% of both Hubei
Gather and Anhui Gather.  The effect of these agreements is that the
Company will have exchanged a 30% interest in Hubei Gather for a 30% interest in
Anhui Gather.  As a result of these transfers, our commitment for
future funding of these entities will remain $2,625,000.





Sinoenergy
Holding and Sinogas signed an agreement to set up Qingdao Sinoenergy Gas in
which Sinoenergy Holding would own 60% and Sinogas would own 40%.  As
a result, Qingdao Sinoenergy Gas will be 90% owned by us.  Sinoenergy
Holding’s commitment will be $2,636,000, and Sinogas’ commitment will be
$1,757,000. As of September 30, 2009, Sinogas had made its full contribution and
the Company’s commitment was $2,636,000.





Jiaxing
Lixun will contribute $58,574 to Yichang Liyuan Power Technology Company to own
40% equity. As of September 30, 2009, Lixun contributed $29,287. As of September
30, 2009, the Company’s commitment for future funding was $29,287.





Wuhan
Sinoenergy and Pingdingshan Sinoenergy, subsidiaries of the Company, have leased
13 parcels of land in Wuhan City and Pingdingshan City for their CNG stations
under operating lease agreements. The lease terms are from 7 year to 30 years
with annual rental fees of approximately $846,000.  Based on land
rental agreements in effect at September 30, 2009, the Company will pay a total
of $5.73 million during through 2039.




Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval.





Our
commitment for the construction of CNG stations, including stations being
constructed by Wuhan Sinoenergy and Hubei Gather, was $1,025,000 as of September
30, 2009. .




Our
commitment for the construction of a new plant in Jiaxing Lixun was $1,085,000
as of September 30, 2009.




Our
commitment for the purchase of property, plant and equipment, including property
for Wuhan Sinoenergy and Hubei Gather, was $5,901,000 as of September 30,
2009.




28





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES







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





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





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





Stock-Based
Compensation. We grant stock options and stock grants to employees and
stock options or warrants to non-employees in non-capital raising transactions
for services and for financing costs.  Share-based payment is
recognized at fair value measured at the grant date. The fair value is
determined using the Black-Scholes option pricing model. The resulting amount is
charged to expense on the straight-line basis over the period we expect to
receive benefit, which is generally the vesting period. In some cases, Skywide,
our principal stockholder, which is owned by our chief executive officer and our
chairman, both of whom are directors, provided or agreed to provide stock to
executive officers in connection with their employment.  These shares
are treated as if the shares were contributed to us by Skywide and issued by
us.





Foreign Currency
Translation.  Our functional currency is RMB, and our
reporting currency is United States dollars. Our balance sheet accounts are
translated using the closing exchange rate in effect at the balance sheet date
and operating accounts are translated using the average exchange rate prevailing
during the year. Equity accounts are translated using the historical rate
as incurred. Translation gains and losses are deferred and accumulated as a
component of accumulated other comprehensive income in stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations from
transactions denominated in a currency other than the functional currency are
included in the statements of operations as incurred.





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





NEW
ACCOUNTING PRONOUNCEMENTS





Effective
July 1, 2009, the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ ASC”) became the single official source of
authoritative, nongovernmental U.S. GAAP. The historical U.S. GAAP hierarchy was
eliminated and the ASC became the only level of authoritative U.S. GAAP, other
than guidance issued by the SEC. The Company’s accounting policies were not
affected by the conversion to ASC. However, references to specific accounting
standards in the notes to our consolidated financial statements have been
changed to refer to the appropriate section of the ASC.





In
April 2008, the FASB issued a pronouncement on what now is codified as FASB
ASC Topic 350, Intangibles —
Goodwill and Other. This pronouncement amends the factors to be
considered in determining the useful life of intangible assets accounted for
pursuant to previous topic guidance. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. This pronouncement is effective for fiscal
years beginning after December 15, 2008 and its adoption did not have a
material effect on the Company’s consolidated financial statements.




In June
2008, the FASB amended FASB Topic ASC 815, Sub-Topic 40, "Contracts in Entity’s
Own Equity” to clarify how to determine whether certain instruments or features
were indexed to an entity's own stock under ASC Topic 815. The amendment applies
to any freestanding financial instrument (or embedded feature) that has all of
the characteristics of a derivative, for purposes of determining whether that
instrument (or embedded feature) qualifies for the scope exception. It is also
applicable to any freestanding financial instrument (e.g., gross physically
settled warrants) that is potentially settled in an entity's own stock,
regardless of whether it has all of the characteristics of a derivative, for
purposes of determining whether to apply ASC 815.




29




In
November 2008, the FASB issued a pronouncement on what is now codified as
FASB ASC Topic 350, Intangibles — Goodwill and
Other. This pronouncement applies to defensive intangible assets, which
are acquired intangible assets that the acquirer does not intend to actively use
but intends to hold to prevent its competitors from obtaining access to them. As
these assets are separately identifiable, the pronouncement requires an
acquiring entity to account for defensive intangible assets as a separate unit
of accounting. Defensive intangible assets must now be recognized at fair value
in accordance with FASB ASC Topic 350. This pronouncement is effective for
intangible assets acquired on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008 and its adoption
did not have a material effect on the Company’s consolidated financial
statements.





In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 805, Business
Combinations. This pronouncement provides new guidance that changes the
accounting treatment of contingent assets and liabilities in business
combinations under previous topic guidance and is effective for contingent
assets or liabilities acquired in business combinations for which the
acquisition date is on or after the first annual reporting period beginning on
or after December 15, 2008. The adoption of this pronouncement did not have
a material effect on the Company’s consolidated financial statements currently,
but its effects will depend on the nature of future acquisitions completed by
the Company.





In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 825, Financial
Instruments. This pronouncement amends previous topic guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies, as well as in annual financial statements.
The pronouncement was effective for interim reporting periods ending after
June 15, 2009 and its adoption resulted in additional disclosures in the
Company’s interim consolidated financial statements.





In
May 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 855, Subsequent
Events. This pronouncement establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
the financial statements are issued or are available to be issued. FASB ASC
Topic 855 provides guidance on the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The pronouncement was effective for the
Company during the annual period ended September 30, 2009. The Company has
evaluated subsequent events for the period from September 30, 2009, the
date of these financial statements, through December 29, 2009, which represents
the date these financial statements are filed with the SEC. Pursuant to the
requirements of FASB ASC Topic 855, there were no events or transactions
occurring during this subsequent event reporting period that require recognition
or disclosure in the consolidated financial statements.





In June
2009, the FASB issued ASC Topic 860-20, "Sales of Financial Assets, SFAS
166" (“ASC 860-20”).  ASC 820-20 is intended to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial statements regarding transfers
of financial assets, including the effects of a transfer on its financial
position, financial performance, and cash flows, and the transferor's continuing
involvement, if any, in the transferred financial assets. This statement must be
applied as of the beginning of the Company’s first annual reporting period that
begins after November 15, 2009. The Company does not expect the adoption of ASC
820-20 to have a material impact on its results of operations, financial
condition or cash flows.





In June
2009, the FASB issued ASC Topic 810-10, "Amendments to FASB Interpretation
No. 46(R)" (“ASC 810-10”).  ASC 810-10 is intended to (1)
address the effects on certain provisions of FASB Interpretation No. 46 (revised
December 2003), “Consolidation of Variable Interest Entities,” as a result of
the elimination of the qualifying special-purpose entity concept in ASC 860-20,
and (2) constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provided timely and useful information
about an enterprise's involvement in a variable interest entity.  This
statement must be applied as of the beginning of the Company’s first annual
reporting period that begins after November 15, 2009.  The Company
does not expect the adoption of 810-10 to have a material impact on its results
of operations, financial condition or cash flows.





In June
2009, the FASB issued ASC Topic 105-10, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles" (“ASC 105-10”).  ASC 105-10 will become the source
of authoritative U.S. generally accepted accounting principles (GAAP) recognized
by the FASB to be applied by non-governmental entities.  Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of Federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this statement, the Codification will
supersede all then-existing non-SEC accounting and reporting
standards.  All other non-grandfathered non-SEC accounting literature
not included in the Codification will become non-authoritative.  This
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009.  The Company does not expect
the adoption of ASC 105-10 to have a material impact on its results of
operations, financial condition or cash flows.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force)and the United States Securities and Exchange Commission did
not or are not believed to have a material impact on the Company's present or
future consolidated financial




30




ITEM 7A.  QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK





Not
Applicable





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL
DATA





The
financial statements begin on Page F-1.





ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE





Not
Applicable





ITEM 9A.  CONTROLS AND PROCEDURES





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





Conclusion
Regarding Effectiveness of Disclosure Controls and Procedures





Under the
supervision and with the participation of management, our chief executive
officer and chief financial officer have carried out an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended.  Based upon that evaluation, our chief executive officer and
chief financial officer concluded that there were material weaknesses in our
internal controls over financial reporting as of the end of the period covered
by this report.  In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the
Treadway Commission in Internal Control — Integrated Framework. Our management
concluded that, as of September 30, 2009, our internal control over financial
reporting was not effective based on these criteria.  Our chief
executive officer and chief financial officer identified weaknesses related to
our accounting personnel’s ability to identify various accounting and disclosure
issues, account for transactions that include an equity-based component, and
prepare financial statements and footnotes in accordance with U.S.
GAAP.  Until June 2006, we were a privately-owned company engaged with
all of our assets and operations located in China, and our financial statements
were prepared in accordance with PRC GAAP.  Since we became a
publicly-traded company, we have significantly expanded the scope of our
business, so that we presently have four business segments.  We have
also engaged in two financings, entered into joint ventures, acquired and
disposed of companies and assets, and granted equity-based
incentives.  All of these events presented complex accounting issues
which were new to our financial staff.  Furthermore, we do not have a
large accounting department and it has been difficult for us to hire qualified
personnel who understand English and Chinese and are familiar with both U.S.
GAAP and PRC GAAP.  We are addressing these issues by reviewing and
revising our internal accounting policies and procedures, expanding the
resources allocated to our accounting department, and hiring outside accounting
advisors.  We expect resolution of these matters may take several
months.  Accordingly, based on the foregoing, the certifying officers
have concluded that our disclosure controls and procedures are not effective at
this time.





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





Our
material weaknesses related to:





•
            an
      insufficient complement of personnel in our corporate accounting and
      financial reporting function with an appropriate level of technical
      accounting knowledge, experience, and training in the application of US
      GAAP commensurate with our complex financial accounting and reporting
      requirements and materiality thresholds.•
            Lack
      of internal audit function - the monitoring function of internal control
      is not well performed due to insufficient resources. In addition, the
      scope and effectiveness of internal audit function have yet to be
      developed.•
            Insufficient
      or lack of written policies and procedures relating to periodic review of
      current policies and procedures and their
  implementation.





31




Remediation
and Changes in Internal Control over Financial Reporting





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





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





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





During
2009, we hired an internal audit manager and, we will increase our efforts to
hire qualified personnel.  We anticipate that we will be able to
complete the remediation before September 30, 2010.





Other
than as described above, management does not believe that there have been any
other changes in our internal control over financial reporting, which have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





ITEM 9B.  OTHER INFORMATION





None





PART III





Part III
is incorporated by reference from our proxy statement relating to our 2010
annual meeting of shareholders.





PART
IV





ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES





(1)             Financial
Statements





See Index
to Consolidated Financial Statements on Page F-1





(2)             Financial
Statement Schedules





All
financial statement schedules are omitted because they are not applicable, not
required under the instructions or all the information required is set forth in
the financial statements or notes thereto.




32




(3)             Exhibits





2.1
            
            Exchange
      Agreement dated as of June 2, 2006, among the Registrant and the former
      stockholders of Sinoenergy.12.2
            
            Agreement
      and plan or merger dated as of October 12, 2009, among the Registrant and
      Skywide Capital Management Limited133.1
            
            Restated
      articles of incorporation .23.2
            
            By-laws.
      34.1
            
            Form
      of convertible note issued in June 2006 private placement. 14.2
            
            Form
      of “A” warrants issued to investors in June 2006 private placement. 14.3
            
            Form
      of “B” warrants issued to investors in the June 2006 private
      placement.14.4
            
            Indenture
      dated September 28, 2007, by and among the Company and DB Trustees (Hong
      Kong) Limited, as trustee, relating to the 3.0% Guaranteed Senior
      convertible notes due 2012.44.5
            
            Indenture
      dated September 28, 2007, by and among the Company and DB Trustees (Hong
      Kong) Limited, as trustee relating to the 12.0% Guaranteed senior notes
      due 2012.410.1
            
            2006
      Long-term incentive plan .110.2
            
            Agreement
      dated June 6, 2006, among Sinoenergy Holding Limited, its wholly-owned
      subsidiary, Qingdao Sinogas General Machinery Limited Corporation, Wuhan
      Fukang Automotive Cleaning Energy Company and Wuhan Yixiang Industry Trade
      Company (English translation).610.3
            
            Agreement
      between Qingdao Sinogas General Machinery Co. Ltd. and Beijing Sanhuan
      Technology Development Co. Ltd. (English Translation).610.4
            
            Agreement
      dated July, 2006, among Sinoenergy Holding Limited, Qingdao Kangtai
      Machinery Equipment Manufacture Co. Limited and Guili Shi (English
      translation).610.5
            
            Agreement,
      dated March 16, 2007, by and among Sinoenergy Corporation, the June 2006
      Private Placement Investors and Skywide Capital Management Limited.710.6
            
            Agreement
      dated March 26, 2007, between Beijing Sinogas Sanhuan Technology
      Development Co., Ltd. and Qingdao Sinogas General Machinery Limited
      Corporation (English translation). 210.7
            
            Agreement
      dated January 26, 2007, among People’s Government of Xuancheng City, Anhui
      Province, China New Energy Development Investment Company Limited and the
      Registrant (English translation) .810.8
            
            Agreement
      dated February 1, 2007, among People’s Government of Huangmei County,
      Hubei Province, China New Energy Development Investment Company Limited
      and the Registrant (English translation) .810.9
            
            Letter
      of Intent to secure the supply of 200 million cubic meters of natural gas
      per year , dated May 14, 2007, among Hubei Gather Energy Gas Co, its 55%
      equity owned subsidiary,   Sinopec Shanghai Petrochemical Company
      Limited (English translation). 410.10
            
            Agreement
      of Natural Gas Sale and Purchase dated June 7, 2007, among China Petroleum
      and Chemical Corporation Natural Gas Branch and Anhui Gather Energy Gas
      Co., Ltd. (English translation).410.11
            
            Composite
      Note Purchase Agreement, dated September 1, 2007, among Sinoenergy
      Corporation, Abax Lotus Ltd. and CCIF Petrol Limited. 410.12
            
            Agreement
      of Equity Interest Transfer dated August 28, 2007, among Junning
      International Industry Co. Ltd., Sinoenergy Holding Limited and Qingdao
      Guang An Industry Co. Ltd (English translation).  410.13
            
            Equity
      registration rights agreement dated September 28, 2007, by and among the
      Company, Abax Lotus Ltd. and CCIF Petrol Limited.410.14
            
            Investor
      rights agreement dated September 28, 2007, by and among the Company, its
      subsidiaries, Mr. DENG Tianzhou and Mr. HUANG Bo, and Abax Lotus Ltd. and
      CCIF Petrol Limited.410.15
            
            Information
      rights agreement dated September 28, 2007, from the Company to Abax Lotus
      Ltd. and CCIF Petrol Limited.410.16
            
            Charge
      agreement over registered shares in Sinoenergy Holding Limited between the
      Company and DB Trustees (Hong Kong) Limited, as security agent. 410.17
            
            Composite
      non-competition covenant and agreement by Mr. DENG Tianzhou and Mr. HUANG
      Bo for the benefit of Abax Lotus Ltd. and CCIF Petrol Limited. 410.18
            
            English
      translation of Equity Transfer Agreement dated January 11, 2008, between
      Sinoenergy Holding Limited, Zhenghong Wang, Hengfu Guo and Jie Shi. 910.19
            
            English
      translation of Equity Transfer Agreement dated December 17, 2007, between
      Sinoenergy Holding Limited, Qingdao Qingqing Enviromental Industry Co.,
      Ltd., Japan Chubu Daichi Yuso Co., Ltd., Japan Neverland and Sanix Co.,
      Ltd. 1010.20
            
            English
      translation of Supplementary Agreement of Equity Transfer dated December
      24, 2007, between Sinoenergy Holding Limited,  Qingdao Qingqing
      Enviromental Industry Co., Ltd. and Qingdao Jia Run He Trading Co.
      Ltd. 1110.21
            
            English
      translation of Land Agreement dated March 1, 2008, between Qingdao Sinogas
      General Machinery Co., Ltd and Qingdao Mingchen Real Estate Co.,
      Ltd. 1210.22
            
            Employment
      Agreement dated October 20, 2008, between the Company and Shiao Ming
      Sheng.5  33
  10.23
            
            Letter
      Agreement dated March 6, 2008, between Abax Lotus Ltd., CCIF Petrol
      Limited, and Skywide Capital Management Limited., and Indenture Waiver
      dated March 6, 2008, by Abax Lotus Ltd. and CCIF Petrol
      Limited. 210.24
            
            Letter
      agreement dated February 23, 2009, by and between the Registrant and Abax
      Lotus Ltd. And CCIF Petrol Limited 1510.25
            
            Amendment
      and waiver agreement dated May 13, 2009, by and between the Company and
      Abax Nai Xin A Ltd., Abax Jade Ltd., and CCIF Petrol Limited.1610.26
            
            Amendment
      and waiver agreement dated May 19, 2009, by and between the Company and
      Abax Nai Xin A Ltd., Abax Jade Ltd., and CCIF Petrol
      Limited.  1610.27
            
            Agreement
      dated October 5, 2009, by and between the Company and Abax Nai Xin A Ltd.,
      Abax Jade Ltd., and CCIF Petrol Limited.1310.28
            
            Agreement
      dated December 17, 2009 by and among the Company, and Abax Nai Xin A Ltd.,
      Abax Jade Ltd., and CCIF Petrol Limited.1716.1
            
            Letter
      from Schwartz Levitsky Feldman LLP1216.2
            
            Letter
      from Grobstein Horwath & Company LLP1421.1
            
            List
      of Subsidiaries.31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act32
            Certification
      of Chief Executive and Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act1
            Filed
      as an exhibit to the Company’s current report on Form 8-K which was filed
      with the Commission on June 15, 2006 and incorporated herein by
      reference.2
            Filed
      as an exhibit to the Company’s annual report on Form 10-K for the year
      ended September 30, 2008 and incorporated herein by
    reference.3
            Filed
      as an exhibit to the General Form for Registration of Securities of Small
      Business Issuers on Form 10-SB which was filed with the Commission on
      March 27, 2000.4
            Filed
      as an exhibit to the Company’s current report on Form 8-K/A which was
      filed with the Commission on July 31, 2006 and incorporated herein by
      reference.





5
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on October 24, 2008, and incorporated herein by
      reference.6
            Filed
      as an exhibit to the Company’s quarterly report on Form 10-QSB for the
      quarter ended June 30, 2006, and incorporated herein by
      reference.7
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on March 21, 2007, and incorporated herein by
      reference.8
            Filed
      as an exhibit to the Company’s Form 10-K report which was filed with the
      Commission on April 10, 2007, and incorporated herein by
      reference.9
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on January 28, 2008, and incorporated herein by
      reference.10
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on February 5, 2008, and incorporated herein by
      reference.11
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on April 2, 2008 (relating to item 1.01), and incorporated
      herein by reference.12
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on April 2, 2008 (relating to item 4.01), and incorporated
      herein by reference.13
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on October 14, 2009 (relating to item 1.01), and incorporated
      herein by reference.14
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on January 15, 2009 (relating to item 4.01), and incorporated
      herein by reference.15
            Filed
      as an exhibit to the Company’s quarterly report on Form 10-Q for the
      quarter ended December 31, 2009, and incorporated herein by
      reference.16
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on May 20, 2009 (relating to item 1.01), and incorporated
      herein by reference.17
            Filed
      as an exhibit to the Company’s Form 8-K report which was filed with the
      Commission on December 24, 2009 (relating to item 1.01), and incorporated
      herein by reference.











34











SIGNATURES





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











SINOENERGY
      CORPORATION.
              (Registrant)Dated:  December 29,
      2009
            By:
            /s/ Bo
      HuangBo
      Huang, Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.  Each person whose
signature appears below hereby authorizes Bo Huang and Shiao Ming Sheng or
either of them acting in the absence of the other as his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him or her and in his or her name, place and stead, in any and all
capacities to sign any and all amendments to this report, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission.





Signature
            
            Title
            
            Date/s/
      Bo Huang
            
            Chief
      Executive Officer
            
            December 29,
      2009Bo
      Huang
            
            and
      Director (Principal Executive Officer)/s/
      Shiao Ming Sheng
            
            Chief
      Financial Officer
            
            December 29,
      2009Shiao
      Ming Sheng
            
            (Principal
      Financial andAccounting
      Officer)/s/
      Tianzhou Deng
            
            Director
            
            December 29,
      2009Tianzhou
      Deng/s/
      Robert I. Adler
            
            Director
            
            December 29,
      2009Robert
      I. Adler/s/
      Renjie Lu
            
            Director
            
            December 29,
      2009Renjie
      Lu/s/
      Greg Marcinkowski
            
            Director
            
            December 29,
      2009Greg
      Marcinkowski/s/
      Baoheng Shi
            
            Director
            
            December 29,
      2009Baoheng
      Shi/s/
      Xiang Dong (Donald) Yang
            
            Director
            
            December 29,
      2009Xiang
      Dong (Donald) Yang





35




SINOENERGY
CORPORATION AND SUBSIDIARIES





Index
to Consolidated Financial Statements




















PageReports
      of Independent Registered Public Accounting Firms
            F-2Consolidated
      Balance Sheets as of September 30, 2009 and 2008
            F-4Consolidated
      Statements of Operations and Comprehensive Income (Loss) for the Years
      Ended September 30, 2009 and 2008
            F-5Consolidated
      Statements of Shareholders’ Equity for the Years Ended September 30, 2009
      and 2008
            F-6Consolidated
      Statements of Cash Flows for the Years Ended September 30, 2009 and
      2008
            F-7Notes
      to the Consolidated Financial Statements
            F-8














F-1











REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Sinoenergy
Corporation








We have
audited the accompanying consolidated balance sheet of Sinoenergy Corporation
and subsidiaries (the “Company”) as of September 30, 2009, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of September 30,
2009, and the results of its operations and its cash flows for the year then
ended, in conformity with U.S. generally accepted accounting
principles.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has incurred a significant loss and negative
operating cash flows for the year ended September 30, 2009, and as of September
30, 2009 there is negative working capital of $9.1 million.  These
matters, among others, raise substantial doubt about the Company’s ability to
continue as a going concern.  Management's plans in regard to these
matters are also described in Note 2.  The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.





/s/ Crowe
Horwath LLP


Sherman
      Oaks, CaliforniaDecember
      29, 2009





F-2





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Sinoenergy
Corporation





We have
audited the accompanying consolidated balance sheet of Sinoenergy Corporation
and subsidiaries (the “Company”) as of September 30, 2008, and the related
consolidated statements of operations and comprehensive income, shareholders’
equity, and cash flows for the year then ended.  These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sinoenergy Corporation and
subsidiaries as of September 30, 2008, and the results of their operations and
cash flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.





/s/
      Grobstein, Horwath & Company LLPSherman
      Oaks, CaliforniaDecember
      23, 2008





F-3





Sinoenergy
Corporation and Subsidiaries


Consolidated
Balance Sheets


(In
thousands of United States dollars)





September
      30, 2009
            
            
            September
      30, 2008ASSETSCURRENT
      ASSETSCash
            
            $
            18,237
            
            
            $
            8,871Restricted
      cash
            
            
            1,413
            
            
            
            523Accounts
      receivable, net
            
            
            29,756
            
            
            
            22,008Inventories
            
            
            4,619
            
            
            
            7,303Other
      receivable, net
            
            
            17,644
            
            
            
            16,939Due
      from related party
            
            
            426
            
            
            
            44Deposits
      and prepayments
            
            
            8,629
            
            
            
            7,918Deferred
      expenses
            
            
            63
            
            
            
            91TOTAL
      CURRENT ASSETS
            
            
            80,787
            
            
            
            63,697Long-term
      investments
            
            
            4,905
            
            
            
            1,568Property,
      plant and equipment, net
            
            
            54,870
            
            
            
            30,298Intangible
      assets
            
            
            116
            
            
            
            160Land
      use rights
            
            
            30,370
            
            
            
            27,431Due
      from related party
            
            
            -
            
            
            
            383Other
      long term assets
            
            
            7,672
            
            
            
            6,891Goodwill
            
            
            1,906
            
            
            
            1,906Deferred
      tax asset
            
            
            20
            
            
            
            13TOTAL
      NON-CURRENT ASSETS
            
            
            99,859
            
            
            
            68,650TOTAL
      ASSETS
            
            $
            180,646
            
            
            $
            132,347CURRENT
      LIABILITIESShort-term
      bank loan
            
            $
            44,223
            
            
            $
            11,953Notes
      payable
            
            
            4,583
            
            
            
            1,633Accounts
      payable
            
            
            5,193
            
            
            
            5,894Advances
      from customers
            
            
            2,100
            
            
            
            2,409Additional
      interest payable under convertible note indenture
            
            
            280
            
            
            
            420Income
      taxes payable
            
            
            475
            
            
            
            633Construction
      payables
            
            
            2,982
            
            
            
            2,497Other
      payables
            
            
            2,801
            
            
            
            2,844Accrued
      expenses
            
            
            538
            
            
            
            335Deferred
      income
            
            
            38
            
            
            
            95Current
      portion of long-term notes payable
            
            
            26,667
            
            
            
            -TOTAL
      CURRENT LIABILITIES
            
            
            89,880
            
            
            
            28,713Long-term
      notes payable, net of current portion
            
            
            -
            
            
            
            29,251Long-term
      bank loan
            
            
            26,358
            
            
            
            3,667Deferred
      tax liabilities
            
            
            1,095
            
            
            
            1,095TOTAL
      LIABILITIES
            
            
            117,333
            
            
            
            62,726Minority
      interests
            
            
            17,132
            
            
            
            14,394CommitmentsSHAREHOLDERS’
      EQUITYCommon
      stock- par value $0.001 per share; Authorized - 50,000,000 shares; Issued
      and outstanding- 15,922,391 shares at September 30, 2009 and
      2008
            
            
            16
            
            
            
            16Additional
      paid-in capital
            
            
            34,543
            
            
            
            30,396Retained
      earnings
            
            
            6,850
            
            
            
            19,953Accumulated
      other comprehensive income
            
            
            4,772
            
            
            
            4,862TOTAL
      SHAREHOLDERS’ EQUITY
            
            
            46,181
            
            
            
            55,227TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            $
            180,646
            
            
            $
            132,347





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





F-4




Sinoenergy
Corporation and Subsidiaries


Consolidated
Statements of Operations and Comprehensive Income (Loss)


(In
thousands of United States dollars except per share information)








Year
      Ended
              September
      30, 2009
            
            
            Year
      Ended
              September
      30, 2008NET
      SALES
            $
            41,800
            
            
            $
            40,940COST
      OF SALES
            
            (32,350
            )
            
            
            (25,589
            )GROSS
      PROFIT
            
            9,450
            
            
            
            15,351OPERATING
      EXPENSESSelling
      expenses
            
            (1,391
            )
            
            
            (881
            )General
      and administrative expenses
            
            (12,722
            )
            
            
            (4,889
            )TOTAL
      OPERATING EXPENSES
            
            (14,113
            )
            
            
            (5,770
            )INCOME
      (LOSS) FROM OPERATIONS
            
            (4,663
            )
            
            
            9,581OTHER
      INCOME (EXPENSES)Rental
      income, net of land use right amortization of $176
            
            1,329
            
            
            
            3,836Gain
      (loss) on sale (transfer) of equity of
    subsidiary
            
            (2,373
            )
            
            
            7,367Interest
      income
            
            458
            
            
            
            126Interest
      expense
            
            (7,298
            )
            
            
            (3,545
            )Other
      income (expense), net
            
            (5
            )
            
            
            1,502Additional
      interest payable under convertible note indenture
            
            (140
            )
            
            
            (420
            )OTHER
      INCOME (EXPENSES), NET
            
            (8,029
            )
            
            
            8,866INCOME
      (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
            
            (12,692
            )
            
            
            18,447Income
      taxes
            
            (748
            )
            
            
            (1,309
            )Minority
      interest
            
            337
            
            
            
            (1,082
            )NET
      INCOME(LOSS)
            
            (13,103
            )
            
            
            16,056Other
      comprehensive income(loss):Foreign
      currency translation adjustments
            
            (90
            )
            
            
            3,550COMPREHENSIVE
      INCOME (LOSS)
            $
            (13,193
            )
            
            $
            19,606Net
      Income (Loss) Per Common ShareBasic
            $
            (0.82
            )
            
            $
            1.02Diluted
            $
            (0.82
            )
            
            $
            0.98Weighted
      Average Common Shares OutstandingBasic
            
            15,922
            
            
            
            15,721Diluted
            
            15,922
            
            
            
            19,076





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





F-5





Sinoenergy
Corporation and Subsidiaries


Consolidated
Statement of Shareholders’ Equity


(In
thousands of United States dollars)








Number
      of Common Shares Issued
            
            Par
      Value Common Stock
            
            Additional
      Paid in Capital
            
            Retained
      Earnings
            
            Accumulated
      Other Comprehensive Income
            
            Total
              Shareholder’s
      Equity -Balance,
      September 30, 2007
            15,709
            
            $
            16
            
            $
            23,175
            
            $
            8,217
            
            $
            1,312
            
            $
            32,720Warrants
      exercised to common stock
            233
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Common
      stock cancelled
            (20
            )Issuance
      of warrants for services
            -
            
            
            -
            
            
            83
            
            
            -
            
            
            -
            
            
            83Share-based
      compensation
            -
            
            
            -
            
            
            552
            
            
            
            
            
            
            
            
            552Adjustment
      to record reduction in conversion price of 3% senior convertible
      notes
            -
            
            
            -
            
            
            2,266
            
            
            -
            
            
            -
            
            
            2,266Transfer
      of reserve
            -
            
            
            -
            
            
            4,320
            
            
            (4,320
            )
            
            
            
            
            -Net
      income for the period
            
            
            
            
            
            
            
            
            
            16,056
            
            
            -
            
            
            16,056Currency
      translation adjustment
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,550
            
            
            3,550Balance,
      September 30, 2008
            15,922
            
            
            16
            
            
            30,396
            
            
            19,953
            
            
            4,862
            
            
            55,227Issuance
      of warrants for services
            -
            
            
            -
            
            
            27
            
            
            -
            
            
            -
            
            
            27Share-based
      compensation
            -
            
            
            -
            
            
            258
            
            
            -
            
            
            -
            
            
            258Adjustment
      to record reduction in conversion price of 3% senior convertible
      notes
            -
            
            
            -
            
            
            3,862
            
            
            -
            
            
            -
            
            
            3,862Net
      loss for the period
            -
            
            
            -
            
            
            -
            
            
            (13,103
            )
            
            -
            
            
            (13,103
            )Currency
      translation adjustment
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (90
            )
            
            (90
            )Balance,
      September 30, 2009
            15,922
            
            $
            16
            
            $
            34,543
            
            $
            6,850
            
            $
            4,772
            
            $
            46,181




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





F-6





Sinoenergy
Corporation and Subsidiaries


Consolidated
Statements of Cash Flows


(In thousands of United States
dollars)





Year
      Ended
              September
      30, 2009
            
            
            Year
      Ended
              September
      30, 2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            
            $
            (13,103
            )
            
            $
            16,056Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Equity
      transfer (sale) of subsidiary
            
            
            2,373
            
            
            
            (7,367
            )Warrants
      and stock awards issued for services
            
            
            27
            
            
            
            83Share-based
      compensation
            
            
            258
            
            
            
            552Amortization
      of note discount
            
            
            1,631
            
            
            
            111Additional
      interest
            
            
            (140
            )
            
            
            420Non-cash
      portion of interest expense
            
            
            3,852
            
            
            
            1,264Minority
      interest
            
            
            (337
            )
            
            
            1,269Depreciation
            
            
            1,147
            
            
            
            551Amortization
      of intangible assets
            
            
            592
            
            
            
            134Loss
      on disposal of property, plant and equipment
            
            
            863
            
            
            
            -Write
      off of rental receivables
            
            
            1,756
            
            
            
            -Provision
      for obsolete inventories
            
            
            366
            
            
            
            -Provision
      for (recovery of) doubtful accounts
            
            
            2,061
            
            
            
            (133
            )Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (8,762
            )
            
            
            (15,940
            )Other
      receivables, deposits and prepayments
            
            
            (3,763
            )
            
            
            (18,402)Inventories
            
            
            2,318
            
            
            
            (4,402
            )Deferred
      tax asset
            
            
            (7
            )
            
            
            (9
            )Accounts
      payable
            
            
            2,249
            
            
            
            3,562Accrued
      expenses
            
            
            203
            
            
            
            (60
            )Advances
      from customers
            
            
            (309
            )
            
            
            1,374Other
      payables
            
            
            442
            
            
            
            160Deferred
      income
            
            
            (57
            )
            
            
            95Income
      taxes payable
            
            
            (158
            )
            
            
            514Net
      cash used in operating activities
            
            
            (6,498
            )
            
            
            (20,168)CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property, plant and equipment
            
            
            (27,519
            )
            
            
            (16,546
            )Prepayment
      for long-term assets
            
            
            (781
            )
            
            
            (2,111
            )Purchase
      of land use right
            
            
            (3,523
            )
            
            
            (2,127
            )Purchase
      of long-term investments
            
            
            (3,338
            )
            
            
            (7,958
            )Changing
      in restricted cash
            
            
            (890
            )
            
            
            702Net
      proceeds related to sale of investment
            
            
            -
            
            
            
            1,738Net
      cash used in investing activities
            
            
            (36,051
            )
            
            
            (26,302
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      proceeds received from note subscription receivable
            
            
            -
            
            
            
            29,840Repayment
      of notes
            
            
            (4,204
            )
            
            
            -Cash
      received from capital contribution in subsidiary
            
            
            -
            
            
            
            18,181Proceeds
      from bank loan
            
            
            66,914
            
            
            
            15,620Payment
      of bank borrowings
            
            
            (11,953
            )
            
            
            (14,843
            )Net
      cash provided by financing activities
            
            
            50,757
            
            
            
            48,798Effect
      on cash of changes in exchange rate
            
            
            1,158
            
            
            
            3,221Net
      increase in cash
            
            
            9,366
            
            
            
            5,549Cash
      at beginning of period
            
            
            8,871
            
            
            
            3,322Cash
      at end of period
            
            $
            18,237
            
            
            $
            8,871Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            5,884
            
            
            $
            2,304Income
      taxes paid
            
            $
            897
            
            
            $
            834




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





F-7





Sinoenergy
Corporation and Subsidiaries


Notes
to the consolidated financial statements





1.
            The
      Company





(a)
Organization





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





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




(b)
Reverse Split of Common Stock





Effective
July 9, 2008, the Company effected a one-for-two reverse split on the common
stock and reduced the Company’s authorized common stock from 100,000,000 shares
to 50,000,000 shares without changing the par value. All share and per share
information in these financial statements retroactively reflects the reverse
split for all periods presented.





(c)
Subsidiaries of the Company





Set forth
below is a list of the Sinoenergy’s wholly-owned and majority-owned subsidiaries
at September 30, 2009, all of whose financial statements are consolidated with
Sinoenergy.  References to the Company include the Company and its
consolidated subsidiaries unless the context indicates otherwise. The percentage ownership
reflects the percentage ownership by Sinoenergy.





F-8





Company
            
            Ownership
      %
            
            Business
      activitiesSinoenergy
      Holding Limited
            
            100%
            
            Holding
      companyQingdao
      Sinogas General
                Machinery
      Limited Corporation (“Sinogas”)
            
            75.05%
            
            Production
      of compressed natural gas (CNG) facilities, technical consulting in CNG
      filling station construction, manufacturing of CNG vehicle conversion
      kitQingdao
      Sinogas Yuhan
                Chemical
      Equipment Company Limited (“Yuhan”)
            
            81%*
            
            Manufacturing
      of customized pressure containersWuhan
      Sinoenergy Gas Company Limited (“Wuhan Sinoenergy”)
            
            90%
            
            Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsPingdingshan
      Sinoenergy Gas
                Company
      Limited (“Pingdingshan Sinoenergy”)
            
            90%
            
            Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsJiaxing
      Lixun Automotive
                Electronic
      Company Limited (“Lixun”)
            
            81%*
            
            Design
      and manufacturing of electric control devices for alternative
      fuelHubei
      Gather Energy
                Company
      Limited (“Hubei Gather”)
            
            80%
            
            Construction
      and operating of natural gas processing plantsXuancheng
      Sinoenergy
                Vehicle
      Gas Company Limited
                (“Xuancheng
      Sinoenegy”)
            
            100%
            
            Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsQingdao
      Jingrun General
                Machinery
      Company Limited (“Jingrun”)
            
            100%
            
            Design
      and manufacturing of petroleum refinery equipment and petroleum
      machineryQingdao
      Sinoenergy General
                Machinery
      Company Limited
                (“Qingdao
      Sinoenergy”)
            
            75.05%
            
            Manufacturing
      and installation of general machinery equipmentNanjing
      Sinoenergy Gas Company Limited(“Nanjing Sinoenergy”)
            
            90%
            
            Construction
      and operating of CNG stations and the manufacturing and sales of
      automobile conversion kitsQingdao
      Sinoenergy General Gas Company Limited(“Sinoenergy
    Gas”)
            
            90%**
            
            Construction
      and operating of CNG and LNG stations and the manufacturing and sales of
      automobile conversion kitsWuhan
      Sinoenergy Changfeng Gas Company Limited
            
            45.9%***
            
            Operation
      of CNG stations and the sales of automobile conversion
      kits





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


**      This
subsidiary is owned 40% by Sinogas and 60% by Sinoenergy.


***   
This subsidiary is owned 51% by Wuhan Sinoenergy, which is owned 90% by the
Company.





2.
Summary of Significant Accounting Policies





Basis of
Presentation




The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. Certain
reclassifications have been made to the September 30, 2008 financial statements
to conform to the September 30, 2009 presentation. Such reclassifications are
not material.




Principles of
Consolidation





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





Going
Concern





As shown
in the accompanying financial statements, we incurred a substantial operating
and net loss during the fiscal year ended September 30, 2009, and as of
September 30, 2009, we have negative working capital of approximately $9.1
million. Furthermore, we have a substantial amount of bank debt and other term
debt that we are contractually obligated to pay in the near term, and our
ability to meet these obligations is dependent upon certain factors outside of
our control. We have limited financial resources to obtain and sustain
profitability and positive cash flows.  Historically, we have been
highly dependent on external debt sources to fund our business growth and
operations. Achievement of our objectives will be dependent upon continued
external financing, to which there is no guarantee. Achievement of our
objectives will also be dependent upon our ability to obtain a larger and more
stable customer base, penetrating greater into markets for our higher margin
products, continuing to grow our CNG station operations to achieve economies of
scale in greater volume sales, and increasing profit margins and achieving other
benefits from the future operations of the new PetroChina pipeline. The Company
believes that it has borrowing capacity and will be able to borrow from major
banks in China to finance its working capital deficit and fund its daily
operations and other working capital needs.  Management is pursuing a
number of activities to address the Company’s immediate liquidity needs,
including the following: discussions with its banks for the restructuring or
refinancing of loans, discussions with other debt or equity sources, cutting
costs and seeking other means to improve operating
efficiencies.




F-9





Use of
Estimates





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





Goodwill





Goodwill
represents the excess of the purchase price of business combinations over the
fair value of the net assets acquired and is tested for impairment at least
annually. The impairment test requires allocating goodwill and all other assets
and liabilities to assigned reporting units. The fair value of each reporting
unit is estimated and compared to the net book value of the reporting unit. If
the estimated fair value of the reporting unit is less than the net book value,
including goodwill, then goodwill is written down to the implied fair value of
goodwill through a charge to operations. Because quoted market prices are not
available for the Company’s reporting units, the fair values of the reporting
units are estimated based upon several valuation analyses. The goodwill on the
Company’s financial statements was a result of the transactions pursuant to
which the Company acquired Yuhan, Jiaxing Lixun and Xuancheng Sinoenergy, and
relates to the pressure container, vehicle conversion kits, and CNG station
operation reporting segments.





Cash and Cash
Equivalents





The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents. As of
September 30, 2009 and 2008, the Company did not have any cash
equivalents.  The Company maintains its cash in bank deposit accounts
that, at times, may be very significant. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on its cash balances.




Allowance for Doubtful
Accounts





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





Inventories





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





Long-Term
Investments





Investments
in entities in which the Company owns more than 20% but less than 50% of the
equity and does not have the ability to control, but has the ability to exert
significant influence, are accounted for using the equity method, which includes
recognition of a percentage share of income or loss, dividends, and any
changes in the investment percentage in an investee by an investor.





Property, Plant and
Equipment





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




F-10




The
estimated useful lives are as follows:





Buildings
      and facilities
            15-20
      yearsMachinery
      and equipment
            5-20
      yearsMotor
      vehicles
            10-20
      yearsOffice
      equipment and others
            5
      to 10 years





Intangible
Assets





Intangible
assets, representing patents, technical know-how, are stated at cost less
accumulated amortization and impairment losses. Amortization is calculated on
the straight-line method over the estimated useful lives of the assets of 10
years.





Land Use
Rights





Land use
rights are stated at cost less accumulated amortization and impairment losses.
Amortization is calculated on the straight-line method over the contractual
useful lives of 50 years.





There is
no private ownership of land in the PRC. All land is owned by the government and
the government grants what is known as a land use right, which is a transferable
right to use the land.





Impairment of
Assets





Impairment
of assets is monitored on a periodic basis, and is assessed based on the
undiscounted cash flows expected to be generated by the underlying assets. In
the event that the carrying amount of assets exceeds the undiscounted future
cash flows (fair value), then the carrying amount of such assets is adjusted to
their fair value.





Capitalization of
Interest





The
Company capitalizes interest incurred in connection with the construction of
assets, principally its CNG stations, during the construction
period.  Capitalized interest is recorded as an increase to
construction in progress and, upon completion of the construction, to property
and equipment.  The Company capitalized $144,064 and $1,791,795 of
interest during the years ended September 30, 2009 and 2008.





Revenue
Recognition





The
Company recognizes revenue when the significant risks and rewards of ownership
have been transferred to the customer, including factors such as when persuasive
evidence that an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and collectability is reasonably assured.  The
Company recognizes product sales generally at the time the product is shipped.
CNG station construction and building technical consulting service revenue
related is recognized on the percentage of completion basis. The percentage of
completion method recognizes income as work on a contract (or group of closely
related contracts) progresses.  The recognition of revenues and profit
is generally related to costs incurred in providing the services required under
the contract.  The Company recognized minimal revenue for the year
ended September 30, 2008 and no revenue for the year ended September 30, 2009 on
the percentage of completion basis.  Revenue is presented net of any
sales tax and value added tax.





Warranty
Reserves





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





Income
Taxes





The
Company accounts for income taxes using an asset and liability approach whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applicable to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.





The
Company recognizes a tax benefit associated with an uncertain tax position when,
in management’s judgment, it is more likely than not that the position will be
sustained upon examination by a taxing authority. For a tax position that meets
the more-likely-than-not recognition threshold, the Company initially and
subsequently measures the tax benefit as the largest amount that it judges to
have a greater than 50% likelihood of being realized upon ultimate settlement
with a taxing authority. The liability associated with unrecognized tax benefits
is adjusted periodically due to changing circumstances, such as the progress of
tax audits, case law developments and new or emerging legislation. Such
adjustments are recognized entirely in the period in which they are identified.
The effective tax rate includes the net impact of changes in the liability for
unrecognized tax benefits and subsequent adjustments as considered appropriate
by management.




F-11




Foreign Currency
Translations





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





Fair Value of Financial
Instruments





The fair
value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or
settlement.





For
certain financial instruments, including cash, accounts receivable, related
party and other receivables, accounts payable, other payables and accrued
expenses, the Company estimates that the carrying amounts approximate fair value
because of the nature of the assets and short- term maturities of the
obligations.  The carrying value of short-term and long-term notes
approximate fair value due to the short time period to maturity (long-term notes
terms do not exceed five years.)  The carrying value of the senior
notes and convertible notes, which are reclassified from long-term liability to
short-term liability due to the repayment arrangement discussed at Note 17 also
approximates fair value as the repayment was recently
negotiated.





Minority
Interest





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





Stock-Based
Compensation





The
Company grants stock options to employees and stock options and warrants to
non-employees in non-capital raising transactions for services and for financing
costs. All grants are recorded at fair value at the grant date. The Company
utilizes the Black-Scholes option pricing model to determine fair value. The
resulting amount is charged to expense on the straight-line basis over the
period in which the Company expects to receive benefit, which is generally the
vesting period. In some cases, our principal stockholder, which is owned by our
chief executive officer and our chairman, both of whom are directors, provided
or agreed to provide stock to executive officers in connection with their
employment.  These shares are treated as if the shares were
contributed to and issued by the Company.





Concentration of Credit
Risk





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





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





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





Earnings per
Share





Basic EPS
is measured as net income or loss divided by the weighted average common shares
outstanding for the period.  Diluted EPS is similar to basic EPS but
presents the dilutive effect on a per share basis of potential common shares
(e.g., convertible securities, options and warrants) as if they had been
converted at the beginning of the periods presented, or issuance date, if
later.  Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.





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





Comprehensive Income or
Loss





Comprehensive
income or loss includes all changes in equity except those resulting from
investments by owners and distributions to owners, including adjustments to
minimum pension liabilities, accumulated foreign currency translation, and
unrealized gains or losses on marketable securities.





The
Company’s only component of other comprehensive income is foreign currency
translation loss of $90,000 for the year ended September 30, 2009 and gain of
$3,550,000 for the year ended September 30, 2008.  Cumulative other
comprehensive income or loss is recorded as a separate component of
shareholders’ equity.





F-12




New Accounting
Pronouncements





Effective
July 1, 2009, the FASB ASC became the single official source of
authoritative, nongovernmental U.S. GAAP. The historical U.S. GAAP hierarchy was
eliminated and the ASC became the only level of authoritative U.S. GAAP, other
than guidance issued by the SEC. The Company’s accounting policies were not
affected by the conversion to ASC. However, references to specific accounting
standards in the notes to our consolidated financial statements have been
changed to refer to the appropriate section of the ASC.





In
April 2008, the FASB issued a pronouncement on what now is codified as FASB
ASC Topic 350, Intangibles —
Goodwill and Other. This pronouncement amends the factors to be
considered in determining the useful life of intangible assets accounted for
pursuant to previous topic guidance. Its intent is to improve the consistency
between the useful life of an intangible asset and the period of expected cash
flows used to measure its fair value. This Company will be required to adopt
this pronouncement on October 1, 2009.  The adoption of this standard
is not expected to have a material effect on the Company’s consolidated
financial statements.





In June
2008, the FASB amended FASB Topic ASC 815, Sub-Topic 40, "Contracts in Entity’s
Own Equity” to clarify how to determine whether certain instruments or features
were indexed to an entity's own stock under ASC Topic 815. The amendment applies
to any freestanding financial instrument (or embedded feature) that has all of
the characteristics of a derivative, for purposes of determining whether that
instrument (or embedded feature) qualifies for the scope exception. It is also
applicable to any freestanding financial instrument (e.g., gross physically
settled warrants) that is potentially settled in an entity's own stock,
regardless of whether it has all of the characteristics of a derivative, for
purposes of determining whether to apply ASC 815.  The Company will be
required to adopt this pronouncement on October 1, 2009.  The Company
has not determined the extent that the adoption of this standard will have on
its financial statements for the quarter ending December 31, 2009 and
afterwards.





In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 805, Business
Combinations. This pronouncement provides new guidance that changes the
accounting treatment of contingent assets and liabilities in business
combinations under previous topic guidance.  This pronouncement will
be effective for the Company for any business combinations that occur on or
after October 1, 2009





In
April 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 825, Financial
Instruments. This pronouncement amends previous topic guidance to require
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies, as well as in annual financial statements.
The pronouncement was effective for interim reporting periods ending after
June 15, 2009 and its adoption did not have any significant effect on the
consolidated financial statements.





In
December 2007, the FASB issued ASC 805 “Business Combinations” and
810 “Consolidation”
(“ASC 810”), which require that ownership interests in subsidiaries held by
parties other than the parent, and the amount of consolidated net income, be
clearly identified, labeled and presented in the consolidated financial
statements.   ASC 805 and ASC 810 also require that once a
subsidiary is deconsolidated, any retained non-controlling equity investment in
the former subsidiary be initially measured at fair value.  Sufficient
disclosures are required to clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners.  ASC 805 and ASC 810 amend ASC 260 to provide that the
calculation of earnings per share amounts in the consolidated financial
statements will continue to be based on the amounts attributable to the parent.
ASC 805 and ASC 810 are effective for financial statements issued for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, and require retroactive adoption of the presentation and
disclosure requirements for existing minority interests.  All other
requirements are applied prospectively.  The Company adopted ASC 805
and ASC 810 on January 1, 2009.  The Company expects retrospective
modification in presentation and disclosure of noncontrolling interest on the
consolidated financial statements upon the adoption of ASC 805 and ASC
810.





In
May 2009, the FASB issued a pronouncement on what is now codified as FASB
ASC Topic 855, Subsequent
Events. This pronouncement establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
the financial statements are issued or are available to be issued. FASB ASC
Topic 855 provides guidance on the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. The pronouncement was effective for the
Company during the annual period ended September 30, 2009. The Company has
evaluated subsequent events for the period from September 30, 2009, the
date of these financial statements, through December 29, 2009, which represents
the date these financial statements are filed with the SEC. The financial
statements at September 30, 2009 reflect the classification of long-term notes
as current liabilities as a result of the agreements with the noteholders
described in Note 26.




F-13








In June
2009, the FASB issued ASC Topic 810-10, "Amendments to FASB Interpretation
No. 46(R)" (“ASC 810-10”).  ASC 810-10 is intended to (1)
address the effects on certain provisions of FASB Interpretation No. 46 (revised
December 2003), “Consolidation of Variable Interest Entities,” as a result of
the elimination of the qualifying special-purpose entity concept in ASC 860-20,
and (2) constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the accounting and disclosures
under the Interpretation do not always provided timely and useful information
about an enterprise's involvement in a variable interest entity.  This
statement will be effective for the Company on October 1, 2010.  The
Company does not expect the adoption of 810-10 to have a material impact on its
results of operations, financial condition or cash flows.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), and the United States Securities and Exchange Commission did
not or are not believed to have a material impact on the Company's present or
future consolidated financial statements.





3.
Restricted Cash





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





4.
Accounts receivable





Accounts
receivable are as follows (dollars in thousands):





September
      30, 2009
            
            
            September
      30, 2008Accounts
      receivable
            
            $
            30,903
            
            
            $
            22,100Notes
      receivable-bank acceptance
            
            
            74
            
            
            
            114Less:
      allowance for doubtful receivables
            
            
            (1,221)
            
            
            
            (206
            )Total
            
            $
            29,756
            
            
            $
            22,008





5.
Other receivables




Other
receivable are as follows (dollars in thousands):




September
      30, 2009
            
            
            September
      30, 2008Unsecured
      interest free receivables relating to projects
            
            $
            -
            
            
            $
            10,236Rental
      receivable
            
            
            2,636
            
            
            
            2,933Due
      from third parties
            
            
            9,734
            
            
            
            2,379Others
      current accounts
            
            
            7,133
            
            
            
            1,403Less:
      allowance for doubtful receivables
            
            
            (1,859)
            
            
            
            (12
            )Total
            
            $
            17,644
            
            
            $
            16,939








On March
31, 2008, Sinogas entered into an agreement to sublease certain parcels of land
to Qingdao Mingcheng Real Estate Co., Ltd. (“Qingdao Mingcheng”), a
non-affiliated third party, for a term of three years beginning in January 2008
and expiring on December 31, 2010, at an annual rental of RMB40 million,
equivalent to approximately $5.9 million based on the March 31, 2009
exchange rate.  During the year ended September 30, 2008, we
recognized rental income of $3.8 million from this lease.  As a result
of the failure of Qingdao Mingcheng to make the required rental payments, on
March 31, 2009, Sinogas signed a memorandum of understanding with Qingdao
Mingcheng pursuant to which Sinogas agreed to a termination of the
sublease, reduced the rental receivable by $1.8 million, and established a note
bearing interest at 5.5755% per annum, due quarterly over a two year
period.  At September 30, 2009, an impairment reserve of $988,000 was
established against the note receivable. Total charges  of
approximately $2.8 million with respect to this lease/note receivable are
reflected in general and administrative expenses in the year ended September 30,
2009.




F-14




6.
Deposits and prepayments




Deposits
and prepayments are as follows (dollars in thousands):





September
      30, 2009
            
            
            September 30,
              2008Related
      to construction
            
            $
            1,681
            
            
            $
            1,377Raw
      materials
            
            
            3,000
            
            
            
            3,006Related
      to equipment
            
            
            1,303
            
            
            
            2,547Natural
      gas
            
            
            2,303
            
            
            
            969Others
            
            
            342
            
            
            
            19Total
            
            $
            8,629
            
            
            $
            7,918





7.
Inventories





Inventories
are as follows (dollars in thousands):





September
      30, 2009
            
            
            September 30,
              2008Raw
      materials
            
            $
            2,153
            
            
            $
            4,145Work
      in progress
            
            
            288
            
            
            
            2,428Finished
      goods
            
            
            2,159
            
            
            
            721Low
      value consumables
            
            
            19
            
            
            
            9Total
            
            $
            4,619
            
            
            $
            7,303





8.
Long-term investments





Anhui
Gather and Hubei Gather





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





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





In
July2008, the
Company entered into an agreement with China New Energy pursuant to which it
exchanged a 25% interest in Anhui Gather for a 25% interest in Hubei
Gather.  As a result of the exchange, the Company owns an 80% interest
in Hubei Gather and a 20% interest in Anhui Gather.  Neither Hubei
Gather nor Anhui Gather has commenced business activities. Since we have an 80%
interest in Hubei Gather, the results of Hubei Gather’s operations are included
in our consolidated financial statements as of and
for the years ended September 30, 2009 and 2008.





Sinogas
General Luxi Natural Gas Equipment Co., Ltd.





On
October 31, 2008, in order to provide for a supply of raw materials, Sinogas
signed a joint venture agreement with LuXi Chemical Group, a Chinese chemical
company, to set up a company located in Liaocheng City, Shandong province, with
proposed annual production capacity of 4,000 steel bottles used in CNG trailer
manufacturing.  The total registered capital is RMB 50 million
(equivalent to $7.32 million based on the exchange rate on September 30, 2009)
of which Sinogas has a 40% interest. This joint venture company commenced
operation in July 2009. At September 30, 2009, Sinogas had contributed $2.93
million, in full satisfaction of its obligations to this
enterprise.




F-15




9.
Property, Plant and Equipment





Property,
plant and equipment consist of the following (dollars in
thousands):





September
      30, 2009
            
            
            September
      30, 2008Buildings
      and facility
            
            $
            15,637
            
            
            $
            6,254Machinery
      equipment
            
            
            15,616
            
            
            
            7,538Motor
      vehicles
            
            
            2,241
            
            
            
            838Office
      equipment and other
            
            
            596
            
            
            
            395Total
            
            
            34,090
            
            
            
            15,025Accumulated
      depreciation
            
            
            (2,308)
            
            
            
            (1,666
            )31,782
            
            
            
            13,359Construction
      in process
            
            
            23,088
            
            
            
            16,939Net
      book value
            
            $
            54,870
            
            
            $
            30,298





10.
Land use rights








September
      30, 2009
            
            
            September 30,
              2008Land
      use rights
            
            
            31,495
            
            
            
            28,054Accumulated
      amortization
            
            
            (1,125)
            
            
            
            (623
            )Net
      book value
            
            $
            30,370
            
            
            $
            27,431





The land
use rights include six parcels of land purchased by the Company, which are held
by Sinogas, Jingrun, Xuancheng, Qingdao Sinoenergy, Jiaxing Lixun, and Hubei
Gather. The land use rights are being amortized over the following periods,
during which they are transferable and renewable, subject to government
approval.





Owner
            Cost
            
            ExpirationSinogas
            $
            20,739
            
            May
      2057Jingrun
            
            4,124
            
            December
      2056Xuancheng
      Sinoenergy
            
            1,015
            
            June
      2058Qingdao
      Sinoenergy
            
            3,396
            
            June
      2058Jiaxing
      Lixun
            
            368
            
            June
      2058Hubei
      Gather
            
            535
            
            June
      2059Wuhan
      Sinoenergy
            
            1,138
            
            <note
      >Total
            $
            31,495








Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid.  The acquisition of the land requires government approval. The
amount paid under the purchase agreements is reflected on the balance sheet
under “land use rights.”




The land
use right owned by Sinogas represents two parcels of land located in the central
portion of Qingdao City, on which Sinogas and Yuhan’s offices and
manufacturing facilities are located. The land use right was purchased by the
Company from Beijing Sanhuan, a former shareholder of Sinogas, for a price of
RMB160 million, equivalent to US$23.47 million based on the current exchange
rate. The land is being amortized from May 2007 over a 50-year
term.





On
December 15, 2007, the Company purchased all of the equity of Jingrun, whose
sole asset is the land use right and construction in progress, for approximately
RMB60 million ($8.8 million based on the September 30, 2009 exchange rate).
The cost of the land use right paid by the Company was approximately $4.1
million based on the September 30, 2009 exchange rate.





The land
use right owned by Xuancheng was purchased by the Company from Shanghai CNPC
Enterprises Group for $874,000 based on the September 30, 2009 exchange
rate.




F-16





On
January 4, 2008, the Company purchased all of the equity of Qingdao Shan Yang
Tai Chemistry Resources Development Co., Ltd. (“QDSY”), whose sole asset is the
land use right and construction in progress, for approximately RMB43
million. The cost of the land use right paid by the Company was approximately
$1.9 million based on the September 30, 2009 exchange rate.





In June
2008, Jiaxing Lixun acquired a land use right for $368,000, which was used for
construction of a new plant.





In June
2009, Hubei Gather acquired a land use right for $535,000. The land is being
used to construct a mother CNG station in Wuhan which will be used to store CNG
and provide CNG to the Company’s stations.




The
Company made additional payments of approximately $2.9 million with respect to
land use rights owned by the Company.




11.
Goodwill





Goodwill
is as follows (dollars in thousands):





Transactions
            
            September
      30, 2009
            
            
            September 30,
              2008Purchase
      of an additional 80% equity interest in Yuhan
            
            $
            995
            
            
            $
            995Purchase
      of 90% equity in Jiaxing Lixun
            
            
            619
            
            
            
            619Purchase
      of a 70% equity in Xuancheng Sinoenergy
            
            
            258
            
            
            
            258Purchase
      of Jingrun
            
            
            34
            
            
            
            34Total
            
            $
            1,906
            
            
            $
            1,906








The
Company monitors the impairment of goodwill at least annually.  As of
September 30, 2009, there were no indications that the carrying amount of the
goodwill was impaired.





12.
Other long-term assets





Other
long-term assets are as follows (dollars in thousands):





September
      30, 2009
            
            
            September 30,
              2008Prepaid
      CNG land rental
            
            $
            2,937
            
            
            $
            1,303Plant
      construction in progress
            
            
            3,096
            
            
            
            -Related
      to deferred income
            
            
            -
            
            
            
            1,021CNG
      station equipment on order from overseas
            
            
            342
            
            
            
            3,715Others
            
            
            1,297
            
            
            
            852Total
            
            $
            7,672
            
            
            $
            6,891





13.
Short Term Bank Loan





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


Bank
      Name
            
            Purpose
            
            Borrowing
      Date
            
            Borrowing
      Term
            
            Annual
      Interest Rate
            
            
            AmountBank
      of Communication
            
            Working
      Capital
            
            April
      27, 2009
            
            Eight
      months
            
            
            5.31
            %
            
            $
            4,979China
      Construction Bank
            
            Working
      Capital
            
            March
      18, 2009
            
            One
      year
            
            
            5.31
            %
            
            
            21,965China
      Construction Bank
            
            Working
      Capital
            
            April
      20, 2009
            
            One
      year
            
            
            5.5775
            %
            
            
            7,322China
      Citic Bank
            
            Working
      Capital
            
            February
      6, 2009
            
            One
      year
            
            
            5.841
            %
            
            
            73China
      Citic Bank
            
            Working
      Capital
            
            January
      4, 2009
            
            One
      year
            
            
            5.841
            %
            
            
            220Industrial
      Bank Co., Ltd.
            
            Working
      Capital
            
            May
      25, 2009
            
            One
      year
            
            
            5.841
            %
            
            
            381Industrial
      Bank Co., Ltd.
            
            Working
      Capital
            
            June
      2, 2009
            
            One
      year
            
            
            5.841
            %
            
            
            644Bank
      of Communication
            
            Working
      Capital
            
            July
      3, 2009
            
            One
      year
            
            
            5.5755
            %
            
            
            146China
      Merchants Bank
            
            Working
      Capital
            
            January
      19, 2009
            
            One
      year
            
            
            5.5755
            %
            
            
            1,464China
      Merchants Bank
            
            Working
      Capital
            
            March
      5, 2009
            
            One
      year
            
            
            5.5755
            %
            
            
            439China
      Merchants Bank
            
            Working
      Capital
            
            May
      8, 2009
            
            One
      year
            
            
            5.5755
            %
            
            
            1,025Hankou
      Bank
            
            Working
      Capital
            
            July
      21, 2009
            
            One
      year
            
            
            5.841
            %
            
            
            2,929CITIC
      Bank
            
            Working
      Capital
            
            August
      26, 2009
            
            One
      year
            
            
            6.372
            %
            
            
            2,636Total
            
            
            
            
            
            
            
            
            
            
            
            $
            44,223




F-17




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


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





14.
Notes payable





The
balances of notes payable as at September 30, 2009 and 2008 represent the
obligations in the form of promissory notes with maturity dates of less than 12
months for the purchase of raw materials.





15.
Advances from Customers





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





16.
Income Taxes Payable





Pursuant
to the PRC income tax laws, the Company’s PRC subsidiaries are generally subject
to enterprise income tax at a statutory rate of 33%, which comprises 30%
national income tax and 3% local income tax. Beginning January 1, 2008, the
Company’s PRC subsidiaries are generally subject to enterprise income tax at a
statutory rate of 25%. The Company pays its enterprise tax based on its taxable
income determined in accordance with the tax laws of the
PRC.    Enterprise tax for the fiscal year ended September
30, 2008 reflects a 33% rate for the quarter ended December 31, 2007 and a 25%
rate for the balance of the fiscal year and 25% for the fiscal year ended
September 30, 2009.





As PRC
subsidiaries that qualify as wholly foreign owned manufacturing enterprises,
Sinogas, Yuhan and Jiaxing Lixun were granted tax preferences. Sinogas and Yuhan
were granted a 100% enterprise income tax exemption for calendar years 2006 and
2007 and a 50% enterprise income tax exemption for 2008 through 2010. Jiaxing
Lixun was granted a 100% tax exemption from August 2007 through
2008 and a 50% enterprise income tax exemption for the calendar years 2009
through 2011.





Under the
current tax laws of the PRC, Wuhan Sinoenergy will be entitled to a two-year
100% tax exemption followed by three years of a 50%
tax exemption once it become profitable. Wuhan Sinoenergy did not achieve
profitability for the year ended September 30, 2009.





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





The
reconciliation between the income tax provision (benefit) computed at the PRC
statutory tax rate and the Company’s provision (benefit) for income tax is as
follows:




2009
              
              
              2008Statutory
      Rate
              
              
              -25.0
              %
              
              
              27.0
              %Permanent
      Differences
              
              
              25.1
              %
              
              
              -Valuation
      Allowance
              
              
              8.5
              %
              
              
              6.1
              %Tax
      Holiday
              
              
              -2.7
              %
              
              
              -26.0
              %5.9
              %
              
              
              7.1
              %





F-18




At
September 30, 2009 and 2008, deferred tax assets and liabilities are comprised
of the following items:





2009
            
            
            2008Deferred
      tax assets, currentAccrued
      expenses and reserve
            
            $
            -
            
            
            $
            -Net operating loss carryforwards and otherTotal deferred tax assets, current
            
            
            -
            
            
            
            -Deferred
      tax assets, non-currentAccrued
      expenses and reserve
            
            
            529
            
            
            
            529Net operating loss carryforwards and other
            
            
            1,682
            
            
            
            609Valuation allowance
            
            
            (2,191
            )
            
            
            (1,125
            )Total deferred tax assets, non-current
            
            $
            20
            
            
            $
            13Deferred
      tax liabilities, non-currentConvertible debt
            
            $
            1,095
            
            
            $
            1,095





At
September 30, 2009, the Company had federal United States net operating loss
(NOL) carryforwards of approximately $2.2 million available to offset future
regular and alternative minimum taxable income. The NOL carryforwards will begin
to expire in 2027.  The Company has fully reserved the deferred tax
asset related to the NOL benefit due to the uncertainty that it will be
realized.





The
Company files PRC tax returns.  For PRC tax purposes, all periods
subsequent to September 30, 2008 are subject to examination by the PRC tax
authority.  The Company believes that its income tax filing positions
and deductions will be sustained on audit and does not anticipate any
adjustments that will result in a material change.  Therefore, no
reserves for uncertain income tax positions have been recorded pursuant to FASB
ASC Topic 740 INCOME TAXES.  In addition, the Company does not
anticipate that the total amount of unrecognized tax benefit related to any
particular tax position will change significantly within the next twelve months.
The Company's policy for recording interest and penalties, if any, associated
with PRC tax authority audits is to record such items as a component of income
taxes.





17.  Long
term notes payable





On
September 28, 2007, the Company issued 12% guaranteed senior notes due 2012 in
the principal amount of $16,000,000 and 3.0% guaranteed senior convertible notes
due 2012 in the principal amount of $14,000,000.  The convertible
notes were initially convertible into common stock at an initial conversion
price of $6.34 per share. The conversion price has been reduced to $4.20 as
described below, and, at September 30, 2009, was subject to further reduction
based on the Company’s net income for the years ended December 31, 2008 and
2009.





In
connection with the issuance of the notes, the Company’s chief executive officer
and its chairman, both of whom are directors, executed non-competition
agreements with the Company, and the Company paid the investors an arrangement
fee of $160,000, which was deducted from the proceeds of the notes.





The
convertible notes were issued pursuant to an indenture between the Company and
DB Trustees (Hong Kong) Limited, as trustee. The convertible notes are due in
September 2012 and bear interest at the stated interest rate of 3% per annum.
Although the stated interest rate is 3% per annum, if the convertible notes are
not redeemed, converted or purchased and cancelled by the maturity date, the
Company is required to redeem the convertible notes at the amount which results
in a yield to maturity of 13.8% per annum, less interest previously paid, plus
any interest accrued on overdue principal (and, to the extent lawful, on overdue
interest) and premium, if any, at a rate which is 3% per annum in excess of the
rate of interest then in effect. As a result, the Company is accruing interest
at the rate of 13.8% per annum. Since the Company is only required to pay
interest currently at the rate of 3%, the remaining 10.8% interest rate is
accrued and treated as deferred interest payable. If the convertible notes are
converted, the deferred interest payable will be credited to additional paid in
capital. Because of the agreement relating to payment of the convertible notes
described in Note 26, the deferred interest is classified as a current liability
at September 30, 2009.





The
convertible note indenture requires the Company to offer to purchase the Notes
at a price which would generate a 13.8% yield if either of the following events
shall occur:





•
            The
      failure of the Company’s common stock to be listed on The NASDAQ Stock
      Market.•
            Trading
      in the Company’s common stock on any exchange or market has been suspended
      for ten or more consecutive trading
days.








Subject
to certain conditions, and in connection with the proposed merger agreement
between the Company and Skywide (see Note 26), the holders of the convertible
notes have waived default resulting from the failure of the Company’s common
stock to be listed on the NASDAQ Stock Market.





F-19




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





•
            At
      the rate of 3.0% per annum if the Company has not obtained a listing of
      its common stock on the NASDAQ Global Market or the NASDAQ Capital Market
      by September 19, 2008 and maintained such listing continuously thereafter
      as long as the Notes are outstanding. At September 30, 2009, the Company
      had met this listing requirement.•
            At
      the rate of 1.0% for each 90-day period in which the Company has failed to
      comply with the registration obligations under the registration rights
      agreement. As of September 30, 2009, the Company had accrued additional
      interest totaling $560,000 pursuant to this provision, of which
      $280,000 has been paid. The noteholders have waived the right to require
      the additional interest from March 31, 2009 through September 30,
      2009.





At
September 30, 2009, the holders of the convertible notes have the right to
convert their notes into common stock at a conversion price of $4.20 per share,
reflecting a reduction in the conversion price to $5.125 per share pursuant to a
supplemental indenture dated as of June 23, 2008 and a further adjustment to
$4.20 per share as of March 28, 2009 based on the market price of the Company’s
common stock. The provisions for adjustment in the conversion price include
adjustments for the following.





•
            A
      stock distribution or dividend, a reverse split or combination of shares
      and the distribution of shares, warrants, assets or indebtedness to our
      stockholders;•
            A
      sale of common stock at a price, or the issuance of options, warrants or
      other convertible securities with an exercise or conversion price, which
      is less than the conversion price at the time, subject to limitations
      provided in the investor rights agreement; and•
            An
      adjustment based on the Company’s failure to have consolidated net income,
      as defined in the indenture, of $14.0 million for 2008 and $22.5 million
      for 2009, or the equivalent in RMB. In December 2009, the note holders
      waived the right to any adjustment based on 2008 and 2009 net income (see
      Note 26).





F-20





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





•
            If
      the Company sells assets and does not reinvest the proceeds in its
      business within 180 days (270 days in the case of a sale of real
      property), to the extent that such proceeds not so reinvested exceed
      $5,000,000, the Company is required to offer the holders of the notes the
      right to have the Company use such excess proceed to purchase their notes
      at the principal amount plus accrued interest..•
            If
      there is a change of control, the Company is required to offer to
      repurchase the notes at 103% of the principal of the note, plus accrued
      interest. A change of control will occur if Bo Huang or Tianzhou Deng own
      less than 25% of the voting power of the Company’s voting stock or, with
      certain exceptions, a merger or consolidation or sale of substantially all
      of the Company’s and its subsidiaries’ assets.•
            The
      Company is restricted from incurring additional debt unless, after giving
      effect to the borrowing, (i) the fixed charge coverage ratio would be
      greater than 2.0 to 1.0 through December 31, 2009 and 3.0 to 1.0 if the
      debt is incurred thereafter, and (ii) the leverage ratio would not exceed
      6.0 to 1.0 through December 31, 2009 and 4.5 to 1.0 if the debt is
      incurred thereafter, provided, that Sinogas may continue to maintain debt
      under credit facilities of not more than $10,000,000, and may incur
      purchase money indebtedness. The fixed charge coverage ratio is the ratio
      of the Company’s earnings before interest, taxes, depreciation and
      amortization, which is generally known as EBITDA, to consolidated interest
      expense, as defined. Leverage ratio means the ratio of outstanding debt to
      EBITDA, with the interest component being the consolidated interest
      expense, as defined.•
            The
      Company is subject to restriction in paying dividends, purchasing its own
      securities or those of its subsidiaries, prepaying subordinated debt, and
      making any investment other than any investments in itself and its
      subsidiaries engaged in the Company’s business and certain other permitted
      investments.•
            The
      Company is subject to restrictions on incurring liens.•
            The
      Company cannot enter into, or permit its subsidiaries to enter into,
      transactions with affiliates unless it is in writing, in the Company’s
      best interest and not less favorable to the Company than it could obtain
      from a non-affiliate in an arms’ length transaction, with any transaction
      involving more than $1,000,000 requiring audit committee approval and any
      transaction involving more than $5,000,000 requiring a written opinion
      from an independent financial advisor.•
            The
      Company shall maintain, as of the last day of each fiscal quarter, (i) a
      fixed charge coverage ratio of at least 2.00 to 1.00 through December 31,
      2009 and 3.0 to 1.0 thereafter, (ii) a leverage ratio of not more than 6.0
      to 1.00 through December 31, 2009 and 4.5 to 1.0 thereafter, and (iii) a
      consolidated subsidiary debt to consolidated net tangible asset ratio of
      not more than 0.35. The noteholders agreed that they would not take any
      action to declare an event of default as long as the Company is in
      compliance with the modified covenants.•
            The
      Company shall make all payments of principal, interest and premium, if
      any, without withholding or deduction for taxes, and must offer to
      repurchase the notes if they are adversely affected by changes in tax laws
      that affect the payments to the
holders.





At
September 30, 2009, the Company was not in compliance with the required
financial covenants. In December 2009, the noteholders have waived the
requirement on the financial ratio at September 30, 2009 through March 31, 2010
as long as the Company makes the payments required under the December 2009
agreement. See Note 26.





The
indentures provide for an event of default should the Company fails to comply
with its obligations under the indentures and certain events of bankruptcy or
similar relief.





The
Company’s obligations are guaranteed by its subsidiaries and are secured by a
lien on the stock of Sinoenergy Holding.





F-21




At the
time of the September 2007 financing, the Company also entered into an investor
rights agreement, as clarified, pursuant to which, as long as an investor holds
at least $2,000,000 principal amount of notes or at least 3% of the issued and
outstanding stock:


•
            The
      investor has the right to approve the Company’s annual budget, and the
      Company cannot deviate by more than 15% of the amount in the approved
      budget.•
            The
      Company and its subsidiaries cannot replace or change the substantive
      responsibilities of the chief executive officer except in the event of his
      incapacity, resignation or retirement.•
            The
      Company and its subsidiaries cannot take any action that would result in a
      change of control, as defined in the indentures.•
            The
      Company and its subsidiaries cannot change the number of board members or
      the composition or structure of the board or board committees or delegate
      powers to a committee or change the responsibilities and powers of any
      committee.•
            The
      Company shall, by April 1, 2008, have appointed an independent public
      accountant from a list of 16 firms provided by the investors, failing
      which the Company shall pay the investors the sum of $2,500,000 on April 1
      of each year in which this condition is not met, and the Company shall not
      terminate the engagement of such auditor without prior investor approval.
      The Company has complied with this condition.•
            The
      investors have a right of first refusal on future financings by us and
      proposed transfers, with limited exceptions, by Mr. Huang and Mr. Deng.
      The investors also have a tag-along right in connection with proposed
      sales of stocks by Mr. Huang and Mr.
Deng.





The
investor rights agreement, as clarified, also provides that (i) the Company will
not sell shares of its common stock or grant options or warrants or issue
convertible securities with an exercise or conversion price that is less than
$0.80 per share, (ii) the minimum conversion price for the convertible debenture
would be $0.80 per share, (iii) the holders of the convertible notes may call an
event of default if the Company breaches its covenant not to issue shares at a
price which is less than $0.40 per share. If the Company increases its
authorized common stock, the conversion price would decrease to an amount not
less than $0.05 per share. The Company and the investors agreed to use their
commercially reasonable efforts to modify the indenture for the convertible
notes to reflect these provisions of the investor rights agreement.





Management
reviewed the accounting for these transactions and concluded that the conversion
option did not constitute an embedded derivative  However, the initial
transaction included a beneficial conversion feature of $176,656 which was
charged to additional paid in capital and is being amortized over the life of
the notes commencing October 1, 2007.





As a
result of the reduction in the conversion price from $6.34 to $5.125, the
Company recorded an additional beneficial conversion feature of $3,360,905 as a
discount to the notes and additional paid in capital, which is being amortized
as interest expense over the remaining term of the notes commencing April 1,
2008.  As a result of the further reduction in the conversion price
from $5.125 to $4.20, the Company recorded an additional beneficial conversion
feature of $3,862,439 as a discount to the notes and additional paid in capital,
which is being amortized as interest expense over the remaining term of the
notes commencing January 1, 2009.  Upon prepayment of the convertible
notes, the unamortized portion of the beneficial conversion feature will be
recognized.





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





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





The
Company is required to prepare and file a registration statement covering the
sales of all of the shares of common stock issuable upon conversion of the
convertible notes, subject to any limitation required by Rule 415 of the SEC
pursuant to the Securities Act of 1933 and to have the registration statement
declared effective by March 28, 2008. In the event that the registration
statement has not been declared effective by the SEC on or before March 28, 2008
or if effectiveness of the Registration Statement is suspended at any time other
than pursuant to a suspension notice, for each 90-day period during which the
registration default remains uncured, the Company is required to pay additional
interest at the rate of one percent 1% of the convertible notes, as described
above. As of September 30, 2009, the common stock issuable upon conversion
of the notes had not been registered under the Securities Act of 1933, as
amended. Accordingly, the Company recorded $420,000 and $140,000 as liquidated
damages payable under registration rights agreements for the years ended
September 30, 2008 and 2009. The Company will review and adjust this accrual at
each subsequent period end.




F-22




A
reconciliation of the original principal amount of the 12% senior notes to the
amounts shown on the balance sheet at September 30, 2009 and September 30, 2008
is as follows (amounts in thousands):





Original
      amount
            
            $
            16,000Note
      discount
            
            
            (378
            )Balance,
      September 30, 2007
            
            
            15,622Accrual
      of interest
            
            
            1,930Amortization
      of beneficial conversion feature
            
            
            76Interest
      paid
            
            
            (970
            )Balance,
      September 30, 2008
            
            $
            16,658Accrual
      of interest
            
            
            1,920Amortization
      of beneficial conversion feature
            
            
            76Interest
      paid
            
            
            (2,400
            )Balance,
      September 30, 2009
            
            $
            16,254





A
reconciliation of the original principal amount of the 3% senior convertible
notes to the amounts shown on the balance sheet at September 30, 2009 and 2008
is as follows (amounts in thousands):





Original
      amount
            
            $
            14,000Beneficial
      conversion feature
            
            
            (177
            )Balance,
      September 30, 2007
            
            
            13,823Amortization
      of beneficial conversion feature
            
            
            35Interest
      paid
            
            
            (211
            )Interest
      accrued for guaranteed 13.8% return
            
            
            1,934Discount
      resulting from reset adjustment effective March 28,
    2008
            
            
            (3,361
            )Amortization
      of discount resulting from reset
            
            
            373Balance,
      September 30, 2008
            
            $
            12,593Interest
      accrued for guaranteed 13.8% return
            
            
            1,932Amortization
      of beneficial conversion feature
            
            
            35Amortization
      of discount resulting from reset
            
            
            1,519Discount
      resulting from reset adjustment effective March 28,
    2009
            
            
            (3,862
            )Interest
      paid
            
            
            (1,804
            )Balance,
      September 30, 2009
            
            $
            10,413





As
further detailed in Note 26, in October and December 2009, the Company and the
noteholders agreed to modifications to and accelerated settlement of the senior
and convertible notes.





18.
Long-term bank loan





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


Bank
      Name
            
            Purpose
            
            Borrowing
      Date
            
            Borrowing
      Term
            
            Annual
      Interest Rate
            
            
            AmountBank
      of Communication
            
            Construction
      Capital
            
            June
      27, 2008
            
            Three
      years
            
            
            8.316
            %
            
            $
            4,393China
      Construction Bank
            
            Construction
      Capital
            
            August
      28, 2009
            
            Five
      years
            
            
            5.76
            %
            
            
            21,965Total
            
            
            
            
            
            
            
            
            
            
            
            $
            26,358





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


Bank
      Name
            
            Purpose
            
            Borrowing
      Date
            
            Borrowing
      Term
            
            Annual
      Interest Rate
            
            
            AmountBank
      of Communication
            
            Construction
      Capital
            
            June
      27, 2008
            
            Three
      years
            
            
            8.316
            %
            
            $
            3,667








F-23




19.           Related Party Relationships and
Transactions





The
related parties with which the Company had transactions in the years ended
September 30, 2009 and 2008, are as follows:





Name
      of related party
            
            RelationshipAnhui
      Gather
            
            Joint
      venture entity with China New Energy in which the Company has a 20%
      interestChina
      New Energy
            
            80%
      shareholder of Anhui Gather and 20% shareolder of Hubei
      Gather





Significant
transactions between the Company and its related parties during the year ended
September 30, 2009 and 2008 are as follows:





Related
party receivables





Name
      of the Company
            
            September
      30, 2009
            
            September
      30, 2008China
      New Energy
            
            $382,000
      (current accounts)
            
            $500,000
      (current accounts)Anhui
      Gather
            
            $44,000
      (current accounts)
            
            $44,000
      (current accounts)





20.
Segment Information





Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance.





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





The
segment information set forth below has been derived from our audited financial
statements for the years ended September 30, 2009 and 2008.





Year
      Ended September 30, 2009
              ($
      `000)
            
            Customized
              pressure
              containers
            
            CNG
      station
              facilities
      and
              construction
            
            CNG
              station
              operation
            
            Vehicle
              conversion
              kits
            
            TotalNet
      sales
            
            $
            4,762
            
            $
            9,495
            
            $
            18,584
            
            $
            8,959
            
            
            $
            41,800Cost
      of sales
            
            
            3,883
            
            
            5,211
            
            
            16,455
            
            
            6,801
            
            
            
            32,350Gross
      profit
            
            
            879
            
            
            4,284
            
            
            2,129
            
            
            2,158
            
            
            
            9,450Gross
      margin
            
            
            18
            %
            
            45
            %
            11%
            
            
            24
            %
            
            
            23
            %Operating
      expenses:Selling
      expenses
            
            
            180
            
            
            84
            
            
            568
            
            
            559
            
            
            
            1,391General
      and administrative expenses
            
            
            2,275
            
            
            6,497
            
            
            3,
      205
            
            
            745
            
            
            
            12,722Total
      operating expense
            
            
            2,455
            
            
            6,581
            
            
            3,773
            
            
            1,304
            
            
            
            14,113Income
      (loss) from operations
            
            $
            (1,576
            )
            $
            (2,297
            )
            $
            (1,644
            )
            $
            854
            
            
            $
            (4,663
            )Total
      assets
            
            $
            62,448
            
            $
            58,073
            
            $
            48,134
            
            $
            11,991
            
            
            $
            180,646








Year
      Ended September 30, 2008
              ($
      `000)
            
            Customized
              pressure
              containers
            
            CNG
      station
              facilities
      and
              construction
            
            CNG
              station
              operation
            
            Vehicle
              conversion
              kits
            
            TotalNet
      sales
            
            $
            9,692
            
            $
            16,237
            
            $
            3,246
            
            $
            11,765
            
            $
            40,940Cost
      of sales
            
            
            5,374
            
            
            9,470
            
            
            2,551
            
            
            8,194
            
            
            25,589Gross
      profit
            
            
            4,318
            
            
            6,767
            
            
            695
            
            
            3,571
            
            
            15,351Gross
      margin
            
            
            45
            %
            
            42
            %
            
            21
            %
            
            30
            %
            
            37
            %Operating
      expenses:Selling
      expenses
            
            
            275
            
            
            52
            
            
            150
            
            
            404
            
            
            881General
      and administrative expenses
            
            
            943
            
            
            1,591
            
            
            1,533
            
            
            822
            
            
            4,889Total
      operating expense
            
            
            1,218
            
            
            1,643
            
            
            1,683
            
            
            1,226
            
            
            5,770Income
      (loss) from operations
            
            $
            3,100
            
            $
            5,124
            
            $
            (988
            )
            $
            2,345
            
            $
            9,581Total
      assets
            
            $
            41,075
            
            $
            45,441
            
            $
            28,654
            
            $
            17,177
            
            $
            132,347




F-24








21.
Capital Stock





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





•
            555,359
      shares issuable upon exercise of warrants;•
            3,333,334
      shares issuable upon conversion of 3% senior convertible
      notes;•
            1,000,000
      shares issuable upon exercise of stock options or other equity-based
      incentives pursuant to the Company’s 2006 long-term incentive plan, of
      which options to purchase 790,000 shares were
  outstanding.





Number
      of shares issuable on exercise of warrants$1.70
      Warrants
            
            $2.40
      Warrants
            
            $4.20
      Warrants
            
            $8.00
      Warrants
            
            TotalBalance
      at September 30, 2007
            
            
            342,857
            
            
            455,358
            
            
            75,000
            
            
            -
            
            
            873,215Issued
      during the period
            
            
            -
            
            
            -
            
            
            -
            
            
            25,000
            
            
            25,000Exercised
      during the period
            
            
            (257,142
            )
            
            (85,714
            )
            
            -
            
            
            -
            
            
            (342,856
            )Balance
      at September 30, 2008
            
            
            85,715
            
            
            369,644
            
            
            75,000
            
            
            25,000
            
            
            555,359Issued
      during the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
      during the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
      at September 30, 2009
            
            
            85,715
            
            
            369,644
            
            
            75,000
            
            
            25,000
            
            
            555,359





As at
September 30, 2009, the weighted average exercise price for all warrants is
$2.79. None of the outstanding warrants is subject to reset provisions other
than as a result of a stock distribution, split or dividend, a reverse split or
combination of shares or other recapitalization, and, in the case of the
warrants to purchase 455,360 shares of common stock issued in the June 2006
private placement, sales of common stock at prices below the exercise
price.





Stock
options





Pursuant
to the 2006 long-term incentive plan, each newly-elected independent director
receives, at the time of his or her election, a five-year option to purchase
15,000 shares of common stock at the fair market value on the date of his or her
election. The plan provides for the annual grant to each independent director of
an option to purchase 2,500 shares of common stock on the first trading day
in April of each calendar year, at market price, subject to stockholder approval
of the plan, commencing in 2007. Pursuant to the automatic grant provisions of
the plan, in June 2006, the Company issued to its independent directors, options
to purchase an aggregate of 60,000 shares of common stock at $1.30 per share,
being the fair market value on the date of grant.





Pursuant
to the 2006 long-term incentive plan, each independent director is to be
granted an option to purchase 2,500 shares of common stock on
the first trading day in April of each calendar year at market price. On
April 1, 2007, the four independent directors were granted stock options to
purchase a total of 10,000 shares of common stock at an exercise price of $4.06
per share, being the fair market value on the date of grant.  On April
1, 2008, the four independent directors were granted stock options to purchase a
total of 10,000 shares of common stock at an exercise price of $5.80 per share,
being the fair market value on the date of grant. On April 1, 2009, the
four independent directors were granted stock options to purchase a total of
20,000 shares of common stock at an exercise price of $1.32 per share, being the
fair market value on the date of grant. All of the options granted to the
independent directors become exercisable cumulatively as to 50% of the shares
subject thereto six months from the date of grant and as to the remaining 50%,
eighteen months from the date of grant, and expire on the earlier of (i) five
years from the date of grant, or (ii) seven months from the date such
independent director ceases to be a director if such independent director ceases
to be a director other than as a result of his death or
disability.





On April
9, 2007, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to its senior managers and
key management to acquire 590,000 shares of common stock at $4.00 per
share, being the fair market value on the date of grant. These options vest as
to 50% of the underlying shares of common stock on August 3, 2007 and as to the
remaining 50% on August 3, 2008.





On
January 9, 2008, pursuant to 2006 long-term incentive plan, the stock option
committee of the board of directors granted five year options to its senior
managers and key management to acquire 60,000 shares of common stock at $8.20
per share, being the fair market value on the date of grant. These options vest
as to 50% of the underlying shares of common stock on January 9, 2009 and as to
the remaining 50% on January 9, 2010.





On March
10, 2008, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to its senior managers and
key management to acquire 40,000 shares of common stock at $6.20 per share,
being the fair market value on the date of grant. The options vest as to 42% of
the underlying shares of common stock on December 31, 2008, 50% on December 31,
2009 and as to the remaining 8% on March 9, 2010.




F-25




On June
1, 2008, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to the former chief
financial officer to acquire 75,000 shares of common stock at $5.72 per share,
being the fair market value on the date of grant. On October 18, 2008, the chief
financial officer resigned from the Company and the options were
forfeited.





Shares subject
              to
      options
            
            
            Weighted
              Average
      exercise price scope
            
            
            Remaining Contractual
              life(years)Options
      outstanding at September 30, 2007
            
            
            660,000
            
            
            $
            3.76
            
            
            
            4.43Options
      granted during the period
            
            
            185,000
            
            
            $
            4.39-8.20
            
            
            
            2.67-4.50Options
      outstanding at September 30, 2008
            
            
            845,000
            
            
            $
            4.39
            
            
            
            4.26Options
      granted during the period (independent directors)
            
            
            20,000
            
            
            
            1.32
            
            
            
            4.5Options
      forfeited during the period
            
            
            75,000
            
            
            
            5.72
            
            
            
            -Options
      outstanding at September 30, 2009
            
            
            790,000
            
            
            
            1.32-8.20
            
            
            
            4.17Options
      exercisable at September 30, 2009
            
            
            711,800
            
            
            $
            3.55
            
            
            
            4.26





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





Stock
      Options Granted OnGrant
      Date
            
            April
      1, 2009
            
            
            June
      1, 2008
            
            
            March
      10, 2008
            
            
            January
      9, 2008
            
            
            April
      9, 2007
            
            
            April
      1, 2007
            
            
            June
      2, 2006Expected
      volatility
            
            
            46.1
            %
            
            
            46.1
            %
            
            
            68.32
            %
            
            
            80.06
            %
            
            
            26.39
            %
            
            
            35.16
            %
            
            
            50
            %Risk-free
      rate
            
            
            2.93
            %
            
            
            2.93
            %
            
            
            4.64
            %
            
            
            4.64
            %
            
            
            4.64
            %
            
            
            4.64
            %
            
            
            4.64
            %Expected
      term (years)
            
            
            5
            
            
            
            3
            
            
            
            5
            
            
            
            5
            
            
            
            5
            
            
            
            5
            
            
            
            3Dividend
      yield
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Fair
      value per share
            
            $
            0.58
            
            
            $
            1.94
            
            
            $
            3.56
            
            
            $
            5.16
            
            
            $
            1.24
            
            
            $
            1.2
            
            
            $
            0.5





The fair
value of stock options issued during the years ended September 30, 2009 and 2008
totaled $11,600 and $435,907, respectively.





22.  Basic
and Diluted Earnings Per Share





Basic
earnings per share is based upon the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share is based on the
assumption that all dilutive convertible shares, stock options and warrants
were converted or exercised. The number of shares included in determining
diluted earnings per share is computed by applying the treasury stock method.
Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), with the funds
obtained thereby being used to purchase common stock at the average market price
during the period.





The
details for the fully diluted outstanding shares for the years ended September
30, 2009 and 2008 are as follows:





Year
      ended
              September
      30, 2009
            
            Year
      ended
              September
      30, 2008Weighted
      average common stock outstanding during period
            
            
            15,922,391
            
            15,720,681Common
      stock issuable pursuant to warrants
            
            
            Anti-dilutive
            
            328,949Common
      stock issuable upon conversion of notes
            
            
            Anti-dilutive
            
            2,731,707Common
      stock issuable upon exercise of stock options
            
            
            Anti-dilutive
            
            295,589Total
      diluted outstanding shares
            
            
            15,922,391
            
            19,076,926





F-26




For the
purpose of computing EPS for the year ended September 30, 2009 and 2008,
earnings are as follows:




Year
      ended
              September
      30, 2009
            
            Year
      ended
              September
      30, 2008Net
      income (loss)
            
            $
            (13,103)
            
            16,056Add
      back interest on convertible notes
            
            
            3,
      487
            
            2,555Net
      income (loss) attributable to common shareholders
            
            $
            (9,616)
            
            18,611





Because
the Company sustained a loss for the year ended September 30, 2009, the share
issuable upon exercise of options and warrants and upon conversion of
convertible notes would be anti-dilutive.





Cancellation
of Shares





As part
of the Company’s June 2006 private placement, the Company issued warrants which
provided for a reduction in the exercise price of the warrants if certain
earnings levels were not reached.  Pursuant to an agreement with the
holders of outstanding warrants, in consideration for the elimination of this
provision, in July 2008, Skywide sold to the warrant holders a total of 79,822
shares of common stock and Skywide returned 20,000 shares of common stock to the
Company for cancellation.





23.
Commitments and Contingencies





The
Company has the following material contractual obligations and capital
expenditure commitments:





The
Company and China New Energy formed Hubei Gather to construct and operate
natural gas processing plants with expected annual processing capacity of
100-300 million cubic meters in Hubei Province. The registered capital is $5
million of which the Company will contribute $4 million as 80% equity owner and
New Energy will contribute $1 million for a 20% interest. The term of the
business of Hubei Gather is from March 23, 2007 to March 22, 2027. As of
September 30, 2009, the Company’s commitment for future funding was
$2,625,000.  In November 2009, the Company signed two agreements with
China New Energy pursuant to which we will transfer a 30% interest in Hubei
Gather to China New Energy for $1.5 million and China New Energy will transfer a
30% interest in Anhui Gather to us for $1.5 million. Upon completion of these
two equity transfers, we and China New Energy would each own 50% of both Hubei
Gather and Anhui Gather.  The effect of these agreements is that the
Company will have exchanged a 30% interest in Hubei Gather for a 30% interest in
Anhui Gather.  As a result of these transfers, our commitment for
future funding of these entities will remain $2,625,000. The
results of Hubei Gather’s operations are included in our consolidated financial
statements as of and for the year ended September 30, 2009 and
2008.


Sinoenergy
Holding and Sinogas signed an agreement to set up Qingdao Sinoenergy Gas in
which Sinoenergy Holding would own 60% and Sinogas would own 40%.  As
a result, Qingdao Sinoenergy Gas will be 90% owned by us.  Sinoenergy
Holding’s commitment will be $2,636,000, and Sinogas’ commitment will be
$1,757,000. As of September 30, 2009, Sinogas had made its full contribution and
the Company’s commitment was $2,636,000.





Jiaxing
Lixun will contribute $58,574 to Yichang Liyuan Power Technology Company to own
40% equity. As of September 30, 2009, Lixun contributed $29,287. As of September
30, 2009, the Company’s commitment for future funding was $29,287.





Wuhan
Sinoenergy and Pingdingshan Sinoenergy, subsidiaries of the Company, have leased
13 parcels of land in Wuhan City and Pingdingshan City for their CNG stations
under operating lease agreements. The lease terms are from 7 year to 30 years
with annual rental fees of approximately $846,000.  Based on land
rental agreements in effect at September 30, 2009, the Company will pay a total
of $5.73 million during through 2039.




Wuhan
Sinoenergy has two agreements to purchase land use rights in Wuhan City from
different non-affiliated parties. One agreement provides for a purchase price of
approximately $1.58 million, of which approximately $1.32 million has been paid,
and the title transfer is in the process. The second provides for a purchase
price of approximately $1.32 million, of which approximately $732,000 has been
paid. The acquisition of the land requires government approval.





Our
commitment for the construction of CNG stations, including stations being
constructed by Wuhan Sinoenergy and Hubei Gather, was $1,025,000 as of September
30, 2009. .




Our
commitment for the construction of a new plant in Jiaxing Lixun was $1,085,000
as of September 30, 2009.




Our
commitment for the purchase of property, plant and equipment, including property
for Wuhan Sinoenergy and Hubei Gather, was $5,901,000 as of September 30,
2009.


F-27




24.
Retirement Benefits





The
full-time contracted employees of the Company are entitled to welfare benefits,
including medical care, labor injury insurance, housing benefits, education
benefits, unemployment insurance and pension benefits through a Chinese
government-mandated multi-employer defined contribution plan.  The
Company is required to accrue the employer-portion for these benefits based on
certain percentages of the employees’ salaries.  The total provision
for such employee benefits was $523,135 and $346,774 for the year ended
September 30, 2009 and 2008, respectively. The PRC government is responsible for
the staff welfare benefits including medical care, casualty, housing benefits,
unemployment insurance and pension benefits to be paid to these employees. The
Company is responsible for the education benefits to be paid.





From time
to time, the Company may hire some part time workers or short term workers to
satisfy the peak season labor requirement. Those workers have the right to
terminate their work to the Company at any time. For those part time
non-contracted workers, it is difficult for the Company to accurately record the
working time, total wages and then accrue welfare benefits. So based on the
common practice in the PRC, the Company treats those workers as probationers,
and does not accrue welfare benefits for them. Although the Company believes the
common treatment is acceptable under these circumstances, there exists a
possibility that the government may require the Company to accrue the welfare
benefit and may assess a penalty for the under accrual.  The Company
does not believe an assessment by the PRC government, if any, would be
significant.





25.
 Significant Concentrations





The
Company grants credit to its customers, generally on an open account basis. The
Company’s customers are all located in the PRC.





In the
year ended September 30, 2009, one customer of the station facilities and
construction segment accounted for more than 10% of total sales, and in the year
ended September 30, 2008, two customers of the station facilities and
construction segment each accounted for more than 10% of our total
sales.  These customers, who purchased CNG truck trailers, accounted
for approximately 19.2% and 32.0% of total sales in the year ended September 30,
2009 and 2008, which, in each year, represented most of the revenue from this
division.  At September 30, 2009 and 2008, approximately 55.7% and
71.0%, respectively, of the Company’s accounts receivable were from these
customers.




26.
Subsequent Events





Merger
Agreement





On
October 12, 2009, the Company entered into an agreement and plan of merger with
Skywide, a corporation which is wholly owned by the Company’s chairman and chief
executive officer, both of whom are also directors. Pursuant to the agreement,
the Company will be merged into Skywide, with Skywide being the surviving
entity, and each shares of common stock of the Company(other than shares owned
by the Company, Skywide, or the two shareholders of Skywide), will be converted
into the right to receive, upon presentation of the certificates for their
common stock, the sum of $1.90.  The merger is subject to shareholder
approval.





Litigation





The
Company is a defendant in an action filed in the Supreme Court of the State of
New York, Nassau County, by Stephen Trecaso and Linda Watts against the Company
and its directors which purports to be a class action asserting claims of breach
of fiduciary duty and aiding and abetting the breach of fiduciary
duty.  The complaint was dated October 16, 2009 and an amended
complaint was dated November 18, 2009.  Plaintiffs seek injunctive
relief and damages arising out of a potential sale of the company to Skywide by
means of an allegedly unfair process and unfair price.  The Company
believes that this action is without merit, that it has valid defenses to the
action, and that it will vigorously defend the action.




The
Company, its directors, and Skywide are defendants in four similar actions
commenced in the Eighth Judicial District Court of the State of Nevada in and
for Clark County.  The Company removed these four actions to the
Federal District Court for the District of Nevada.  The plaintiffs in
those actions are (i) Robert Grabowski, (ii) Robert E. Guzman, (iii) Carol Karch
and (iv) Johan L. Stoltz.  The Guzman, Karch and Stoltz actions were
filed on October 26, 2009 and the Grabowski action was filed on October 30,
2009.  Plaintiffs allege causes of action that sound in breach of
fiduciary duty and aiding and abetting the breach of that fiduciary
duty.  Plaintiffs seek injunctive relief and damages arising out of a
potential sale of the company to Skywide by means of an allegedly unfair process
and unfair price.  The Company believes that these actions are without
merit, that it has valid defenses to the actions, and that it will vigorously
defend the action.




F-28




Modification
and Waiver under Debt Agreements





On
October 5, 2009 and December 17, 2009, the Company entered into agreements with
the holders of its $16,000,000, 12% senior notes and its $14,000,000, 3%
convertible notes.  Pursuant to these agreements:





·
            The
      noteholders agreed to waive default of the provisions that require the
      Company’s common stock to be publicly traded, that require the Company to
      repurchase the notes upon a change of control, and that require the
      Company’s common stock to be traded on the NASDAQ Capital Market or the
      NASDAQ Global Market.




·
            The
      noteholders waived covenant compliance requirements at September 30, 2009
      and through March 31, 2010.




·
            The
      Company agreed to repay the 12% senior notes in the principal amount of
      $16 million.  Initially the payments were due by November 30,
      2009.  The Company paid approximately $14 million by November
      30, 2009.  As a result of the December agreement, the Company
      must pay the remaining balance of approximately $2 million by December 31,
      2009. The balance due on these notes was paid on December 23,
      2009.




·
            The
      Company agreed to pay the convertible notes in the principal amount of $14
      million in two installments, with an initial payment of $5 million being
      due ten days after the merger with Skywide becomes effective and the
      balance 30 days thereafter.  The conversion feature of the notes
      will be eliminated. The Company will be required to pay interest to
      provide the note holders with a yield to maturity of 13.8% per
      annum.




·
            The
      noteholders reduced the remaining obligation for liquidated damages for
      failure to register the shares of common stock issuable upon conversion of
      the convertible notes to $280,000, which is to be paid by December 31,
      2009.




·
            The
      provision requiring an adjustment to the conversion price of the notes
      based on stated annual earnings of the Company was
    eliminated.




·
            The
      provisions of the indenture relating to the reduction in the conversion
      price of the convertible notes if the Company issues stock at a price, or
      issue convertible securities with a conversion or exercise price that is
      less than the conversion price (presently $4.20 per share) were
      eliminated.




Equity
transfer





On
November 27, 2009, the Company signed agreement with China New Energy pursuant
to which the Company will transfer a 30% interest in Hubei Gather to China New
Energy for $1.5 million.





On
November 23, 2009, the Company signed an agreement with China New Energy
pursuant to which China New Energy will transfer a 30% interest Anhui Gather to
the Company for $1.5 million.





Upon
completion of these two equity transfers, the Company and China New Energy will
each own 50% of both Hubei Gather and Anhui Gather.  The effect of
these agreements is that the Company will have exchanged a 30% interest in Hubei
Gather for a 30% interest in Anhui Gather.