form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 [X]
Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For the quarterly period ended: September 30, 2008

Or
 
[__]
Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For the transition period from ______________ to _______________

Commission File Number: 000-51753
 
SINO CLEAN ENERGY INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
75-2882833
(State or other jurisdiction of incorporation of origination)
 
(I.R.S. Employer Identification Number)

Room 2205, Suite A, Zhengxin Building
No. 5 Gaoxin 1st Road, Gao Xin District
Xi’an, Shaanxi Province
People’s Republic of China
 
N/A
(Address of principal executive offices)
 
(Zip code)
 
(029) 8209-1099
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [__]

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 [   ]                                                                                                                                                       Accelerated filer [  ]

Non-accelerated filer   [   ] (Do not check if a smaller reporting company)                                                                                                                                      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 [   ] No [X]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each issuer’s classes of common stock, as of the latest practicable date: 94,514,750 issued and outstanding as of November 12, 2008.

Transitional Small Business Disclosure Form (Check one): Yes [   ] No [X]

 
TABLE OF CONTENTS
TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2008


PART I
Page
Item 1.
   4 
 
  5
 
  6
 
  7
 
  8
 
  9
Item 2.
  25
Item 3.
  29
Item 4.
  29

PART II
   30
Item 1.
  30
Item 1A.
  30
Item 2.
  30
Item 3.
  30
Item 4.
  30
Item 5.
  30
Item 6.
  30
 
  32
 
 


























CAUTION REGARDING FORWARD-LOOKING INFORMATION

All statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q”) for Sino Clean Energy Inc., other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words “believe,” “anticipate,” “expect” and words of similar import.  These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances.  However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties that may cause actual results to differ materially.

Such risks include, among others, the following: national and local general economic and market conditions: our ability to sustain, manage or forecast our growth; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations.  As used in this Form 10-Q, unless the context requires otherwise, “we” or “us” or “Registrant” or the “Company” means Sino Clean Energy Inc. and its subsidiaries.




 























PART I - FINANCIAL INFORMATION

Item 1.                      Financial Statements


SINO CLEAN ENERGY INC. AND SUBSIDIARIES
     
Consolidated Financial Statements
For the Periods Ended September 30, 2008 and 2007

 



-4-

 
Sino Clean Energy Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts expressed in U.S. Dollars)
             
ASSETS
             
   
September 30,
   
December 31,
 
   
2008
   
2007
 
   
(Unaudited)
   
(Audited)
 
             
Current assets
           
Cash and cash equivalent
  $ 2,533,999     $ 2,832,132  
Accounts receivable, net (Note 2(d))
    6,242,716       1,068,303  
Deposits and prepayments (Note 6)
    732,420       2,542,929  
Other receivables
    160,829       138,523  
Prepaid land use right - current portion (Note 10)
    38,845       36,285  
Government grant receivable (Note 7)
    -       411,000  
Assets on discontinued operation
               
   Other receivable - related (Note 21 (b))
    -       141,795  
Inventories (Note 8)
    293,101       40,959  
                 
Total current assets
    10,001,910       7,211,926  
                 
Deferred debt issuance cost, net (Note 15)
    209,519       -  
Property, plant and equipment, net (Note 9)
    5,915,779       5,435,804  
Prepaid land use right - non current portion (Note 10)
    1,810,955       1,718,744  
Goodwill (Notes 3 and 11)
    410,869       -  
Intangible assets, net (Note 12)
    1,268       1,478  
                 
Total assets
  $ 18,350,300     $ 14,367,952  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
                 
Current liabilities
               
Accounts payable
  $ 47,043     $ 41,827  
Accrued expenses and other payables (Note 13)
    735,079       893,732  
Amount due to a director (Note 21(a))
    1,178       8,527  
Obligations under capital leases (Note 14)
    13,450       -  
Taxes payable
    150,031       130,332  
Deposit on sales of property (Note 21 (c))
    -       1,507,000  
                 
Total current liabilities
    946,781       2,581,418  
                 
Non-current liabilities
               
Convertible debentures (Note 15)
    383,856       -  
Obligations under capital leases (Note 14)
    4,265       -  
                 
Total non-current liabilities
    388,121       -  
                 
Total liabilities
    1,334,902       2,581,418  
                 
Minority interest
    -       352,789  
                 
Commitments and Contingencies (Note 22)
               
                 
Shareholders' Equity
               
Preferred stock, $0.001 par value,
               
 50,000,000 shares authorized,
               
 nil issued and outstanding
    -       -  
Common stock, $0.001 par value,
               
200,000,000 shares authorized,
               
92,181,750 and 84,681,750 issued and outstanding
               
as of September 30, 2008 and December 31, 2007
               
respectively
    92,182       84,682  
Additional paid-in capital
    11,312,205       9,153,174  
Retained earnings
    3,166,608       686,482  
Statutory reserves (Note 18)
    348,309       348,309  
Accumulated other comprehensive income
    2,096,094       1,161,098  
                 
Total shareholders' equity
    17,015,398       11,433,745  
                 
Total liabilities and shareholders' equity
  $ 18,350,300     $ 14,367,952  

 
 

Sino Clean Energy Inc. and Subsidiaries
Consolidated Statements of Income (Operations) and Other Comprehensive Income
For the three months and nine months ended September 30, 2008 and 2007
(Amounts expressed in U.S. Dollars)
(Unaudited)
                         
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Revenue
  $ 3,419,941     $ 234,639     $ 9,156,293     $ 234,639  
                                 
Cost of goods sold
    (2,297,227 )     (181,563 )     (6,227,606 )     (181,563 )
                                 
Gross profit
    1,122,714       53,076       2,928,687       53,076  
                                 
Selling expenses
    3,106       17,229       7,871       19,009  
General and administrative expenses
    204,915       197,371       590,719       330,282  
                                 
                                 
Income (loss) from operations
    914,693       (161,524 )     2,330,097       (296,215 )
                                 
Other income (expenses)
                               
  Rental income, net of outgoings
    230       -       79,843       -  
  Interest income
    8,026       3,449       19,537       13,372  
  Commission income
    80,072       -       224,947       -  
  Sundry income (expenses)
    78       6,471       26,921       (131 )
  Other income (expenses)
    -       (7,601 )     -       137,339  
  Gain on disposal of property (Note 21(c))
    95       -       33,095       -  
  Government grant
    141,614       -       141,614       -  
                                 
Total other income
    230,115       2,319       525,957       150,580  
                                 
Income (loss) before provision for income taxes
    1,144,808       (159,205 )     2,856,054       (145,635 )
                                 
Provision for income taxes (Note 19)
    71       -       24,779       -  
                                 
Net income (loss) before minority interest
  $ 1,144,737     $ (159,205 )   $ 2,831,275     $ (145,635 )
                                 
Less: Minority interest
    -       11,099       (351,149 )     21,190  
                                 
Net income (loss)
    1,144,737       (148,106 )     2,480,126       (124,445 )
                                 
Other comprehensive income
                               
  Foreign currency translation adjustment
    124,319       116,066       934,996       385,813  
                                 
Comprehensive income (loss)
  $ 1,269,056     $ (32,040 )   $ 3,415,122     $ 261,368  
                                 
Weight average number of shares
                               
  - Basic and diluted
    92,181,750       84,681,750       92,181,750       84,681,750  
                                 
Income (loss) per common share (Note 20)
                               
                                 
  - Basic and diluted
  $ 0.0124     $ (0.0017 )   $ 0.0269     $ (0.0015 )

 
-6-

 
 
Sino Clean Energy Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Amount expressed in U.S. Dollars except number of shares)
                                                 
   
 Common stock
                     
(Accumulated
   
    Accumulated
 
   
 (par value $0.1208)
   
Additional
   
Statutory
   
Statutory
   
deficits) /
   
           other
 
               
paid-in
   
capital
   
welfare
   
Retained
   
   comprehensive
 
   
Shares
   
Amount
   
capital
   
reserves
   
reserves
   
earnings
   
income
   
Total
 
                                                 
Balance, January 1, 2007 (audited)
    84,681,750     $ 84,682     $ 9,153,174     $ 232,206     $ 116,103     $ (330,456 )   $ 432,312     $ 9,688,021  
                                                                 
Net loss
    -       -       -       -       -       (124,445 )     -       (124,445 )
Foreign currency translation gain
    -       -       -       -       -       -       385,813       385,813  
                                                                 
Balance, September 30, 2007 (Unaudited)
    84,681,750     $ 84,682     $ 9,153,174     $ 232,206     $ 116,103     $ (454,901 )   $ 818,125     $ 9,949,389  
                                                                 
Net income
    -       -       -       -       -       1,141,383       -       1,141,383  
Foreign currency translation gain
    -       -       -       -       -       -       342,973       342,973  
                                                                 
Balance, December 31, 2007  (audited)
    84,681,750     $ 84,682     $ 9,153,174     $ 232,206     $ 116,103     $ 686,482     $ 1,161,098     $ 11,433,745  
  Issuance of share
    7,500,000       7,500       1,141,351       -       -       -       -       1,148,851  
Benefical conversion feature of debenture 
    -       -       986,921       -       -       -       -       986,921  
Warrants issued to placement agent
    -       -       30,759       -       -       -       -       30,759  
Net income
    -       -       -       -       -       2,480,126       -       2,480,126  
Foreign currency translation gain
    -       -       -       -       -       -       934,996       934,996  
                                                                 
Balance, September 30, 2008 (Unaudited)
    92,181,750     $ 92,182     $ 11,312,205     $ 232,206     $ 116,103     $ 3,166,608     $ 2,096,094     $ 17,015,398  
                                                                 

-7-


Sino Clean Energy Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts expressed in U.S. Dollars)
(Unaudited)
             
   
Period ended September 30,
 
   
2008
   
2007
 
             
Cash flows from operating activities:
           
Net income
  $ 2,480,126     $ (124,445 )
Adjustments to reconcile net income to cash
               
 provided by operating activities:
               
  Minority interest
    351,149       (21,190 )
  Net income from discontinued operations
    -       (137,339 )
  Amortization of deferred debenture expenses
    8,399       -  
  Discount on debenture
    35,127       -  
  Depreciation and amortization
    175,399       40,607  
  Gain on disposal of property
    (33,095 )     -  
(Increase) decrease in assets:
               
Accounts receivable
    (4,923,476 )     (248,645 )
Deposits and prepayments
    1,921,371       (2,633,573 )
Other receivables
    (14,227 )     207,656  
Prepaid land use rights
    28,031       -  
Receipt from government grant
    411,000       -  
Other receivables - discontinued operations
    141,795       -  
Inventories
    (240,670 )     (28,160 )
Increase (decrease) in liabilities:
               
Accounts payable
    2,187       148,429  
Advance from customers
    -       602,864  
Accrued expenses and other payable
    (198,852 )     105,435  
Taxes payables
    10,143       37,730  
Net cash provided by discontinued operations
    -       69,729  
Net cash provided from (used in) operating activities
    154,407       (1,980,902 )
                 
Cash flows from investing activities:
               
Amount due from a director
    -       133,255  
Purchase of property, plant and equipment
    (2,791,475 )     (1,187,120 )
Net cash used in investing activities
    (2,791,475 )     (1,053,865 )
                 
Cash flows from financing activities:
               
(Payment to ) advance from a director
    (7,427 )     74,515  
Proceeds from disposal of property
    1,025,437       -  
Issuance of convertible debenture
    1,148,491       -  
Capital element of capital lease
    44,423       -  
Obligations under capital leases
    (27,318 )     -  
Net cash provided by financing activities
    2,183,606       74,515  
                 
Effect of foreign currency translation
    155,329       120,880  
                 
Net decrease in cash and cash equivalents
    (298,133 )     (2,839,372 )
                 
Cash and cash equivalents, beginning of period
    2,832,132       4,450,557  
                 
Cash and cash equivalents, end of period
  $ 2,533,999     $ 1,611,185  
                 
Supplemental Disclosure Information
               
                 
Interest paid
  $ -     $ -  
                 
Income taxes paid
  $ -     $ -  
                 
Major non-cash transaction
               
Issuance of share in exchange of equity interest (Note 3)
 
    $ 1,500,000     $ -  



CORPORATION REORGANZATION AND BUSINESS ACTIVITIES

 
Sino Clean Energy Inc. (the “Company”) was originally incorporated in Texas as “Discount Mortgage Services, Inc.” on July 11, 2000. In November 2001, the Company changed its name to Endo Networks, Inc. and was redomiciled to the State of Nevada in December 2002. On January 4, 2007, the Company changed its name to “China West Coal Energy Inc.” Further on August 15, 2007, the Company changed its name to “Sino Clean Energy Inc”.
 
Prior to December 2006, the Company had principally been engaged in production and sales of coal-polymer (“COPO”) resin products. In December 2006, the Company decided to cease its operations in manufacturing COPO products and shift all its resources towards the production and sale of “coal-water mixture” products.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
a.
Basis of presentation and consolidation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.

 
The consolidated financial statements include the financial statements of the Company, its wholly owned subsidiary Hangson Ltd. (“Hangson”), its variable interest entity (VIE) Shaanxi Suo’ang Biological Science & Technology Co., Ltd. (“Suo’ang Biological”) and Suo’ang Biological’s subsidiary, Shaanxi Suo’ang New Energy Enterprise Co., Ltd. (“Suo’ang New Energy”). All significant inter-company transactions and balances among the Company, Hangson, Suo’ang Biological and Suo’ang New Energy are eliminated upon consolidation.

b.
Use of estimates

 
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Significant estimates include estimates of accruals and determination of fair values for assets disposed.

c.
Cash and cash equivalents

 
Cash and cash equivalents consist of cash on hand, bank deposits and deposit in an escrow account.  Deposit in the escrow account was $885,057 as of September 30, 2008. The fund held in the escrow account was released to the Company in late October 2008.

d.
Accounts receivable

 
Accounts receivables are recognized and carried at original invoiced amount less an allowance for any uncollectible accounts.

 
The Company uses the aging method to estimate the valuation allowance for anticipated uncollectible receivable balances. Under the aging method, bad debts determined by management are based on historical experience as well as the current economic climate and are applied to customers' balances categorized by the number of months the underlying invoices have remained outstanding. The valuation allowance balance is adjusted to the amount computed as a result of the aging method. When facts subsequently become available to indicate that an adjustment to the allowance should be made, this is recorded as a change in estimate in the current period. As of September 30, 2008 and December 31, 2007, accounts receivable were net of allowances of $5,747 and $5,368, respectively.


e.
Inventories

 
Inventories are stated at the lower of cost, as determined on a weighted average basis, or net realizable value. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition.

f.
Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of plant, property and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repair and maintenance costs are expensed as incurred.

 
Depreciation or amortization for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows:
 
Buildings
the shorter of the useful life or the lease term
Leasehold improvements
the shorter of the useful life or the lease term
Plant and machinery
10 years
Office equipment
5 years
Motor vehicles
3 years

g.
Construction in progress

 
Construction in progress includes direct costs of factory buildings. Construction in progress is not depreciated until such time as the assets are completed and put into operational use.

h.
Prepaid land use rights

 
Prepaid land use right is expensed over the term of 50 years.

i.
Goodwill

 
The Company accounts for acquisitions of business in accordance with SFAS No. 141 “Business Combinations”, which may result in the recognition of goodwill. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method. Goodwill is not subject to amortization but will be subject to periodic evaluation for impairment. Goodwill is stated in the consolidated balance sheet at cost less accumulated impairment loss.

j.
Impairment

(i)           Long-lived Assets

The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of future cash flows from other asset groups.



(ii)           Goodwill

Impairment of goodwill is tested at least annually at the reporting unit. The test consists of two steps. Firstly, the Company identifies potential impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired. Secondly, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No 141, “Business Combinations”. If the carrying value of a reporting unit exceeds its estimated fair value, the Company compares the implied fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying value over the fair value is charged to earnings. The Company’s fair value estimates are based on numerous assumptions and it is possible that actual fair value will be significantly different than the estimates.