CHINA CLEAN ENERGY INC - FORM 10-K

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EX-23 - CHINA CLEAN ENERGY INC	e608263_ex23.htm
EX-31.1 - CHINA CLEAN ENERGY INC	e608263_ex31-1.htm
EX-32.1 - CHINA CLEAN ENERGY INC	e608263_ex32-1.htm
EX-31.2 - CHINA CLEAN ENERGY INC	e608263_ex31-2.htm
EX-32.2 - CHINA CLEAN ENERGY INC	e608263_ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-K

R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2010

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 000-53773

CHINA CLEAN ENERGY INC.

(Exact name of Registrant as specified in its charter)

Delaware	87-0700927
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification Number)

Jiangyin Industrial Zone, Jiangyin Town Fuqing City, Fujian Province People’s Republic of China	350309
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (347) 235-0258

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No R

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 R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £

Indicate by check mark if disclosure of delinquent filers pursuant 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 reference in Part III of this Form 10-K or any amendment to this Form 10-K. R

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 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 R

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes £ No R

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, based on the price at which the common equity was last sold on the OTC Bulletin Board on such date, was approximately $14,457,724. For purposes of this computation only, all officers, directors and 10% or greater stockholders of the registrant are deemed to be affiliates.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

Class		Outstanding at March 20, 2011
Common Stock, $0.001 par value		31,512,269

Documents incorporated by reference:

None

Table of Contents

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business.	1
Item 1A.	Risk Factors.	9
Item 1B.	Unresolved Staff Comments.	21
Item 2.	Properties.	21
Item 3.	Legal Proceedings.	22
Item 4.	Removed and Reserved.	22

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	22
Item 6.	Selected Financial Data.	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	29
Item 8.	Financial Statements and Supplementary Data.	29
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	50
Item 9A.	Controls and Procedures.	50
Item 9B.	Other Information.	50

	PART III
Item 10.	Directors, Executive Officers and Corporate Governance.	51
Item 11.	Executive Compensation.	53
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	55
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	56
Item 14.	Principal Accounting Fees and Services.	58

	PART IV
Item 15.	Exhibits and Financial Statement Schedules.	58

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PART I

As used in this Annual Report on Form 10-K, unless otherwise indicated, the terms “we,” “us,” “our” and “the Company” refer to China Clean Energy Inc.

Item 1.Business.

Company Overview

We, through our wholly-owned subsidiaries, Fujian Zhongde Technology Co., Ltd. (“Fujian Zhongde”) and Fujian Zhongde Energy Co., Ltd. (“Zhongde Energy”), are engaged in the development, manufacturing, and distribution of biodiesel and specialty chemical products made from renewable resources. Fujian Zhongde was incorporated in the Fujian Province of the People’s Republic of China in 1995 and Zhongde Energy was incorporated and officially granted a business license on November 5, 2007. Since inception, we have been engaged in the manufacture of high-quality specialty chemical products from renewable resources. Through cooperation with outside experts at various research institutes and our research and development efforts, we formulated a proprietary process for refining biodiesel from waste vegetable oils and waste grease. Using this proprietary process, we began producing biodiesel in 2005 and commenced selling biodiesel commercially in December 2005.

Recent Developments

We completed construction of a new biodiesel and specialty chemical focused production facility in the new Fuqing Jiangyin Industrial Park in the Fujian Province, People’s Republic of China in October 2009. We successfully completed the trial production phase at our new facility at the end of 2009 and the new plant was fully operational by January 2010. We have moved our administrative headquarters to the new plant.

The Fuqing Jiangyin Industrial Park is equipped with a deep sea harbor capable of servicing 100,000 ton cargo ships, a container port and a railroad that will be connected to the People’s Republic of China’s national railroad network. The facility originally had the flexibility to produce 100,000 tons of biodiesel per year, 30,000 tons of specialty chemicals per year, or a combination of biodiesel and specialty chemicals for a total output of 70,000 tons per year. During the third quarter of 2010, the Company successfully transferred to the new Jiangyin plant and installed the plant and equipment representing all of our biodiesel and specialty chemicals capacity except for our printing ink production line. As a result, the annual production capacity in the Jiangyin plant is now 50,000 tons of biodiesel and 40,000 tons of specialty chemicals. The printing ink production line, which accounts for approximately 500 tons of annual production capacity, will remain at the old plant. We believe our expansion of both biodiesel and specialty chemical production capacity has and will continue to help us to increase our competitiveness and profitability in the future.

Biodiesel

In November 2005, we filed an application with the State Intellectual Property Office of the People’s Republic of China (“SIPO”) for patent protection for our method of producing biodiesel from monomer acid. In December 2005, we began producing biodiesel and currently sell our biodiesel to regional service stations. SIPO granted us our patent for our method of producing biodiesel from monomer acid on October 8, 2008.

The term “biodiesel” generally refers to methyl esters (sometimes called “fatty acid methyl esters”) made by transesterification, a chemical process that reacts a “feedstock” oil or fat with methanol and a potassium hydroxide catalyst. The “feedstock” can be vegetable oil, such as that derived from oil-seed crops (e.g. soy, sunflower, cottonseed, rapeseed, etc.), or used frying oil (e.g. yellow grease from restaurants). In addition to biodiesel, our production process typically yields co-products that can be turned into an array of valuable specialty chemicals. We believe that this specialty chemical co-production capability improves the economic viability of producing biodiesel.

According to the National Biodiesel Board (in the United States), “biodiesel” is a clean-burning alternative fuel produced from domestic, renewable resources for use in compression ignition (diesel) engines. Biodiesel is comprised of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats. Biodiesel is produced from feedstock, which comes from animal fats or vegetable oils.

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According to the National Biodiesel Board, biodiesel can be used in virtually any diesel engine without modification. It can be used in its pure form (called B100) or as a blend with petroleum diesel at any ratio. It can also be stored in the same containers as petroleum diesel, which allows it to use the current fuel supply infrastructure that is already in place. Biodiesel has a higher flash point (the point at which fuel ignites) than petroleum diesel, according to the National Biodiesel Board. This characteristic makes biodiesel safer than petroleum diesel because it will not combust as easily.

A commonly used form of biodiesel is a 20% blend of biodiesel with 80% petroleum diesel, known as B20. B20 provides many of the environmental and safety benefits of biodiesel and generally avoids the cold weather and solvency considerations associated with biodiesel. Biodiesel provides similar horsepower and fuel economy as petroleum diesel with superior lubricity to reduce wear and tear on engines.

Biodiesel Benefits. We believe that the main benefit derived from using biodiesel comes from the reduction in carbon dioxide and other emissions generated when using this biodegradable, low toxicity fuel.

Petroleum diesel, in contrast to biodiesel, produces high levels of carbon dioxide (CO2), a greenhouse gas that is widely believed to be a significant contributor to global warming. It also produces other harmful pollutants, namely:

•

carbon monoxide (CO), a poisonous gas that causes smog;

•

particulates that contribute to respiratory infections, including asthma;

•

sulfur, which contributes to the formation of acid rain; and

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unburned aromatic hydrocarbons that create smog and may be a contributing cause of cancer.

By comparison, whether used in its pure form or blended with petroleum diesel, biodiesel produces significantly lower levels of harmful emissions of carbon monoxide, particulates and unburned aromatic hydrocarbons. In addition, because biodiesel is virtually free of sulfur, we believe that the use of biodiesel will not contribute to acid-rain pollution.

Moreover, according to The Office of Renewable Fuels and Co-Products of the Iowa Department of Agriculture and Land Stewardship, when comparing biodiesel and petroleum diesel, a 100% biodiesel blend (B100) lowers carbon monoxide emissions by 44%, particulate matter emissions by 40% and sulfate emissions by 100%. A blend of 20% biodiesel and 80% petroleum diesel (B20) lowers carbon monoxide emissions by 9%, particulate matter emissions by 8% and sulfate emissions by 20%. When B20 is used along with an oxidation catalyst, it reduces particulate matter by 45%, carbon monoxide by 41% and total hydrocarbons by 65%.

Other benefits of biodiesel include:

•

Biodegradability - According to a study performed at the University of Idaho in 2004, biodiesel tends to degrade more rapidly than petroleum diesel.

•

Improved Safety - According to the U.S. Department of Energy, the flash point, or temperature at which fuel “autocombusts” under pressure, of biodiesel blends increases as the percentage of biodiesel increases. Therefore, pure biodiesel or blends of biodiesel with petroleum diesel are safer to store, handle, and use than petroleum diesel.

•

Better Lubricity - According to the National Biodiesel Board, the addition of biodiesel, even in very small quantities, has been shown to provide increases in fuel lubricity using a variety of bench scale test methods.

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•

Alternative Fuel Performance - According to a 1998 study jointly sponsored by the U.S. Department of Agriculture and the U.S. Department of Energy, biodiesel and petroleum diesel have very similar energy efficiencies.

Chemicals

We manufacture and sell a variety of industrial products using environmentally-focused chemicals derived from renewable resources, such as waste vegetable oils. Our product categories include polyamide hot-melt adhesives, printing inks, alcohol and benzene-soluble polyamide resins and various fatty acids, such as dimer acid. We believe that our vegetable oil-based products will be viewed as an increasingly attractive alternative to products made with petroleum-based chemicals as a result of recently volatile oil prices, possible oil shortages and an increased awareness and concern for protecting the environment.

Hot-Melt Adhesives. We manufacture dimer acid-based polyamide hot-melt adhesives and a wide variety of high-performance polyamide hot-melt adhesives. We offer products with varying softening points, tensile strengths, viscosities and adhesion strengths. These products are used in a wide range of applications, from book-binding and adhesion of fabrics, leather, plastic and wood to cementation of metal, ceramics and electronic components.

Polyamide Resins. We offer a wide variety of alcohol-soluble and benzene-soluble polyamide resins for use in printing inks. Our alcohol-soluble resins have good glossiness, adhesion, heat stability and anti-freeze ability and are used primarily in various kinds of bucked plate plastic-based inks such as polypropylene, polyethylene, terylene, cellophane and paper. Our benzene-soluble polyamide resins are characterized by good dissolving ability, leveling and liberation, excellent glossiness, excellent anti-gelling properties and adhesion to plastic membranes. They are used primarily in gravure printing inks and are compatible with gravure printers that have varying rotating speed capabilities. In addition, we manufacture low molecular weight liquid polyamide resin, a flexibilizer and curing agent for epoxy resin. It is used in epoxy coating, epoxy adhesive, epoxy casting seal and epoxy varnish.

Dimer, Stearic and Monomer Acids. These are fatty acids that are used for a variety of lubricating, flexibilizing, surfactant and emulsifying applications. Dimer acid is used in the production of resins, lubricants, coatings and corrosion-resistant agents. Stearic acid, produced by hydrolysis and rectification of various kinds of vegetable oils, is widely used in plastic flexibilizers, stabilizers, surfactants and soap bases. Monomer acid, a by-product from dimer and oleic acid processing, is used in plastics, lubricants, leather agents, detergents, soaps and alkyd resins.

Printing Inks. We manufacture a variety of printing inks for gravure surface printing, gravure inner printing and flexible typographic printing on plastic, aluminum foil and paper.

Sales

The following table sets forth our sales by product category for the twelve-month period from January 1, 2010 through December 31, 2010. As shown in the table, during the twelve-month period ending December 31, 2010, dimer acid was our top selling product, accounting for 28.08% of total sales.

Products Sold		% of Total Sales for the Year
1.	Dimer Acid	28.08%
2.	Polyamide Hot Melt Adhesive	20.92%
3.	Biodiesel	18.67%
4.	Polyamide Resin	12.52%
5.	Fatty Acid	11.50%
6.	Purity Dimer Acid	2.78%
7.	Vegetable Asphaltum	2.24%
8.	High Performance Polyamide Hot Melt	2.09%
9.	Printing Ink	1.20%

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The following table sets forth our sales by product category for the twelve-month period from January 1, 2009 through December 31, 2009. As shown in the table, during the twelve month period ended December 31, 2009, dimer acid was our top selling product, accounting for 30.30% of total sales.

Products Sold		% of Total Sales for the Year
1.	Dimer Acid	30.30%
2.	Polyamide Hot Melt Adhesive	21.09%
3.	Polyamide Resin	15.41%
4.	Biodiesel	14.84%
5.	Fatty Acid	9.73%
6.	Print Ink	4.49%
7.	Liquid Resin 651#	1.90%
8.	Vegetable Asphaltum	1.88%
9.	High Performance Polyamide Hot Melt Adhesive	0.30%
10.	Purity Dimer Acid	0.06%

The Biodiesel and Specialty Chemicals Markets

We believe that oil price volatility, global warming, and other environmental sustainability issues are rapidly increasing the demand for chemicals and fuels derived from renewable resources. We expect that global prices for gasoline, diesel fuels and chemicals will rise in the next few years as supply concerns accelerate and oil prices resume their historical upward trend. Elevated oil prices not only drive gasoline and diesel fuel prices higher but also create pressure on a wide range of petrochemical derivatives such as nylon (polyamides). In addition, technological innovations, profit motive, and the desire to reduce reliance on oil have moved bio-based chemistry and fuel production to the forefront of the global marketplace. As a result, we believe the economic, social, and environmental benefits of a new generation of bio-refinery products are rapidly becoming integrated into global economies.

The People’s Republic of China Biodiesel Market

The People’s Republic of China biodiesel industry is still very much in its infancy. With volatile oil prices and worsening pollution, the People’s Republic of China is expected to promote low-polluting alternatives to foreign oil and we anticipate biodiesel being recognized as a leading near-term solution. Further, we believe the integration of biodiesel into the fuel supply of the People’s Republic of China can be swift and immediate, as biodiesel can be blended at any level with petroleum diesel or used in its pure form (B100) and biodiesel also makes use of the existing petroleum infrastructure; i.e., tankers, storage depots, and filling stations.

The People’s Republic of China Legislation. In 2005, the Standing Committee of the National People’s Congress passed “The Renewable Energy Law of the People’s Republic of China.” The legislation aims to “promote the development and utilization of renewable energy, improve the energy structure, diversify energy supplies, safeguard energy security, protect the environment and realize the sustainable development of the economy and society.” This legislation states that fuel retail businesses must begin to include “biological liquid fuel” in their enterprises or they will suffer imposed fines. On April 20, 2006, Chinese premier Wen Jiabao convened the Second National Leadership Conference on Energy to consider the Medium and Long-term Development Plan for Renewable Energy, stating that equal emphasis shall be placed on development and conservation, and that stronger measures shall be taken to promote comprehensive energy conservation and to vigorously develop renewable energy.

Potential for Increase in Diesel Engines. The People’s Republic of China's central government introduced an updated Auto Policy in 2004, which stipulates that gasoline consumption should decline 15% by 2010. The People’s Republic of China’s recent gasoline shortages and the enforcement of this new policy may be likely to increase the adoption of diesel cars over the next several years.

We believe that in comparison to gasoline-powered cars, diesel-powered cars are more fuel-efficient, more environmentally friendly, better suited for urban driving, safer, and more durable.

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The People’s Republic of China Specialty Chemicals Market

We view the People’s Republic of China as the world’s most attractive market for commodity and specialty chemicals. We believe that the long-term demand for commodity and specialty chemicals is likely to grow at a faster rate in the People’s Republic of China than in North America and Western Europe. As such, we believe that the People’s Republic of China will be a very attractive market for commodity and specialty chemicals for the foreseeable future. Demand comes from both rising domestic consumption and the country’s thriving exporters. Demand for our specialty chemical products (printing inks, adhesives, resins, and intermediary substances) continues to accelerate with the rise in domestic consumption, expansion of the People’s Republic of China’s exports and an increasing global appetite for non-petroleum based, specialty chemical products. Building and construction continues to grow in the People’s Republic of China and domestic consumers with more disposable income are creating new and increased demand for a wide range of products, many of which contain our adhesives, inks, polyamides, resins and related products.

In addition, the People’s Republic of China’s export manufacturing base continues to expand. The global chemical market is experiencing fundamental changes in how it operates as economic, environmental, and political pressures force the industry to rely less on petroleum products. A wave of renewable or biotech products is already replacing petroleum-based raw materials in a wide array of markets such as plastics, fibers, adhesives, resins and more. We believe the main drivers behind the acceptance of chemicals derived from renewable resources as replacements for petrochemicals are price, performance, and environmental sustainability.

Petroleum, waste, regulatory, and environmental cost pressures are now evident throughout the supply chain for chemical products. As oil prices remain volatile and companies continue to disassociate themselves from any chemical in their supply chain that is recognized as being hazardous or harmful to the environment, we expect to see petrochemicals replaced by more environmentally friendly chemistry alternatives.

Competition

In the area of biodiesel production, we are aware of the existence of at least three main domestic competitors: Gushan Environmental Energy Ltd., with operations in Handan, Hebei Province, Fuzhou, Fujian Province, Mianyang, Sichuan Province, Beijing and Shanghai, China Biodiesel International Holding Co., Ltd., located in Longyan and Fujian Province and Wuxi Huahong Bio-fuel Co., Ltd., located in Wuxi, Jiangsu Province.

We have several major competitors that also produce specialty chemicals from renewable resources. For instance, Jiangsu Yonglin Oil & Grease Chemicals Co., Ltd., located in the northern part of Jiangsu Province, produces polyamide resins from oleic acid. Shanghai Jiangqiao Chemical Factory, a private company located in a suburb of Shanghai, produces dimer acid from oleic acid. Zhejiang Henghua Huagong Co., Ltd., located in the Zhejiang Province, manufactures alkyd resin and polyamide resin from oleic acid. Zhejiang Huangyan Resin Chemical Industry Co., Ltd., located in Zhejiang Province, manufactures polyamide resin from oleic acid.

In addition, we may face competition from foreign competitors if such competitors choose to export their biodiesel to the People’s Republic of China.

We believe that we enjoy a material presence in the biodiesel industry in Fuqing City, Fujian Province, as there are only a handful of other companies currently in the country and the markets are extremely local due to transportation costs. In addition, we believe our industry relationships, contracts with feedstock suppliers, cost efficient manufacturing methods and ability to sell diesel co-products to our specialty chemical customers provide us with competitive advantages.

We believe that our product formulations, price points, relationships, infrastructure, quality control standards, and reputation provide us with competitive advantages with respect to the production and sale of specialty chemicals. We are currently able to maintain a lower cost structure than competitors based in the U.S. and Europe. Furthermore, we believe our competitive advantage in the People’s Republic of China is protected by our knowledge of government regulations, business practices, and strong relationships.

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In comparison to our competitors in the People’s Republic of China, we believe we possess greater technological expertise, marketing knowledge and global relationships. We also view our proprietary line of multi-purpose hot-melt adhesives as key technological advantages. In addition, we believe domestic competitors typically lack the global marketing capability and reputation that we currently enjoy and are continuing to strengthen.

Growth Strategy

In response to growing global demand for transport fuels and clean technologies, we are focused on increasing our biodiesel and specialty chemical production capacity. In October 2009, we completed construction of our new biodiesel and specialty chemical production facility in the new Fuqing Jiangyin Industrial Park in the Fujian Province, People’s Republic of China. The new facility is located 20 miles from our old facility and is 20,000 square meters in size. The Fuquing Jiangyin Industrial Park is equipped with a deep sea harbor capable of 100,000 ton cargo ships, a container port, and a railroad to be connected to the People’s Republic of China’s national railroad network. The plant has the flexibility to produce up to 110,000 tons of biodiesel per year, or 40,000 tons of specialty chemicals per year, or a combination of biodiesel and specialty chemicals for a total output of 90,000 tons per year. We expect that the new plant’s proximity to our existing plant will help us to improve our efficiency and cost effectiveness. As we grow and secure more customers, we plan to expand our existing plants.

Our vision is to be the global market leader for the development and manufacturing of energy products and specialty chemicals made from renewable resources. Management intends to grow our business by pursuing the following strategies:

•

grow capacity and capabilities in line with market demand increases;

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enhance our technology through innovation, research and study, and obtain global patent protection;

•

continue to improve operational efficiencies and use of nearly all resource by-products;

•

further expand into global markets and diverse industry sectors; and

•

build a strong market reputation to foster and capture future growth in the People’s Republic of China and abroad.

We also plan to expand our existing refining facilities and launch additional plants, in addition to growing our specialty chemical business lines.

Sales and Marketing

Biodiesel. To date, we have developed relationships with current and future potential customers primarily through company visits, our website and direct sales calls. We currently plan on concentrating our sales efforts on the local market in the People’s Republic of China, as demand is expected to increase steadily over the next decade. However, as the business expands, we will evaluate global biodiesel prices for opportunities abroad, depending upon shipping and export costs, as biodiesel can sell for up to 50% to 100% more at the wholesale level overseas in comparison to the price in the People’s Republic of China. While we do not plan to rely on our ability to export biodiesel for our main growth and cannot predict when the market for biodeisel will return to its normal patterns, we view the export opportunity as a potential enhancement to our business plan, especially given the higher prices at which biodiesel can be sold in markets abroad.

We believe that manufacturing and feedstock cost differences create opportunities for import/export markets and cross-border investments. Such activities could substantially lower the cost and increase supplies to Europe and the U.S. A number of documents published by the International Energy Agency (IEA) discuss the development of international markets for biofuels, as there are fairly wide ranges of feedstock availability and production costs among countries and regions.

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Specialty Chemicals. To date, we have developed relationships with current and future potential customers primarily through our participation and use of seminars, trade shows, industry conferences, websites and direct sales calls. We hope to continue to build on our success by expanding our sales force in the People’s Republic of China and increasing our focus on international markets. As our business expands, we intend to develop several sales channels, such as direct sales, working with industry-specific manufacturer representatives and through international strategic partnerships. Our sales strategy is designed to capitalize on our reputation, current industry trends and new market segments that have shown the most promise.

Intellectual Property

Through our subsidiary, Fujian Zhongde, we own a patent for our proprietary biodiesel production method to produce biodiesel from monomer acid, China Patent Registration Number ZL200510019790.9. SIPO granted the patent on October 8, 2008. The patent is valid for twenty years, from October 8, 2008 to October 7, 2028.

We also own a patent for Multi-purpose Polyamide Hot Melt Adhesive and its Production Method, China Patent Registration Number ZL00132072.6 and International Patent Category #C09J177/00. The patent is valid for twenty years, from December 12, 2000 to December 11, 2020.

Customers

Biodiesel. We currently sell biodiesel to regional service stations and power generating plants in the People’s Republic of China. We believe that the market for biodiesel will expand and can absorb an increase in supply. Since we began selling biodiesel in December 2005 along with specialty chemicals, it has been one of our best-selling products. In fact, from January 2006 through December 2010, sales of biodiesel accounted for approximately 25% of our total sales for that time period.

Chemicals. Our specialty chemical products are sold to companies domestically and exported globally to companies in Europe, the U.S. and Asia. We believe that high-quality and low-production costs have allowed us to gain successful entry into the global market and to diversify our customer base.

During the twelve-month period from January 1, 2010 through December 31, 2010, we had net sales of $58,956,142. The customer listed in the table below contributed over 5% of our total revenues for the year ended December 31, 2010.

Name of Customer		Products Sold	Sales for the Year by Customer		% of Sales for the Year
1.	Air Products Chemicals PTE Ltd.	Specialty Chemicals		3,814,779	6.47%
Total (all customers)				58,956,142	100.00%

During the twelve-month period from January 1, 2009 through December 31, 2009, we had net sales of $15,933,351. The two customers listed in the table below each contributed over 5% of our total revenues for the year ended December 31, 2009.

Name of Customer				Products Sold	Sales for the Year by Customer		% of Sales for the Year
	1.	Air Products and Chemicals (PTE) Ltd.		Specialty Chemicals		1,642,523	10.31%
	2.		Cray Valley Resins PVT., Ltd.	Specialty Chemicals		1,295,258	8.13%
Total (top two)						2,937,781	18.44%
Total (all customers)						15,933,351	100.00%

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Principal Suppliers

We use feedstock, which can be vegetable oil derived from either oil-seed crops or used frying oil, as the primary raw materials for our manufacturing process. During the twelve-month period from January 1, 2010 through December 31, 2010, the feedstock suppliers listed in the table below supplied more than 5% of our feedstock. To date, we have not experienced any shortages in the supply of raw materials from our key suppliers.

Name of Supplier			% of Feedstock Supplied for the Year
	1.	Fujian QuanZhou Zhongyuan Chemical Co., Ltd.		16.49%
	2.	Shaxian Jinlong Chemical Industry Co., Ltd.		11.69%
	3.	Fuzhou Yinfu Oils & Fats Industrial Co., Ltd.		11.16%
	4.	Fujian Dongtai Imp & Exp Co., Ltd.		7.91%
	5.	Fujian Zhongmin Chemical Co., Ltd.		7.35%

During the twelve-month period from January 1, 2009 through December 31, 2009, we had four feedstock suppliers who supplied more than 5% of our feedstocks.

Name of Supplier			% of Feedstock Supplied for the Year
	1.	Fujian Zhongmin Chemical Co., Ltd.		16.81%
	2.	Xinjiang Guansheng Technology Co., Ltd.		11.53%
	3.	Fujian QuanZhou Zhongyuan Chemical Co., Ltd.		9.77%
	4.	Dongying Haifutong Chemical Co., Ltd.		5.11%

Employees

As of March 19, 2010, we had 120 employees. All are full time employees.

Regulation

We are subject to environmental regulation by both the central government of the People’s Republic of China and by local government agencies. Since our inception, we have been in compliance with all applicable regulations.

Under the State Environmental Protection Administration of the People’s Republic of China, all chemical and biodiesel manufacturing facilities are required to obtain a Discharge Permit and a Safe Production Permit. These permits are valid for a period of three years and may be renewed for additional periods of three years. In order to renew the Safe Production Permit, the subject facility must not have had any accidents during the previous three years. In addition, the local environmental protection administration inspects waste-water, gas and solid waste discharges and issues an examination report each calendar quarter. In order to renew the Discharge Permit, the subject facility must have consistently passed the local government inspections for the prior three years. We currently own each of these permits for our existing plant in Fuzhou City. Neither of these permits have been issued for the Jiangyin plant. We applied for both permits and received approval of the Discharge Permit. We are waiting for approval for the Safety Permit.

In addition, we expect the government of the People’s Republic of China to release an official standard for biodiesel in the near future. We will seek to qualify our products for the biodiesel standard when it is released. We believe that we are well positioned to qualify due to our early production of biodiesel as well as our longstanding history of being in operation since 1995, among other things.

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Item 1A.

Risk Factors.

There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. You should carefully consider the risks described below and the other information included in this Annual Report on Form 10-K, including the consolidated financial statements and related notes. Our business, financial condition and results of operations could be materially adversely affected by any of the following risks. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual outcomes may vary materially from those included in this Annual Report on Form 10-K.

Risks Related to Our Business

We have a limited history of producing biodiesel, which makes it difficult to evaluate our business.

Currently, we have only two manufacturing facilities, which began producing biodiesel in 2005 and 2010. We began selling biodiesel in December 2005 and suspended production for 8 months in 2008. Our limited operating history as a manufacturer and distributor of biodiesel makes it difficult for prospective investors to evaluate our business. Therefore, our operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the early stages of any new business, as well as those risks that are specific to the biodiesel industry. Investors should evaluate us in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services, and technologies. Despite best efforts, we may never overcome these obstacles.

Our business is dependent upon the implementation of our business plan, as well as our ability to enter into agreements with third parties for the provision of necessary feedstock sources and the sale and distribution of our biodiesel and specialty chemicals on terms that are commercially viable for us. There can be no assurance that our efforts will be successful or result in continued revenue or profit.

Economic conditions could materially adversely affect us.

Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about current global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products. Other factors that could influence demand include continuing increases in energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.

Under the current financial condition affecting the banking system and financial markets and given the possibility that financial institutions may consolidate or go out of business, there has been a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays, inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies. Uncertainty about current global economic conditions could also continue to increase the volatility of our stock price.

Our results of operations, financial position and business outlook are highly dependent on commodity prices, which are subject to significant volatility and uncertainty, and the availability of supplies, so our results could fluctuate substantially.

Our results are substantially dependent on commodity prices, especially prices for feedstock, specialty chemicals, biodiesel, petroleum diesel and materials used in the construction of our proposed refineries. As a result of the volatility of the prices for these items, our results may fluctuate substantially and we may experience periods of declining prices for our products and increasing costs for our raw materials, which could result in operating losses. Although we may attempt to offset a portion of the effects of fluctuations in prices by entering into forward contracts to supply biodiesel or purchase feedstock or other items or by engaging in transactions involving exchange-traded futures contracts, the amount and duration of these hedging and other risk mitigation activities may vary substantially over time and these activities also involve substantial risks.

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The price of feedstock is influenced by market demand, weather conditions, animal processing and rendering plant decisions and factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply as well as foreign currency exchange rates compared to Renminbi, which may affect our specialty chemical exports and some feedstock imports. The significance and relative effect of these factors on the price of feedstock is difficult to predict. Any event that tends to negatively affect the supply of feedstock, such as increased demand, foreign exchange rate fluctuation, adverse weather or crop disease, could increase feedstock prices and potentially harm our business. In addition, we may also have difficulty, from time to time, in physically sourcing feedstock on economical terms due to supply shortages. Such a shortage could require us to suspend operations until feedstock is available at economical terms, which would have a material adverse effect on our business, results of operations and financial position. The price we pay for feedstock at a facility could increase if an additional multi-feedstock biodiesel production facility is built in the same general vicinity or if alternative uses are found for feedstock.

Biodiesel is a commodity whose price is determined based on the price of petroleum diesel, governmental price controls, world demand, supply and other factors, all of which are beyond our control. World prices for crude oil and biodiesel have fluctuated widely in recent years. We expect that prices will continue to fluctuate in the future. Price fluctuations will have a significant impact upon our revenue, the return on our investment in biodiesel refineries and on our general financial condition. Moreover, in the event the price of our feedstock increases at a time when the price of biodiesel decreases, remains stagnant or fails to increase accordingly, it could render the production of biodiesel unprofitable. Price fluctuations for biodiesel may also impact the investment market, and our ability to raise investor capital. Any future decreases in the prices of biodiesel or petroleum diesel fuel may have a material adverse effect on our financial condition and future results of operations.

We may be unable to obtain any additional capital that we may require in the future, which could negatively impact our ability to operate or grow our business.

We expect that current capital and other existing resources will provide a limited amount of working capital, sufficient to operate at full capacity until the end of 2011. We also believe that revenue from our operations is sufficient to acquire an upstream feedstock supplier to mitigate our feedstock supply risk and feedstock price fluctuation.

We intend to repay our debt and other obligations through cash generated from our business operation. To the extent that we have excess funds on hand, we intend to reinvest such excess funds in additional equipment.

To the extent that we do not have sufficient capital to fund future construction and operation of our biodiesel and specialty chemical refineries, capital expenditures to build and operate our refineries, hiring qualified management and key employees, complying with licensing, registration and other requirements, maintaining compliance with applicable laws, production and marketing activities, administrative requirements, such as salaries, insurance expenses and general overhead expenses, legal compliance costs and accounting expenses, all of which require a substantial amount of capital and cash flow, we will be required to pursue sources of additional capital through various means, including joint venture projects, debt financing, equity financing or other means. There is no assurance that we will be successful in locating a suitable financing transaction in a timely fashion or at all. In addition, there is no assurance that we will be successful in obtaining the capital we require by any other means. Future financings through equity investments are likely to be dilutive to the existing stockholders. Also, the terms of securities we issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, and the issuance of warrants or other derivative securities, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which may adversely impact our financial condition.

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Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in the biodiesel and specialty chemicals industries, the fact that we are a new enterprise without a proven operating history, the location of our production facilities in the People’s Republic of China, and the price of biodiesel, oil and specialty chemicals on the commodities market, which may impact the amount of available asset-based financing. Furthermore, if petroleum, biodiesel or specialty chemicals’ prices on the commodities markets decrease, then our revenues will likely decrease and decreased revenues may increase our requirements for capital. Some of the contractual arrangements governing our operations may require us to maintain minimum capital, and we may lose our contract rights if we do not have the required minimum capital. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operation in one or both of our facilities and/or lay off excess employees.

Our reliance upon a limited number of feedstock suppliers may hinder our ability to be profitable.

Five feedstock suppliers collectively provide us with approximately 54.60% of our feedstock and our two largest suppliers, Fujian QuanZhou Zhongyuan Chemical Co., Ltd.. and Shaxian Jinlong Chemical Industry Co., Ltd., each supplied approximately 16.49% and 11.69% of our feedstock, respectively, in 2010. Should any of these suppliers terminate their supply relationships with us, sell to other buyers, or enter into the biodiesel manufacturing business in competition with us, we may be unable to procure sufficient feedstock to satisfy demand for our end products. Moreover, there are presently a finite number of feedstock suppliers within the People’s Republic of China. Thus, as demand for biodiesel products continues to increase, feedstock supplies will likely decrease, causing the price of feedstock to increase proportionally. If we are unable to obtain adequate quantities of feedstock at economically viable prices, our business could become unprofitable and investors could suffer a loss with respect to their investment in us.

Price declines in petro-based diesel due to alternative energy discoveries or enhanced supply of oil could negatively impact demand for our biodiesel.

Our biodiesel product is currently sold in the People’s Republic of China as a substitute to petro-based diesel. As a result, demand for our biodiesel could be negatively impacted should the Chinese government lower the retail prices of fuel, including diesel, due to the discovery of new oil fields or energy technology inventions.

Strategic relationships upon which we may rely are subject to change, leading to uncertainty and a negative impact on our business.

Our ability to identify and enter into commercial arrangements with feedstock suppliers, construction contractors, equipment fabricators and customers will depend on developing and maintaining close working relationships with industry participants. Our success in this area will also depend on our ability to select and evaluate suitable projects, as well as to consummate transactions in a highly competitive environment. These realities are subject to change and may impair our ability to grow.

To develop our business, we are using the business relationships of management in order to form strategic relationships. These relationships may take the form of joint ventures with other private parties or local government bodies, contractual arrangements with other companies, including those that supply feedstock that we will use in our business, or minority investments from third parties. There can be no assurances that we will be able to establish these strategic relationships, or, if established, that the relationships will be maintained, particularly if members of the management team leave us. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake in order to fulfill our obligations to these partners or maintain these relationships. If we do not successfully establish or maintain strategic relationships, our business may be negatively impacted.

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A large portion of our sales is concentrated in a few major customers; loss of any of those customers would have a material adverse impact on our revenues.

Our top five customers accounted for approximately 12.96% of our sales in 2010 and 31.21% of our sales in 2009. Our largest customer accounted for more than 6.47% of sales in 2010 and for more than 18.44% of sales in 2009. If not replaced, the loss of any of these customers could significantly reduce our revenues and adversely affect the value of an investment in us.

We are dependent on others for sales of a significant portion of our products, which may place us at a competitive disadvantage and reduce profitability.

We have a small sales force of our own to market our biodiesel and specialty chemical products. As such, we expect to contract with third parties to market and distribute some of our specialty chemical products. We have no definitive agreements at this time. As a result, we will be somewhat dependent on whomever we contract with to market our biodiesel and specialty chemical products. There is no assurance that we will be able to enter into contracts with any specialty chemical products brokers or distributors on acceptable terms. If any of our distributors breaches its contract with us or does not have the ability, for financial or other reasons, to market all of the specialty chemicals products we produce, we will not have any other readily available means to sell our products. Our lack of a sufficient sales force and reliance on third parties to sell and market our products may place us at a competitive disadvantage. Our failure to sell all of our biodiesel or specialty chemical products may result in less income from sales.

The success of our business depends upon the continuing contributions of our Chief Executive Officer and other key personnel and our ability to attract other employees to expand our business.

We rely heavily on the services of Tai-ming Ou, our Chief Executive Officer, as well as several other senior management personnel. Loss of the services of any of such individuals would adversely impact our operations. In addition, we believe that our technical personnel represent a significant asset and provide us with a competitive advantage over many of our competitors. We believe that our future success will depend upon our ability to retain these key employees and our ability to attract and retain other skilled financial, engineering, technical and managerial personnel. For example, we presently do not have any directors or officers, other than William Chen, our Chief Financial Officer, who have experience with preparing disclosure mandated by U.S. securities laws and we will be required to engage such persons, and independent directors, in order to satisfy the initial listing standards of the major exchanges on which we may seek to list our common stock. In addition, if we fail to engage qualified personnel, we may be unable to meet our responsibilities as a public reporting company under the rules and regulations of the Securities and Exchange Commission.

We plan to grow very rapidly, which will place strains on management and other resources.

We plan to grow rapidly and significantly expand our operations. This growth will place a significant strain on management systems and resources. We will not be able to implement our business strategy in a rapidly evolving market without an effective planning and management process, and, to date, we have not implemented sophisticated managerial, operational and financial systems and controls. We are required to manage multiple relationships with various strategic partners, technology licensors, users, advertisers and other third parties. These requirements will be strained in the event of rapid growth or in the number of third party relationships, and our systems, procedures or controls may not be adequate to support our operations and management may be unable to manage growth effectively. To manage our expected growth, we will be required to significantly improve or replace existing managerial, financial and operational systems, procedures and controls, and to expand, train and manage our growing employee base. We will be required to expand our finance, administrative and operations staff. We may be unable to complete in a timely manner the improvements to our systems, procedures and controls necessary to support future operations, management may be unable to hire, train, retain, motivate and manage required personnel and management may be unable to successfully identify, manage and exploit existing and potential market opportunities.

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Increases in our energy expenses will negatively impact operating results and financial condition.

Our biodiesel and specialty chemical production costs will be dependent on the costs of the energy sources used to run our refineries. These costs are subject to fluctuations and variations in different locales in which we intend to operate, and we may not be able to predict or control these costs. If these costs exceed our expectations, this may adversely affect our results of operations.

We may be unable to locate suitable properties and obtain the development rights needed to build and expand our business.

Our business plan focuses on designing, building and operating specialty chemical and biodiesel production facilities for our own account. Although we were able to successfully enter into an agreement to purchase land use rights in Jiang Yin, People’s Republic of China to construct our second specialty chemical and biodiesel production facility for our own account, our ability to acquire quality and reliable properties and facilities in the future may be unpredictable and we may be required to delay construction of our facilities, which will create unanticipated costs and delays. In the event that we are not successful in identifying and obtaining development rights on suitable properties for building and operating specialty chemical and biodiesel production facilities, our future prospects for profitability will likely be substantially limited, and our financial condition and resulting operations may be adversely affected.

The production, sale and distribution of biodiesel are dependent on the sufficiency of necessary infrastructure which may not occur on a timely basis, if at all, and our operations could be adversely affected by infrastructure disruptions.

Substantial development of infrastructure will be required by persons and entities outside our control for our operations, and the biodiesel industry generally, to grow. Areas requiring expansion include, but are not limited to:

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adequate highway or rail capacity, including sufficient numbers of dedicated tanker trucks or cars;

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sufficient storage facilities for feedstock and biodiesel;

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increases in truck fleets capable of transporting biodiesel within localized markets; and

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expansion of independent filling stations.

Substantial investments required for these infrastructure changes and expansions may not be made or they may not be made on a timely basis. Any delay or failure in making the changes to or expansion of infrastructure could hurt the demand or prices for our products, impede our delivery of products, impose additional costs on us or otherwise have a material adverse effect on our results of operations or financial position. Our business is dependent on the continuing availability of infrastructure and any infrastructure disruptions could have a material adverse effect on our business.

Our commercial success will depend in part on our ability to obtain and maintain protection of our intellectual property.

Our success will depend in part on our ability to maintain or obtain and enforce patent and other intellectual property protection for our technologies and to preserve our trade secrets, and to operate without infringing upon the proprietary rights of third parties. We have obtained or developed rights to one patent and one patent application in the People’s Republic of China, and may, in the future, seek rights from third parties to other patent applications or patented technology. Significant aspects of our technology are currently protected as trade secrets, for which we intend to file patent applications when appropriate. There can be no assurance that a patent will issue from the patent application filed or that the scope of any claims granted in any patent will provide us with proprietary protection or a competitive advantage. We cannot be certain that the creators of our technology were the first inventors of inventions covered by our patent and patent application or that they were the first to file. Accordingly, there can be no assurance that our patent and patent application are valid or will afford us with protection against competitors with similar technology. The failure to obtain or maintain patent or other intellectual property protection on the technologies underlying our biodiesel refining and specialty chemical manufacturing processes may have a material adverse effect on our competitive position and business prospects. It is also possible that our technologies may infringe on patents or other intellectual property rights owned by others. We may have to alter our products or processes, pay licensing fees, defend an infringement action or challenge the validity of the patents in court, or cease activities altogether because of patent rights of third parties, thereby causing additional unexpected costs and delays to us. There can be no assurance that a license will be available to us, if at all, upon terms and conditions acceptable to us or that we will prevail in any intellectual property litigation. Intellectual property litigation is costly and time consuming, and there can be no assurance that we will have sufficient resources to pursue such litigation. If we do not obtain a license under such intellectual property rights, are found liable for infringement or are not able to have such patents declared invalid, we may be liable for significant money damages and may encounter significant delays in bringing products and services to market.

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We face significant competition, which may negatively impact our future growth.

We face competition from other producers of biodiesel with respect to the procurement of feedstock, obtaining suitable properties for the construction of biodiesel refineries and selling biodiesel and related products. Such competition could be intense thus driving up the cost of feedstock and driving down the price for our products. Competition will likely increase as prices of energy on the commodities market, including petroleum and biodiesel, rise, as they have in recent years. Additionally, new companies are constantly entering the market, thus increasing the competition. Increased competition could also have a negative impact on our ability to obtain additional capital from investors. Larger foreign owned and domestic companies that have been engaged in this business for substantially longer periods of time may have access to greater resources. These companies may have greater success in the recruitment and retention of qualified employees, as well as in conducting their own refining and fuel marketing operations, which may give them a competitive advantage. In addition, actual or potential competitors may be strengthened through the acquisition of additional assets and interests. If we are unable to compete effectively or adequately respond to competitive pressures, this may materially adversely affect our results of operation and financial condition.

Our business is subject to local legal, political, and economic factors that are beyond our control.

We believe that the current political environment for construction of biodiesel and specialty chemical facilities is sufficiently supportive to enable us to plan and implement our operations. However, there are risks that conditions will change in an adverse manner. These risks include, but are not limited to, laws or policies affecting mandates or incentives to promote the use of biodiesel, environmental issues, land use, air emissions, water use, zoning, workplace safety, restrictions imposed on the biodiesel and specialty chemicals industry such as restrictions on production, substantial changes in product quality standards, restrictions on feedstock supply, price controls and export controls. Any changes in biodiesel and specialty chemicals, financial incentives, investment regulations, policies or a shift in political attitudes are beyond our control and may adversely affect our business and future financial results.

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

Our operations require licenses, permits and in some cases renewals of these licenses and permits from various governmental authorities within the People’s Republic of China. We believe that we either hold or will be able to obtain all necessary licenses and permits to carry on the activities that we contemplate, and that we will be able to obtain the licenses and permits necessary for our future biodiesel and specialty chemical operations. However, our ability to obtain, sustain, or renew such licenses and permits on acceptable terms are subject to change, as, among other things, the regulations and policies of applicable governmental authorities may change. Our inability to obtain, loss of, or denial of, extension as to any of these licenses or permits may have a material adverse effect on our operations and financial condition.

Penalties we may incur could impair our business.

Failure to comply with government regulations could subject us to civil and criminal penalties, require us to forfeit property rights and may affect the value of our assets. We may also be required to take corrective actions, including, but not limited to, installing additional equipment, which could require us to make substantial capital expenditures. We could also be required to indemnify our employees in connection with any expenses or liabilities that they may incur individually in connection with regulatory action against them. These could result in a material adverse effect on our prospects, business, financial condition and our results of operation.

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We are subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared.

We are subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under these rules, among other things, we must evaluate the effectiveness of our internal controls over financial reporting. These reporting and other obligations place significant demands on our management, administrative, operational, internal audit and accounting resources. We anticipate that as our business grows we will need to upgrade our systems; implement additional financial and management controls, reporting systems and procedures; implement an internal audit function; and hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.

Our operations are susceptible to interruption from natural disasters.

Our operations are located in Fujian Province of the People’s Republic of China. Historically, this region has suffered damage from typhoons or other natural disasters. Should any of these natural events occur, it would likely slow down development of our new production facility and construction plans, thus adversely impacting current operations and future growth plans.

Risks Related to Doing Business in the People’s Republic of China

We face the risk that changes in the policies of the government of the People’s Republic of China could have a significant impact upon our business and profitability.

The economy of the People’s Republic of China is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the People’s Republic of China can have significant effects on the economic conditions of the People’s Republic of China. The government of the People’s Republic of China has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the People’s Republic of China will continue to strengthen its economic and trading relationships with foreign countries and business development in the People’s Republic of China will follow market forces. While we believe that this trend will continue, there can be no assurance that this will be the case. A change in policies by the government of the People’s Republic of China could adversely affect our interests by, among other factors:

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changes in laws,

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imposition of new regulations or the interpretations of such regulations,

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confiscatory taxation,

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restrictions on currency conversion, imports or sources of supplies, or

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the expropriation or nationalization of private enterprises.

Although the government of the People’s Republic of China has been pursuing economic reform policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life in the People’s Republic of China.

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The laws and regulations of the People’s Republic of China governing our current business operations are sometimes vague and uncertain. Any changes in these laws and regulations may have a material and adverse effect on our business.

There are substantial uncertainties regarding the interpretation and application of laws and regulations of the People’s Republic of China, including but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We are considered a foreign person or foreign funded enterprise under the laws of the People’s Republic of China, and, as such, we are required to comply with the laws and regulations of the People’s Republic of China. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new laws or regulations of the People’s Republic of China may have on our businesses.

A slowdown or other adverse developments in the economy of the People’s Republic of China may materially and adversely affect our customers, demand for our products and our business.

Much of our operations are conducted in the People’s Republic of China. In the fiscal year 2009, approximately 56.96% of our revenue was generated from sales in the People’s Republic of China. Although the economy of the People’s Republic of China has grown significantly in recent years, we cannot assure investors that such growth will continue. The renewable energy and specialty chemicals industries in the People’s Republic of China are relatively new and growing, and we therefore do not know how sensitive they are to a slowdown in economic growth or other adverse changes in the economy of the People’s Republic of China. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the People’s Republic of China could materially reduce the demand for our products and materially and adversely affect our business.

Inflation in the People’s Republic of China could negatively affect our profitability and growth.

While the People’s Republic of China economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the People’s Republic of China has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austere policy can lead to a slowing of economic growth. On October 28, 2004, the People’s Bank of China, the People’s Republic of China’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns. Repeated rises in interest rates by the central bank would likely slow economic activity in the People’s Republic of China, which could, in turn, materially increase our costs and also reduce demand for our products.

Governmental control of currency conversion may affect the value of an investment in us.

The government of the People’s Republic of China imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the People’s Republic of China. In 2010, approximately 82.33% of our revenues was received in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations. Under existing People’s Republic of China foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the People’s Republic of China State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required whenever Renminbi is to be converted into foreign currency and remitted out of the People’s Republic of China to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies.

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The People’s Republic of China may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.

The fluctuation of the Renminbi may materially and adversely affect investments in us.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the political and economic climate of the People’s Republic of China. As part of our business relies on revenues earned in the People’s Republic of China, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi that we convert would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.

On July 21, 2005, the People’s Republic of China changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. While the international reaction to the Renminbi revaluation has generally been positive, pressure remains on the People’s Republic of China to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. The Ministry of Commerce has expressed that it would continue to pursue a course of “stability” with respect to fluctuation of the Renminbi in 2010.

Recent People’s Republic of China State Administration of Foreign Exchange (“SAFE”) Regulations regarding offshore financing activities by residents of the People’s Republic of China have undergone a number of changes that may increase the administrative burden we face. The failure by our stockholders who are residents of the People’s Republic of China to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our People’s Republic of China resident stockholders to liability under the laws of the People’s Republic of China.

SAFE issued a public notice (the “October Notice”) effective November 1, 2005 that requires registration with SAFE by the People’s Republic of China resident stockholders of any foreign holding company of a People’s Republic of China entity. Without registration, the People’s Republic of China entity cannot remit any of its profits out of the People’s Republic of China as dividends or otherwise. However, it is uncertain how the October Notice will be interpreted or implemented regarding specific documentation requirements for a foreign holding company formed prior to the effective date of the October Notice, such as in our case. While our local counsel has advised us that only the People’s Republic of China resident stockholders who receive the ownership of the foreign holding company in exchange for ownership in the People’s Republic of China operating company are subject to the October Notice, there can be no assurance that SAFE will not require our other People’s Republic of China resident stockholders to make disclosure. In addition, the October Notice requires that any monies remitted to residents of the People’s Republic of China outside of the People’s Republic of China be returned within 180 days. However, there is no indication of what the penalty will be for failure to comply or if stockholder non-compliance will be considered to be a violation of the October Notice by us or otherwise affect us.

In the event that the proper procedures are not followed under the SAFE October Notice, we could lose the ability to remit monies outside of the People’s Republic of China and would therefore be unable to pay dividends or make other distributions. Our People’s Republic of China resident stockholders could be subject to fines, other sanctions and even criminal liabilities under the People’s Republic of China Foreign Exchange Administrative Regulations promulgated January 29, 1996, as amended.

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Our current tax status is uncertain, exposing us to potential liability.

Pursuant to the relevant laws and regulations in the People’s Republic of China, Fujian Zhongde, as a wholly-owned foreign enterprise (“WOFE”) in the People’s Republic of China, is entitled to 50% relief from the People’s Republic of China enterprise income tax in each of 2008, 2009 and 2010. As a newly-registered WOFE, our subsidiary, Zhongde Energy, is subject to the regular corporate income tax rate of 25%. As a “high tech” company, Fujian Zhongde qualifies to pay tax at a reduced rate of 15%, for which qualification Fujian Zhongde’s tax certificate must be re-certified annually with the local tax authority.

Further, there can be no assurance that the central government will not audit our previous tax returns and payments and require that we pay additional taxes and penalties in the future that could materially and adversely affect our business and financial condition.

Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could adversely affect our operations.

A renewed outbreak of SARS or another widespread public health problem in the People’s Republic of China, where much of our revenue is derived, could have an adverse effect on our operations. Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that would adversely disrupt our operations. Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.

Because our principal assets are located outside of the U.S. and all of our directors and officers, except for William Chen, reside outside of the U.S., it may be difficult for investors to enforce their rights based on U.S. federal securities laws against us and our officers and directors in the U.S. or to enforce a U.S. court judgment against us or them in the People’s Republic of China.

All of our directors and officers, except for William Chen, reside outside of the U.S. In addition, Fujian Zhongde and Zhongde Energy, our operating subsidiaries, are located in the People’s Republic of China and substantially all of their assets are located outside of the U.S. It may therefore be difficult or impossible for investors in the U.S. to enforce their legal rights based on the civil liability provisions of the U.S. federal securities laws against us in the courts of either the U.S. or the People’s Republic of China and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in the People’s Republic of China courts. Further, it is unclear if extradition treaties now in effect between the U.S. and the People’s Republic of China would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. federal securities laws or otherwise.

We may have difficulty establishing adequate management, legal and financial controls in the People’s Republic of China.

The People’s Republic of China historically has not adopted a western style of management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the People’s Republic of China. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards.

Risks Relating to Our Organization

Our executive officers beneficially own a substantial percentage of our outstanding common stock, which gives them significant influence over certain major decisions on which our stockholders may vote, which may discourage an acquisition of us.

Tai-ming Ou, our Chief Executive Officer, beneficially owns, in the aggregate, approximately 24.17% of our outstanding common stock and our directors and executive officers as a group collectively own approximately 32.47% of our outstanding shares. The interests of management may differ from the interests of other stockholders. As a result, our executive management will have the right and ability to exert significant influence over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the following actions:

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electing or defeating the election of directors;

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amending or preventing amendment of our Certificate of Incorporation or Bylaws;

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effecting or preventing a merger, sale of assets or other corporate transaction; and

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the outcome of any other matter submitted to the stockholders for vote.

Our management’s stock ownership may discourage a potential acquirer from seeking to acquire shares of our common stock or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.

Because we became public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.

There may be risks associated with us becoming public through a reverse merger. Specifically, securities analysts of major brokerage firms may not provide coverage of us because there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will, in the future, want to conduct any secondary offerings on our behalf.

Risks Relating to Our Common Stock

Our stock price may be volatile, so investors could lose their investment.

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

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technological innovations or new products and services by us or our competitors;

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additions or departures of key personnel;

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limited “public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for the common stock;

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sales of the common stock;

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our ability to execute our business plan;

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operating results that fall below expectations;

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industry developments;

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economic and other external factors; and

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period-to-period fluctuations in our financial results.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

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There may be a limited market for our securities and we may fail to qualify for a listing on a national securities exchange such as the NASDAQ Stock Market or the NYSE Amex Equities.

Although we plan on applying for listing of our common stock on a national stock exchange such as the NYSE Amex once we meet the qualifications, there can be no assurance that our initial listing application will be granted, when the required listing criteria will be met or when, or if, our application will be granted. Thereafter, there can be no assurance that trading of our common stock on such a market will be sustained or desirable. In the event that our common stock fails to qualify for initial or continued inclusion, our common stock could thereafter only be quoted on the OTC Bulletin Board, OTC Markets Group or in what are commonly referred to as the “pink sheets.” Under such circumstances, a stockholder may find it more difficult to dispose of, or to obtain accurate quotations, for our common stock, and our common stock would become substantially less attractive to certain purchasers, such as financial institutions, hedge funds, and large investors.

Furthermore, for companies whose securities are quoted on the OTC Bulletin Board, the OTC Markets Group or the Pink Sheets, it is more difficult to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and to obtain needed capital.

Provisions of our Certificate of Incorporation and Delaware law could deter a change of control, which could discourage or delay offers to acquire us.

Provisions of our Certificate of Incorporation and Delaware law may make it more difficult for someone to acquire control of us or for our stockholders to remove existing management, and might discourage a third party from offering to acquire us, even if a change in control or in management would be beneficial to stockholders. For example, our Certificate of Incorporation allows us to issue shares of preferred stock without any vote or further action by stockholders.

Our Certificate of Incorporation authorizes the board to create new series of preferred stock without further approval by stockholders, which could adversely affect the rights of the holders of common stock.

Pursuant to our Certificate of Incorporation, our board of directors has the authority to fix and determine the relative rights and preferences of our preferred stock. The board of directors also has the authority to issue preferred stock without further stockholder approval. As a result, the board of directors could authorize the issuance of a series of preferred stock that grants holders a liquidation preference, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to have their shares redeemed by us, together with a premium, prior to the any redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than the common stock or that is convertible into common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.

Volatility in our common stock price may subject us to securities litigation.

The market for our common stock is characterized by significant price volatility when compared to seasoned issuers. We expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

The elimination of monetary liability against our directors under Delaware law and the existence of indemnification rights to our directors may result in substantial expenditures by us and may discourage lawsuits against our directors.

Our Certificate of Incorporation provides that, to the fullest extent that the General Corporation Law of the State of Delaware permits, none of our directors shall be personally liable to either us or our stockholders for any breach in his or her fiduciary duties as a director. This provision creates an indemnification obligation by us that could ultimately cause us to incur substantial expenditures to cover the cost of settlement or damage awards against our directors. This provision and resultant costs may also discourage us from bringing a lawsuit against directors for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors even though such actions, if successful, might otherwise benefit us and our stockholders.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulations. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by these forward-looking statements. Forward-looking statements involve risks and uncertainties. These uncertainties include factors that affect all businesses as well as matters specific to us. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described under the heading “Item 1A. Risk Factors” in this Annual Report on Form 10-K, as well as others that we may consider immaterial or do not anticipate at this time.

Forward-looking statements in this Annual Report on Form 10-K are based on management’s beliefs and opinions at the time the statements are made. The forward-looking statements contained in this Annual Report on Form 10-K are expressly qualified in their entirety by this cautionary statement. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Our headquarters are located at our new biodiesel and specialty chemical focused production manufacturing facility in the Jiangyin Industrial Zone, Jiangyin Town, Fuqing City, in the Fujian Province in the People’s Republic of China. The facility is approximately 20,000 square meters in size and is located approximately 50 miles from Fuzhou, the Capital City of Fujian Province. We completed construction in October 2009 and completed the trial production phase in December 2009. In January 2010, the plant was fully operational and had a production capacity of 100,000 tons of biodiesel per year or 40,000 tons of specialty chemicals per year or a combination of biodiesel and specialty chemicals for a total output of 90,000 tons per year. In the People’s Republic of China, the ownership of land belongs to the government of the People’s Republic of China, and private entities and individuals can only acquire land use rights for a certain period of time. We own certain rights with respect to the land on which the facility is located pursuant to a contract we entered into with Fuzhou City Jiangyin Industry District Management Committee on December 25, 2006 to purchase land usage rights with respect to 112,744 square meters of land for 50 years at a purchase price of 18,549,000 Renminbi, or approximately $2.5 million. The total capital expenditure for this facility was $22.3 million, including the $2.6 million we paid in 2006 to acquire the land usage rights. We anticipate that we will require an additional $3 million for working capital uses annually.

We own an additional 311,000 square-foot manufacturing facility located 20 miles from our headquarters at Fulu Industrial District, Long Tian Town, Fuqing City, Fujian Province, People’s Republic of China. This facility was originally erected in 1995 with a core focus on developing and manufacturing high-quality specialty chemical products from renewable resources. During the third quarter of 2010, the Company successfully transferred to the new Jiangyin plant and installed the plant and equipment representing all of our biodiesel and specialty chemicals capacity except for our printing ink production line. As a result, the annual production capacity in the Jiangyin plant is now 50,000 tons of biodiesel and 40,000 tons of specialty chemicals. The printing ink production line, which accounts for approximately 500 tons of annual production capacity, will remain at the old plant.

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Item 3.Legal Proceedings.

We are not presently a party to any material litigation nor are we aware of any such threatened or pending litigation.

Item 4.Removed and Reserved.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock was quoted on the OTC Bulletin Board under the symbol CCGY.OB through February 22, 2011. After such date, our common stock has been quoted on OTC Markets Group under the symbol CCGY.PK. The change was due to the fact that we no longer have a market maker on the OTC Bulletin Board. The OTC Bulletin Board was sold in late 2009. As a result, many market makers switched exclusively to the OTC Markets Group and many companies no longer have a market maker on the OTC Bulletin Board and now trade exclusively on the OTC Markets Group.

The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

Fiscal Year 2010	High	Low
First Quarter	$0.75	$0.41
Second Quarter	$0.99	$0.51
Third Quarter	$0.82	$0.50
Fourth Quarter	$1.37	$0.71

Fiscal Year 2009	High	Low
First Quarter	$0.22	$0.10
Second Quarter	$0.38	$0.16
Third Quarter	$0.75	$0.28
Fourth Quarter	$0.90	$0.39

The last reported sales price of our common stock on the OTC Markets Group on March 24, 2011 was $0.99 per share.

Holders

As of March 24, 2011, there were approximately 80 holders of record of our common stock.

Dividends

We have not declared or paid any cash dividends on our common stock and do not anticipate declaring or paying any cash dividends in the foreseeable future. We currently expect to retain future earnings, if any, for the development of our business. Dividends may be paid on our common stock only if and when declared by our board of directors.

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Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read together with the information contained in the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” and “Risk factors” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not significantly affected by inflation.

Company Overview

We are a Chinese renewable resource-based biodiesel and specialty chemicals manufacturer and distributor. Through our wholly-owned subsidiary, China Clean Energy Resources, Ltd. (“CCER”), a British Virgin Islands holding company, we own 100% interests in Fujian Zhongde Technology Co. Ltd. (“Fujian Zhongde”) and Fujian Zhongde Energy Co., Ltd. (“Zhongde Energy”), Chinese companies incorporated in the Province of Fujian, People’s Republic of China. CCER does not conduct any substantive operations of its own, but rather conducts its primary business operations through Fujian Zhongde and Zhongde Energy.

Zhongde Energy built and operates our new biodiesel and specialty chemical refinery in Jiangyin Industrial Park, Fuqing City, Fujian Province, People’s Republic of China. As of September 30, 2010, we have successfully transferred to the new Jiangyin plant and installed plant and equipment representing 50,000 tons of biodiesel and 40,000 tons of specialty chemicals capacity, which is all of our capacity except for our printing ink production line. As previously disclosed, prior to these transfers, the new Jiangyin plant had a production capacity of 100,000 tons of biodiesel per year, 30,000 tons of specialty chemicals per year or a combination of biodiesel and specialty chemicals for a total output of 70,000 tons per year. As a result of the consolidation of the two plants, the annual production capacity in the Jiangyin plant is now 110,000 tons of biodiesel per year, 40,000 tons of specialty chemicals per year or a combination of biodiesel and specialty chemicals for a total output of 50,000 tons of biodiesel and 40,000 tons of specialty chemicals per year. The printing ink production line, which accounts for approximately 500 tons of annual production capacity, will remain at the old plant.

Results of Operations

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

Revenues. During the year ended December 31, 2010, we had net sales of $58,956,142 (19% from biodiesel sales and 81% from specialty chemicals sales), compared to net sales of $15,933,351 (15% from biodiesel sales and 85% from specialty chemicals sales) during the year ended December 31, 2009, an increase of approximately 270%. The increase in revenue was driven by the increased capacity provided by our new facility in Jiangyin and an increase in demand that we believe was due to the global economic recovery. These drivers increased both our sales volume and our average selling prices for our specialty chemicals and biodiesel products. During 2010, we changed our sales strategy to increase our focus on sales to domestic customers. We expanded our sales to our existing customers and added new customers in the specialty chemical products and in the biodiesel products for the year ended December 31, 2010. For the year ended December 31, 2010, domestic sales and international sales were $48,539,438 and $10,416,704, respectively, compared to $9,075,128 and $6,858,223, respectively, for the year ended December 31, 2009, an increase of approximately 435% for the domestic sales and 52% for the international sales. For the year ended December 31, 2010, we shipped 31,896 tons of specialty chemicals and 15,853 tons of biodiesel, compared to 10,386 tons of specialty chemicals and 4,078 tons of biodiesel for the year ended December 31, 2009. During the year ended December 31, 2010, the average selling price was approximately $1,503 per ton for specialty chemicals and approximately $694 per ton for biodiesel, compared to the year ended December 31, 2009, in which the average selling price was approximately $1,307 per ton for specialty chemicals and approximately $580 per ton for biodiesel. The increase in average selling price for biodiesel was driven by an increase in the petroleum diesel wholesale price. The increase in average selling price for specialty chemicals was driven by increased demand and better product mix.

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Gross Profit. The cost of goods sold was $46,731,955 for the year ended December 31, 2010, compared to cost of goods sold of $12,993,260 for the year ended December 31, 2009. The increase in cost of goods sold was primarily driven by our increased revenue. Increased feedstock prices also contributed to the increase in cost of goods sold. For the year ended December 31, 2010, feedstock used for production of biodiesel averaged $614 per ton, compared to $563 for the year ended December 31, 2009. This increase was primarily due to the increase in the wholesale price of petroleum diesel. The price of feedstock used for the production of biodiesel is directly related to the wholesale price of petroleum diesel per ton. For the year ended December 31, 2010, feedstock used for production of specialty chemicals averaged $1,159 per ton, compared to $1,040 for the year ended December 31, 2009. This increase was primarily due to the global economy recovery, which increased demand for feedstock material.

We had a gross profit of $12,224,187 for the year ended December 31, 2010, compared to a gross profit of $2,940,091 for the year ended December 31, 2009, representing gross margins of 20.73% and 18.45%, respectively. This increase in gross margins was primarily due to the increased sale of specialty chemicals products with higher gross margins.

Selling and Marketing Expenses. Selling and marketing expenses totaled $368,953 for the year ended December 31, 2010, compared to $286,055 for the year ended December 31, 2009, an increase of approximately 29%. This increase was primarily due to higher sales volume and domestic shipping fees and commission fees.

General and Administrative. General and administrative expenses totaled $1,523,738 for the year ended December 31, 2010, compared to $1,641,535 for the year ended December 31, 2009, a decrease of approximately 7%. This decrease was primarily attributable to more customers taking delivery of our products at our production facility, which has decreased our expenses associated with shipping.

Other Income (Expense). The largest component of other income (expense) in the years ended December 31, 2010 and 2010 was change in fair value of warrant liabilities. In a private placement in 2008, we issued five-year warrants to purchase 5,000,000 shares of common stock at an initial exercise price of $2.00 per share. The strike price of the warrants is denominated in U.S. dollars and the Company’s functional currency is the Remnibi. The warrants are now classified as a derivative liability carried at fair value, with periodic changes in the fair value charged or credited to income each period. For the year ended December 31, 2010, we recognized a loss on the change in the fair value of derivative liabilities of $932,578. The recognized loss on the change in the fair value is mainly due to the Company’s stock price increase from $0.51 as of December 31, 2009 to $1.03 as of December 31, 2010. We also had impairment loss of $258,861 for the year ended December 31, 2010, primarily due to the write down on assets held for sale at our old Longtian plant. These are assets that are not being used at the new Jiangyin plant. In addition, we had other income of $78,549 for the year ended December 31, 2010, primarily contributed from a government grant we received as an award for achieving high export sales.

Provision for Income Taxes. Provision for income taxes totaled $2,424,836 for the year ended December 31, 2010, compared to $236,613 for the year ended December 31, 2009. The increase was primarily due to our higher revenue and higher income before taxes for the year ended December 31, 2010 in our Chinese operating entities, Fujian Zhongde and Zhongde Energy.

Net Income (loss). We recorded net income of $6,368,675, or $0.20 per basic and diluted share, for the year ended December 31, 2010, compared to net loss of $324,450, or $0.01 loss per basic and diluted share, for the year ended December 31, 2009. This increase in net income was attributable mainly to the increase in revenue and gross profit.

Liquidity and Capital Resources

General. As of December 31, 2010 and 2009, we had cash and cash equivalents of $13,648,437 and $4,154,814, respectively. The increase in cash and cash equivalents was primarily attributable to $6,368,675 net income from operating activities and $4,339,354 of proceeds we received from bank loans, partly offset by net cash used in purchasing equipment in the amount of $1,974,321.

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Net cash provided by operating activities totaled $9,427,599 for the year ended December 31, 2010, compared to net cash provided by operating activities of $1,434,448 for the year ended December 31, 2009. This increase was primarily due to $6,368,675 from net income during the year ended December 31, 2010. Net cash used in inventory totaled $1,661,533 for the year ended December 31, 2010, compared to net cash provided by inventory of $350,154 for the year ended December 31, 2009. This increase was primarily due to increased production capacity, increased sales revenue, and increased sales volume. In addition, accounts payable generated net cash of $1,242,755 during the year ended December 31, 2010, compared to net cash used in accounts payable of $193,068 for the year ended December 31, 2009. This increase was primarily due to increased feedstock purchased from suppliers.

Net cash used in investing activities totaled $1,974,321 for the year ended December 31, 2010, primarily a result of the purchase of additional equipment for the Jiangyin plant, compared to $3,010,857 for the year ended December 31, 2009. This decrease was primarily due to the completion of construction of the new Jiangyin plant.

Net cash provided by financing activities totaled $3,215,033 during the year ended December 31, 2010 and was due primarily to net proceeds from bank loans of $4,339,354 for working capital uses and $1,598,278 proceeds from banker acceptances, partially offset by $2,159,499 payment on a bank loan. Net cash provided by financing activities totaled $2,821,108 for the year ended December 31, 2009, primarily due to the net proceeds from a bank loan of $3,078,810. Net cash provided by proceeds from banker acceptances totaled $1,598,278 for the year ended December 31, 2010, compared to none for the year ended December 31, 2009. The increase was primarily due to the increase in production, which resulted in our increased purchase of feedstock from suppliers, financed with bankers acceptances.

Accounts Receivable, and Allowance for Doubtful Accounts. Substantial portions of our business operations are conducted in the People’s Republic of China. During the normal course of business, we extend unsecured credit to our customers. Currently, the maximum amount of credit that may be extended to an existing customer is 5 million Remnibi (“RMB”), or approximately $735,294. The Company’s standard collection term is three months. Management reviews our accounts receivable based on the customers’ financial condition and their prior payment history to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer likely

Loan Agreement. In February 2010, we secured bank financing for approximately $4,800,000 from Fujian Haixia Bank, formerly Fuzhou City Commercial Bank, for use in working capital.

Pursuant to the Loan Agreement, Zhongde Energy borrowed RMB 33 million, or approximately $4.8 million, at an annual interest rate of 5.94% (the “Base Rate”). The proceeds from the loan are required to be used for working capital. Zhongde Energy must repay RMB 5 million, or approximately $905,000, by February 24, 2011 and RMB 28 million, or approximately $4,180,000, by January 5, 2012. The loan is secured by, among other things, the real property of Zhongde Energy and the bank accounts and real property of Fujian Zhongde. Mr. Tai-Ming Ou, the Company’s chief executive officer, has personally guaranteed Zhongde Energy’s obligations under the loan agreement. Zhongde Energy shall be subject to a penalty interest rate that is 30% greater than the Base Rate in the event it does not timely repay the loan and 80% greater than the Base Rate in the event that it does not use the proceeds from the loan as specified in the loan agreement. There are no additional financial covenants pursuant the loan agreement.

We have historically met our liquidity and capital requirements from a variety of sources. These include internally generated cash flow, short-term borrowings from related parties and financial institutions, and sales of common stock.

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We intend to repay our debt and other obligations through cash generated from our business operations. To the extent that we have excess funds on hand, we intend to reinvest such excess funds in additional equipment.

Obligations under Material Contracts. We had no material commitments as of December 31, 2010 other than the loan agreement described above.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition presented in this section is based on the consolidated financial statements. Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). During the preparation of our consolidated financial statements, we are required to make estimates and judgments that affect the reported amount of assets, liabilities, revenues, expenses and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to sales, returns, pricing concessions, allowance for doubtful accounts, inventories, share-based compensation, impairment charge, fixed assets, intangible assets, income taxes, fair value of warrants and other contingencies. We based our estimates on historical experience and various other assumptions that we believe are reasonable under the set of current conditions. Actual results may differ from these estimates under a different set of assumptions or set of conditions.

In response to the Securities and Exchange Commission’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure about Critical Accounting Policy,” we identified the most critical accounting principles upon which our financial status depends. We determined that those critical accounting principles are related to share-based compensation and warrants liability, the use of estimates, inventory valuation, revenue recognition, income tax, impairment of intangibles and other long-lived assets. Our consolidated financial statements are expressed in U.S. dollars. All significant intercompany balances and transactions have been eliminated in consolidation. We have reclassified certain prior year amounts to conform to the current year presentation.

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Fair Value of Financial Instruments

The accounting standard regarding fair value of financial instruments and related fair value measurements define financial instruments and require fair value disclosures of those financial instruments. This accounting standard defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The three levels are defined as follow:

Level 1 -- inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 -- inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.

Level 3 -- inputs to the valuation methodology are unobservable and significant to the fair value.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate the hierarchy disclosures each quarter.

Current assets and current liabilities are financial instruments and management believes their carrying amounts are reasonable estimates of fair values because of the short period of time between the origination of such instruments and their expected realization and, if applicable, their current interest rate is equivalent to interest rates currently available.

Accounts Receivable

We extend unsecured credit to our customers in the ordinary course of business but mitigate the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on management’s assessment of potential losses based on the credit history of and our relationship with the customers. Management reviews our receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

Inventories

Inventories are stated at the lower of cost or market using the weighted average method. Management reviews inventories for obsolescence or cost in excess of net realizable value periodically and records an inventory write-down and additional cost of goods sold when the carrying value exceeds the net realizable value.

Intangible Assets

Goodwill and other intangible assets which have indefinite lives are not amortized but are tested for impairment at least annually. Other intangible assets are amortized over their useful lives and reviewed for impairment in accordance with the accounting standard for accounting for impairment or disposal of long-lived assets.

Intangible assets consist of land use rights and patents. All land in China is owned by the government, however, the government grants “land use rights.” Through our 100% owned subsidiaries, we own three land use rights with usable life ranging from 42 to 50 years which will expire in various years ranging from 2048 to 2058. We amortize the cost of land use rights over the respective contract periods.

Patents, which have a legal life of 10 years in the People’s Republic of China, are being amortized over 10 years as management believes that this is the estimated useful life of the patents we currently own.

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Impairment of Long-Lived Assets

We review our long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected discounted cash flows is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of the assets.

Machinery and equipment held for sale

In the third quarter of fiscal 2010, we announced and completed our plan to consolidate part of our Fujian Zhongde facility to our new Zhongde Energy facility. As a result of such announcement, machinery and equipment in the amount of $108,458 were listed as held for sale at September 30, 2010.

We annually assess whether the cost of our intangible assets subject to amortization or other long-lived assets is recoverable or whether the remaining useful lives may warrant revision. We perform this assessment more frequently when specific events or circumstances have occurred that suggest the recoverability of the cost of the intangible and other long-lived assets is at risk.

When such events or circumstances occur, we assess the recoverability of these assets by determining whether the carrying value will be recovered through expected cash flows from the operating division or estimated selling price or the estimated fair value of these assets. An impairment charge is recognized as the difference between the carrying amount and the estimated fair value if such estimated fair value is less than the carrying amount of the asset.

In making these cash flow projections or estimating fair value, various factors such as the timing of the cash flows and the discount rate are based upon the best information available at the time such projection or estimate is made. The estimated fair value is also based on management’s experience and the condition of the assets. Changes in these factors could materially affect the cash flow projections or the estimated fair value and result in the later recognition of an impairment charge.

There was a provision for impairment loss on assets held for sale of approximately $259,000 for the year ended December 31, 2010. Management concluded that its estimate in connection with this impairment loss was conservative and reasonable. Of the machinery involved, 80% was valued at a selling price that management believes is equal to the salvage value. Management determined that no impairment charge was necessary for the remaining 20% of the related assets, which are still in operation.

Revenue Recognition

Our sales are sales of product. Revenue for product sales is recognized when risk and title to the product transfer to the customer, which usually occurs at the time shipment is made. However, revenue is realized and earned only when four criteria are met:

persuasive evidence of an arrangement exists (we consider our sale contracts to be persuasive evidence of an arrangement);

product is shipped or service has been rendered;

the seller’s price to the buyer is fixed or determinable; and

collectability of payment is reasonably assured.

Substantially all of our products are sold free on board shipping point. Title to the product passes when the product is delivered to the freight carrier.

Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of our products that are sold in the People’s Republic of China are subject to a Chinese VAT at a rate of 17% of the gross sale price or a rate approved by the Chinese local government. This VAT may be offset by the VAT paid by us on raw materials and other material included in the cost of producing its finished product.

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Stock-Based Compensation

We account for equity instruments issued to employees and in exchange for the receipt of goods or services from other than employees in accordance with GAAP regarding accounting for stock-based compensation and accounting for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. Equity instruments issued to consultants are measured at their fair value and recognized over the term of the consulting agreements, as earned.

Income Taxes

Our recorded income taxes include the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus these deferred taxes.

The charge for taxation is based on the results for the year as adjusted for items that are non-deductible or disallowed. It is calculated using tax rates that have been enacted or substantially enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method with respect to temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the consolidated statements of income and other comprehensive income (loss), except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and we intend to settle our current tax assets and liabilities on a net basis.

U.S. income tax returns for the years prior to 2007 are no longer subject to examination by tax authorities.

China Income Taxes

Our subsidiaries are governed by the Income Tax Law of the People’s Republic of China concerning foreign investment enterprises and foreign enterprises (the “EIT”) and various local income tax laws.

The EIT utilizes a tax rate of 25%, except for companies that qualify as “High Tech” companies, which pay a reduced rate of 15%. Fujian Zhongde qualifies for this reduced tax rate of 15% and its tax certificate must be re-certified every year with the local tax authority.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8. Financial Statements and Supplementary Data.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

China Clean Energy Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of China Clean Energy, Inc. and Subsidiaries as of December 31, 2010, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for the year then ended. China Clean Energy, Inc. and Subsidiaries management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. China Clean Energy, Inc. and Subsidiaries 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 opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, accessing 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 consolidated financial position of China Clean Energy, Inc. and Subsidiaries as of December 31, 2010, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Friedman LLP

New York, New York

March 30, 2011

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

China Clean Energy Inc.

We have audited the accompanying consolidated balance sheets of China Clean Energy Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations and other comprehensive (loss) income, statements of equity, and cash flows for each of the years in the two-year period ended December 31, 2009. China Clean Energy Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Clean Energy Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/S/ Frazer Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and Torbet, LLP, see Form 8-K filed on January 7, 2010)
Brea, California

March 31, 2010

135 South State College Boulevard, Suite 300 | Brea, California 92821 | 714.990.1040 | frazerfrost.com

Los Angeles and Visalia, CA | Little Rock and Fayetteville, AR | Raleigh, NC

FRAZER FROST, LLP is an independent firm associated with Moore Stephens International Limited.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	December 31,		December 31,
ASSETS	2010		2009

CURRENT ASSETS
Cash and cash equivalents	$	13,648,437	$	4,154,814
Resticted cash		443,647		-
Accounts receivable, net of allowance for doubtful accounts of $29,665 and $93,761		4,080,424		1,766,952
Other current assets		9,332		11,000
Tax receivable		63,865		-
Inventories		2,126,375		464,842
Advances for inventory purchases		1,031,401		188,659
Machinery and equipment held for sale		108,458		-
Total current assets		21,511,939		6,586,267

Deferred tax assets		104,246		69,466
Plant and equipment, net		25,656,929		25,119,034
Intangible assets, net		4,812,693		4,860,645
TOTAL ASSETS	$	52,085,807	$	36,635,412

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	1,400,188	$	157,433
Accrued liabilities		244,044		279,516
Customer deposits		650,017		71,090
Taxes payable		1,526,033		130,287
Banker acceptances		1,478,825		-
Bank loan payable - current portion		1,025,835		3,080,700
Total current liabilities		6,324,942		3,719,026

Warrants liability		2,192,352		1,259,774
Bank loan payable - net of current portion		4,234,720		-

Total liabilities		12,752,014		4,978,800

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Preferred stock, par value $0.001 per share, authorized 10,000,000 shares, no shares issued and outstanding as of December 31, 2010 and December 31, 2009, respectively		-		-
Common stock, par value $0.001 per share, authorized 90,000,000 shares, 31,512,269 shares issued and outstanding as of December 31, 2010 and December 31, 2009, respectively		31,512		31,512
Additional paid-in capital		12,708,060		12,420,523
Statutory reserves		2,424,309		1,630,882
Retained earnings		19,982,696		14,407,448
Accumulated other comprehensive income		4,187,216		3,166,247
Total shareholders' equity		39,333,793		31,656,612
Total liabilities and shareholders' equity	$	52,085,807	$	36,635,412

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	For the years ended December 31,
	2010			2009

REVENUES	$	58,956,142		$	15,933,351
Less: cost of goods sold		46,731,955			12,993,260
GROSS PROFIT		12,224,187			2,940,091

OPERATING EXPENSES
Selling and marketing		368,953			286,055
General and administrative		1,523,738			1,641,535
Research and development		132,474			143,944
		2,025,165			2,071,534

INCOME FROM OPERATIONS		10,199,022			868,557

OTHER INCOME (EXPENSE)
Interest expense		(293,402	)		-
Impairment loss on machinery and equipment held for sale		(258,861	)		-
Other income, net		79,330			7,997
Change in fair value of warrants liability		(932,578	)		(964,391	)
		(1,405,511	)		(956,394	)

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		8,793,511			(87,837	)

Provision for income taxes		2,424,836			236,613


NET INCOME (LOSS)		6,368,675			(324,450	)

OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment		1,020,970			(3,742	)

COMPREHENSIVE INCOME (LOSS)	$	7,389,645		$	(328,192	)


BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Weighted average number of shares		31,512,269			31,512,269
Earnings (loss) per share	$	0.20		$	(0.01	)

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

	Common Stock				Additional		Retained Earnings					Accumulated Other
	Common Stock				Paid-in		Statutory		Unrestricted			Comprehensive
	Shares		Amount		Capital		Reserves		Earnings			Income			Total
Balance, January 1, 2009		31,512,269	$	31,512	$	12,015,941	$	1,457,432	$	14,905,348		$	3,169,989		$	31,580,222

Stock-based compensation						404,582										404,582
Net loss										(324,450	)					(324,450	)
Adjustment to statutory reserve								173,450		(173,450	)					-
Foreign currency translation adjustment													(3,742	)		(3,742	)

Balance at December 31, 2009		31,512,269		31,512		12,420,523		1,630,882		14,407,448			3,166,247			31,656,612



Stock-based compensation						287,537										287,537
Net income										6,368,675						6,368,675
Adjustment to statutory reserve								793,427		(793,427	)					-
Foreign currency translation adjustment													1,020,969			1,020,969

Balance at December 31, 2010		31,512,269	$	31,512	$	12,708,060	$	2,424,309	$	19,982,696		$	4,187,216		$	39,333,793

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the years ended
	December 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	6,368,675		$	(324,450	)
Adjusted to reconcile net income (loss) to cash provided by operating activities:
Depreciation		3,114,340			710,051
Recovery of allowance for doubtful accounts		(64,095	)		(42,602	)
Amortization of intangible assets		198,376			211,851
Stock-based compensation expense		287,537			404,582
Impairment on machinery and equipment held for sale		258,861			-
Change in fair value of warrants libility		932,578			964,391
Deferred tax benefit		(34,780	)		(69,424	)
Changes in operating assets and liabilities
Accounts receivable		(2,249,377	)		(631,169	)
Inventories		(1,661,533	)		350,154
Other assets		1,668			(11,000	)
Advances for inventory purchases		(842,742	)		122,038
Accounts payable		1,242,755			(193,068	)
Accrued liabilities		(35,472	)		(69,890	)
Customer deposits		578,927			39,644
Taxes payables		1,395,746			(26,660	)
Taxes receivable		(63,865	)		-
Net cash provided by operating activities		9,427,599			1,434,448

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment		(1,974,321	)		(3,010,857	)
Net cash used in investing activities		(1,974,321	)		(3,010,857	)

CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash		(443,647	)		-
Proceeds from bank loans		4,339,354			3,078,810
Proceeds from banker acceptances		1,598,278			-
Payments on bankers acceptances		(119,453	)		-
Payments on bank loans		(2,159,499	)		(257,702	)
Net cash provided by financing activities		3,215,033			2,821,108
EFFECT OF EXCHANGE RATE ON CASH		(1,174,688	)		(3,596	)

INCREASE IN CASH AND CASH EQUIVALENTS		9,493,623			1,241,103
CASH AND CASH EQUIVALENTS, beginning of year		4,154,814			2,913,711
CASH AND CASH EQUIVALENTS, end of year	$	13,648,437			4,154,814

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest	$	293,402		$	114,718
Income taxes	$	1,657,336		$	283,103
Non-cash investing and financing activites:
Advances for equipment purchases transferred to plant and equipment	$	-		$	3,646,953

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND BUSINESS

China Clean Energy, Inc. (“CCE” or the “Company”) was incorporated in the State of Delaware on November 12, 2004. The Company through its wholly-owned subsidiaries, China Clean Energy Resources Limited (“CCER”), Fujian Zhongde Technology Co., Ltd. (“Fujian Zhongde”), and Fujian Zhongde Energy Co., Ltd. (“Zhongde Energy”), synthesizes and distributes renewable fuel products and specialty chemicals to customers in both the People’s Republic of China (“PRC” or “China”) and abroad.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements of China Clean Energy Inc. reflect the activities of CCE and its 100% owned subsidiaries CCER, Fujian Zhongde and Zhongde Energy.

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and are expressed in U.S. dollars. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Significant estimates include the fair value of share-based compensation and warrants liability, impairment charge related to machinery and equipment and potential losses on uncollectible receivables. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and appropriate. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires fair value disclosures of those financial instruments. This accounting standard defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements regarding fair value.

The three levels are defined as follows:

·	Level 1 -- inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

·	Level 2 -- inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.

·	Level 3 -- inputs to the valuation methodology are unobservable and significant to the fair value.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Determining which category an asset or liability falls within the hierarchy requires significant judgment.

The Company determined that the carrying value of the long term bank loans approximated their fair value using the level 2 inputs by comparing the stated loan interest rate to the rate charged by the Bank of China on similar loans (see Note 7). The fair value of the warrants liability was determined using level 3 inputs, as further discussed in Note 9.

Foreign Currency Translation

The functional currency of CCE, CCER, Fujian Zhongde and Zhongde Energy is the Chinese Renminbi (“RMB”). The reporting currency of the Company is the U.S. dollar.

Fujian Zhongde and Zhongde Energy assets and liabilities are translated into U.S. dollars at period-end exchange rates ($0.15124 and $0.1467 at December 31, 2010 and December 31, 2009, respectively). Fujian Zhongde and Zhongde Energy revenues and expenses are translated into U.S. dollars at average exchange rates for the periods ($0.14794 and $0.14661 for the year ended December 31, 2010 and 2009, respectively). Resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the consolidated statements of cash flows are translated at the average exchange rate for the period. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

As of December 31, 2010 and 2009, translation adjustments resulting from this process included in accumulated other comprehensive income in the consolidated statement of shareholders’ equity amounted to $4,187,216 and $3,166,247, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with original maturities of three months or less at the time of purchase to be cash equivalents.

Restricted Cash

The Company has notes payable outstanding with various banks and is required to keep certain amounts on deposit that are subject to withdrawal restrictions.

Accounts Receivable

The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on management’s assessment of potential losses based on the credit history and relationship with the customers. Management reviews its receivables on a regular basis to determine if the allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories

Plant and Equipment

Plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of plant and equipment used in operations is provided using the straight-line method for substantially all assets with estimated lives as follows:

	Estimated Useful Life
Buildings	10-20 years
Vehicles	5 years
Office equipment	5 years
Production equipment	10 years

Maintenance, repairs and minor renewals are charged directly to expense as incurred. Major additions and betterment to buildings and equipment are capitalized. When plant and equipment is held for sale, it is not depreciated.

Intangible Assets

Goodwill and certain intangible assets which have indefinite lives are not amortized but are tested for impairment at least annually. Other intangible assets are amortized over their useful lives and reviewed for impairment in accordance with the accounting standard for accounting for impairment or disposal of long-lived assets.

Intangible assets consist of land use rights and patents. All land in China is owned by the government, however, the government grants “land use rights.” The Company, through its 100% owned subsidiaries, owns three land use rights with usable life ranging from 42 to 50 years which will expire in various years ranging from 2048 to 2058. The Company amortizes the cost of land use right over the respective contract periods.

Patents, which have a legal life of 10 years in PRC, are being amortized over 10 years as management believes that ten years is the useful life of the patents currently owned by the Company.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment of Long-Lived Assets

The Company reviews its long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from its use and eventual disposition. If the sum of the expected discounted cash flows is less than the carrying amount of the asset, the Company would recognize an impairment loss based on the fair value of the asset. As of December 31, 2010 and 2009, the company recorded an impairment loss related to its machinery and equipment of $258,861, using level three inputs based on estimated salvage values, and $0, respectively.

Assets Held for Sale

An asset or business is classified as held for sale when:

management commits to a plan to sell and it is actively marketed; and

it is available for immediate sale and the sale is expected to be completed within one year.

Assets held for sale may not be sold within the expected one year period due to events or circumstances beyond the Company’s control. Upon being classified as held for sale, the recoverability of the carrying value must be assessed. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill and other assets are assessed. After the valuation process is completed, the assets held for sale are reported at the lower of the carrying value or fair value less cost to sell and the assets are no longer depreciated or amortized. The assets and related liabilities are aggregated and reported on separate lines of the balance sheet.

Revenue Recognition

The Company’s sales are sales of product. Revenue for product sales is recognized when risk and title to the product transfer to the customer, which usually occurs at the time when shipment is made. However, revenue is realized and earned only when four criteria are met:

persuasive evidence of an arrangement exists (the Company considers its sale contracts to be persuasive evidence of an arrangement);

product is shipped or service has been rendered;

the seller’s price to the buyer is fixed or determinable; and

collectability of payment is reasonably assured.

Substantially all of the Company’s products are sold free on board shipping point. Title to the product passes when the product is delivered to the freight carrier.

Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to a Chinese VAT at a rate of 17% of the gross sale price or a rate approved by the Chinese local government. This VAT may be offset by the VAT paid by the Company on raw materials and other material included in the cost of producing its finished product.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Transportation and unloading charges and product inspection charges are included in selling expenses totaled $316,335 and $211,538 for the years ended December 31, 2010 and 2009, respectively.

Research and Development Costs

Research and development (“R&D”) expenses include salaries, material, contract and other outside service fees, facilities and overhead costs. In accordance with GAAP, the Company expenses the costs associated with research and development activities when incurred.

Research and development expenses are included in general and administrative expenses and totaled $132,474 and $143,944 for the years ended December 31, 2010 and 2009, respectively.

Stock-Based Compensation

The Company accounts for equity instruments issued to employees and in exchange for the receipt of goods or services from other than employees in accordance with GAAP. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. Equity instruments issued to consultants are measured at their fair value and recognized over the term of the consulting agreements, as earned.

Income Taxes

The Company’s recorded income taxes include the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

U.S. income tax returns for the years prior to 2007 are no longer subject to examination by tax authorities.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

China Income Taxes

The Company’s subsidiaries are governed by the Income Tax Law of the People’s Republic of China concerning foreign investment enterprises and foreign enterprises (the “EIT) and various local income tax laws.

The EIT utilizes a tax rate of 25%, except for companies that qualify as “High Tech” companies which pay a reduced rate of 15%. Fujian Zhongde qualifies for this reduced tax rate of 15% and its tax certificate must be re-certified every year with the local tax authority.

Earnings per Share

Diluted earnings per share are computed on the basis of the weighted average number of common shares and dilutive securities (such as stock options and convertible securities) outstanding. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.

Basic earnings per share is computed by dividing net income attributable to holders of common shares by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common shares were exercised or converted into common shares. Convertible, redeemable preferred shares are included in the computation of diluted earnings per share on an “if converted” basis, when the impact is dilutive. Contingent exercise price resets are accounted for in a manner similar to contingently issuable shares such as warrants and options. Common share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive. For the year ended December 31, 2010, none of the Company’s warrants and options was included in the diluted earnings per share calculation because the average selling price was lower than the exercise price.

NOTE 3 – INVENTORIES

Inventories consist of the following:

	December 31, 2010		December 31, 2009

Raw materials	$	1,011,112	$	349,800
Work in process and packaging materials		28,448		4,471
Finished goods		1,086,815		110,571
Total	$	2,126,375	$	464,842

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – PLANT AND EQUIPMENT

Plant and equipment, net consist of:

	December 31, 2010			December 31, 2009

Buildings	$	14,161,537		$	12,032,983
Equipment and machinery		17,376,990			16,744,242
Office equipment and vehicles		187,924			92,708
Total		31,726,451			28,869,933
Impairment of long-lived assets		(258,861	)		-
Less accumulated depreciation		(5,810,661	)		(3,750,899	)
Plant and equipment, net	$	25,656,929		$	25,119,034

Depreciation expense was $3,114,340 and $710,051 for the years ended December 31, 2010 and 2009, respectively.

Machinery and equipment held for sale

The Company announced in the third quarter of fiscal year 2010 its plan to consolidate its Fujian Zhongde facility to its new Fujian Zhongde Energy facility. As a result, machinery and equipment in the amount of $108,458 is listed as held for sale at December 31, 2010 and depreciation ceased. The consolidation was completed during the year 2010.

NOTE 5 – INTANGIBLE ASSETS

Intangible assets, net consist of:

	December 31, 2010			December 31, 2009

Land use rights	$	5,165,811		$	4,950,538
Patents and licenses		1,240,168			1,349,640
Total		6,405,979			6,300,178
Less accumulated amortization		(1,593,286	)		(1,439,533	)
Total intangible assets, net	$	4,812,693		$	4,860,645

Amortization expense for the years ended December 31, 2010 and 2009 amounted to $198,376 and $211,851, respectively. The estimated aggregate amortization expenses for each of the five succeeding fiscal years are as follows:

Years ending December 31,	Estimated Amortization Expense
2011	$	190,004
2012		190,004
2013		190,004
2014		190,004
2015		190,004

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – BANKER ACCEPTANCES

Bankers acceptances have no interest if paid on or before their due dates. The Company can borrow against bankers acceptances up to 15,000,000 RMB.

NOTE 7 – BANK LOAN PAYABLE

Bank loan payable consists of a loan with annual interest at 5.94% payable monthly through January 2012, secured by the buildings and land use rights of both Zhongde Energy and Fujian Zhongde. Two installment payments are scheduled: (i) 5,000,000 RMB (approximately $905,454) is due February 2011; and (ii) 28,000,000 RMB (approximately $4,180,400) is due January 2012. On February 11, 2011, 5,000,000 RMB was repaid to the bank.

Total interest expense on the bank loan for the years ended December 31, 2010 and 2009 amounted to $293,402 and $114,718, respectively. For the year ended December 31, 2009, all the interest was capitalized and included in the construction of the new plant.

The Company’s Chief Executive Officer has provided a personal guarantee of the above bank loan.

NOTE 8 – RETIREMENT AND EMPLOYMENT LIABILITIES

The full time employees of the Company are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and retirement benefits through a Chinese government mandated multi-employer defined contribution plan. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans. The total provisions made for such employee benefits were $25,105 and $13,669 for the years ended December 31, 2010 and 2009, respectively.

NOTE 9 – PRIVATE PLACEMENT AND WARRANTS

On January 9, 2008, CCE completed a private placement, pursuant to which CCE issued 10,000,000 shares of common stock and 5,000,000 five-year warrants at an initial exercise price of $2.00 per share for aggregate gross proceeds of $15,000,000. In connection with this private placement, CCE incurred placement agent cash fees of approximately $1,200,000, and issued the placement agent 1,200,000 five-year warrants at an initial exercise price of $2.00 per share. The net proceeds of $13.6 million were recorded as equity. The fair value of the warrants issued to the placement agent was determined to be part of the cost of raising capital and therefore netted against the additional paid-in capital.

In connection with the private placement, four shareholders and officers placed a total of 1,500,000 shares of their personally owned CCE common stock into an escrow account, to be released to the investors of the offering if the Company failed to (1) commence the production of biodiesel at its production facility in Jiangyin, PRC on or before January 1, 2009, or (2) record at least $14,000,000 of adjusted net income for the fiscal year ended December 31, 2009.

As of January 1, 2009, the Company did not successfully commence production of biodiesel at the Jiangyin location, and the 1,500,000 shares of Company’s common stock held in escrow was transferred to the offering investors.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company adopted the provisions of ASC Topic 815-40 regarding whether an instrument (or embedded feature) is indexed to an entity’s own stock. This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. It provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception. As a result of adoption, 6,200,000 of issued and outstanding warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment, because these warrants are denominated in U.S. dollars and the Company’s functional currency is Renminbi and the warrants are effectively “dual-indexed.” As such, effective January 1, 2009, the Company reclassified the fair value of these warrants, from equity to liability status as if these warrants were treated as a derivative liability. All changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised or expire.

Warrants liability measured at fair value on a recurring basis is summarized as follows:

	Carrying Value as of December 31, 2010	Fair Value Measurements at December 31, 2010
		Level 1	Level 2	Level 3
Warrants liability	$2,192,352			$2,192,352

	Carrying Value as of December 31, 2009	Fair Value Measurements at December 31, 2009
		Level 1	Level 2	Level 3
Warrants liability	$1,259,774			$1,259,774

The following is a reconciliation of the beginning and ending balances of warrants liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2010 and December 31, 2009:

	December 31,
	2010		2009

Beginning balance	$	1,259,774	$	295,381
Total gains or losses:
Included in earnings		932,578		964,393
Ending balance	$	2,192,352	$	1,259,774

On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative effect adjustment, $9.2 million to retained earnings and $295,381 to long-term warrants liability to recognize the fair value of such warrants on such date.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These warrants do not trade in an active securities market, and as such, the Company estimates the fair value using the Black-Scholes Option Pricing Model using the following assumptions:

	December 31,		December 31,		January 1,
	2010		2009		2009

Annual dividend yield	—		—		—
Expected life (years)	2.00		3.0		4.00
Risk-free interest rate	1.02	%	1.70	%	1.55	%
Expected volatility	96	%	117	%	99	%

Expected volatility is based primarily on historical volatility. The Company does not have historical data commensurate with the expected term. Historical volatility was computed using daily pricing observations for the past three years. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities with the same term as the warrants when granted.

Following is a summary of warrants activity and status:

					Weighted		Average
					Average		Remaining
	Warrants		Warrants		Exercise		Contractual
	Outstanding		Exercisable		Price		Life
Balance, at January 1, 2009		6,200,000		6,200,000	$	2.00	4 years
Granted		-		-		-		-
Forfeited		-		-		-		-
Exercised		-		-		-		-
Balance, at December 31, 2009		6,200,000		6,200,000	$	2.00	3 years
Granted		-		-		-		-
Forfeited		-		-		-		-
Exercised		-		-		-		-
Balance, at December 31, 2010		6,200,000		6,200,000	$	2.00	2 years

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – OPTIONS

On January 9, 2008, the Company adopted the 2008 Equity Incentive Plan. Under the 2008 Equity Incentive Plan, CCE is authorized to issue up to 2,000,000 options, of which 1,000,000 are to have an exercise price equal to the greater of (i) $2.50 or (ii) the fair market value of the common stock on the date of grant (“Tranche 1 Options”) and 1,000,000 are to have an exercise price equal to the greater of (i) $3.00 or (ii) the fair market value of the common stock on the date of grant (“Tranche 2 Options”). CCE is authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, and non-qualified stock options. All options under the Plan vest quarterly over three years. The 2008 Equity Incentive Plan is administered by CCE’S board of directors.

On February 1, 2010, the Company granted options to purchase a total of 300,000 shares of common stock to the chief financial officer. Options totaling 150,000 are exercisable at a price of $2.50 per share and 150,000 options are exercisable at a price of $3.00 per share. All 300,000 options expire 10 years from the date of grant. The $140,180 fair value of the 300,000 stock options will be expensed ratably over the three year requisite service period of the respective personnel. The fair value of the stock options was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: exercise prices of $2.50 (for 150,000 stock options) and $3.00 (for 150,000 stock options), expected life of options of 10 years, expected volatility of 103%, expected dividend yield of 0%, and risk-free interest rate of 3.68%.

For the years ended December 31, 2010 and 2009, stock-based compensation expense related to these options was $287,537 and $404,582, respectively.

Following is a summary of stock option activity:

	Options Outstanding			Weighted Average Exercise Price
Outstanding as of January 1, 2009		610,000		$	2.75
Granted		-			-
Forfeited		(20,000	)		2.75
Exercised		-			-
Outstanding as of December 31, 2009		590,000		$	2.75
Granted		300,000			2.75
Forfeited		(20,000	)		2.75
Exercised		-			-
Outstanding as of December 31, 2010		870,000		$	2.75

Following is a summary of the status of options outstanding and exercisable at December 31, 2010:

Outstanding Options			Exercisable Options
Exercise Price	Number	Average Remaining Contractual Life	Average Exercise Price	Number	Average Remaining Contractual Life
$2.50	435,000	7.00 years	$2.50	335,000	7.00 years
$3.00	435,000	7.00 years	$3.00	335,000	7.00 years
Total	870,000			670,000

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - EARNINGS PER SHARE

For the years ended December 31, 2010 and 2009, all warrants and options were excluded from the calculation of diluted earnings per share because the exercise prices of $2.00, $2.50, and $3.00 were higher than the average trading price of the Company’s stock.

NOTE 12 – STATUTORY RESERVES

The Company’s PRC subsidiaries are required to make appropriations to the statutory surplus reserve fund, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital.

NOTE 13 – TAXES

Income Taxes

Income tax provision consists of:

	Year ended December 31,
	2010			2009
Current:
PRC	$	2,457,383		$	306,037
United States		-			-
Total current	$	2,457,383		$	306,037
Deferred		(32,547	)		(69,424	)
Total	$	2,424,836		$	236,613

Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% replaces the 33% rate applicable to both DES and FIEs, except for high tech companies that pay a reduced rate of 15%. Pursuant to the PRC tax law, net operating losses can be carried forward five years to offset future taxable income.

Fujian Zhongde is a wholly-owned foreign enterprise (“WOFE”). The PRC income tax laws provide that certain WOFEs may be exempt from income taxes for two years, commencing with their first profitable year of operations, after taking into account any losses brought forward from prior years, and thereafter 50% exempt for the next three years.

In March 31, 2007, the PRC tax authorities approved a full income tax exemption for Fujian Zhongde for 2007 and a 12.5% income tax rate for 2008, 2009 and 2010. Absent the exemption, Zhongde Energy is subject to a 25.0% income tax rate.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2010 and 2009:

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	2010			2009
U.S. statutory rates		35	%		35	%
Foreign income not recognized in USA		(35	)		(35	)
China income taxes		25			25
Tax exemption		(13	)		(13	)
Utilization of net operating loss in PRC		21	%		-
Other items (1)		(5	)		(281	)
Total effective income tax rate		28	%		269	%

(1) These rates differ from the stated effective tax rate in China mainly due to losses incurred by the U.S. company (CCE) that was not deductible in the PRC.

Deferred Income Taxes

As of December 31, 2009, Zhongde Energy had an operating loss of approximately $417,000 that can be carried forward to offset income through 2014. The company utilized approximately $139,000 of the net operating loss for the year ended December 31, 2010 and recorded deferred tax assets of $104,246 and $69,424 as of December 31, 2010 and 2009, respectively. Based on the foregoing information, the Company believes that a valuation allowance is not deemed necessary for the deferred assets for the following reasons: (i) there will be sufficient operating income generated in future years based on the fact that the Company’s wholly owned subsidiary, Zhongde Energy, is expected to generate profits, and (ii) the current operating loss of Zhongde Energy can be carried forward through 2014 to offset future operating income under PRC tax regulations.

The Company has cumulative undistributed earnings of foreign subsidiaries of $16,910,509 and $9,409,861 as of December 31, 2010 and 2009, respectively, which is included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

CCE was incorporated in the United States and has incurred net operating losses of approximately $436,000 for income tax purposes for the year ended December 31, 2010. The estimated net operating loss carry forwards for United States income taxes amounted to approximately $2,385,000 and $1,949,000 as of December 31, 2010 and 2009, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2024 and 2030. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance. The valuation allowance as of December 31, 2010 and 2009 was $834,663 and $682,000, respectively. The valuation allowance increased by $152,663 and $136,546 during the years ended December 31, 2010 and 2009, respectively.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Value Added Tax

Enterprises or individuals who sell commodities, engage in repair and maintenance or import and export goods in the PRC are subject to a VAT, in accordance with Chinese laws. The VAT standard rate is 17% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished product. A preferential rate is also applied for exporting products.

VAT on sales and VAT on purchases amounted to $9,670,117 and $3,463,165 for the years ended December 31, 2010, and 2009, respectively. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent. Because the Company’s VAT taxes paid on purchases were greater than sales during the period, the Company has prepaid tax that can be used to offset future VAT due on sales.

NOTE 14 – OTHER INCOME, NET

For the year ended December 31, 2010, other income consisted primarily of an award received from the local government in China for the Company’s high value of export sales.

NOTE 15 – CONCENTRATIONS

Net sales and gross profit percentages (“GP%”) for the years ended December 31, 2010 and 2009 consist of:

	2010		2009
	Sales	GP%	Sales	GP%

Domestic Sales	$ 48,539,438	20%	$ 9,075,128	7%
International Sales	10,416,704	25%	6,858,223	34%
Total Sales	$ 58,956,142	21%	$ 15,933,351	18%

The Company’s demand deposits are in accounts maintained with state owned banks within the PRC and an account in the U.S. Total cash deposited with banks within the PRC, as of December 31, 2010 amounted to $13,648,437, of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

There was one major customer that accounted for 11% of the total accounts receivable as of December 31, 2010. There was one customer that accounted for 10.3% of net sales for the year ended December 31, 2009.

NOTE 16 – COMMITMENTS AND CONTINGENCIES

The Labor Contract Law of the People’s Republic of China requires employers to assure the liability of severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The employers will be liable for one month of severance pay for each year of service provided by the employees. As of December 31, 2010, the Company has estimated possible severance payments of approximately $98,000, which has not been reflected in its consolidated financial statements because it is not more likely than not that this will be paid or incurred.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 – SUBSEQUENT EVENTS

On January 4, 2011, the Board adopted the China Clean Energy Inc. 2011 Long-Term Incentive Plan (the “2011 Plan”), which terminated the 2008 Equity Incentive Plan, and the forms of award agreements for nonqualified stock option awards, incentive stock option awards and restricted stock awards to be granted under the Plan. The Company’s outside directors and employees, including the Company’s principal executive officer, principal financial officer and other named executive officers, are all eligible to participate in the 2011 Plan. The 2011 Plan allows for the granting of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards, which may be granted singly, in combination, or in tandem to employees and outside directors of the Company, and upon such terms as determined by the Board. Subject to certain adjustments, the maximum number of shares of the Company’s Original Common Stock that may be delivered pursuant to awards under the 2011 Plan is 2,700,000.

On February 2, 2011, the Company granted non-qualified stock options to purchase 2,490,000 shares of common stock under the 2011 Plan. The options vest in accordance with the following schedule: 1/12 of the shares vested on the date of grant, and 1/12 of the shares will vest on the first day of each calendar quarter thereafter beginning on April 1, 2011, with the option being 100% vested on October 1, 2013, subject to continuing service as a director or employee of the Company through each such date.

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Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A.

Controls and Procedures.

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of December 31, 2010, the end of the period covered by this Annual Report on Form 10-K. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective at the reasonable assurance level as of December 31, 2010.

Management's Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate over time.

Management, including our CEO and our CFO, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on its assessment and those criteria, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2010.

This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

Not applicable.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The following table sets forth information regarding the members of our board of directors and our executive officers. All directors hold office for one-year terms until the election and qualification of their successors. Officers are appointed by our board of directors and serve at their discretion.

Name	Age	Position
Tai-ming Ou	56	Chief Executive Officer and Chairman of the Board
William Chen	25	Chief Financial Officer
Ri-wen Xue	46	Chief Operating Officer
Yu Lin	46	Director
Qin Yang	51	Director

Biographies

Tai-ming Ou, Chief Executive Officer and Chairman of the Board. Mr. Ou is one of our co-founders and has been our Chief Executive Officer since inception in 1995. Prior to our founding, Mr. Ou was the Director of General and Administrative Office of Fuqing First Secondary School and was responsible for building construction, repair and maintenance and purchases of teaching instruments, property, plant and equipment, and office stationery. Mr. Ou was also in charge of operating and managing a factory run by the school. Mr. Ou is a certified senior economist in the People’s Republic of China. Mr. Ou’s extensive knowledge of our business and his leadership, management and quantitative skills, honed during his fifteen years as our Chief Executive Officer, provide valuable insights to the board. Mr. Ou graduated from Fujian Normal University in 1981 with a Bachelor’s degree in mathematics. Mr. Ou and Ms. Yang are husband and wife.

William Chen, Chief Financial Officer. Mr. Chen joined us in December 2009 as our vice president of investor relations and was appointed our Chief Financial Officer in February 2010. Prior to joining us, Mr. Chen worked as a financial analyst at Wealth Transition Planning LLC, a comprehensive financial services firm, from April 2009 through September 2009. Mr. Chen served as a director assistant at EKN Financial Service from January 2009 through April 2009. His earlier work experiences were as an accounting intern at Colgate Palmolive Company from January 2006 through August 2006 and as a marketing and business development intern at Duane Reade Corporation from September 2004 through April 2005. Mr. Chen holds a Bachelors degree in Finance and Investment from Baruch College and is working towards an MBA degree.

Ri-wen Xue, Chief Operating Officer. Mr. Xue joined us in early 2000 as Executive Secretary to the General Manager. In this capacity, Mr. Xue was in charge of assisting the General Manager in dealing with daily affairs, planning and implementing our business management system, adjusting our organizational chart, establishing employee job descriptions and functional department duties. In October 2002, Mr. Xue was promoted to Production Manager and became responsible for improving production processes and technology. In December 2003, Mr. Xue was promoted to the positions of Vice President - Production and Engineering, and Chairperson of the Board of Supervisors, where he was in charge of planning and carrying out new project development, streamlining production and engineering processes, and undertaking research and development, technology applications and improvements. In October 2006, Mr. Xue became our Chief Operating Officer and a Director. Mr. Xue resigned as a director on January 7, 2011, to allow the Company to establish an independent board. Prior to joining us, Mr. Xue was a Pipelining Operator, Quality Control, and Local Assistant Manager at the Chip Copperize Corporation in Japan from April 1995 to April 1999. Mr. Xue is a certified senior economist and a certified senior engineer in the People’s Republic of China. Mr. Xue graduated from Fujian Finance College in 1985 with a Bachelor’s degree in finance.

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Yu Lin, Direcor. Mr. Lin was appointed as one of our directors on January 7, 2011. Mr. Lin is a senior engineer and the Head of the Science and Technology Institute for Chemical Industry of Fujian Province. He joined the institute in 1985 after he graduated from the Fuzhou University, with a major in Chemicals. Mr. Yu has participated in a number of award-winning research projects in the chemicals field. Mr. Lin’s scientific background and training provide valuable insights to the board.

Qin Yang, Director. Ms. Yang is one of our co-founders and has been a director since inception in 1995. Since 1995, Ms. Yang has been in charge of our raw material purchase department. Ms. Yang had previously founded the Fuqing Welfare Garment Factory in 1984 and served as its Chief Designer and director. Ms. Yang’s long tenure with us, her entrepreneurial experience and her leadership and management skills provide valuable insights to the board. Ms. Yang graduated from Fujian Industrial Arts School in the Fujian province of the People’s Republic of China. Mr. Ou and Ms. Yang and are husband and wife.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and officers, and persons who own more than ten percent of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Directors, officers and persons who own more than ten percent of our common stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us, during the year ended December 31, 2010, each of our directors, officers and ten percent stockholders complied with all Section 16(a) filing requirements applicable to our directors, officers and ten percent stockholders.

Board Committees

Audit Committee. We established an audit committee of the board of directors on January 4, 2011. The audit committee consists of Mr. Lin, whom our board has determined qualifies as an independent director under Section 803A(2) of the NYSE Amex Rules and Rule 10A-3 under the Exchange Act. The audit committee does not currently have a member who qualifies as a financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K, but the board anticipates appointing such a director to the board and the committee in the near future. The function of the audit committee is to oversee our accounting and financial reporting and the audits of our financial statements. The audit committee assists the board in monitoring the integrity of the financial statements, the qualifications, independence and appointment of the independent registered public accounting firm, the performance of our internal audit function and independent auditors, our systems of internal control and our compliance with legal and regulatory requirements.

Compensation Committee. We established a compensation committee of the board of directors on January 4, 2011. The compensation committee consists of Mr. Lin, whom our board has determined qualifies as an independent director under Section 803A(2) of the NYSE Amex Rules, as an “outside director” for purposes of Section 162(m) of the Internal Revenue Code and as a “non-employee director” for purposes of Section 16b-3 under the Exchange Act. The function of the compensation committee is to assist the board in the discharge of its fiduciary responsibilities relating to the determination and execution of our compensation philosophy as it pertains to the fair and competitive compensation of our executive officers, provide overall guidance with respect to the establishment, maintenance, and administration of our compensation programs, including stock and benefit plans, and oversee and advise the board on the adoption of policies that govern our compensation programs.

Nominating and Corporate Governance Committee. We established a nominating and corporate governance committee of the board of directors on January 4, 2011. The nominating and corporate governance committee consists of Mr. Lin, whom our board has determined qualifies as an independent director under Section 803A(2) of the NYSE Amex Rules. The function of the nominating and corporate governance committee is to identify and recommend to the board individuals qualified to be nominated for election to the board, recommend to the board the members and chairman for each board committee, if any, periodically review and assess the Code of Business Conduct and Ethics and our corporate governance guidelines and make recommendations for changes thereto to the board, review any other matters related to corporate governance, and to oversee the evaluation of the board and management.

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Code of Ethics

The board of directors has adopted a Code of Ethics that is applicable to all of our directors, officers and employees, including our Chief Executive Officer and our Chief Financial Officer and principal accounting officer. We will provide our Code of Ethics without charge upon request. Requests should be made by email and addressed to William Chen at william.chen@chinacleanenergy.com.

Item 11. Executive Compensation.

Summary Compensation Table

The following table summarizes the annual and long-term compensation paid to Tai-ming Ou, our Chief Executive Officer, who we refer to as the “named executive officer.” During 2010, no executive officer received annual remuneration in excess of $100,000.

Summary Compensation Table

Name and Principal Position	Year	Salary	Option Awards(1)	Total
Tai-ming Ou Chief Executive Officer (principal executive officer)	2010	$32,668	$66,607	$99,275
	2009	$31,622	$ 78,501	$110,123

_____________

(1)

The dollar amounts in this column reflect the dollar amounts recognized for financial statement reporting purposes, in accordance with FASB ASC Topic 718, except that the amounts reported do not include any reduction in the value of the awards for the possibility of forfeiture. Please see Note 10 to our financial statements for a discussion of assumptions made in the valuation.

Employment Agreement

On January 9, 2008, we entered into a two-year employment agreement with Tai-ming Ou, which automatically renews for additional one-year periods until either we or Mr. Ou, as the case may be, give the other written notice of our intent not to renew the agreement at least 90 days prior to the end of the then current term. Pursuant to this agreement, Mr. Ou serves as our Chief Executive Officer and receives a salary of approximately $2,854 per month.

Outstanding Equity Awards at Fiscal Year-End

The following table shows information concerning unexercised options outstanding as of December 31, 2010 for our named executive officer.

	Option Awards
Name	Number of securities underlying unexercised options (#) exercisable	Option exercise price	Option expiration date
Tai-ming Ou	65,000(1)	$2.50	January 9, 2018
	65,000(1)	$3.00	January 9, 2018

_____________

(1)	Granted pursuant to our 2008 Equity Incentive Plan. The options vest quarterly over a three year period commencing March 31, 2008.

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We also granted Mr. Ou options to purchase 330,000 shares of common stock with an exercise price of $1.02 per share on February 2, 2011. The options vest in accordance with the following schedule: 1/12 of the shares vested on the date of grant, and 1/12 of the shares will vest on the first day of each calendar quarter thereafter beginning on April 1, 2011, with the option being 100% vested on October 1, 2013, subject to Mr. Ou continuing to serve as a director or employee of the Company through each such date. If Mr. Ou’s employment is terminated without cause or he resigns for good reason, Mr. Ou will be entitled to the continuation of benefits and the payment of his salary for 12 months.

Equity Incentive Plans

Our board of directors and stockholders adopted the 2008 Equity Incentive Plan on January 9, 2008. The purpose of the 2008 Equity Incentive Plan was to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in our development and financial success. Under the 2008 Equity Incentive Plan, we were authorized to issue up to 2,000,000 stock options, 1,000,000 of which were to have an exercise price per share equal to the greater of (i) $2.50 or (ii) 100% of the fair market value of a share of common stock on the date of grant and 1,000,000 of which were to have an exercise price per share equal to the greater of (i) $3.00 or (ii) 100% of the fair market value of a share of common stock on the date of grant. Under the 2008 Equity Incentive Plan, we were authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, and non-qualified stock options. All options under the plan vest quarterly over three years. The 2008 Equity Incentive Plan is administered by our board of directors.

The 2008 Equity Incentive Plan was terminated on January 4, 2011, upon our adoption of the China Clean Energy Inc. 2011 Long-Term Incentive Plan (the “2011 Equity Incentive Plan”). The Company’s outside directors and employees, including the Company’s principal executive officer, principal financial officer and other named executive officers, are all eligible to participate in the 2011 Equity Incentive Plan. The 2011 Equity Incentive Plan allows for the granting of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards, which may be granted singly, in combination, or in tandem to employees and outside directors of the Company, and upon such terms as determined by the board. Subject to certain adjustments, the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the 2011 Plan is 2,700,000 shares.

Compensation of Directors

The following table sets forth director compensation for the year ended December 31, 2010.

Name		Fees earned or paid in cash ($)		Option awards ($)(1)		Total ($)
Qin Yang		$18,149		$10,247		$28,396

_____________

(1)

Ms. Qin Yang was one of our original founders in 1995 and has been one of our directors since that time. In addition, since June 2006, Ms. Yang has been an independent contractor, and for such services received $1,465 per month or $17,579 per annum during the year ended December 31, 2009. We granted Ms. Yang options to purchase 10,000 shares of our common stock at $2.50 per share and 10,000 shares of our common stock at $3.00 per share pursuant to our 2008 Equity Incentive Plan. The options vest quarterly over a three year period commencing March 31, 2008. As of December 31, 2010, options to purchase 6,667 shares of our common stock at $2.50 per share and 6,667 shares of our common stock at $3.00 were exercisable. We granted Ms. Yang options to purchase 210,000 shares of our common stock at $1.02 per share pursuant to our 2011 Equity Incentive Plan on February 2, 2011. The options vest in accordance with the following schedule: 1/12 of the shares vested on the date of grant, and 1/12 of the shares will vest on the first day of each calendar quarter thereafter beginning on April 1, 2011, with the option being 100% vested on October 1, 2013, subject to Ms. Yang continuing to serve as a director or employee of the Company through each such date.

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Mr. Lin was appointed to our board on January 7, 2011. Pursuant to an Offer of Board Position dated January 7, 2011, the Company has agreed to pay Mr. Lin an annual retainer of 30,000 Chinese Renminbi for his service as a director. The Company also agreed to grant Mr. Lin an option to purchase 30,000 shares of common stock. Such grant was made on February 2, 2011, at an exercise price of $1.02 per share. The options vest in accordance with the following schedule: 1/12 of the shares vested on the date of grant, and 1/12 of the shares will vest on the first day of each calendar quarter thereafter beginning on April 1, 2011, with the option being 100% vested on October 1, 2013, subject to Mr. Lin continuing to serve as a director of the Company through each such date.

Mr. A. Carl Mudd was appointed on January 4, 2011, as a director of the Company. Pursuant to an Offer of Board Position of the same date, the Company agreed, among other things, to grant Mr. Mudd an option to purchase 150,000 shares of the Company’s common stock, 12,500 of which vested immediately. On March 9, 2011, Mr. Mudd resigned from his position as a director of the Company.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth information with respect to the beneficial ownership of our common stock as of March 20, 2011 by:

•

each person known by us to beneficially own more than 5.0% of our common stock;

•

each of our directors;

•

our named executive officer; and

•

all of our directors and executive officers as a group.

The percentages of common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Securities and Exchange Commission, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the disposition of the security. Except as indicated in the footnotes to this table, each beneficial owner named in the table below has sole voting and sole investment power with respect to all shares beneficially owned and each person’s address is c/o China Clean Energy Inc., Jiangyin Industrial Zone, Jiangyin Town, Fuqing City, Fujian Province, People’s Republic of China, 350309.

As of March, 20, 2011, we had 31,512,269 shares outstanding.

Name and Address of Beneficial Owner	Number of Shares Beneficially Owned(1)	Percentage of Shares Beneficially Owned(1)
Tai-ming Ou	7,675,338(2)	24.17%
Qin Yang	7,675,338(3)	24.17%
Yu Lin	5,000	*
Nai-ming Yu	2,399,250	7.61%
All officers and directors as a group (6 persons)	10,786,048(4)	32.47%

———————

*	Less than 1%

(1)

Shares of common stock beneficially owned and the respective percentages of beneficial ownership of common stock assume the exercise of all options, warrants and other securities convertible into common stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of March 20, 2011. Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days are deemed outstanding and held by the holder of such options or warrants for computing the percentage of outstanding common stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.

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(2)	Includes (i) 185,000 shares of common stock issuable upon the exercise of options, (ii) 3,518,900 shares of common stock held directly by Qin Yang and (iii) 55,000 shares of common stock issuable upon the exercise of options held by Qin Yang. Tai-ming Ou and Qin Yang are husband and wife.

(3)	Includes (i) 55,000 shares of common stock issuable upon the exercise of options, (ii) 3,916,438 shares of common stock held directly by Tai-ming Ou and (iii) 185,000 shares of common stock issuable upon the exercise of options held by Tai-ming Ou. Tai-ming Ou and Qin Yang are husband and wife.

(4)	Includes 1,708,333 shares of common stock issuable upon the exercise of options.

Equity Compensation Plan Information

The following table provides certain information as of December 31, 2010 with respect to our equity compensation plans under which our equity securities are authorized for issuance:

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	870,000	$2.75	-
Equity compensation plans not approved by security holders	-	-
Total	870,000	$2.75	-

Item 13. Certain Relationships and Related Transactions, and Director Independence.

We review all relationships and transactions in which the company and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. Transactions that we have determined to be directly or indirectly material to us or a related person are disclosed below. We believe each transaction is on terms no less favorable to us than the terms generally available to an unaffiliated third-party under the same or similar circumstances.

In connection with our January 9, 2008 private placement, Tai-ming Ou, our Chief Executive Officer and Chairman, agreed to place 1,042,012 shares of common stock held by him into an escrow account, with such shares to be released to the investors in such private placement should we fail to either (i) commence the production of biodiesel at our production facility in Jiang Yin, People’s Republic of China on or before January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income for the fiscal year ending December 31, 2009. As a result of construction delays, we failed to commence the production of biodiesel at our production facility in Jian Yin on or before January 1, 2009 and on January 30, 2009, these 1,042,012 shares of common stock held by Mr. Ou were disbursed, pro rata, among the private placement investors.

In connection with our January 9, 2008 private placement, Yun He, our Vice President of Sales, agreed to place 235,293 shares of common stock held by him into an escrow account, with such shares to be released to the investors in such private placement should we fail to either (i) commence the production of biodiesel at our production facility in Jiang Yin, People’s Republic of China on or before January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income for the fiscal year ending December 31, 2009. As a result of construction delays, we failed to commence the production of biodiesel at our production facility in Jian Yin on or before January 1, 2009 and on January 30, 2009, these 235,293 shares of common stock held by Mr. He were disbursed, pro rata, among the private placement investors.

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In connection with our January 9, 2008 private placement, Ri-wen Xue, our Chief Operating Officer and Director, agreed to place 201,680 shares of common stock held by him into an escrow account, with such shares to be released to the investors in such private placement should we fail to either (i) commence the production of biodiesel at our production facility in Jiang Yin, People’s Republic of China on or before January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income for the fiscal year ending December 31, 2009. As a result of construction delays, we failed to commence the production of biodiesel at our production facility in Jian Yin on or before January 1, 2009 and on January 30, 2009, these 201,680 shares of common stock held by Mr. Xue were disbursed, pro rata, among the private placement investors.

In connection with our January 9, 2008 private placement, Gary Zhao, our former Chief Financial Officer and a former Director, agreed to place 21,015 shares of common stock held by him into an escrow account, with such shares to be released to the investors in such private placement should we fail to either (i) commence the production of biodiesel at our production facility in Jiang Yin, People’s Republic of China on or before January 1, 2009 or (ii) record at least $14,000,000 of adjusted net income for the fiscal year ending December 31, 2009. As a result of construction delays, we failed to commence the production of biodiesel at our production facility in Jian Yin on or before January 1, 2009 and on January 30, 2009, these 21,015 shares of common stock held by Mr. Zhao were disbursed, pro rata, among the private placement investors.

Mr. Ou agreed to personally guarantee Fujian Zhongde’s obligations under its April 14, 2009 RMB 10 million, or approximately $1.43 million, loan agreement with Fujian Haixia Bank, formerly Fuzhou City Commercial Bank, at an annual interest rate of 5.84%. In addition to Mr. Ou’s guarantee, Fujian Zhongde’s obligations under this loan agreement were secured by, among other things, the land, bank accounts and real property of Fujian Zhongde and the land of Zhongde Energy. On February 20, 2010, Fujian Zhongde Technology Co., Ltd paid the full loan principal back to the bank.

Mr. Ou agreed to personally guarantee Fujian Zhongde Technology Co. Ltd.’s obligations under its April 14, 2009 RMB 11 million, or approximately $1.57 million revolving line of credit with Fuzhou City Commercial Bank. All advances under the revolving line of credit shall be evidenced by a promissory note with a floating interest rate based on the face value and maturity period of such note. In addition to Mr. Ou’s guarantee, Fujian Zhongde Technology Co. Ltd.’s obligations under this revolving line of credit are secured by, among other things, the land, bank accounts and real property of Fujian Zhongde Technology Co. Ltd and the land of Zhongde Energy As of December 31, 2009, Fujian Zhongde Technology Co. Ltd. had received advances of RMB 11 million, or approximately $1.57 million under the revolving line of credit. On February 20, 2010, Fujian Zhongde Technology Co., Ltd repaid RMB 3 million, or approximately $440,100, of the loan principal.

Mr. Ou agreed to personally guarantee Fujian Zhongde Energy Co. Ltd.’s obligation under its February 24, 2010 RMB 33 million, or approximately $4.8, loan agreement with Fujian Haixia Bank, formerly Fuzhou City Commercial Bank, at an annual interest rate of 5.94%. Fujian Zhongde Energy Co. Ltd must repay RMB 5 million by February 24, 2011 and RMB 28 million by January 5, 2012. Repayment is secured by, among other things, the land of Fujian Zhongde Energy Co. Ltd and the land, and real property of Fujian Zhongde

Director Independence

The board of directors has determined that Mr. Lin satisfies the requirement for independence set out in Section 803A(2) of the NYSE Amex Rules and that each of these directors has no material relationship with us (other than being a director and/or a stockholder). In making its independence determinations, the board of directors sought to identify and analyze all of the facts and circumstances relating to any relationship between a director, his immediate family or affiliates and our company and our affiliates and did not rely on categorical standards other than those contained in the NYSE Amex rule referenced above.

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Item 14. Principal Accountant Fees and Services.

Fees billed for professional services provided to us by Frazer Frost, LLP for the fiscal year ended December 31, 2009 were:

	2009
Audit Fees	$	180,000
Audit-Related Fees	$	-
Tax Fees	$	-
All Other Fees	$	-

Fees billed for professional services provided to us by Friedman LLP for the fiscal year ended December 31, 2010 were:

	2010
Audit Fees	$	80,000
Audit-Related Fees	$	10,492
Tax Fees	$	-
All Other Fees	$	-

During the fiscal years ended December 31, 2010 and 2009, we did not have an audit committee. In the future, our audit committee formed on January 4, 2011 will pre-approve all auditing services, internal control-related services and permitted non-audit services (including the fees and terms thereof) to be performed for us by our independent auditor, except for de minimis non-audit services that are approved by the audit committee prior to the completion of the audit. The audit committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals is presented to the full audit committee at its next scheduled meeting.

PART IV

Item 15.

Exhibits and Financial Statement Schedules.

Documents filed as part of report:

1. Financial Statements

The following financial statements are included in Item 8 herein:

Report of Friedman LLP, Independent Registered Public Accounting Firm

Report of Frazer Frost LLP, Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2010 and 2009

Consolidated Statements of Operations and Other Comprehensive (Loss) Income for the Years Ended December 31, 2010 and 2009

Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended December 31, 2010 and 2009

Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

None

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3. Exhibits

See Index to Exhibits

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA CLEAN ENERGY INC.

Date: March 30, 2011	By:	/s/ Tai-ming Ou
		Tai-ming Ou,
		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Tai-ming Ou	Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)	March 30, 2011
Tai-ming Ou
/s/ William Chen	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	March 30, 2011
William Chen
/s/ Yu Lin	Director	March 30, 2011
Yu Lin
/s/ Qin Yang	Director	March 30, 2011
Qin Yang

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Index to Exhibits

Exhibit No.		Description
3.1		Composite Certificate of Incorporation of China Clean Energy Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form SB-2 of China Clean Energy Inc. filed with the Securities and Exchange Commission on February 1, 2008).

3.2		Bylaws of China Clean Energy Inc. (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on October 30, 2006).

10.1		Amended and Restated Consulting Agreement, dated January 18, 2007, between Fujian Zhongde Technology Co., Ltd. and Allstar Capital Inc. (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on January 22, 2007).

10.2		Engagement Letter, dated September 19, 2006 between China Clean Energy Resources, Ltd. and Westminster Securities Corporation (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on January 22, 2007).

10.3		Land Investment Agreement, dated December 25, 2006 between Fujian Zhongde Technology Co., Ltd and Fuzhou City Jiangyin Industry District Management Committee (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on January 22, 2007).

10.4		Supplier Agreement, dated March 5, 2007 between China Clean Energy Inc. and Fujian Quanzhou Zhong Yuan Long Chemistry Industry Co., Ltd. (incorporated by reference to Exhibit 10.13 of Amendment No. 2 to the Registration Statement on form SB-2 of China Clean Energy Inc. filed with the Securities and Exchange Commission on May 25, 2007).

10.5		Supplier Agreement, dated March 5, 2007 between China Clean Energy, Inc. and Xinjiang Guansheng Technology Chemistry Co., Ltd. (incorporated by reference to Exhibit 10.15 to Amendment No. 2 to the Registration Statement on form SB-2 of China Clean Energy Inc. filed with the Securities and Exchange Commission on May 25, 2007).

10.6		Supplier Agreement, dated March 6, 2007 between China Clean Energy, Inc. and Meiweike (Shaxian) Linchan Chemistry Co., Ltd. (incorporated by reference to Exhibit 10.14 to Amendment No. 2 to the Registration Statement on form SB-2 of China Clean Energy Inc. filed with the Securities and Exchange Commission on May 25, 2007).

10.7		Form of Securities Purchase Agreement, dated January 9, 2008 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

10.8		Form of Registration Rights Agreement, dated January 9, 2008 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

10.9		Form of Class A Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

10.10		Form of Lock-up Letter Agreement (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).Form of Lock-up Letter Agreement (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

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10.11+		2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

10.12+		Form of 2008 Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

10.13+		Form of 2008 Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

10.14+		Employment Agreement, dated January 9, 2008 between China Clean Energy Inc. and Tai-ming Ou (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

10.15+		Employment Agreement, dated January 9, 2008, between China Clean Energy Inc. and Ri-wen Xue (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

10.16+		Employment Agreement, dated January 9, 2008, between China Clean Energy Inc. and Yun He (incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2008).

10.17		Loan Agreement, dated April 14, 2009 between Fujian Zhongde Technology Co., Ltd. and Fuzhou City Commercial Bank Co., Ltd., Longtian Branch (incorporated by reference to Exhibit 10.13 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 of China Clean Energy Inc. filed with the Securities and Exchange Commission on May 1, 2009).

10.18		Bank Draft and Acceptance Limit Agreement, dated April 14, 2009 between Fujian Zhongde Technology Co., Ltd. and Fuzhou City Commercial Bank Co., Ltd., Longtian Branch (incorporated by reference to Exhibit 10.14 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 of China Clean Energy Inc. filed with the Securities and Exchange Commission on May 1, 2009).

10.19		Loan Agreement, dated February 24, 2010 between Fujian Zhongde Energy Co., Ltd. and Fujian Haixia Bank Co., Ltd. Longtian Branch (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on March 12, 2010).

10.20+		Offer of Board Position, dated January 4, 2011, by and between A. Carl Mudd and China Clean Energy Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on January 10, 2011).

10.21+		Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on March 12, 2010).

10.22+		China Clean Energy Inc. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on March 12, 2010).

10.23+		Form of Incentive Stock Option Agreement for the China Clean Energy Inc. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on March 12, 2010).

10.24+		Form of Nonqualified Stock Option Agreement for the China Clean Energy Inc. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on March 12, 2010).

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10.25+		Form of Restricted Stock Award Agreement for the China Clean Energy Inc. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on March 12, 2010).

10.26+		Offer of Board Position, dated January 7, 2011, by and between Constantine Konstans and China Clean Energy Inc. (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on March 12, 2010)

10.27+		Offer of Board Position, dated January 7, 2011, by and between Yu Lin and China Clean Energy Inc. (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K of China Clean Energy Inc. filed with the Securities and Exchange Commission on March 12, 2010)

14.1		Code of Ethics (incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-KSB of China Clean Energy Inc. filed with the Securities and Exchange Commission on March 11, 2008)

21.1		List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the Registration Statement on Form SB-2 of China Clean Energy Inc. filed with the Securities and Exchange Commission on February 1, 2008)

23*		Consent of Independent Registered Public Accounting Firm

31.1*		Section 302 Certification of Principal Executive Officer

31.2*		Section 302 Certification of Principal Financial Officer

32.1*		Section 906 Certification of Principal Executive Officer

32.2*		Section 906 Certification of Principal Financial Officer

* Filed herewith.

+ Management contract or compensatory plan or arrangement.

Attached files

CHINA CLEAN ENERGY INC Reports

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