U.S. Securities and Exchange Commission
Washington, DC 20549

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED
June 30, 2010

Commission File Number: 1-34131

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

Nevada
 
84-1491682
(State or other jurisdiction
of incorporation)
 
(I.R.S. Employer
Identification Number)

1603-1604, Tower B Fortune Centre Ao City
Beiyuan Road, Chaoyang District,
Beijing, People’s Republic of China 100107
(Address of principal executive offices)
 
Issuer’s telephone number, including area code: 86-10-84928149

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
(Do not check if smaller reporting company)
o
Smaller reporting company
x
 
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x

As of August 15, 2010, the Registrant had 15,922,391 shares of common stock, par value $0.001 per share, issued and outstanding. 

Transitional Small Business Disclosure Format: Yes  o    No  x
 
 
 
SINOENERGY CORPORATION AND SUBSIDIARIES

      Page  
Part I. Financial Information
     
       
Item 1. Consolidated Financial Statements
 
3
 
       
 
3
 
       
 
4
 
       
 
5
 
       
 
6
 
       
 
7
 
       
 
26
 
       
 
36
 
       
Part II. Other Information
 
36
 
       
       
 
36
 
       
 
37
 
 
 
Sinoenergy Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands of United States dollars)
 
   
June 30, 2010
   
September 30, 2009
 
   
(unaudited)
       
ASSETS
           
CURRENT ASSETS
           
Cash
 
$
23,887
   
$
18,237
 
Restricted cash
   
277
     
1,413
 
Accounts receivable, net
   
33,813
     
29,756
 
Inventories
   
7,532
     
4,619
 
Other receivable, net
   
26,701
     
17,644
 
Due from related party
   
-
     
426
 
Deposits and prepayments
   
9,091
     
8,629
 
Deferred expenses
   
29
     
63
 
TOTAL CURRENT ASSETS
   
101,330
     
80,787
 
                 
Long-term investments
   
6,075
     
4,905
 
Property, plant and equipment, net
   
72,316
     
54,870
 
Intangible assets
   
85
     
116
 
Land use rights
   
20,074
     
30,370
 
Other long term assets
   
7,931
     
7,672
 
Goodwill
   
1,906
     
1,906
 
Deferred tax asset
   
43
     
20
 
TOTAL NON-CURRENT ASSETS
   
108,430
     
99,859
 
                 
TOTAL ASSETS
 
$
209,760
   
$
180,646
 
                 
CURRENT LIABILITIES
               
Short-term bank loan
 
$
41,762
   
$
44,223
 
Notes payable
   
311
     
4,583
 
Accounts payable
   
11,188
     
5,193
 
Advances from customers
   
979
     
2,100
 
Additional interest payable under convertible note indenture
   
-
     
280
 
Income taxes payable
   
523
     
475
 
Construction payables
   
1,929
     
2,982
 
Other payables
   
6,583
     
2,801
 
Due to related party
   
30,410
     
-
 
Accrued expenses
   
463
     
538
 
Deferred income
   
6
     
38
 
Derivative liability
   
2,418
     
-
 
Current portion of long-term notes payable
   
12,901
     
26,667
 
TOTAL CURRENT LIABILITIES
   
109,473
     
89,880
 
                 
Long-term bank loan
   
38,287
     
26,358
 
Deferred tax liabilities
   
1,095
     
1,095
 
TOTAL LIABILITIES
   
148,855
     
117,333
 
                 
Commitments
               
                 
SHAREHOLDERS’ EQUITY
               
Common stock- par value $0.001 per share; Authorized - 50,000,000 shares; Issued and outstanding- 15,922,391 shares at June 30, 2010 and September 30, 2009
   
16
     
16
 
Additional paid-in capital
   
27,226
     
34,543
 
Retained earnings
   
9,235
     
6,850
 
Accumulated other comprehensive income
   
5,340
     
4,772
 
Total parent shareholders’ equity
   
41,817
     
46,181
 
Non-controlling interest
   
19,088
     
17,132
 
                 
TOTAL SHAREHOLDERS’ EQUITY
   
60,905
     
63,313
 
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
209,760
   
$
180,646
 

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

Sinoenergy Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands of United States dollars except per share information)
 
   
Three Months Ended June 30,
 
   
2010
   
2009
 
NET SALES
 
$
16,361
   
$
7,710
 
COST OF SALES
   
(12,386
)
   
(6,240
)
GROSS PROFIT
   
3,975
     
1,470
 
                 
OPERATING EXPENSES
               
Selling expenses
   
478
     
394
 
General and administrative expenses
   
1,738
     
1,461
 
                 
TOTAL OPERATING EXPENSES
   
2,216
     
1,855
 
                 
INCOME(LOSS) FROM OPERATIONS
   
1,759
     
(385
)
                 
OTHER INCOME (EXPENSES)
               
Change in fair value of derivative liability
   
10
     
-
 
Gain (loss) from unconsolidated entity
   
23
     
(11
)
Interest expense
   
(1,153)
     
(1,518
)
Additional interest payable under convertible note indenture
   
-
     
(140
)
Gain from the sale of land use right     2,992        -  
Other income, net
   
34
     
16
 
                 
OTHER INCOME (EXPENSES), NET
   
1,906
     
(1,653
)
                 
INCOME (LOSS) BEFORE INCOME TAXES AND NONCONTROLLING INTEREST
   
3,665
     
(2,038
)
Income tax provision
   
(149
)
   
(431
)
CONSOLIDATED NET INCOME (LOSS)
   
3,516
     
(2,469
)
Noncontrolling interest
   
(1,292
) 
   
19
 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
   
2,224
     
(2,450
)
Other comprehensive income:
               
Foreign currency translation adjustments
   
403
     
35
 
CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
 
$
2,627
   
$
(2,415
)
Net Income (Loss) Per Common Share
               
  Basic
 
$
0.14
   
$
(0.15
)
  Diluted
 
$
0.14
   
$
(0.15
)
Weighted Average Common Shares Outstanding
               
  Basic
   
15,922
     
15,942
 
  Diluted
   
15,922
     
15,942
 

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

 
  Sinoenergy Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(In thousands of United States dollars except per share information)
 
   
Nine Months Ended June 30,
 
   
2010
   
2009
 
NET SALES
 
$
37,896
   
$
30,609
 
COST OF SALES
   
(30,607
)
   
 
(22,861
)
GROSS PROFIT
   
7,289
     
7,748
 
                 
OPERATING EXPENSES
               
Selling expenses
   
1,302
     
982
 
General and administrative expenses
   
6,212
     
6,200
 
                 
TOTAL OPERATING EXPENSES
   
7,514
     
7,182
 
                 
INCOME (LOSS) FROM OPERATIONS
   
(225
)
   
566
 
                 
OTHER INCOME (EXPENSES)
               
Rental income, net of land use right amortization
   
-
     
1,329
 
Change in fair value of derivative liability
   
287
     
-
 
Loss from unconsolidated entity
   
(65
)
   
(44
)
Interest expense
   
(4,863
)
   
(3,835
)
Additional interest payable under convertible note indenture
   
-
     
(280
)
Gain from the sale of land use rights      2,992        -  
Other income, net
   
90
     
229
 
                 
OTHER INCOME (EXPENSES), NET
   
(1,559
)
   
(2,601
) 
                 
INCOME (LOSS) BEFORE INCOME TAXES AND NONCONTROLLING INTEREST
   
(1,784
)
   
(2,035
) 
Income tax provision
   
(570
)
   
(1,045
)
CONSOLIDATED NET LOSS
   
(2,354
)
   
(3,080
)
Noncontrolling interest
   
(1,688
)
   
(507
)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
   
(4,042
)
   
(3,587
) 
Other comprehensive income:
               
Foreign currency translation adjustments
   
568
     
498
 
CONSOLIDATED COMPREHENSIVE LOSS
 
$
(3,474
)
 
$
(3,089
)
Net Loss Per Common Share
               
  Basic
 
$
(0.25
)
 
$
(0.22
)
  Diluted
 
$
(0.25
)
 
$
(0.22
)
Weighted Average Common Shares Outstanding
               
  Basic
   
15,922
     
15,942
 
  Diluted
   
15,922
     
15,942
 

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

Sinoenergy Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands of United States dollars)
 
 
 
Nine Months Ended June 30,
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
2010
 
 
2009
 
Consolidated net loss
 
$
(2,354
)
 
$
(3,080
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
Disposal of land use right and property, plant and equipment
   
(2,992
)
   
-
 
Share-based compensation
 
 
83
 
 
 
219
 
Record cumulative change in accounting for conversion feature
 
 
287
 
 
 
-
 
Amortization of note discount
 
 
851
 
 
 
83
 
Deferred portion of interest expense
 
 
(349
)
 
 
3,963
 
Additional interest payable
 
 
(280
)
 
 
-
 
Depreciation
 
 
1,245
 
 
 
693
 
Amortization of intangible assets
 
 
192
 
 
 
333
 
Provision for (recovery of) doubtful accounts
 
 
(237
)
 
 
38
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
Accounts and notes receivable
 
 
(4,059
)
 
 
(7,153
)
Other receivables, deposits and prepayments
 
 
(8,820
)
 
 
6,324
 
Inventories
 
 
(2,913
)
 
 
1,947
 
Deferred tax asset
 
 
(23
)
 
 
(4
)
Accounts payable
 
 
1,723
 
 
 
(1,076
)
Accrued expenses
 
 
(75
)
 
 
82
 
Advances from customers
 
 
(1,121
)
 
 
(286
)
Other payables
 
 
2,730
 
 
 
(2,275
)
Deferred income
 
 
(32
)
 
 
(45
)
Derivative liability
 
 
  2,418
 
 
 
  -
 
Income taxes payable
 
 
48
 
 
 
222
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
 
(13,678
)
 
 
(15)
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment
 
 
(22,086
)
 
 
(15,851
)
Purchase of land use right
 
 
-
 
 
 
(533
)
Investment in unconsolidated entities
 
 
(1,170
)
 
 
(2,879
)
Sales of land use right and property, plant and equipment
 
 
16,525
 
 
 
-
 
Changes in restricted cash
 
 
1,136
 
 
 
84
 
 
 
 
 
 
 
 
 
 
Net cash used in investing activities
 
 
(5,595
)
 
 
(19,179
)
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
Proceeds from bank loan
 
 
54,720
 
 
 
45,083
 
Loan from related parties
 
 
30,410
 
 
 
-
 
Payment of bank loan
 
 
(45,649
)
 
 
(22,690
)
Payments of senior notes
 
 
(15,530
)
 
 
-
 
Net cash provided by financing activities
 
 
23,951
 
 
 
22,393
 
 
 
 
 
 
 
 
 
 
Effect on cash of changes in exchange rate
 
 
972
 
 
 
138
 
 
 
 
 
 
 
 
 
 
Net increase in cash
 
 
5,650
 
 
 
3,337
 
Cash at beginning of period
 
 
18,237
 
 
 
8,871
 
Cash at end of period
 
$
23,887
 
 
$
12,208
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
 
Interest paid
 
$
1,690
 
 
$
3,565
 
Income taxes paid
 
$
410
 
 
$
397
 
 
  The accompanying notes are an integral part of these financial statements.

Sinoenergy Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2010
1. The Company

(a) Organization

Sinoenergy Corporation (“Sinoenergy” or the “Company”) was incorporated in Nevada on March 2, 1999 under the name Franklyn Resources III, Inc. (“Franklyn”). The Company’s corporate name was changed to Sinoenergy Corporation on September 28, 2006.
 
On June 2, 2006, the Company acquired Sinoenergy Holding Limited (“Sinoenergy Holding”), a British Virgin Islands corporation.  Sinoenergy Holding was the sole stockholder of Qingdao Sinogas General Machinery Limited Corporation (“Sinogas”), a wholly foreign-owned enterprise (“WFOE”) registered under laws of the People’s Republic of China (the “PRC”). Sinoenergy Holding had no business other than its ownership of Sinogas. As a result of this transaction, Sinoenergy Holding and its subsidiary, Sinogas, became subsidiaries of the Company and the business of Sinogas became the business of the Company.
 
(b) Subsidiaries of the Company

Set forth below is a list of the Sinoenergy’s wholly-owned and majority-owned subsidiaries at December 31, 2009, all of whose financial statements are consolidated with Sinoenergy.  References to the Company include the Company and its consolidated subsidiaries unless the context indicates otherwise.   The percentage ownership reflects the percentage ownership by Sinoenergy.
 
Company
 
Ownership %
 
Business activities
Sinoenergy Holding Limited
 
100%
 
Holding company
         
Qingdao Sinogas General
Machinery Limited Corporation (“Sinogas”)
 
75.05%
 
Production of compressed natural gas (CNG) facilities, technical consulting in CNG filling station construction, manufacturing of CNG vehicle conversion kit
         
Qingdao Sinogas Yuhan
Chemical Equipment Company Limited (“Yuhan”)
 
81%*
 
Manufacturing of customized pressure containers
         
Wuhan Sinoenergy Gas Company Limited (“Wuhan Sinoenergy”)
 
90%
 
Construction and operating of CNG stations and the manufacturing and sales of automobile conversion kits
         
Pingdingshan Sinoenergy Gas
Company Limited (“Pingdingshan Sinoenergy”)
 
90%
 
Construction and operating of CNG stations and the manufacturing and sales of automobile conversion kits
         
Jiaxing Lixun Automotive
Electronic Company Limited (“ Jiaxing Lixun”)
 
81%*
 
Design and manufacturing of electric control devices for alternative fuel
         
Hubei Gather Energy
Company Limited (“Hubei Gather”)
 
80%
 
Construction and operating of natural gas processing plants
         
Xuancheng Sinoenergy
Vehicle Gas Company Limited
(“Xuancheng Sinoenegy”)
 
100%
 
Construction and operating of CNG stations and the manufacturing and sales of automobile conversion kits
         
Qingdao Jingrun General
Machinery Company Limited (“Jingrun”)
 
100%
 
Design and manufacturing of petroleum refinery equipment and petroleum machinery
         
Qingdao Sinoenergy General
Machinery Company Limited
(“Qingdao Sinoenergy”)
 
75.05%
 
Manufacturing and installation of general machinery equipment
         
Nanjing Sinoenergy Gas Company Limited(“Nanjing Sinoenergy”)
 
90%
 
Construction and operating of CNG stations and the manufacturing and sales of automobile conversion kits
         
Qingdao Sinoenergy General Gas Company Limited(“Sinoenergy Gas”)
 
90%**
 
Construction and operating of CNG and LNG stations and the manufacturing and sales of automobile conversion kits
 
*        These subsidiaries are owned 75% by Sinogas and 25% by Sinoenergy.
**      This subsidiary is owned 40% by Sinogas and 60% by Sinoenergy.
 
 
2. Summary of Significant Accounting Policies

Management’s Responsibility
 
Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements, which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of results for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the fiscal year ended September 30, 2009. These financial statements have been prepared assuming that the Company will continue as a going concern. Results for the nine months ended June 30, 2010 are not necessarily indicative of results to be expected for the year.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to interim financial statements.

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

Use of Estimates

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

Goodwill

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

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of June 30, 2010 and September 30, 2009, the Company did not have any cash equivalents.  The Company maintains its cash in bank deposit accounts that, at times, may be very significant. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash balances.
 
Allowance for Doubtful Accounts

An allowance for doubtful accounts is maintained for customers (other than related parties) based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. When circumstances related to customers change, estimates of the recoverability of receivables are further adjusted.

Inventories

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

Long-Term Investments

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

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

Buildings and facilities
15-20 years
Machinery and equipment
5-20 years
Motor vehicles
10-20 years
Office equipment and others
5 to 10 years

Intangible Assets

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

Land Use Rights

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

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

Impairment of Assets

Impairment of assets is monitored on a periodic basis, and is assessed based on the undiscounted cash flows expected to be generated by the underlying assets. In the event that the carrying amount of assets exceeds the undiscounted future cash flows, then the carrying amount of such assets is adjusted by the difference in these amounts.

Capitalization of Interest

The Company capitalizes interest incurred in connection with the construction of assets, principally its CNG stations, during the construction period.  Capitalized interest is recorded as an increase to construction in progress and, upon completion of the construction. The capitalized interest is included in property and equipment.  The Company capitalized $107,995 and $401,568 of interest during the three months ended June 30, 2010 and 2009, respectively, and $199,708 and $643,558 of interest during the nine months ended June 30, 2010 and 2009, respectively.
 
Revenue Recognition

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

Warranty Reserves

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

The following tables show a reconciliation of the changes in the Company’s product warranty liability (dollars in thousands), which is included within Accrued Expenses in the accompanying balance sheet.

   
Nine months ended June 30,
 
   
2010
   
2009
 
Product warranty liability, beginning of period
 
$
227
   
$
167
 
Changes in liability for warranties issued during the period
   
58
     
43
 
Foreign exchange effect
   
2
     
1
 
Product warranties, end of period
 
$
287
   
$
211
 
 
Income Taxes

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

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

Foreign Currency Translations

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

Fair Value of Financial Instruments

US GAAP requires certain disclosures about the fair value of financial instruments. The Company defines fair value, using the required three-level valuation hierarchy for disclosures of fair value measurement the enhanced disclosures requirements for fair value measures. Current assets and current liabilities qualified as financial instruments and management believes their carrying amounts are a reasonable estimate of fair value 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.  The three levels are defined as follow:

Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company's assumptions.

US GAAP requires the use of observable market data if such data is available without undue cost and effort.

The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of June 30, 2010 (unaudited):

   
Level 1
   
Level 2
   
Level 3
   
Total
Fair value of embedded derivatives
   
-
     
-
   
$
2,417,715
   
$
2,417,715
 
For the nine months ended June 30, 2010, there were no transfers or sales of derivate instruments, nor were there any transfers in or out of the level 3 fair value classification.
 
Derivative financial instruments
 

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations.  For stock-based derivative financial instruments, the Company uses both the Black-Scholes-Merton and Binomial option pricing models to value the derivative instruments at inception and on subsequent valuation dates.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.  Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. 

Derivative Liability

On October 1, 2009, the Company adopted a new accounting principle effective for the 2010 fiscal year. The new principle results from a new pronouncement that redefined when an embedded conversion feature is indexed to an entity’s own stock. The Company’s convertible debt has a conversion feature that requires a reset to the conversion price based on certain events and the conversion feature in denominated in US currency rather than the functional currency of the Company (RMB). The newly adopted accounting principles define both of those factors as reasons the conversion feature is no longer indexed to the company stock. The effect of the change is to cause the conversion feature to change its classification from equity based to a derivative liability. Accounting principles require that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
 
The derivative liabilities were valued using the following assumptions:
 
   
June 30,
2010
   
September 30,
2009
   
Date of issuance
September 30,
  2007
 
Conversion feature:
                 
Risk-free interest rate
   
1.18
%
   
1.38
%
   
4.23
%
Expected volatility
   
89.03
%
   
109.51
%
   
79.64
%
Expected life (in years)
 
2.25 years
   
3.0 years
   
5.0 years
 
Expected dividend yield
   
0
     
0
     
0
 
                         
Fair value:
                       
Conversion feature
 
$
2,417,715
   
$
2,705,232
   
$
11,946,000
 

The risk-free interest rate was based on rates established by the Federal Reserve.  The expected volatility was based on the historical volatility since the common stock became publicly traded.    The expected life of the conversion feature of the notes was based on the term of the notes; provided, that, as a result of a December 17, 2009 agreement with the holder of the notes, the Company agreed to pay the notes following within 40 days after the completion of the proposed merger with SNEN Acquisition Corp., which is expected to occur during September 2010. The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future.
 
 The accounting principle was implemented in the first quarter of 2010 and is reported as a cumulative change in accounting principle.  The cumulative effect on the accounting for the conversion feature of the notes at October 1, 2009 is as follows: 

 
Derivative Instrument:
 
Additional
Paid-in Capital
   
Retained
Earnings
   
Derivative Liability
 
Conversion feature
 
$
(7,400,000)
   
  $
6,425,000
   
$
2,705,232
 

The derivative liability amounts reflect the fair value of each derivative instrument as of the October 1, 2009 date of implementation. 
 
The change in additional paid-in capital for the nine months ended June 30, 2010 pertains primarily to the cumulative effect of adoption of this accounting principle.
 
On June 30, 2010, the Company measured the fair value of the conversion feature and recorded $10,000 as a reduction in fair value of the liabilities in the accompanying condensed consolidated financial statements for the three months then ended.    For the nine months ended June 30, 2010, the derivative liability change resulted in a gain on the change in derivative liability of  $287,517.
 
Noncontrolling Interest

Noncontrolling interest refers to the portion of a consolidated subsidiary which is not wholly-owned by the Company. The
 
 
Company records the noncontrolling interest portion of any related profits and losses in consolidation.  Other comprehensive income related to the noncontrolling interest for the three and nine months ended June 30, 2010 was $0.  Noncontrolling interest represented $19,088,000 of the total shareholders’ equity at June 30, 2010.
 
Stock-Based Compensation

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

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

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

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

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

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

Comprehensive Income or Loss

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

The Company’s only component of other comprehensive income is foreign currency translation gain $403,000 and $35,000 for the three months ended June 30, 2010 and 2009, respectively, and $568,000 and $498,000 for the nine months ended June 30, 2010 and 2009, respectively.  Cumulative other comprehensive income is recorded as a separate component of shareholders’ equity.

3. Restricted Cash

The balances of restricted cash as at June 30, 2010 and September 30, 2009 represent deposits on a bill of exchange issued by the Company for the purchase of materials.
 
4. Accounts and notes receivable

Accounts receivable are as follows (dollars in thousands):

   
June 30,
2010
   
September 30,
2009
 
Accounts receivable
 
$
34,824
   
$
30,903
 
Notes receivable-bank acceptance
   
212
     
74
 
Less: allowance for doubtful receivables
   
(1,223
) 
   
(1,221
)
                 
Total
 
$
33,813
   
$
29,756
 
 
 
5. Other receivable

Other receivable are as follows (dollars in thousands):

   
June 30,
2010
   
September 30,
2009
 
Rental receivable
 
$
2,650
   
$
2,636
 
Due from third parties
   
15,160
     
9,734
 
Others current accounts
   
10,511
     
7,133
 
Less: allowance for doubtful receivables
   
(1,620
) 
   
(1,859)
 
                 
Total
 
$
26,701
   
$
17,644
 
 
6. Deposits and prepayments
 
Deposits and prepayments are as follows (dollars in thousands):

   
June 30,
  2010
   
September 30, 
2009
 
             
Related to construction
 
$
2,029
   
$
1,681
 
Raw materials
   
2,899
     
3,000
 
Related to equipment
   
2,846
     
1,303
 
Natural gas
   
911
     
2,303
 
Others
   
406
     
342
 
                 
Total
 
$
9,091
   
$
8,629
 
 
7. Inventories
 
Inventories are as follows (dollars in thousands):
 
   
June 30,
2010
   
September 30, 
2009
 
             
Raw materials
 
$
2,933
   
$
2,153
 
Work in progress
   
1,114
     
288
 
Finished goods
   
3,369
     
2,159
 
Low value consumables
   
116
     
19
 
                 
Total
 
$
7,532
   
$
4,619
 

8. Long-term investments

Sinogas General Luxi Natural Gas Equipment Co., Ltd.

On October 31, 2008, in order to provide for a supply of raw materials, Sinogas signed a joint venture agreement with LuXi Chemical Group, a Chinese chemical company, to set up a company located in Liaocheng City, Shandong province, with proposed annual production capacity of 4,000 steel bottles used in CNG trailer manufacturing.  The total registered capital is RMB 50 million (equivalent to $7.32 million based on the exchange rate on June 30, 2010) of which Sinogas has a 40% interest, which, since the Company has a 75.05% interest in Sinogas, gives the Company has a 30.02% interest. This joint venture company commenced operation in July 2009. At December 31, 2009, Sinogas had contributed $2.93 million, in full satisfaction of its obligations to this enterprise. For the nine months ended June 30, 2010, the joint venture incurred loss at $69,666, of which $27,866 is allocated to the Company.  This investment is accounted for using the equity method of accounting.

  9. Property, Plant and Equipment
 
Property, plant and equipment consist of the following (dollars in thousands):
 
 
   
June 30,
2010
   
September 30,
2009
 
                 
Buildings and facility
 
$
18,436
   
$
15,637
 
Machinery equipment
   
17,290
     
15,616
 
Motor vehicles
   
2,491
     
2,241
 
Office equipment and other
   
493
     
596
 
Total
   
38,710
     
34,090
 
                 
Accumulated depreciation
   
(3,553
)
   
(2,308)
 
     
35,157
     
31,782
 
                 
Construction in process
   
37,159
     
23,088
 
                 
Net book value
 
$
72,316
   
$
54,870
 

10. Land use rights
 
   
June 30,
2010
   
September 30, 
2009
 
             
Land use rights
   
21,104
     
31,495
 
                 
Accumulated amortization
   
(1,030
)
   
(1,125)
 
                 
Net book value
 
$
20,074
   
$
30,370
 
 
The land use rights include six parcels of land purchased by the Company, which are held by Sinogas, Jingrun, Xuancheng, Qingdao Sinoenergy, Jiaxing Lixun, and Hubei Gather. The land use rights are being amortized over the following periods, during which they are transferable and renewable, subject to government approval.

Owner
 
Cost
 
Expiration
Sinogas
 
$
9,100
 
May 2057
Jingrun
   
4,099
 
December 2056
Xuancheng Sinoenergy
   
1,015
 
June 2058
Qingdao Sinoenergy
   
3,338
 
June 2058
Jiaxing Lixun
   
370
 
June 2058
Hubei Gather
   
528
 
June 2059
Total
 
$
18,450
   
Wuhan Sinoenergy
   
2,654
 
*
 
﹡ Wuhan Sinoenergy has two agreements to purchase land use rights in Wuhan City from different non-affiliated parties. One agreement provides for a purchase price of approximately $1.58 million, of which approximately $1.32 million has been paid, and the title transfer is in the process. The second provides for a purchase price of approximately $1.32 million, which Wuhan Sinoenergy paid in full.  The acquisition of the land use rights requires government approval. The amount paid under the purchase agreements is reflected on the balance sheet under “land use rights.” Title to that parcel had not been transferred yet as of June 30, 2010.
 
The land use right owned by Sinogas represents two parcels of land located in the central portion of Qingdao City, on which Sinogas and Yuhan’s offices and manufacturing facilities are located. The land use right was purchased by the Company from Beijing Sanhuan, a former shareholder of Sinogas, for a price of RMB160 million, equivalent to US$23.47 million based on the current exchange rate. The land is being amortized from May 2007 over a 50-year term.

On December 15, 2007, the Company purchased all of the equity of Jingrun, whose sole asset is the land use right and construction in progress, for approximately RMB60 million ($8.8 million based on the June 30, 2010 exchange rate). The cost of the land use right paid by the Company was approximately $4.1 million based on the June 30, 2010 exchange rate.
 
The land use right owned by Xuancheng was purchased by the Company from Shanghai CNPC Enterprises Group for $874,000 based on the June 30, 2010 exchange rate.
 
On January 4, 2008, the Company purchased all of the equity of Qingdao Shan Yang Tai Chemistry Resources Development Co., Ltd. (“QDSY”), whose sole asset is the land use right and construction in progress, for approximately RMB43 million. The cost of
 
 
 the land use right paid by the Company was approximately $1.9 million based on the June 30, 2010 exchange rate.
 
On February 9, 2010, Sinogas signed a supplemental agreement, modifying an agreement dated July 29, 2009 with  Qingdao City Land Reserve Center for the transfer of the certain land use rights in Qingdao City to the Land Reserve Center for a purchase price of RMB 112,222,883, which has a value of approximately $16.4 million, using a current conversion rate.  These land rights related to the real estate where Sinogas’ former manufacturing facilities were located.  The purchase price has been paid by the Land Reserve Center.  The Company has the obligation to remove the buildings and other constructions on the land and pay the applicable tax and record the transfer documents.  As of June 30, 2010, the Company has accrued approximately $1.1 million for the  estimated cost to remove buildings and other structures and restore the land, as required. A gain of $2.99 million, net of expenses and estimated costs, has been recognized during the period ended June 30, 2010.
 
In June 2008, Jiaxing Lixun acquired a land use right for $368,000, which was used for construction of a new plant.

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

Goodwill is as follows (dollars in thousands):

Transactions
 
June 30,
2010
   
September 30, 
2009
 
             
Purchase of an additional 80% equity interest in Yuhan
 
$
995
   
$
995
 
Purchase of 90% equity in Jiaxing Lixun
   
619
     
619
 
Purchase of a 70% equity in Xuancheng Sinoenergy
   
258
     
258
 
Purchase of Jingrun
   
34
     
34
 
                 
Total
 
$
1,906
   
$
1,906
 
 
The Company monitors the impairment of goodwill at least annually.  As of June 30, 2010, there were no indications that the carrying amount of the goodwill was impaired.

12. Other long-term assets

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

   
June 30,
2010
   
September 30, 
2009
 
             
Prepaid CNG land rental
 
$
4,639
   
$
2,937
 
Plant construction in progress
   
1,822
     
3,096
 
CNG station equipment on order from overseas
   
-
     
342
 
Others
   
1,470
     
1,297
 
                 
Total
 
$
7,931
   
$
7,672
 

13. Short Term Bank Loan

The following table summarizes the contractual short-term borrowings between the banks and the Company as of June 30, 2010 (dollars in thousands):

Bank Name
 
Purpose
 
Borrowing Date
 
Borrowing Term
 
Annual Interest Rate
   
Amount
 
China Construction Bank
 
Working Capital
 
March 9, 2010
 
One year
   
5.5755
%
 
$
7,363
 
China Construction Bank
 
Working Capital
 
April 28, 2010
 
One year
   
5.841
%
   
19,732
 
China Merchants Bank
 
Working Capital
 
February 1, 2010
 
One year
   
5.841
%
   
2,945
 
China Merchants Bank
 
Working Capital
 
March 5, 2010
 
One year
   
5.5755
%
   
442
 
China Merchants Bank
 
Working Capital
 
May 19, 2010
 
One year
   
5.5755
%
   
1,031
 
Hankou Bank
 
Working Capital
 
July 21, 2009
 
One year
   
5.841
%
   
2,945
 
CITIC Bank
 
Working Capital
 
August 26, 2009
 
One year
   
6.372
%
   
2,651
 
Bank of Communication
 
Working Capital
 
October 9, 2009
 
One year
   
5.841
%
   
2,386
 
Bank of Communication
 
Working Capital
 
April1, 2010
 
One year
   
5.81
%
   
1,237
 
Bank of Communication
 
Working Capital
 
April 9, 2010
 
One year
   
5.81
%
   
589
 
Bank of Communication
 
Working Capital
 
April 14, 2010
 
One year
   
5.81
%
   
294
 
Bank of Communication
 
Working Capital
 
June 3, 2010
 
One year
   
5.81
%
   
147
 
Total
                     
$
41,762
 
 
 
 
The following table summarizes the contractual short-term borrowings between various banks and the Company as of September 30, 2009 (dollars in thousands):
 


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

14. Notes payable

The balances of notes payable as at June 30, 2010 and September 30, 2009 represent the obligations in the form of promissory notes with maturity dates of less than 12 months for the purchase of raw materials.

15. Advances from Customers

Advances from customers at June 30, 2010 and September 30, 2009 consist of advances received for routine sales orders according to the Company’s sales policy.

16. Income Taxes Payable

Pursuant to the PRC income tax laws, the Company’s PRC subsidiaries are generally subject to enterprise income tax at a statutory rate of 25%. The Company pays its enterprise tax based on its taxable income determined in accordance with the tax laws of the PRC.   

As PRC subsidiaries that qualify as wholly foreign owned manufacturing enterprises, Sinogas, Yuhan and Jiaxing Lixun were granted tax preferences. Sinogas and Yuhan were granted a 100% enterprise income tax exemption for calendar years 2006 and 2007 and a 50% enterprise income tax exemption for 2008 through 2010. Jiaxing Lixun was granted a 100% tax exemption from August 2007 through 2008 and a 50% enterprise income tax exemption for the calendar years 2009 through 2011. 
 
Under the current tax laws of the PRC, Wuhan Sinoenergy will be entitled to a two-year 100% tax exemption followed by three years of a 50% tax exemption once it become profitable. Wuhan Sinoenergy did not achieve profitability for the year ended September 30, 2009.

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

17.  Long term notes payable
 
On September 28, 2007, the Company issued 12% guaranteed senior notes due 2012 in the principal amount of $16,000,000 and 3.0% guaranteed senior convertible notes due 2012 in the principal amount of $14,000,000.  At December 31, 2009, the 12% guaranteed senior notes had been paid in full. The convertible notes were initially convertible into common stock at an initial conversion price of $6.34 per share. The conversion price had been reduced to $4.20 as described below at March 31, 2009.

In connection with the issuance of the notes, the Company’s chief executive officer and its chairman, both of whom are directors, executed non-competition agreements with the Company, and the Company paid the investors an arrangement fee of $160,000, which was deducted from the proceeds of the notes.
 
 
The convertible notes were issued pursuant to an indenture between the Company and DB Trustees (Hong Kong) Limited, as trustee. The convertible notes are due in September 2012 and bear interest at the stated interest rate of 3% per annum. Although the stated interest rate is 3% per annum, if the convertible notes are not redeemed, converted or purchased and cancelled by the maturity date, the Company is required to redeem the convertible notes at the amount which results in a yield to maturity of 13.8% per annum, less interest previously paid, plus any interest accrued on overdue principal (and, to the extent lawful, on overdue interest) and premium, if any, at a rate which is 3% per annum in excess of the rate of interest then in effect. As a result, the Company is accruing interest at the rate of 13.8% per annum. Since the Company is only required to pay interest currently at the rate of 3%, the remaining 10.8% interest rate is accrued and treated as deferred interest payable. If the convertible notes are converted, the deferred interest payable will be credited to additional paid in capital. Because of the agreement relating to payment of the convertible notes described below, the principal amount of the notes and the deferred interest are classified as current liabilities at June 30, 2010.
 
The convertible note indenture requires the Company to offer to purchase the Notes at a price which would generate a 13.8% yield if either of the following events shall occur:
 
 
●
The failure of the Company’s common stock to be listed on The NASDAQ Stock Market.
     
 
●
Trading in the Company’s common stock on any exchange or market has been suspended for ten or more consecutive trading days.
 
The indenture also requires the Company to pay additional interest as follows:
 
 
●
At the rate of 3.0% per annum if the Company has not obtained a listing of its common stock on the NASDAQ Global Market or the NASDAQ Capital Market by September 19, 2008 and maintained such listing continuously thereafter as long as the Notes are outstanding. At June 30, 2010, the Company had met this listing requirement.
     
 
●
At the rate of 1.0% for each 90-day period in which the Company has failed to comply with the registration obligations under the registration rights agreement. As of September 30, 2009, the Company had accrued additional interest totaling $560,000 pursuant to this provision, of which $280,000 has been paid. The noteholders have waived the right to require the additional interest from March 31, 2009 through September 30, 2009 and afterwards.
 
At June 30, 2010, the holders of the convertible notes have the right to convert their notes into common stock at a conversion price of $4.20 per share, reflecting a reduction in the conversion price to $5.125 per share pursuant to a supplemental indenture dated as of June 23, 2008 and a further adjustment to $4.20 per share as of March 28, 2009 based on the market price of the Company’s common stock. As March 31, 2010, the conversion price was subject to adjustment in the event of a stock distribution or dividend, a reverse split or combination of shares and the distribution of shares, warrants, assets or indebtedness to our stockholders.  Other adjustment provisions had been terminated as of March 31, 2010.
 
The indenture relating to the convertible notes including the following:
 
●
If the Company sells assets and does not reinvest the proceeds in its business within 180 days (270 days in the case of a sale of real property), to the extent that such proceeds not so reinvested exceed $5,000,000, the Company is required to offer the holders of the notes the right to have the Company use such excess proceed to purchase their notes at the principal amount plus accrued interest..
   
●
If there is a change of control, the Company is required to offer to repurchase the notes at 103% of the principal of the note, plus accrued interest. A change of control will occur if Bo Huang or Tianzhou Deng own less than 25% of the voting power of the Company’s voting stock or, with certain exceptions, a merger or consolidation or sale of substantially all of the Company’s and its subsidiaries’ assets.
   
●
The Company is restricted from incurring additional debt unless, after giving effect to the borrowing, (i) the fixed charge coverage ratio would be greater than 2.0 to 1.0 through December 31, 2009 and 3.0 to 1.0 if the debt is incurred thereafter, and (ii) the leverage ratio would not exceed 6.0 to 1.0 through December 31, 2009 and 4.5 to 1.0 if the debt is incurred thereafter, provided, that Sinogas may continue to maintain debt under credit facilities of not more than $10,000,000, and may incur purchase money indebtedness. The fixed charge coverage ratio is the ratio of the Company’s earnings before interest, taxes, depreciation and amortization, which is generally known as EBITDA, to consolidated interest expense, as defined. Leverage ratio means the ratio of outstanding debt to EBITDA, with the interest component being the consolidated interest expense, as defined.
 
●
The Company is subject to restriction in paying dividends, purchasing its own securities or those of its subsidiaries, prepaying subordinated debt, and making any investment other than any investments in itself and its subsidiaries engaged in the Company’s business and certain other permitted investments.
   
●
The Company is subject to restrictions on incurring liens.
 
 
   
●
The Company cannot enter into, or permit its subsidiaries to enter into, transactions with affiliates unless it is in writing, in the Company’s best interest and not less favorable to the Company than it could obtain from a non-affiliate in an arms’ length transaction, with any transaction involving more than $1,000,000 requiring audit committee approval and any transaction involving more than $5,000,000 requiring a written opinion from an independent financial advisor.
   

●
The Company shall maintain, as of the last day of each fiscal quarter, (i) a fixed charge coverage ratio of at least 2.00 to 1.00 through December 31, 2009 and 3.0 to 1.0 thereafter, (ii) a leverage ratio of not more than 6.0 to 1.00 through December 31, 2009 and 4.5 to 1.0 thereafter, and (iii) a consolidated subsidiary debt to consolidated net tangible asset ratio of not more than 0.35. The noteholders agreed that they would not take any action to declare an event of default as long as the Company is in compliance with the modified covenants.  
   
●
The Company shall make all payments of principal, interest and premium, if any, without withholding or deduction for taxes, and must offer to repurchase the notes if they are adversely affected by changes in tax laws that affect the payments to the holders.
 
At June 30, 2010, the Company was not in compliance with the financial covenants in the indentures relating to our 3.0% senior convertible notes due 2012 in the principal amount of $14 million. In October and December 2009 and August 2010, we entered into agreements that modified the terms of the notes, the cumulative effect of which is as follows.

●   
The noteholders waived compliance with the covenants at September 30, 2009 and through September 30, 2010.
 
●   
The Company repaid our 12% senior notes in the principal amount of $16 million prior to December 31, 2009.
 
●   
The Company agreed to pay the convertible notes in the principal amount of $14 million in two installments, with an initial payment of $5 million being due ten days after the merger with SNEN Acquisition Corp. becomes effective and the balance 30 days thereafter.  Since the note holders would not be converting the notes, we would pay interest to provide the note holders with a yield to maturity of 13.8%, net of payments previously made.
 
●   
The noteholders reduced our remaining obligation for liquidated damages for failure to register the shares of common stock issuable upon conversion of the convertible notes to $280,000, which is payable by December 31, 2009. The payment was made on January 7, 2010.
 
●
The provision that would have resulted in a further decrease in the conversion price of the convertible notes if we did not meet certain levels of net income was eliminated.
 
●   
The provisions of the indenture relating to the reduction in the conversion price of the convertible notes if we issue stock at a price, or issue convertible securities with a conversion or exercise price, that is less than the conversion price (presently $4.20 per share) were eliminated.
 
As a result of these agreements, the $14 million convertible notes are classified as current liabilities at June 30, 2010 and September 30, 2009.  

The indenture also provides for an event of default if the Company fails to comply with its obligations under the indenture and certain events of bankruptcy or similar relief.
 
The Company’s obligations are guaranteed by its subsidiaries and are secured by a lien on the stock of Sinoenergy Holding.

Subject to certain conditions, and in connection with the proposed merger agreement between the Company and SNEN Acquisition Corp., a wholly-owned subsidiary of Skywide Capital Management Limited (“Skywide”), which is described in Note 19, the holders of the convertible notes have waived default resulting from the failure of the Company’s common stock to be listed on the NASDAQ Stock Market.
 
At the time of the September 2007 financing, the Company also entered into an investor rights agreement, as clarified, pursuant to which, as long as an investor holds at least $2,000,000 principal amount of notes or at least 3% of the issued and outstanding stock:
 
 
●
The investor has the right to approve the Company’s annual budget, and the Company cannot deviate by more than 15% of the amount in the approved budget.
     
 
●
The Company and its subsidiaries cannot replace or change the substantive responsibilities of the chief executive officer except in the event of his incapacity, resignation or retirement.
 
 
 
●
The Company and its subsidiaries cannot take any action that would result in a change of control, as defined in the indentures.
     
 
●
The Company and its subsidiaries cannot change the number of board members or the composition or structure of the board or board committees or delegate powers to a committee or change the responsibilities and powers of any committee.
     
 
●
The Company shall, by April 1, 2008, have appointed an independent public accountant from a list of 16 firms provided by the investors, failing which the Company shall pay the investors the sum of $2,500,000 on April 1 of each year in which this condition is not met, and the Company shall not terminate the engagement of such auditor without prior investor approval. The Company has complied with this condition.
     
 
●
The investors have a right of first refusal on future financings by us and proposed transfers, with limited exceptions, by Mr. Huang and Mr. Deng. The investors also have a tag-along right in connection with proposed sales of stocks by Mr. Huang and Mr. Deng.
 
The investor rights agreement, as clarified, also provides that (i) the Company will not sell shares of its common stock or grant options or warrants or issue convertible securities with an exercise or conversion price that is less than $0.80 per share, (ii) the minimum conversion price for the convertible debenture would be $0.80 per share, (iii) the holders of the convertible notes may call an event of default if the Company breaches its covenant not to issue shares at a price which is less than $0.40 per share. If the Company increases its authorized common stock, the conversion price would decrease to an amount not less than $0.05 per share. The Company and the investors agreed to use their commercially reasonable efforts to modify the indenture for the convertible notes to reflect these provisions of the investor rights agreement.
 
As a result of the reduction in the conversion price from $6.34 to $5.125, the Company recorded an additional beneficial conversion feature of $3,360,905 as a discount to the notes and additional paid in capital, which is being amortized as interest expense over the remaining term of the notes commencing April 1, 2008.  As a result of the further reduction in the conversion price from $5.125 to $4.20, the Company recorded an additional beneficial conversion feature of $3,862,439 as a discount to the notes and additional paid in capital, which is being amortized as interest expense over the remaining term of the notes commencing January 1, 2009.  Upon prepayment of the convertible notes, the unamortized portion of the beneficial conversion feature will be recognized.

Mr. Huang and Mr. Deng are also prohibited from transferring any shares, with limited exceptions, until the investors shall have sold, singly or in the aggregate, more than 5% of the Company’s total outstanding equity on a fully-diluted basis.
 
As long as long as Abax continues to hold more than 5% of the outstanding shares of common stock on an as-converted basis, (i) Abax shall be entitled to appoint up to 20% of the voting members (or the next higher whole number if such percentage does not yield a whole number) of the Company’s board of directors, and (ii) if the Company fails to meet the net income requirements under the indenture for the convertible notes, Abax has the right to appoint an additional director. The Abax director shall be entitled to serve on each committee of the board, except that, the Abax director shall not serve on the audit committee unless he or she is an independent director. Mr. Huang and Mr. Deng have agreed to vote their shares for the election of the Abax directors. The Company is required to amend its by-laws to provide that a quorum for action by the board shall include at least one Abax director.
 
The Company is required to prepare and file a registration statement covering the sales of all of the shares of common stock issuable upon conversion of the convertible notes, subject to any limitation required by Rule 415 of the SEC pursuant to the Securities Act of 1933 and to have the registration statement declared effective by March 28, 2008. In the event that the registration statement has not been declared effective by the SEC on or before March 28, 2008 or if effectiveness of the Registration Statement is suspended at any time other than pursuant to a suspension notice, for each 90-day period during which the registration default remains uncured, the Company is required to pay additional interest at the rate of one percent 1% of the convertible notes, as described above. As of September 30, 2009, the common stock issuable upon conversion of the notes had not been registered under the Securities Act of 1933, as amended. As a result of an agreement with the noteholders, as described below, the Company made a $280,000 payment in respect of this additional interest in January 2010, and the Company has no further obligation with respect to additional interest resulting from the failure to register the underlying shares.
 
A reconciliation of the original principal amount of the 3% senior convertible notes to the amounts shown on the balance sheet at June 30, 2010 and September 30, 2009:
 

Original amount
 
$
14,000
 
Beneficial conversion feature
   
(177
)
Balance, September 30, 2007
 
$
13,823
 
Amortization of beneficial conversion feature
   
35
 
Interest paid
   
(211
) 
Interest accrued for guaranteed 13.8% return
   
1,934
 
Discount resulting from reset adjustment effective March 28, 2008
   
(3,361
)
Amortization of discount resulting from reset
   
373
 
Balance, September 30, 2008
 
$
12,593
 
Interest accrued for guaranteed 13.8% return
   
1,932
 
Amortization of beneficial conversion feature
   
35
 
Amortization of discount resulting from reset
   
1,519
 
Discount resulting from reset adjustment effective March 28, 2009
   
(3,862
)
Interest paid
   
(1,804
)
Balance, September 30, 2009
 
$
10,413
 
Interest accrued for guaranteed 13.8% return
   
1,449
 
Amortization of beneficial conversion feature
   
27
 
Adjustment-interest paid
   
1,376
 
Cumulative change in accounting for conversion feature
   
(1,730
)
Amortization of original discount
   
1,791
 
Interest paid
   
(425
)
Balance, June 30, 2010
 
$
12,901
 

18. Long-term bank loan

The following table summarizes the contractual long-term borrowings by the Company from various banks as of June 30, 2010 (dollars in thousands):

Bank Name
 
Purpose
 
Borrowing Date
 
Borrowing Term
 
Annual Interest Rate
   
Amount
 
Bank of Communication
 
Construction Capital
 
June 27, 2008
 
Three years
   
8.316
%
 
$
4,418
 
China Construction Bank
 
Construction Capital
 
August 28, 2009
 
Five years
   
5.76
%
   
22,088
 
Rural Commercial Bank
 
Construction Capital
 
January 20, 2010
 
Three years
   
6.00
%
   
2,651
 
Rural Commercial Bank
 
Construction Capital
 
March 11, 2010
 
Three years
   
6.00
%
   
9,130
 
Total
                     
$
38,287
 

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

Bank Name
 
Purpose
 
Borrowing Date
 
Borrowing Term
 
Annual Interest Rate
   
Amount
 
Bank of Communication
 
Construction Capital
 
June 27, 2008
 
Three years
   
8.316
%
 
$
4,393
 
China Construction Bank
 
Construction Capital
 
August 28, 2009
 
Five years
   
5.76
%
   
21,965
 
Total
                     
$
26,358
 
 
19. Merger Agreement with SNEN Acquisition Corp.

On October 12, 2009, the Company entered into an agreement and plan of merger with Skywide Capital Management Limited (“Skywide”), a corporation which is wholly owned by the Company’s chairman and chief executive officer, both of whom are also directors. This agreement was amended and restated on March 29, 2010.  Pursuant to the agreement, as amended and restated, the Company will be merged with SNEN Acquisition Corp., a wholly-owned subsidiary of Skywide, with Skywide becoming the Company’s sole shareholder, and each share of common stock of the Company (other than shares owned by the Company, Skywide or the two shareholders of Skywide), will be converted into the right to receive, upon presentation of the certificates for their common stock, the sum of $1.90.  The merger is subject to shareholder approval.

20. Related Party Relationships and Transactions
 
The related parties with which the Company had transactions in the nine months ended June 30, 2010 and 2009, are as follows:
 
Name of related party
 
Relationship
Anhui Gather
 
Joint venture entity with China New Energy in which the Company has a 20% interest
China New Energy
 
80% shareholder of Anhui Gather and 20% shareholder of Hubei Gather
Beijing Shanglira Capital Co, Ltd.
 
Controlled by Mr Tianzhou Deng and Mr Bo Huang
Skywide
 
Owned by Mr Tianzhou Deng and Mr Bo Huang
 
 
(1) Related party receivables (dollars in thousands)


Name of the Company
 
June, 2010
 
September 30, 2009
China New Energy
 
-None
 
$382 (current accounts)
         
Anhui Gather
 
-None
 
$44 (current accounts)

(2) Related party payables (dollars in thousands)

Name of the Company
 
June, 2010
 
September 30, 2009
Beijing Shanglira Capital Co, Ltd.
 
-$22,830 (current accounts)
 
-None
         
Skywide
 
-$7,580 (current accounts)
 
-None

In October 2009, Beijing Shanglira Capital Co., Ltd. advanced the Company $17,213,000, and in December 2009, Skywide advanced the Company $3 million. The loans are unsecured and are payable on demand.  The proceeds of the loans were used primarily to reimburse the Company for paying the Abax/CCIF senior debt during the quarter ended December 31, 2009. In May 2010, Beijing Shanglira Capital Co., Ltd. advanced the Company $5,527,000 for the current accounts purpose, and the loans are unsecured and are payable on demand.
 
(3) Related party transactions:

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

On November 23, 2009, the Company signed an agreement with China New Energy pursuant to which China New Energy will transfer a 30% interest Anhui Gather to the Company for $1.5 million. In June 2010, the Company paid the contribution to Anhui Gather for the 30% interest.

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

See Note 19 in connection with the proposed merger between the Company and a wholly-owned subsidiary of Skywide.

21. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance.
 
As all businesses of the Company are carried out in the PRC, the Company is deemed to operate in one geographical area.
 
The segment information set forth below has been derived from our unaudited financial statements for the three and six months ended June 30, 2010 and 2009.

 
 
Three Months Ended June 30, 2010
(dollars in thousands)
　
Customized
pressure
containers
　
 
CNG station
facilities and construction
　
 
 
CNG station
Operation
　
 
Vehicle
conversion
kits
　
 
 
 
Total
 
Net sales
　
$
2,071
　
 
$
5,935
　
 
$ 　
5,795
　
 
$
2,560
　
 
$
16,361
 
Cost of sales
　
　
1,801
　
 
　
4,020
　
 
　
4,643
　
 
　
1,922
　
 
　
12,386
 
Gross profit
　
　
270
　
 
　
1,915
　
 
　
1,152
　
 
　
638
　
 
　
3,975
 
Gross margin
　
　
13
% 　
 
　
32
% 　
 
　
20
% 　
 
　
25
% 　
 
　
24
% 
Operating expenses:
　
　
 
　
 
　
 
　
 
　
 
　
 
　
 
　
 
　
   
Selling expenses
　
 
63
　
   
61
　
   
202
　
   
152
　
   
478
 
General and administrative expenses
　
　
532
　
 
　
588
　
 
　
425
　
 
　
193
　
 
　
1,738
 
Total operating expense
　
　
595
　
 
　
649
　
 
　
627
　
 
　
345
　
 
　
2,216
 
Income (loss) from operations
　
$
(325
) 　
 
$
1,266
　
 
$ 　
525
　
 
$
293
　
 
$
1,759
 
                                         
Total assets
 
$
75,652
   
$
57,301
   
$
61,723
   
$
15,084
   
$
209,760
 
 
 
  Three Months Ended June 30, 2009
(dollars in thousands)
　
Customized
pressure
containers
　
 
CNG station
facilities and construction
　
   
  CNG station
operation
　
 
Vehicle
conversion
kits
　
 
Total
 
Net sales
　
$
413
　
 
$
761
　
   
$ 　
4,867
　
 
$
1,669
　
 
$
7,710
 
Cost of sales
　
　
324
　
 
　
492
　
   
　
4,258
　
 
　
1,166
　
 
　
6,240
 
Gross profit
　
　
89
　
 
　
269
　
   
　
609
　
 
　
503
　
 
　
1,470
 
Gross margin
　
　
21
% 　
 
　
35
% 　
   
　
13
% 　
 
　
30
% 　
 
　
19
% 
Operating expenses:
　
　
 
　
 
　
 
　
   
　
 
　
 
　
 
　
 
　
   
Selling expenses
　
 
20
　
   
17
　
     
211
　
   
146
　
   
394
 
General and administrative
　
　
246
　
 
　
698
　
   
　
338
　
 
　
179
　
 
　
1,461
 
Total operating expense
　
　
266
　
 
　
715
　
   
　
549
　
 
　
325
　
 
　
1,855
 
(Loss) income from operations
　
$
(177
)
 
$
(446
) 　
   
$ 　
60
   
$
178
　
 
$
(385
)

 
 
Nine Months Ended June 30, 2010
(dollars in thousands)
　
Customized
pressure
containers
　
 
CNG station
facilities and construction
　
 
 
CNG station
Operation
　
 
Vehicle
conversion
kits
　
 
 
 
Total
 
Net sales
　
$
5,574
　
 
$
10,616
　
 
$ 　
14,643
　
 
$
7,063
　
 
$
37,896
 
Cost of sales
　
　
5,019
　
 
　
7,480
　
 
　
12,833
　
 
　
5,275
　
 
　
30,607
 
Gross profit
　
　
555
　
 
　
3,136
　
 
　
1,810
　
 
　
1,788
　
 
　
7,289
 
Gross margin
　
　
10
% 　
 
　
30
% 　
 
　
12
% 　
 
　
25
% 　
 
　
19
% 
Operating expenses:
　
　
 
　
 
　
 
　
 
　
 
　
 
　
 
　
 
　
   
Selling expenses
　
 
116
　
   
134
　
   
517
　
   
535
　
   
1,302
 
General and administrative expenses
　
　
1,680
　
 
　
2,389
　
 
　
1,344
　
 
　
799
　
 
　
6,212
 
Total operating expense
　
　
1,796
　
 
　
2,523
　
 
　
1,861
　
 
　
1,334
　
 
　
7,514
 
Income (loss) from operations
　
$
(1,241
) 　
 
$
613
　
 
$ 　
(51
) 　
 
$
454
　
 
$
(225
) 
 
 
Nine Months Ended June 30, 2009
(dollars in thousands)
　
Customized
pressure
containers
　
CNG station
facilities and construction
　
 
CNG station
operation
　
Vehicle
conversion
kits
　
 
 
Total
Net sales
　
$
4,234
　
$
8,211
　
$ 　
13,650
　
$
4,514
　
$
30,609
Cost of sales
　
　
3,097
　
　
4,958
　
　
11,681
　
　
3,125
　
　
22,861
Gross profit
　
　
1,137
　
　
3,253
　
　
1,969
　
　
1,389
　
　
7,748
Gross margin
　
　
27
% 　
　
40
% 　
　
14
% 　
　
31
% 　
　
25
Operating expenses:
　
　
 
　
　
 
　
　
 
　
　
 
　
　
 
Selling expenses
　
 
118
　
 
49
　
 
467
　
 
348
　
 
982
General and administrative expenses
　
　
834
　
　
3,576
　
　
1,179
　
　
611
　
　
6,200
Total operating expense
　
　
952
　
　
3,625
　
　
1,646
　
　
959
　
　
7,182
Income (loss) from operations
　
$
185
　
$
(372
) 　
$ 　
323
　
$
430
　
$
566

22. Capital Stock

As of June 30, 2010, the Company had the following shares of common stock reserved for issuance:
 
 
●
555,359 shares issuable upon exercise of warrants;
     
 
●
3,333,334 shares issuable upon conversion of 3% senior convertible notes;
 
 
 
●
1,000,000 shares issuable upon exercise of stock options or other equity-based incentives pursuant to the Company’s 2006 long-term incentive plan, of which options to purchase 790,000 shares were outstanding.
 
   
Number of shares issuable on exercise of warrants
 
　
　
$1.70 Warrants
　
 
$2.40 Warrants
　
 
$4.20 Warrants
　
 
$8.00 Warrants
　
 
Total
 
   
　
   
　
   
　
   
　
   
　
 
Balance at September 30, 2009
　
　
85,715
　
 
　
369,644
　
 
　
75,000
　
 
　
25,000
　
 
　
555,359
 
Issued during the period
　
　
-
　
 
　
-
　
 
　
-
　
 
　
-
　
 
　
-
 
Exercised during the period
　
　
-
     
-
     
-
     
-
     
-
 
Balance at June 30, 2010
　
　
85,715
　
 
　
369,644
　
 
　
75,000
　
 
　
25,000
　
 
　
555,359
 
 
As at June 30, 2010, the weighted average exercise price for all warrants is $2.79. None of the outstanding warrants is subject to reset provisions other than as a result of a stock distribution, split or dividend, a reverse split or combination of shares or other recapitalization, and, in the case of the warrants to purchase 455,360 shares of common stock issued in the June 2006 private placement, sales of common stock at prices below the exercise price.
 
Stock options

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

Pursuant to the 2006 long-term incentive plan, each independent director is to be granted an option to purchase 2,500 shares of common stock on the first trading day in April of each calendar year at market price. On April 1, 2007, the four independent directors were granted stock options to purchase a total of 10,000 shares of common stock at an exercise price of $4.06 per share, being the fair market value on the date of grant.  On April 1, 2008, the four independent directors were granted stock options to purchase a total of 10,000 shares of common stock at an exercise price of $5.80 per share, being the fair market value on the date of grant. On April 1, 2009, the four independent directors were granted stock options to purchase a total of 20,000 shares of common stock at an exercise price of $1.32 per share, being the fair market value on the date of grant.  On April 1, 2010, the four independent directors were granted stock options to purchase a total of 20,000 shares of common stock at an exercise price of $1.61 per share, being the fair market value on the date of grant. All of the options granted to the independent directors become exercisable cumulatively as to 50% of the shares subject thereto six months from the date of grant and as to the remaining 50%, eighteen months from the date of grant, and expire on the earlier of (i) five years from the date of grant, or (ii) seven months from the date such independent director ceases to be a director if such independent director ceases to be a director other than as a result of his death or disability. 

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

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

On March 10, 2008, pursuant to 2006 long-term incentive plan, the stock option committee of the board of directors granted five year options to its senior managers and key management to acquire 40,000 shares of common stock at $6.20 per share, being the fair market value on the date of grant. The options vest as to 42% of the underlying shares of common stock on December 31, 2008, 50% on December 31, 2009 and as to the remaining 8% on March 9, 2010.
 
On June 1, 2008, pursuant to 2006 long-term incentive plan, the stock option committee of the board of directors granted five year options to the former chief financial officer to acquire 75,000 shares of common stock at $5.72 per share, being the fair market value on the date of grant. On October 18, 2008, the chief financial officer resigned from the Company and the options were forfeited.
 
   
Shares subject
to options
   
Weighted 
Average exercise
price scope
   
Remaining Contractual
 life(years)
 
Options outstanding at September 30, 2009
   
790,000 
   
 $
1.32-8.20 
     
4.17 
 
Options granted during the period
   
20,000
     
1.61
     
3.0
 
Options exercised during the period
   
-
     
-
     
-
 
Options forfeited during the period
   
-
     
-
     
-
 
Options outstanding at June 30, 2010
   
810,000  
     
1.32-8.20 
     
3.42
 
Options exercisable at June 30, 2010
   
711,800
   
$
3.3
     
3.51
 
 
 
The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model utilizing the assumptions shown in the following table:  
 
Grant Date
 
1-Apr-10
   
1-Apr-09
   
1-Jun-08
   
10-Mar-08
   
9-Jan, 08
   
9-Apr-07
   
1-Apr-07
   
2-Jun-06
 
   
　
   
　
   
　
   
　
   
　
   
　
   
　
   
　
 
Expected volatility
　
 
46.1
%
   
46.1
%
   
46.1
%
   
68.32
%
   
80.06
%
   
26.39
%
   
35.16
%
   
50
%
Risk-free rate
　
 
2.93
%
   
2.93
%
   
2.93
%
   
4.64
%
   
4.64
%
   
4.64
%
   
4.64
%
   
4.64
%
Expected term (years)
　
 
5
     
5
     
3
     
5
     
5
     
5
     
5
     
3
 
Dividend yield
　
 
0
%
   
0
%
   
0
%
   
0
%
   
0
%
   
0
%
   
0
%
   
0
%
Fair value per share
　
$
0.71
　
 
$
0.58
   
$
1.94
   
$
3.56
   
$
5.16
   
$
1.24
   
$
1.2
   
$
0.5
 
 
The share-based compensation expense during the three and nine months ended June 30, 2010 was $3,000 and $83,000 respectively, which was charged to operations as general and administrative expense.
 
23.  Basic and Diluted Earnings Per Share

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

The details for the fully diluted outstanding shares for the nine months ended June 30, 2010 and 2009 are as follows:
 
   
Nine months ended June 30, 2010
   
Nine months ended March 31, 2009
 
Weighted average common stock outstanding during period
    15,922,391       15,942,336  
Common stock issuable pursuant to warrants
 
Anti-dilutive
      -  
Common stock issuable upon conversion of 3% convertible notes
 
Anti-dilutive
      -  
Common stock issuable upon exercise of options outstanding during the period
 
Anti-dilutive
      -  
Total diluted outstanding shares
    15,922,391       15,942,336  
 
Because the Company sustained a loss for the nine months ended June 30, 2010, the shares issuable upon exercise of options and warrants and upon conversion of convertible notes would be anti-dilutive.
 
24. Commitments and Contingencies
 
Litigation

Four class action lawsuits against the Company and its directors have been dismissed pursuant to a settlement agreement among the parties.  The Company has no further liability with respect to any of these actions.


Contractual Obligations
 
The Company has the following material contractual obligations and capital expenditure commitments:
 
 
Wuhan Sinoenergy and Pingdingshan Sinoenergy, subsidiaries of the Company, have leased 13 parcels of land in Wuhan City and Pingdingshan City for their CNG stations under operating lease agreements. The lease terms are from 7 year to 30 years with annual rental fees of approximately $846,000.  Based on land rental agreements in effect at June 30, 2010, the Company will pay a total of $5.73 million through 2039.
 
Wuhan Sinoenergy has two agreements to purchase land use rights in Wuhan City from different non-affiliated parties. One agreement provides for a purchase price of approximately $1.58 million, of which approximately $1.32 million has been paid, and the title transfer is in the process. The second provides for a purchase price of approximately $1.32 million, of which approximately $732,000 has been paid. The acquisition of the land requires government approval.  See Note 10.

The Company’s commitment for the construction of CNG stations, including stations being constructed by Wuhan Sinoenergy and Hubei Gather, was $762,000 as of March 31, 2010.
 
The Company’s commitment for the construction of a new plant for Jiaxing Lixun was $94,000 as of June 30, 2010.
 
The Company’s commitment for the purchase of property, plant and equipment, including property for Wuhan Sinoenergy and Hubei Gather, was $5,825,000 as of June 30, 2010.
 
25. Retirement Benefits
 
The full-time contracted employees of the Company are entitled to welfare benefits, including medical care, labor injury insurance, housing benefits, education benefits, unemployment insurance and pension benefits through a Chinese government-mandated multi-employer defined contribution plan.  The total provision for such employee benefits was $95,199 and $51,243 for the three months ended June 30, 2010 and 2009, respectively, and $299,219 and $254,976 for the nine months ended June 30, 2010 and 2009, respectively, and was recorded as other payables. The PRC government is responsible for the staff welfare benefits including medical care, casualty, housing benefits, unemployment insurance and pension benefits to be paid to these employees. The Company is responsible for the education benefits to be paid.

From time to time, the Company may hire some part time workers or short term workers to satisfy the peak season labor requirement. Those workers have the right to terminate their work for the Company at any time. For those part time non-contracted workers, it is difficult for the Company to accurately record the working time, total wages and then accrue welfare benefits. Based on the common practice in the PRC, the Company treats those workers as probationary employees, and does not accrue welfare benefits for them. Although the Company believes that it is treating these employees in accordance with applicable law, it is possible that the government may require the Company to accrue the welfare benefit and may assess a penalty for the underaccrual.

26.  Significant Concentrations
 
In the CNG station facilities and construction segment, the Company manufactures, sells and installs CNG vehicle and gas station equipment. The Company provides products for third party companies that operate fixed and/or mobile CNG filling stations and it designs the CNG station construction plans, constructs CNG stations, and installs CNG station equipment and related systems.

These products and services are designed to meet the customer specifications.  Sales in this segment are dependent upon the Company developing a continuing stream of business so that it does not incur a significant lag between the time the Company completes one contract and starts another.  Although the Company does not have a long history of operations in this business, the Company anticipates that its major customers will vary from period to period.  

In the three months ended June 30, 2010, one customer of the station facilities and construction segment accounted for 32.7% of total sales and at June 30, 2010, approximately 61.3% of accounts receivable were from this customer.

In the three months ended June 30, 2009, one customer of the station facilities and construction segment accounted for 24.6% of our total sales and at June 30, 2009, approximately 53.2% of accounts receivable was from this customer. The following table sets forth information as to the sales generated from these customers for the three months ended June 30, 2010 and 2009 (dollars in thousands):

Name
 
Three Months Ended
June 30, 2010
   
Thee Months Ended
June 30, 2009
 
   
Dollars
   
Percent
   
Dollars
   
Percent
 
Wuhan Lvneng Gas Transportation Co.,
 
$
5,357
     
32.7
%
 
 $
1,645
     
24.6
%
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this report, including the risks described under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended September 30, 2009 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q as well as any other filings we make with the SEC. In addition, such statements could be affected by risks and uncertainties related to the ability to conduct business in the PRC, product demand, including our ability to continue to be in compliance with the financial covenants under the indentures relating to our senior debt, our working capital deficiency, our ability to collect outstanding accounts receivable, the demand for CNG and our conversion kits, the prices at which we purchase and sell CNG at our stations, our ability to develop, construct and operate a CNG station business, our ability to raise any financing which we may require for our operations, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions as well as economic conditions that affect the natural gas industry. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this report is filed, and we do not intend to update any of the forward-looking statements after the date this report is filed to conform these statements to actual results, unless required by law.
 
OVERVIEW

We design, manufacture and market a range of pressurized containers for CNG. Although our initial business involved the manufacturing of customized equipment and pressure containers, our business has evolved as an increasing market is developing in the PRC for the use of CNG. Our CNG vehicle and gas station construction business consists of two divisions (i) the manufacturing of CNG vehicle and gas station equipment, and (ii) the design of construction plans for CNG stations, the construction of the CNG stations, and the installation of CNG station equipment and related systems. 
 
We continue to manufacture a wide variety of pressure containers for use in different industries, including the design and manufacture of various types of pressure containers in the petroleum and chemical industries, the metallurgy and electricity generation industries and the food and brewery industries and have the capacity to design and manufacture various types of customized equipment.
 
All of our products and services are manufactured or performed pursuant to agreements with our customers, which provide the specifications for the products and services. As a result, our revenue is dependent upon the flow of contracts. In any fiscal period, a small number of customers may represent a disproportionately large percentage of our business in one period and a significantly lower percentage, if any, in a subsequent period.

Commencing in 2006, we began to construct CNG stations and, commencing in 2008 we began to operate CNG stations. This aspect of our business is different from our other business. The business of operating CNG stations requires a substantial capital investment.  For this purpose, we raised approximately $30 million from the sale of our convertible and fixed rate notes in September 2007. The indentures relating to these notes have restrictions on our incurring additional debt. The nature of the operation of the business and the risks associated with that business are significantly different from the manufacturing of equipment or the construction of CNG stations for third parties. One aspect of the operation of CNG stations is the price controls, whereby both the price at which we purchase CNG and the price at which we sell CNG are subject to price controls by central government and municipal government. As a result of these price controls, our gross margin is effectively dependent upon the government’s pricing policies. For the nine months ended June 30, 2010, our gross margin from this segment was 12%, as compared with 14% in the comparable quarter of the prior year.  The operation of CNG stations is reported as a separate segment.
 
In early 2007, we established a division to manufacture and sell CNG vehicle conversion kits to OEM and for sale in the aftermarket. These kits are designed to enable a gasoline powered vehicle to operate on CNG. We began to generate revenue from
 

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

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

·  
the manufacture of equipment for CNG vehicles and gas stations, and
 
·  
the design of CNG station and construction plans, construction of CNG stations and installation of CNG station equipment and related systems.
 
Our original business was the manufacture and sale of nonstandard equipment and pressure containers operated by our subsidiary, Qingdao Sinogas Yuhan Chemical Equipment Co., Ltd. (“Yuhan”), which is owned 75% by Sinogas and a 25% ownership by Sinoenergy Holdings, a wholly-owned subsidiary.

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

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

The growth of the Chinese economy has been uneven across geographic regions and economic sectors. Following a period of general economic growth, China, like the rest of the world, has recently been subject to an economic downturn.  Although the Chinese economy is showing signs of growth, we cannot assure you that any economic growth will benefit our businesses. Our customized pressure container business and our CNG station facilities and construction business are dependent upon our customers making significant capital purchases, either for pressure containers or for new CNG stations.  The availability of financing to our customers as well as the capital requirements of our customers could significantly reduce the need for these products and services.  Since our CNG station business is dependent upon the development of a market for cars and trucks that run on CNG rather than gasoline, any economic trends which have the effect of dampening the market for CNG vehicles could affect our ability both to sell our CNG products and to sell CNG at our proposed CNG stations. The recent sharp decline in oil and gasoline prices may affect the need for both CNG stations and conversion kits that enable gasoline-powered vehicles to operate on CNG.  Although the government of China has encouraged the use of CNG as part of its effort to reduce pollution in China, the factors described above may affect the development of the CNG industry in China.  We cannot predict whether or how these factors will affect the market for CNG in the areas in which we are constructing our CNG filling stations or the market for our conversion kits. However, these factors were a significant reason for our reduced gross margin in the segments related to CNG and our net loss for the three and nine months ended June 30, 2010.
 
We purchase CNG from government controlled entities.  During 2007, we entered into two joint ventures for the operation of natural gas process plants. We have an 80% interest in one of these ventures and a 20% interest in the other. These two facilities are in the early construction stage, and neither of these ventures has commenced operations. We also have contracted for the purchase of natural gas which is to be delivered through a pipeline.  The pipeline was completed in December 2009, and is undergoing completion testing prior to being placed in commercial operation.  These contracts do not have specific delivery quantities or prices, all of which are to be determined later.

In September 2007, we issued our 12% senior notes due 2012 in the principal amount of $16,000,000, which were paid in December 2009, and our 3.0% senior convertible notes due 2012 in the principal amount of $14,000,000.  The indentures relating to the convertible notes included financial covenants, which were amended on May 19, 2009.  We were not in compliance with these covenants at September 30, 2009 or December 30, 2009, and the note holders waived compliance with the covenants at both of these dates.  In October and December 2009 and August 2010, we entered into agreements with the holders of the 3% convertible notes.  Pursuant to these agreements, (i) we agreed to pay the $14,000,000 convertible notes, including interest to provide the holders with a 13.8% yield to maturity, after giving effect to current interest payments made at the annual rate of 3.0% per annum, would be paid in two installments following completion of the merger with SNEN Acquisition Corp, with the first payment of $5,000,000 being due ten days after the effectiveness of the merger and the balance 30 days thereafter, (ii) the requirement that we meet certain net income levels for 2008 and 2009 were eliminated, (iii) the provisions that would have resulted in a reduction in the conversion price of the convertible notes if we sold common stock or securities convertible into common stock were eliminated, (v) the liquidated damages due for failing to register the shares of common stock issuable upon conversion of the notes was reduced to $280,000, which was due by December 31, 2009, and was paid on January 7, 2010, with the consent of the noteholders, and (vi) the noteholders agreed to not to take any action to cause or declare an event of default as a result of our failure to be in compliance with the stated financial ratios through September 30, 2010.    As a result of our agreement to pay the convertible notes upon completion of the merger with SNEN Acquisition Corp., we have classified the principal and the deferred interest as current at September 30, 2009 and June 30, 2010.
 

 
Our accounts receivable increased from $29.8 million at September 30, 2009 to $33.8 million at June 30, 2010.  At September 30, 2009, our accounts receivable were outstanding for an average of 225 days.  At June 30, 2010, our accounts receivable were outstanding for an average of 229 days.  At June 30, 2010, we had a note receivable of $2.0 million resulting from the termination of a sublease for which no payments had been made by the tenant.  Our failure to collect our receivables in the normal course of business could impair our ability to continue in business.

RESULTS OF OPERATIONS

We are engaged in four business segments:

(i) Customized pressure container business

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

Our CNG station construction business represents:
 
  ●
The manufacture and installation of CNG vehicle and gas station equipment that is used in the transportation and storage of CNG and the operation of a CNG station. We provide these services for other companies that operate CNG stations.
 
  ●
CNG station construction service, which includes the design of CNG station construction plans, construction of CNG stations, and installation of CNG station equipment and related systems. Because of our emergence into the CNG filling station business in 2006, we did not receive any CNG station construction service orders from the beginning of 2007. Our operating results in this segment reflects contracts which we entered into during or prior to the beginning of 2007. We anticipate that, at least in the near term, we will devote most, if not all, of our CNG construction business to the construction of our own CNG filling stations.

(iii) CNG station operations
 
In 2006, we entered the CNG station business, which involves the design, construction and equipping of CNG stations and the operation of those stations.  As of August 10, 2010, we were operating twenty-one CNG stations, of which sixteen are located in Wuhan, two in Pingdingshan and three in Xuancheng.  An additional four stations in Wuhan are in the final stages of construction, and four   stations in Wuhan   were in the preliminary planning stage.
 
(iv) Vehicle fuel conversion equipment
 
We manufacture conversion kits and electrical control devices that enable vehicles that are designed to operate on gasoline to operate on CNG.

Three Months Ended June 30, 2010 and 2009

The information set forth below represents segment information for the three months ended June 30, 2010 and 2009.
 
 
 
Three Months Ended June 30, 2010
(dollars in thousands)
　
Customized
pressure
containers
　
 
CNG station
facilities and construction
　
 
 
CNG station
Operation
　
 
Vehicle
conversion
kits
　
 
 
 
Total
 
Net sales
　
$
2,071
　
 
$
5,935
　
 
$ 　
5,795
　
 
$
2,560
　
 
$
16,361
 
Cost of sales
　
　
1,801
　
 
　
4,020
　
 
　
4,643
　
 
　
1,922
　
 
　
12,386
 
Gross profit
　
　
270
　
 
　
1,915
　
 
　
1,152
　
 
　
638
　
 
　
3,975
 
Gross margin
　
　
13
% 　
 
　
32
% 　
 
　
20
% 　
 
　
25
% 　
 
　
24
% 
Operating expenses:
　
　
 
　
 
　
 
　
 
　
 
　
 
　
 
　
 
　
   
Selling expenses
　
 
63
　
   
61
　
   
202
　
   
152
　
   
478
 
General and administrative expenses
　
　
532
　
 
　
588
　
 
　
425
　
 
　
193
　
 
　
1,738
 
Total operating expense
　
　
595
　
 
　
649
　
 
　
627
　
 
　
345
　
 
　
2,216
 
Loss from operations
　
$
(325
) 　
 
$
1,266
　
 
$ 　
525
　
 
$
293
　
 
$
1,759
 
                                         
Total assets
 
$
75,652
   
$
57,301
   
$
61,723
   
$
15,084
   
$
209,760
 

  Three Months Ended June 30, 2009
(dollars in thousands)
　
Customized
pressure
containers
　
 
CNG station
facilities and construction
　
   
  CNG station
operation
　
 
Vehicle
conversion
kits
　
 
Total
 
Net sales
　
$
413
　
 
$
761
　
   
$ 　
4,867
　
 
$
1,669
　
 
$
7,710
 
Cost of sales
　
　
324
　
 
　
492
　
   
　
4,258
　
 
　
1,166
　
 
　
6,240
 
Gross profit
　
　
89
　
 
　
269
　
   
　
609
　
 
　
503
　
 
　
1,470
 
Gross margin
　
　
21
% 　
 
　
35
% 　
   
　
13
% 　
 
　
30
% 　
 
　
19
% 
Operating expenses:
　
　
 
　
 
　
 
　
   
　
 
　
 
　
 
　
 
　
   
Selling expenses
　
 
20
　
   
17
　
     
211
　
   
146
　
   
394
 
General and administrative
　
　
246
　
 
　
698
　
   
　
338
　
 
　
179
　
 
　
1,461
 
Total operating expense
　
　
266
　
 
　
715
　
   
　
549
　
 
　
325
　
 
　
1,855
 
(Loss) income from operations
　
$
(177
)
 
$
(446
) 　
   
$ 　
60
   
$
178
　
 
$
(385
)

Net Sales. Net sales for the three months ended June 30, 2010 (“June 2010 quarter”) were approximately $16.4 million, an increase of approximately $8.7 million, or 113%, from sales of approximately $7.7 million for the three months ended June 30, 2009 (“June 2009 quarter”).  This increase resulted from the segment of customized pressure containers, namely, an increase of approximately $1.7 million, or 401%, in sales from the customized pressure containers, and an increase of approximately $5.2 million, or 680%, for CNG station facilities and construction. Revenue from CNG station operations remained relatively constant.
 
Cost of Sales; Gross Margin. The cost of sales for the June 2010 quarter was approximately $12.4 million, an increase of approximately 100% from approximately $6.2 million for the June 2009 quarter. Our overall gross margin increased from 19% to 24% from the June 2009 quarter to the June 2010 quarter for the following reasons:
 
 
●
Our gross margin for the customized pressure containers decreased from 21% to 13%. Since these products are customized, there is a wide range for our gross margin because of the variety of the products. We had to reduce our prices to meet competition during a period of general economic downturn without a reduction in our cost.  As a result we sustained a significantly lower gross margin in this segment.
     
 
●
Our gross margin for the CNG station facilities and construction remained relatively constant.
     
 
●
Our gross margin for the operation of our CNG stations increased from 13% to 20%. The freight costs (the transmission of the CNG to our stations), which are included in cost of sales, decreased approximately 10%, which significantly affected the gross margin in this segment. The gross margin for this segment reflects the effects of price controls, which cover both the price at which we buy and the price at which we sell CNG.
     
 
●
Our gross margin for the vehicle conversion kits decreased from 30% to 25% because of the market competition.
 
Selling Expenses .    Selling expenses increased approximately $84,000, from the June 2009 quarter to the June 2010 quarter. Our selling expenses include land rental for the CNG stations, and reflects land rented for this segment which increased significantly as we added more leases when we increased the number of stations we operate.   In addition, selling expenses for the vehicle conversion kits segment increased along with sales in this segment.
 
General and Administrative Expenses .    General and administrative expenses decreased approximately $300,000, or 21%.  Our general and administrative expenses include, in addition to the management expenses and depreciation related to the division, an allocation of corporate expenses, including expenses   relating to our status as a public company, such as legal and audit costs.  Management overhead was allocated among the segments based on the relative time devoted by management to the business of the segments. For the June 2010 quarter, the Company incurred expenses of $388,000 related to the proposed merger.
 
 
Interest Expense .    Interest expense for the June 2010 quarter was approximately $1.2 million, as compared with $1.5 million for the June 2009 quarter. Because of the repayment of the $16 million notes in December 2009 quarter, the interest decreased accordingly.

Other Income and Other Expenses .    On February 9, 2010, Sinogas signed a supplemental agreement, modifying an agreement dated July 29, 2009 with  Qingdao City Land Reserve Center for the transfer of the certain land use rights in Qingdao City to the Land Reserve Center for a purchase price of RMB 112,222,883, which has a value of approximately $16.4 million, using a current conversion rate.  These land rights related to the real estate where Sinogas’ former manufacturing facilities were located.  The purchase price has been paid by the Land Reserve Center.  The Company has the obligation to remove the buildings and other constructions on the land and pay the applicable tax and record the transfer documents.  Upon completion of these steps, the land use rights will be transferred to the Land Reserve Center. Sinogas recognized $3.0 million income from the sales of land and its plant in June 30, 2010 quarter.

Income Taxes.   Our income taxes decreased from $431,000 of June 2009 quarter to $149,000 of June 2010 quarter.  Sinogas and Yuhan were granted 50% enterprise income tax exemption for 2008 through 2010. Lixun was granted a 100% tax exemption from August 2007 through December 2008 and a 50% enterprise income tax exemption for 2009 through 2011. In January 2009, the Chinese tax authorities issued a ruling that a joint venture enterprise incorporated after March 16, 2007 cannot enjoy the tax preferences. Since Lixun is a joint venture incorporated in July 2007, it cannot enjoy the tax preferences. Lixun was recognized as a high-tech enterprise, and its tax rate is 15% from January 2008.
 
Non-controlling Interest .    The minority interest, of $1,292,000 in June 2010 quarter and a $19,000 in June 2009 quarter, represents the share of the income of our majority-owned subsidiaries that is allocated to the subsidiaries’ minority equity owners. 

Net Income (loss) .    As a result of the foregoing, we had a net income of approximately $2.2 million, or $0.14 per share (basic and diluted), for June 2010 quarter, as compared with net loss of approximately $2.4 million, or $0.15 per share (basic and diluted) for the March 2009 quarter.
 
Comprehensive Income (Loss) .    Our comprehensive income for the June 2010 quarter was $403,000 million, as compared with comprehensive income of $35,000 for the June 2009 quarter. Other comprehensive income items include foreign currency translation adjustments resulting from changes in the currency rates between the RMB and the United States dollar, or approximately $403,000 in the three months ended June 30, 2010 and $35,000 in the nine months ended June 30, 2009.
 
Nine Months Ended June 30, 2010 and 2009

The information set forth below represents segment information for the nine months ended June 30, 2010 and 2009.

 
Nine Months Ended June 30, 2010
(dollars in thousands)
　
Customized
pressure
containers
　
 
CNG station
facilities and construction
　
 
 
CNG station
Operation
　
 
Vehicle
conversion
kits
　
 
 
 
Total
 
Net sales
　
$
5,574
　
 
$
10,616
　
 
$ 　
14,643
　
 
$
7,063
　
 
$
37,896
 
Cost of sales
　
　
5,019
　
 
　
7,480
　
 
　
12,833
　
 
　
5,275
　
 
　
30,607
 
Gross profit
　
　
555
　
 
　
3,136
　
 
　
1,810
　
 
　
1,788
　
 
　
7,289
 
Gross margin
　
　
10
% 　
 
　
30
% 　
 
　
12
% 　
 
　
25
% 　
 
　
19
% 
Operating expenses:
　
　
 
　
 
　
 
　
 
　
 
　
 
　
 
　
 
　
   
Selling expenses
　
 
116
　
   
134
　
   
517
　
   
535
　
   
1,302
 
General and administrative expenses
　
　
1,680
　
 
　
2,389
　
 
　
1,344
　
 
　
799
　
 
　
6,212
 
Total operating expense
　
　
1,796
　
 
　
2,523
　
 
　
1,861
　
 
　
1,334
　
 
　
7,514
 
Loss from operations
　
$
(1,241
) 　
 
$
613
　
 
$ 　
(51
) 　
 
$
454
　
 
$
(225
) 
 

  
Nine Months Ended June 30, 2009
(dollars in thousands)
　
Customized
pressure
containers
　
CNG station
facilities and construction
　
 
CNG station
operation
　
Vehicle
conversion
kits
　
 
 
Total
 
Net sales
　
$
4,234
　
$
8,211
　
$ 　
13,650
　
$
4,514
　
$
30,609
 
Cost of sales
　
　
3,097
　
　
4,958
　
　
11,681
　
　
3,125
　
　
22,861
 
Gross profit
　
　
1,137
　
　
3,253
　
　
1,969
　
　
1,389
　
　
7,748
 
Gross margin
　
　
27
% 　
　
40
% 　
　
14
% 　
　
31
% 　
　
25
% 
Operating expenses:
　
　
 
　
　
 
　
　
 
　
　
 
　
　
   
Selling expenses
　
 
118
　
 
49
　
 
467
　
 
348
　
 
982
 
General and administrative
　
　
834
　
　
3,576
　
　
1,179
　
　
611
　
　
6,200
 
Total operating expense
　
　
952
　
　
3,625
　
　
1,646
　
　
959
　
　
7,182
 
Income (loss) from operations
　
$
185
　
$
(372
) 　
$ 　
323
　
$
430
　
$
566
 

Net Sales. Net sales for the nine months ended June 30, 2010 were approximately $37.9 million, an increase of approximately $7.3 million, or 24%, from sales of approximately $30.6 million for the nine months ended June 30, 2009.    This increase resulted principally from an increase of approximately $2.5 million in sales from the vehicle conversion kits, an increase of approximately $2.4 million in sales from CNG station facilities and construction, and increase of approximately $1.3 million in sales from customized pressure containers.
 
Cost of Sales; Gross Margin. The cost of sales for the nine months ended June 30, 2010 was approximately $30.6 million, an increase of approximately 25% from approximately $22.9 million for the nine months ended June 30, 2009. Our overall gross margin decreased from 25% to 19% from the nine months ended June 30, 2010 to the nine months ended June 30, 2009 for the following reasons:
 
 
●
Our gross margin for the customized pressure containers decreased from 27% to 10%. Since these products are customized, there is a wide range for our gross margin because of the variety of the products. We had to reduce our prices to meet competition during a period of general economic downturn without a reduction in our cost.  As a result we sustained a significantly lower gross margin in this segment.
     
 
●
Our gross margin for the CNG station facilities and construction decreased from 40% to 30% because we had to reduce our prices to meet competition. Also, the Company began to design and sell other kinds of CNG station facilities with different gross margin with traditional CNG station facilities.
     
 
●
Our gross margin for the vehicle conversion kits decreased from 31% to 25% because of the market competition.
 
Selling Expenses .    Selling expenses increased approximately $320,000, from the nine months ended June 30, 2009 to the nine months ended June 30, 2010.    Our selling expenses include land rental for the CNG stations, and reflects land rented for this segment which increased significantly as we added more leases when we increased the number of stations we operate.   In addition, selling expenses for the vehicle conversion kits segment increased along with sales in this segment.

General and Administrative Expenses .    General and administrative expenses increased slightly. Our general and administrative expenses include, in addition to the management expenses and depreciation related to the division, an allocation of corporate expenses, including expenses   relating to our status as a public company, such as legal and audit costs.  Management overhead was allocated among the segments based on the relative time devoted by management to the business of the segments. For the June 2010 quarter, the Company incurred expenses of $757,000 related to the proposed merger.
 
Interest Expense .    Interest expense for the nine months ended June 30, 2010 was approximately $4.9 million, as compared with $3.8 million for the nine months ended June 30, 2009.   In the nine months ended June 30, 2010, we increased our bank borrowings to expand our CNG station operation and manufacturing plant, which also increased interest expense. In addition, amortization of original issuance discount from issuance of the convertible notes was $1.2 million in the nine months ended June 30, 2010.

Other Income and Other Expenses .    On February 9, 2010, Sinogas signed a supplemental agreement, modifying an agreement dated July 29, 2009 with  Qingdao City Land Reserve Center for the transfer of the certain land use rights in Qingdao City to the Land Reserve Center for a purchase price of RMB 112,222,883, which has a value of approximately $16.4 million, using a current conversion rate.  These land rights related to the real estate where Sinogas’ former manufacturing facilities were located.  The purchase price has been paid by the Land Reserve Center.  The Company has the obligation to remove the buildings and other constructions on the land and pay the applicable tax and record the transfer documents.  Upon completion of these steps, the land use rights will be transferred to the Land Reserve Center. Sinogas recognized $3.0 million income from the sales of land and its plant in the nine months ended June 30, 2010. During the nine months ended June 30, 2009, we recognized rental income of approximately $1.3 million for the rental of the land use rights for Singas’s former manufacturing facility.  The receivable for relating to this rental remained outstanding at June 30, 2010.

 
Change in Fair Value of Derivative Liability .    At September 30, 2009, our 3% convertible notes included a provision pursuant to which the conversion price of the notes can be reduced as a result of our sales of stock at a price below the conversion price or by our failure to meet certain net income levels.  In addition, the conversion price is reflected in terms of U.S. dollars, which is our reporting currency, and not RMB, which is our operating currency.  Effective October 1, 2009, we are required to change the conversion feature classification from equity based to a derivative liability. The cumulative change to this new accounting has been reflected on October 1 as an adjustment to additional paid in capital and retained earnings. For the nine months ended June 30, 2010 we incurred a gain of $287,517, reflecting the change in the value of the derivative liability from September 30, 2009 to June 30, 2010. This gain is a non-cash gain that did not affect our operations, and there was no comparable charge for the nine months ended June 30, 2009.
 
Income Taxes.   Our income taxes decreased from $1,045,000 of the nine months ended June 30, 2009 to $372,000 of the nine months ended June 30, 2010.  Sinogas and Yuhan were granted 50% enterprise income tax exemption for 2008 through 2010. Lixun was granted a 100% tax exemption from August 2007 through December 2008 and a 50% enterprise income tax exemption for 2009 through 2011. In January 2009, the Chinese tax authorities issued a ruling that a joint venture enterprise incorporated after March 16, 2007 cannot enjoy the tax preferences. Since Lixun is a joint venture incorporated in July 2007, it cannot enjoy the tax preferences. Lixun was recognized as a high-tech enterprise, and its tax rate is 15% from January 2008.

Non-controlling Interest .    The minority interest, of $1,688,000 in the nine months ended June 30, 2010 and $507,000 in the nine months ended June 30, 2009, represents the share of the income of our majority-owned subsidiaries that is allocated to the subsidiaries’ minority equity owners. 

Net Income (loss) .    As a result of the foregoing, we had a net loss of approximately $4,040,000, or $0.21 per share (basic and diluted), for the nine months ended June 30, 2010, as compared with net loss of approximately $3,587,000, or $0.22 per share (basic and diluted) for the nine months ended June 30, 2009.
 
Comprehensive Income (Loss) .    Our comprehensive loss for the nine months ended June 30, 2010 was $3,472,000 as compared with comprehensive loss of $3,089,000 for the nine months ended June 30, 2009. Other comprehensive income items include foreign currency translation adjustments resulting from changes in the currency rates between the RMB and the United States dollar, or approximately $568,000 in the nine months ended June 30, 2010 and $498,000 in the nine months ended June 30, 2009.

Liquidity and Capital Resources

At June 30, 2010, we had cash of approximately $23.9 million, an increase of approximately $5.7 million (excluding restricted cash of $277,000 at June 30, 2010 and $1.4 million at September 30, 2009), from September 30, 2009. At June 30, 2010, we had a working capital deficiency of approximately $8.1 million and shareholders’ equity of approximately $41.8 million, compared with working capital deficiency of approximately $9.1 million and shareholders’ equity of approximately $46.2 million at September 30, 2009. The following table sets forth information as to the principal changes in the components of our working capital (dollars in thousands):

 
Category  
30-Jun-10
    30-Sep-09    
Change
   
Percent Change
 
ASSETS                        
CURRENT ASSETS
                       
Cash
  $ 23,887     $ 18,237       5,650       31.0 %
Restricted cash
    277       1,413       (1,136 )     -80.4 %
Accounts and notes receivable, net
    33,813       29,756       4,057       13.6 %
Inventories
    7,532       4,619       2,913       63.1 %
Other receivables, net
    26,701       17,644       9,057       51.3 %
Deposits and prepayments
    9,091       8,629       462       5.4 %
Due from related party
    0       426       (426 )     -100.0 %
Deferred expenses
    29       63       (34 )     -54.0 %
CURRENT LIABILITIES                                
Short-term loans
  $ 41,762     $ 44,223     $ (2,461 )     -5.6 %
Notes payable
    311       4,583       (4,272 )     -93.2 %
Accounts payable
    11,188       5,193       5,995       115.4 %
Advances from customers
    979       2,100       (1,121 )     -53.4 %
Additional interest on notes
    0       280       (280 )     -100.0 %
Income taxes payable
    523       475       48       10.1 %
Other payables
    14,039       5,783       8,256       142.8 %
Due to related party
    24,883       0       24,883       0.0 %
Accrued expenses
    463       538       (75 )     -13.9 %
Deferred income
    6       38       (32 )     -84.2 %
Derivative Liability
    2,418       0       2,418       0.0 %
Long-term Notes payable (current portion)
    12,901       26,667       (13,766 )     -51.6 %
                                 
Total current assets
  $ 101,330     $ 80,787     $ 20,543       25.4 %
Less: total current liabilities
    109,473       89,880       19,593       21.8 %
Net working capital
    (8,143 )     (9,093 )     950       -10.4 %
 
 
At June 30, 2010, we required substantial capital to meet the required payments toward the $14 million convertible senior notes and to maintain the level of cash flows needed for continuing operations.  We can give no assurance that we will be able to raise such capital.  We have limited financial resources until such time that we are able to generate additional financing or cash flow from operations.  Our ability to establish profitability and positive cash flow is dependent upon our ability both to raise funds to finance our immediate cash requirements and to market our products in anticipation of a recovery in China of those industries we serve, including the CNG market.  If we are unable to raise adequate capital to meet the payment required to pay the remaining principal and interest on the notes and cash flows needed for operations, it is likely we would have to substantially curtail, if not terminate, our business activity.

Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As reflected in our consolidated financial statements we incurred substantial losses during the nine months ended June 30, 2010 and following our previously reported significant losses for the year ended September 30, 2009.  We are also liable for substantial repayment of bank notes and convertible senior notes and well as advance of $20.2 million from related parties. These factors, among others, may indicate that we will be unable to continue as a going concern for reasonable period of time.

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

For the nine months ended June 30, 2010, we used net cash of $13.7 million in operating activities. Working capital decreased by approximately $1 million from September 30, 2009 to June 30, 2010 primarily as a result of funding net losses and the $3.6 million derivative liability which did not exist at September 30, 2009 as well as the advance from related parties and the purchase of property, plant and equipment.  The $3.6 million derivative liability is a non-cash item resulting from the reclassification of our convertible notes to reflect a derivative liability.

At June 30, 2010, we were not in compliance with the financial covenants in the indentures relating to our 3.0% senior convertible notes due 2012 in the principal amount of $14 million. In October and December 2009, we entered into two agreements that modified the terms of the notes, the cumulative effect of which is as follows.

●            We repaid our 12% senior notes in the principal amount of $16 million prior to December 31, 2009.
 
●            We agreed to pay the convertible notes in the principal amount of $14 million in two installments, with an initial payment of $5 million being due ten days after the merger with SNEN Acquisition Corp. becomes effective and the balance 30 days thereafter.  Since the note holders would not be converting the notes, we would pay interest to provide the note holders with a yield to maturity of 13.8%, net of payments previously made.
 
●            The noteholders reduced our remaining obligation for liquidated damages for failure to register the shares of common stock issuable upon conversion of the convertible notes to $280,000, which is payable by December 31, 2009. The payment was made on January 7, 2010.
 
 
●            The provision that would have resulted in a further decrease in the conversion price of the convertible notes if we did not meet certain levels of net income was eliminated.
 
●            The provisions of the indenture relating to the reduction in the conversion price of the convertible notes if we issue stock at a price, or issue convertible securities with a conversion or exercise price, that is less than the conversion price (presently $4.20 per share) were eliminated.
 
As a result of these agreements, the $14 million convertible notes are classified as current liabilities at June 30, 2010 and September 30, 2009.  
 
For the nine months ended June 30, 2010, net cash used in operating activities was $13.7 million, primarily related to the $1.7 million increase in accounts payables, partially offset by a $4.0 million increase in accounts receivable and $8.8 million increase in other receivables.
 
Net cash of $5.6 million used in investing activities for the nine months ended June 30, 2010. This was due primarily to $16.5 million relatively related to the transfer of land use rights and offset by the expansion of our CNG station operation segment, principally for purchase of property, plant and equipment at $22.1 million.
 
Net cash used in financing activities was $24.0 million for the nine months ended June 30, 2010, primarily related to $54.7 million in new loans from domestic banks in China, $20.2 million in loans from related parties, which were offset by the repayment of $15.5 million in the 12% senior notes and the repayment of $45.7 million in the bank loans.

We will continue to incur capital expenditures for the CNG station segment in the future. It is necessary for us to plan, construct and equip each CNG station before we can generate any revenue.

Our agreement relating to the $14 million principal amount of convertible notes have covenants which could impair our ability to raise additional funds while the notes are outstanding. These covenants include the following:
 
 
●
We cannot incur any debt unless, after giving effect to the borrowing, (i) the fixed charge coverage ratio would be greater than 3.5 to 1.0, and (ii) the leverage ratio would not exceed 3.75 to 1.00, provided, that Sinogas continue to maintain debt under credit facilities of not more than $10,000,000, and may incur purchase money indebtedness. The fixed charge coverage ratio is the ratio of our earnings before interest, taxes, depreciation and amortization, which is generally known as EBITDA, to consolidated interest expense, as defined. Leverage ratio means the ratio of outstanding debt to EBITDA, with the interest component being the consolidated interest expense, as defined. At June 30, 2010, our fixed charge coverage ratio was negative 0.80 to 1.00, and our leverage ratio was negative 19.02 to 1.00.
     
 
●
We must maintain, as of the last day of each fiscal quarter, (i) a fixed charge coverage ratio of at least 2.00 to 1.00 through December 31, 2009 and 3.0 to 1.00 thereafter, (ii) a leverage ratio of not more than 6.0 to 1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, and (iii) a consolidated subsidiary debt to consolidated net tangible asset ratio of not more than 0.35 thereafter. The noteholders agreed that they would not take any action to declare an event of default as long as the Company is in compliance with the modified covenants.  At June 30, 2010, our fixed charge coverage ratio was negative 0.80 to 1.00, and our leverage ratio was negative 19.02 to 1.00, and our consolidated subsidiary debt to consolidated net tangible asset ratio was 0.47 to 1.00.
     
 
●
Sinogas cannot incur debt under its credit facilities except to the extent that such debt does not exceed $10.0 million.
     
 
●
We are subject to restriction in paying dividends, purchasing our own securities or those of our subsidiaries, prepaying subordinated debt, and making any investment other any investments in itself and its subsidiaries engaged in our business and certain other permitted investments.
     
 
●
We are subject to restrictions on incurring liens.
 
As of June 30, 2010, we were not in compliance with the financial covenants; however, the note holders agreed to they would not take any action to cause or declare an event of default in connection with our non-compliance at September 30, 2009 and through September 30, 2010 as long as we comply with the covenants in the December 17, 2009 agreement.  However, we cannot assure you that the noteholders will continue to waive compliance with these covenants in future quarter,

On October 12, 2009, we entered into an agreement and plan of merger with Skywide, which is owned by Mr. Deng, chairman and a director, and Mr. Huang, chief executive officer and a director.  This agreement was amended and restated on March 29, 2010.  Pursuant to the agreement as amended and restated, the Company will be merged with a SNEN Acquisition Corp., a wholly-owned subsidiary of Skywide, with Skywide becoming our sole shareholder, and each share of common stock of the Company (other than shares owned by the Company, Skywide or the two shareholders of Skywide), will be converted into the right to receive, upon presentation of the certificates for their common stock, the sum of $1.90.  The merger is subject to shareholder approval.
 
 
For the nine months ended June 30, 2009, net cash provided in operating activities was $ 15,000. The changes in working capital for the nine months ended June 30, 2009, were primarily related to a $7.2 million increase in accounts receivable which resulted from the increase in our business and longer period during which our accounts receivables (principally those generated by Sinogas) are outstanding, a $2.2 million decrease in other payables, and offset by a $6.3 decrease of deposit and prepayment, and a $1.9 million decrease of inventories.

For the nine months ended June 30, 2009, we used approximately $19.2 million in investing activities, primarily due to the expansion of our CNG station operations and purchase of property, plant and equipment of $15.9 million, purchase of land use right of $0.5 million, and $2.9 million to invest in the unconsolidated entities.
 
Net cash provided by financing activities was $22.4 million for the nine months ended June 30, 2009 related loans from domestic banks in China and repayment of a bank loan.

Commitments
 
The Company has the following material contractual obligations and capital expenditure commitments:
 
Wuhan Sinoenergy and Pingdingshan Sinoenergy, subsidiaries of the Company, have leased 13 parcels of land in Wuhan City and Pingdingshan City for their CNG stations under operating lease agreements. The lease terms are from 7 year to 30 years with annual rental fees of approximately $846,000.  Based on land rental agreements in effect at June 30, 2010, the Company will pay a total of $5.73 million during through 2039.
 
Wuhan Sinoenergy has two agreements to purchase land use rights in Wuhan City from different non-affiliated parties. One agreement provides for a purchase price of approximately $1.58 million, of which approximately $1.32 million has been paid, and the title transfer is in the process. The second provides for a purchase price of approximately $1.32 million, of which approximately $732,000 has been paid. The acquisition of the land requires government approval.  See Note 10.

The Company’s commitment for the construction of CNG stations, including stations being constructed by Wuhan Sinoenergy and Hubei Gather, was $762,000 as of March 31, 2010.
 
The Company’s commitment for the construction of a new plant for Jiaxing Lixun was $94,000 as of June 30, 2010.
 
The Company’s commitment for the purchase of property, plant and equipment, including property for Wuhan Sinoenergy and Hubei Gather, was $5,825,000 as of June 30, 2010.

Item 4. Controls and Procedures
 
Disclosure Controls and Procedures

Under the supervision and with the participation of management, our chief executive officer and chief financial officer have carried out an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.   Based on that evaluation, we have concluded that these disclosure controls and procedures are effective.
 
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures. It is our management’s responsibility to establish and maintain adequate internal controls over financial reporting. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
  
Management’s Report on Internal Control over Financial Reporting
 
Our 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 Securities Exchange Act.  Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) on an annual basis.   As previously reported on our Form 10-K for the year ended December 31, 2009, management identified material weaknesses, which related to:
 

 
●
an insufficient complement of personnel in our corporate accounting and financial reporting function with an appropriate level of technical accounting knowledge, experience, and training in the application of US GAAP commensurate with our complex financial accounting and reporting requirements and materiality thresholds.
     
 
●
Lack of internal audit function - the monitoring function of internal control is not well performed due to insufficient resources. In addition, the scope and effectiveness of internal audit function have yet to be developed.
     
 
●
Insufficient or lack of written policies and procedures relating to periodic review of current policies and procedures and their implementation.
 
Remediation and Changes in Internal Control over Financial Reporting
 
The following specific remedial actions are currently in process, to address the material weaknesses in our internal controls over financial reporting described above:
 
 
●
Reorganize and restructure our corporate accounting staff by:
       
   
●
revising the reporting structure and establishing clear roles, responsibilities, and accountability;
       
   
●
hiring additional technical accounting personnel to address our complex accounting and financial reporting requirements;
       

   
●
assessing the technical accounting capabilities at our subsidiaries to ensure the right complement of knowledge, skills, and training; and
       
   
●
establishing internal audit functions,
       
 
●
Improve period-end closing procedures by:
       
   
●
ensuring that account reconciliations and analyses for significant financial statement accounts are reviewed for completeness and accuracy by qualified accounting personnel;
       
   
●
implementing a process that ensures the timely review and approval of complex accounting estimates by qualified accounting personnel and subject matter experts, where appropriate;
       
   
●
developing better monitoring controls for corporate accounting and at our subsidiaries,
       
   
●
documenting and implementing antifraud programs and controls as well as comprehensive risk assessment of procedures, programs and controls, and
       
   
●
making efforts to develop written policies and procedures, but the progress has been slowed due to limited resources and personnel changes.
 
During 2009, we hired an internal audit manager and, we will increase our efforts to hire qualified personnel.  We anticipate that we will be able to complete the remediation before September 30, 2010.
 
Other than as described above, management does not believe that there have been any other changes in our internal control over financial reporting, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item 6. Exhibits
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1
Certification of Chief Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 

SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SINOENERGY CORPORATION.
 
 (Registrant)
   
Dated: August 19, 2010
/s/ Bo Huang
 
Bo Huang, Chief Executive Officer
   
Dated: August 19, 2010
/s/ ShiaoMing Sheng
 
Chief Financial Officer
 
37
 
 
 
Sinoenergy New Com (MM) (NASDAQ:SNEN)
Historical Stock Chart
From Mar 2024 to Apr 2024 Click Here for more Sinoenergy New Com (MM) Charts.
Sinoenergy New Com (MM) (NASDAQ:SNEN)
Historical Stock Chart
From Apr 2023 to Apr 2024 Click Here for more Sinoenergy New Com (MM) Charts.