UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: September 30, 2011

OR

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

For the transition period from to

Commission file number: 000-53773

CHINA CLEAN ENERGY INC.

(Exact name of registrant as specified in its charter)

Delaware		87-0700927
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Jiangyin Industrial Zone, Jiangyin Town

Fuqing City, Fujian Province

People’s Republic of China

(Address of principal executive offices)

(Zip Code)

(347) 235-0258

(Registrant’s telephone number, including area code)

Indicate by check mark whether 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 o		Smaller reporting company x
(Do not check if a smaller reporting company)

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

The number of shares of the registrant’s common stock outstanding as of November 10, 2011: 31,512,269

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 4.	Controls and Procedures	23
	PART II
Item 1A.	Risk Factors	23
Item 6.	Exhibits	23

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

ASSETS
	September 30,			December 31,
	2011			2010

CURRENT ASSETS
Cash and cash equivalents	$	23,609,392		$	13,648,437
Restricted cash		-			443,647
Accounts receivable, net of allowance for doubtful accounts of $0 and $29,665		3,015,118			4,080,424
Other current assets		2,374			9,332
Tax Receivable		-			63,865
Inventories		2,260,497			2,126,375
Advances for inventory purchases		1,504,072			1,031,401
Machinery and equipment held for sale		-			108,458
Total current assets		30,391,453			21,511,939

Plant and Equipment, net		24,962,437			25,656,929
Intangible assets, net		4,811,188			4,812,693
Deferred tax assets		107,484			104,246
TOTAL ASSETS	$	60,272,562		$	52,085,807

LIABILITIES AND EQUITY

CURRENT LIABILITIES
Accounts payable	$	2,307,315		$	1,400,188
Accrued liabilities		161,086			227,991
Customer deposits		273,951			650,017
Taxes payable		771,080			1,526,033
Banker acceptances		-			1,494,878
Bank loan payable - current portion		7,020,156			1,025,835
Total current liabilities		10,533,588			6,324,942

Warrant liabilities		440,318			2,192,352
Long-term bank loans - net of current portion		-			4,234,720

Total liabilities		10,973,906			12,752,014

COMMITMENTS AND CONTINGENCIES

EQUITY
Preferred stock, par value $0.001 per share, authorized 10,000,000 shares, none
issued and outstanding		-			-
Common stock, par value $0.001 per share, authorized 90,000,000 shares, 31,512,269
shares issued and outstanding		31,512			31,512
Additional paid-in capital		13,255,339			12,708,060
Treasury stock, at cost, 64,100 and 0 shares, respectively		(47,626	)		-
Statutory reserves		2,424,309			2,424,309
Retained earnings		28,135,096			19,982,696
Accumulated other comprehensive income		5,500,026			4,187,216
Total equity		49,298,656			39,333,793

Total liabilities and equity	$	60,272,562		$	52,085,807

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)

	Three months ended September 30						Nine months ended September 30,
	2011			2010			2011			2010

REVENUES	$	17,137,183		$	15,966,951		$	55,368,905		$	40,845,079
Less: cost of goods sold		14,193,951			12,258,337			43,995,154			32,910,770
GROSS PROFIT		2,943,232			3,708,614			11,373,751			7,934,309

OPERATING EXPENSES
Selling and marketing		70,411			97,696			399,308			269,177
General and administrative		511,604			332,887			1,571,680			1,207,336
Research and development		37,432			35,365			112,693			79,743
Total operating expenses		619,447			465,948			2,083,681			1,556,256

INCOME FROM OPERATIONS		2,323,785			3,242,666			9,290,070			6,378,053

OTHER INCOME (EXPENSE)
Interest income, net		(139,999	)		(103,386	)		(366,419	)		(271,384	)
Impairment loss on assets held for sale		-			(257,391	)		-			(257,391	)
Other expense		(74,163	)		(46,852	)		(72,107	)		(32,211	)
Change in fair value of warrant liabilities		90,565			(252,231	)		1,752,034			(246,478	)
Total other income (expenses)		(123,597	)		(659,860	)		1,313,508			(807,464	)
		-
INCOME BEFORE PROVISION FOR INCOME TAXES		2,200,188			2,582,806			10,603,578			5,570,589

PROVISION FOR INCOME TAXES		637,954			738,299			2,451,176			1,426,320

NET INCOME		1,562,234			1,844,507			8,152,402			4,144,269

OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment		366,634			495,457			1,312,810			523,874

COMPREHENSIVE INCOME	$	1,928,868		$	2,339,964		$	9,465,212		$	4,668,143


BASIC AND DILUTED EARNINGS PER SHARE
Weighted average number of shares		31,512,269			31,512,269			31,512,269			31,512,269
Earnings per share	$	0.05		$	0.06		$	0.26		$	0.13

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

CHINA CLEAN ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	For the nine months ended
	September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	8,152,402		$	4,144,269
Adjusted to reconcile net income to cash provided
by operating activities:
Depreciation		1,545,165			1,577,712
Recovery of allowance for doubtful accounts		(30,148	)		(40,108	)
Amortization of intangible assets		148,897			145,445
Stock-based compensation expense		547,279			318,945
Loss of impairment on assets held for sale		-			257,391
Change in fair value of warrants libility		(1,752,034	)		246,478
Deferred tax benefit		-			(33,442	)
Loss on disposal of assets		73,470			-
Changes in operating assets and liabilities
Accounts receivable		1,205,135			(1,453,337	)
Inventories		(67,065	)		(4,124,833	)
Other current assets		6,958			(1,833	)
Advances for inventory purchases		(434,289	)		(711,015	)
Accounts payable		851,539			1,407,348
Accrued liabilities		(87,519	)		(35,865	)
Customer deposits		(390,573	)		(16,346	)
Taxes payables		(790,851	)		919,358
Taxes receivable		64,904			(267,019	)
Net cash provided by operating activities		9,043,270			2,333,148

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment		(74,776	)		(246,210	)
Proceeds from disposal of assets		36,752			-
Net cash used in investing activities		(38,024	)		(246,210	)

CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash		450,864			(474,729	)
Proceeds from bank loans		7,090,462			4,339,354
Repayments on bank loans		(5,517,268	)		(2,334,200	)
Proceeds from (Repayments on) bankers acceptances		(1,502,879	)		1,598,278
Purchase of treasury stock		(47,626	)		-
Net cash provided by financing activities		473,553			3,128,703

EFFECT OF EXCHANGE RATE ON CASH		482,156			(256,173	)

INCREASE IN CASH AND CASH EQUIVALENTS		9,960,955			4,959,468
CASH AND CASH EQUIVALENTS, beginning of period		13,648,437			4,154,814
CASH AND CASH EQUIVALENTS, end of period	$	23,609,392			9,114,282

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest	$	367,517		$	224,620
Income taxes	$	2,899,421		$	787,834

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – ORGANIZATION AND BUSINESS

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

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

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

In the opinion of management, the unaudited interim condensed consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented. Interim results are not necessarily indicative of the results that may be expected for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 30, 2011.

Use of Estimates and Assumptions

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

Fair Value of Financial Instruments

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The three levels are defined as follows:

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

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

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

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

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

The Company determined that the carrying value of the long term bank loans approximated their fair value using the level 2 inputs by comparing the stated loan interest rate to the rate charged by the Bank of China on similar loans (see Note 7). The fair value of the warrants liability was determined using level 3 inputs, as further discussed in Note 10.

Foreign Currency Translation

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

Fujian Zhongde and Zhongde Energy assets and liabilities are translated into U.S. dollars at period-end exchange rates ($0.15594 and $0.15124 at September 30, 2011 and December 31, 2010, respectively). Fujian Zhongde and Zhongde Energy revenues and expenses are translated into U.S. dollars at weighted average exchange rates for the periods ($0.15370 and $0.14673 for the nine months ended September 30, 2011 and 2010, respectively). Resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity. The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Items in the condensed consolidated statements of cash flows are translated at the average exchange rate for the period. As a result, amounts related to assets and liabilities reported on the condensed consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the condensed consolidated balance sheets.

Cash and Cash Equivalents

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

Restricted Cash

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Accounts Receivable

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

Inventories

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

Intangible Assets

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

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

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

Impairment of Long-Lived Assets

The Company reviews its long-lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from its use and eventual disposition. If the sum of the expected discounted cash flows is less than the carrying amount of the asset, the Company would recognize an impairment loss based on the fair value of the asset. For the year ended December 31, 2010, the company recorded an impairment loss related to its machinery and equipment held for sale of approximately $258,000, using level three inputs based on estimated salvage values.

Assets Held for Sale

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

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

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Revenue Recognition

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

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

product is shipped or service has been rendered;

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

collectability of payment is reasonably assured.

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

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

Transportation and unloading charges and product inspection charges are included in selling expenses totaled $52,698 and $88,317 for the three months ended September 30, 2011 and 2010, respectively, and $347,833 and $231,174 for the nine months ended September 30, 2011 and 2010, respectively.

Stock-Based Compensation

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

Income Taxes

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

U.S. income tax returns for the years prior to 2008 are no longer subject to examination by tax authorities.

China Income Taxes

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

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

Earnings per Share

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

Basic earnings per share is computed by dividing net income attributable to holders of common shares by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common shares were exercised or converted into common shares. Convertible, redeemable preferred shares are included in the computation of diluted earnings per share on an “if converted” basis, when the impact is dilutive. Contingent exercise price resets are accounted for in a manner similar to contingently issuable shares such as warrants and options. Common share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3 – INVENTORIES

Inventories consist of the following:

	September 30, 2011		December 31, 2010

Raw materials	$	1,464,085	$	1,011,112
Work in process and packaging materials		33,447		28,448
Finished goods		762,965		1,086,815
Total	$	2,260,497	$	2,126,375

NOTE 4 – PLANT AND EQUIPMENT

For the year ended December 31, 2010, the company recorded an impairment loss related to its machinery and equipment held for sale of approximately $258,000. The assets held for sale were sold during September 2011 for $36,752.

Depreciation expense was $509,135 and $708,227 for the three months ended September 30, 2011 and 2010, respectively, and $1,545,165 and $1,577,712 for the nine months ended September 30, 2011 and 2010, respectively.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – INTANGIBLE ASSETS, NET

Intangible assets, net consist of:

	September 30, 2011			December 31, 2010

Land use rights	$	5,326,346		$	5,165,811
Patents and licenses		935,640			1,240,168
Total		6,261,986			6,405,979
Less accumulated amortization		(1,450,798	)		(1,450,798	)
Total intangible assets, net	$	4,811,188		$	4,812,693

Amortization expense was $51,189 and $10,426 for the three months ended September 30, 2011 and 2010, respectively, and for the nine months ended September 30, 2011 and 2010 was $148,897 and $145,445, respectively. The estimated aggregate amortization expenses for each of the five succeeding fiscal years are the following:

Twelve months ending September 30,	Estimated Amortization Expense
2012		196,568
2013		196,568
2014		196,568
2015		196,568
Thereafter		4,035,055
	$	4,821,327

NOTE 6 – BANKER ACCEPTANCES

Bankers acceptances have no interest if paid on or before their due dates. The Company can borrow against bankers acceptances up to approximately $2.3 million (equivalent to RMB15,000,000).

NOTE 7 – BANK LOANS PAYABLE

Bank loans payable includes a loan with annual interest at 5.94% payable monthly through January 2012, secured by the buildings and land use rights of both Zhongde Energy and Fujian Zhongde. One installment payment is scheduled: $4.37 million (equivalent to RMB 28,000,000) is due January 2012. The Company’s Chief Executive Officer has provided a personal guarantee for this obligation.

On January 7, 2011, the Company entered into a trade financing arrangement that expires on December 15, 2011 with another bank pursuant to which the Company can borrow up to $5.22 million (equivalent to RMB 33,400,000) with annual interest rate at the bank’s adjustable rate. The trade financing arrangement consists of the following sublimit:

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

· Loans payable (packing loans)	$2,339,100	(Equivalent to RMB 15 million)
· Letters of credit	$4,366,320	(Equivalent to RMB 28 million)
· Export negotiation	$4,366,320	(Equivalent to RMB 28 million)
· Negotiation under guarantee	$4,366,320	(Equivalent to RMB 28 million)
· Bankers acceptance	$4,366,320	(Equivalent to RMB 28 million)
· Bankers acceptance payable	$4,366,320	(Equivalent to RMB 28 million)

During the nine months ended September 30, 2011, the Company borrowed $7.09 million (equivalent to RMB 46,132,000) from the bank.

Total interest expense on the bank loans for the three months ended September 30, 2011 and 2010 was approximately $144,000 and $19,000, respectively, and approximately $368,000 and $225,000 for the nine months ended September 30, 2011 and 2010, respectively.

NOTE 8 – RETIREMENT AND EMPLOYMENT LIABILITIES

The full time employees of the Company are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and retirement benefits through a Chinese government mandated multi-employer defined contribution plan. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans. The total provisions made for such employee benefits were $7,415 and $1,794 for the three months ended September 30, 2011 and 2010, respectively, and $24,435 and $16,589 for the nine months ended September 30, 2011 and 2010, respectively.

NOTE 9 – COMMON STOCK

On May 12, 2011, Board of Directors authorized the repurchase of up to $1 million of its outstanding common shares between May 16, 2011 and May 16, 2012, subject to market and other conditions. Under this plan, the Company can repurchase shares from time to time for cash in open market purchases in accordance with applicable federal securities laws.

For the nine month period ended September 30, 2011, the Company purchased 64,100 shares of common stock for $47,626 at the market price.

NOTE 10 –WARRANTS

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

	Carrying Value as of September 30, 2011	Fair Value Measurements at September 30, 2011
		Level 1	Level 2	Level 3
Warrants liability	$440,318			$440,318

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

The following is a reconciliation of the beginning and ending balances of warrants liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2011 and December 31, 2010:

	September 30,			December 31,
	2011			2010

Beginning balance, January 1,	$	2,192,352		$	1,259,774

Change in fair value of warrant liabilities		(1,752,034	)		932,578
Ending balance	$	440,318		$	2,192,352

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

	September 30,			December 31,
	2011			2010

Annual dividend yield		—			—
Expected life (years)		1.25			2.00
Risk-free interest rate		0.25	%		1.02	%
Expected volatility		97	%		96	%

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for the past three years. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities with the same term as the warrants when granted.

There were no warrants granted, forfeited or exercised during the period presented.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 11 – OPTIONS

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

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

For the nine months ended September 30, 2011 and 2010, stock-based compensation expense related to these options was $547,279 and $318,945, and $177,138 and $106,315 for the three months ended September 30, 2011 and 2010, respectively, which is included in general and administrative expense.

Following is a summary of the status of options outstanding and exercisable at September 30, 2011:

Outstanding Options					Exercisable Options
Exercise Price		Number		Average Remaining Contractual Life	Average Exercise Price		Number		Average Remaining Contractual Life
$	2.50		435,000	6.25 years	$	2.50		372,500	6.25 years
$	3.00		435,000	6.25 years	$	3.00		372,500	6.25 years
Total			870,000					745,000

On January 4, 2011, the Board adopted the China Clean Energy Inc. 2011 Long-Term Incentive Plan (the “2011 Plan”) and the forms of award agreements for nonqualified stock option awards, incentive stock option awards and restricted stock awards to be granted under the Plan. The Company’s outside directors and employees, including the Company’s principal executive officer, principal financial officer and other named executive officers, are all eligible to participate. Subject to certain adjustments, the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the 2011 Plan is 2,700,000 shares. All stock options granted under the 2011 Plan must have an exercise price equal to the fair market value of the common stock on the date of grant.

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Following is a summary of stock option activity:

	Options Outstanding			Weighted Average Exercise Price
Outstanding as of January 1, 2011		-			-
Granted		2,490,000			1.02
Forfeited		(282,500	)		1.02
Exercised		-			-
Outstanding as of September 30, 2011		2,207,500		$	1.02

Following is a summary of the status of options outstanding and exercisable at September 30, 2011:

Outstanding Options					Exercisable Options
Exercise Price		Number		Average Remaining Contractual Life	Average Exercise Price		Number		Average Remaining Contractual Life
$	1.02		2,207,500	9.25 years	$	1.02		565,000	9.25 years
Total			2,207,500					565,000

NOTE 12 - EARNINGS PER SHARE

For the nine months ended September 30, 2011 and 2010, all warrants and options were excluded from the calculation of diluted earnings per share because the exercise prices of $1.02, $2.00, $2.50, and $3.00 were higher than the average trading price of the Company’s stock during the respective periods.

NOTE 13 – TAXES

Income Taxes

Income tax provision consists of:

	For the three months ended September 30,							For the nine months ended September 30,
	2011			2010				2011			2010
Current:
PRC		$	637,954		$	839,691			$	2,451,176		$	1,527,712
United States			-			-				-			-
Total current			637,954			839,691				2,451,176			1,527,712	)
Deferred						(101,392	)						(101,392	)
Total		$	637,954		$	738,299			$	2,451,176		$	1,426,320

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

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On March 31, 2007, the PRC tax authorities approved a 12.5% income tax rate for 2009 and 2010 for Fujian Zhongde.

Deferred Income Taxes Assets

Since Zhongde Energy had an operating loss of approximately $417,000 for the year ended December 31, 2009, the loss can be carried forward to offset income through 2014. The Company recorded deferred tax assets of $107,484 and $104,246 as of September 30, 2011 and December 31, 2010, respectively. Based on the foregoing information, the Company believes that a valuation allowance is not deemed necessary for the deferred assets for the following reasons: (i) there will be sufficient operating income generated in future years based on the fact that the Company’s wholly owned subsidiary, Zhongde Energy, is expected to generate profits, and (ii) the current operating loss of Zhongde Energy can be carried forward through 2014 to offset future operating income under PRC tax regulations. An adjustment of approximately $8,000 to deferred income tax assets was not made to reflect a deferred income tax expense due to immateriality.

The Company has cumulative undistributed earnings of foreign subsidiaries of $25,710,787 and $16,910,509 as of September 30, 2011 and December 31, 2010, respectively, which is included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

Value Added Tax

VAT on sales and VAT on purchases amounted to $5,859,250 and $2,929,076, respectively, for the three months ended September 30, 2011 and 2010, and $7,961,047 and $5,859,250, respectively, for the nine months ended September 30, 2011 and 2010. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent. Because the Company’s VAT taxes paid on purchases were greater than sales during the period, the Company has prepaid tax that can be used to offset future VAT due on sales.

NOTE 14 – CONCENTRATIONS

Net sales and gross profit percentages (“GP%”) for the nine months ended September 30, 2011 and 2010 consist of:

	For the nine months ended				For the nine months ended
	September 30,				September 30,
	2011				2010
	Sales		GP%		Sales		GP%

Domestic Sales	$	45,289,273		21%	$	32,942,315		19.20%
International Sales	$	10,079,632		21%		7,902,764		20.40%
Total Sales	$	55,368,905		21%	$	40,845,079		19.43%

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CHINA CLEAN ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Net sales and GP% for the three months ended September 30, 2011 and 2010 consist of:

	For the three months ended				For the three months ended
	September 30				September 30
	2011				2010
	Sales		GP%		Sales		GP%

Domestic Sales	$	14,632,211		17%	$	13,584,721		23.26%
International Sales	$	2,504,972		19%		2,382,230		23.06%
Total Sales	$	17,137,183		17%	$	15,966,951		23.23%

The Company’s demand deposits are in accounts maintained with state owned banks within the PRC and an account in the U.S. Total cash deposited with banks within the PRC as of September 30, 2011 amounted to $22,306,776, which was not are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

There was one major customer that accounted for 27% of the total accounts receivable as of September 30, 2011. There were five customers that accounted for 10% of net sales for the nine months ended September 30, 2011.

NOTE 15 – COMMITMENTS AND CONTINGENCIES

The Labor Contract Law of the People’s Republic of China requires employers to assure the liability of severance payments if employees are terminated and have been working for the employers for at least two years prior to January 1, 2008. The employers will be liable for one month of severance pay for each year of service provided by the employees. As of September 30, 2011, the Company has estimated possible severance payments of approximately $168,000, which has not been reflected in its condensed consolidated financial statements because it is not more likely than not that this will be paid or incurred.

NOTE 16 – SUBSEQUENT EVENTS

On November 10, 2011, Zhongde Energy entered into a Limited Liability Company Acquisition Agreement (“Agreement”) with the owner of Handan Guanxin Technology Co., Ltd. (“Guanxin Technology”) to acquire 100% of the equity interest in Guanxin Technology. Guanxin Technology is a supplier of specialty chemical feedstock in Hebei Province, PRC. The Company sought to acquire Guanxin Technology in order to mitigate the feedstock supply risk and have better control over the cost and quality of feedstock. The consideration for the transaction included a cash payment of approximately $13.1 million (RMB 83 million). As of the date of this report, the Company is still in the due diligence process of reviewing the books and records of Guanxin Technology. If the books and records of Guanxin Technology do not agree with the information provided, the Company reserves the right to nullify the Agreement within seven days from the date of the Agreement.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2011.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulations. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. These uncertainties include factors that affect all businesses as well as matters specific to us, including, but not limited to, the effectiveness, profitability and marketability of our products, the future trading of our common stock, our ability to capitalize on our expanded production capacity, the period of time for which our current liquidity will enable us to fund our operations, our ability to protect our proprietary information, general economic and business conditions, the volatility of our operating results and financial condition resulting from changes in raw material prices, international oil prices and price controls imposed by the Chinese government, our ability to attract or retain qualified senior management personnel and research and development staff and independent directors, and other risks. We caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 30, 2011, as well as others that we may consider immaterial or do not anticipate at this time.

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

Company Overview

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

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

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On November 10, 2011, Zhongde Energy entered into a Limited Liability Company Acquisition Agreement with the owner of Handan Guanxin Technology Co., Ltd. (“Guanxin Technology”) to acquire 100% of the equity interest in Guanxin Technology. Guanxin Technology is a supplier of specialty chemical feedstock in Hebei Province, People’s Republic of China. The Company sought to acquire Guanxin Technology in order to mitigate the feedstock supply risk and have better control over the cost and quality of feedstock. The consideration for the transaction included a cash payment of approximately $13.1 million (RMB 83 million). As of the date of this report, the Company is still in the due diligence process of reviewing the books and records of Guanxin Technology. If the books and records of Guanxin Technology do not agree with the information provided, the Company reserves the right to nullify the agreement within seven days from the date of the agreement.

Results of Operations

Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010

Revenues. During the quarter ended September 30, 2011, we had net sales of $17,137,183 (6% from biodiesel sales and 94% from specialty chemicals sales), compared to net sales of $15,966,951 (14% from biodiesel sales and 86% from specialty chemicals sales) during the quarter ended September 30, 2010, an increase of approximately 7%. The increase in revenue was driven by increased average selling prices for our specialty chemicals products. We have shifted our focus to the specialty chemicals business, where we see strong demand and higher gross margin. For the quarter ended September 30, 2011, domestic sales and international sales were $14,632,211 and $2,504,972, respectively, compared to $13,584,721 and $2,382,230, respectively, for the quarter ended September 30, 2010, an increase of approximately 8% for the domestic sales and 5% for the international sales. During the quarter ended September 30, 2011, we had sales volume of 8,815 tons from specialty chemicals and 1,170 tons from biodiesel, compared to sales volume of 8,935 tons from specialty chemicals and 3,213 tons from biodiesel during the quarter ended September 30, 2010. We believe that the decrease in the sales volume of specialty chemicals and biodiesel was primarily due to our increased average selling price. Because our feedstock material costs rose 27% for the quarter ended September 30, 2011, as compared to the quarter ended September 30, 2010, we increased our average selling prices. However, we were only able to increase our average selling prices by 17% due to competitive pressures in the market place. During the quarter ended September 30, 2011, the average selling price was approximately $1,773 per ton for specialty chemicals and approximately $897 per ton for biodiesel, compared to the quarter ended September 30, 2010, in which the average selling price was approximately $1,535 per ton for specialty chemicals and approximately $682 per ton for biodiesel. In addition to the effects of increased feedstock prices, the increase in average selling price for biodiesel was driven by an increase in the petroleum diesel wholesale price and the increase in average selling price for specialty chemicals was driven by increased demand and better product mix.

Gross Profit. The cost of goods sold, which consists of direct labor, feedstock, direct materials, overhead and product costs, and depreciation of production facilities, was $14,193,951 for the quarter ended September 30, 2011 compared to costs of goods sold of $12,258,337 for the quarter ended September 30, 2010. The increase in cost of goods sold was primarily driven by the additional revenue and an increase in raw material cost. For the quarter ended September 30, 2011, feedstock used for production of biodiesel and specialty chemicals averaged approximately $905 per ton and $1,447 per ton, respectively, compared to approximately $590 per ton and $1,153 for the quarter ended September 30, 2010, respectively. This increase in the cost of specialty chemicals and biodiesel feedstock was primarily due to inflation in the People’s Republic of China.

We had a gross profit of $2,943,232 for the quarter ended September 30, 2011, compared to a gross profit of $3,708,614 for the quarter ended September 30, 2010, representing a decrease of approximately 21%. This was primarily due to the increase in feedstock cost, which increased faster than our average selling prices, and also to our lower sales volume. Gross margins for the quarters ended September 30, 2011 and 2010 were 17% and 23%, respectively. This decrease in gross margin was primarily driven by the increase in feedstock cost and also our lower sales volume. Gross margins of specialty chemicals decreased to 18% for the quarter ended September 30, 2011, compared to 25% for the quarter ended September 30, 2010, also due to higher feedstock cost and lower sales volume. Gross margins for biodiesel decreased to negative 1% for the quarter ended September 30, 2011, compared to 13% for the quarter ended September 30, 2010. This decrease in gross margin was primarily due to the increase in raw material cost, stagnant wholesale diesel pricing in the People’s Republic of China and lower sales volume. We believe our gross margins will improve, however, now that we have acquired our own feedstock supplier and as China’s inflation improves.

Selling and Marketing. Selling and marketing expenses, which include advertising and promotion, freight charges, exporting expenses, wages and salaries, totaled $70,411 for the quarter ended September 30, 2011, as compared to $97,696 for the quarter ended September 30, 2010, a decrease of approximately 28%. This decrease was due to lower selling costs related to lower sales volume and domestic shipping fees and commissions.

General and Administrative. General and administrative expenses totaled $511,604 for the quarter ended September 30, 2011, as compared to $332,887 for the quarter ended September 30, 2010, an increase of approximately 54%. This increase was primarily attributable to additional expenses related to professional services and non-cash charges for employee stock-based compensation.

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Net Income. We recorded net income of $1,562,234, or $0.05 per basic and diluted share, for the quarter ended September 30, 2011, which included non-cash income of $90,565 due to the change in fair value measurement of the warrants issued in connection with our 2008 private placement. We recorded net income of $1,844,507, or $0.06 per basic and diluted share, for the quarter ended September 30, 2010. The decrease in net income was attributable mainly to the decrease in the gross margin of specialty chemicals and biodiesel.

We have reviewed our non-GAAP adjusted net earnings to help us measure the performance of our business. The non-GAAP adjusted net earnings exclude both non-recurring items and non-cash charges related to our warrants liability and stock-based compensation. We believe that these non-GAAP adjusted financial measures are helpful to both management and investors because the non-GAAP measures provide a consistent basis to understand our financial performance as compared to historical periods without variation of non-recurring items and non-operating related charges. In addition, providing these measures to investors allows them to evaluate our performance using the same methodology and information that is used by management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment regarding which charges are excluded. However, we believe we compensate for these limitations by providing the relevant disclosure of the items excluded.

The following table provides the non-GAAP financial measures and a reconciliation of the non-GAAP measures to the GAAP net income (loss).

	Three months ended September 30,
	2011		2010

Net income	$	1,562,234	$	1,844,507
Add back:
Change in fair value of warrants liability	$	(90,565)	$	252,231
Stock-based compensation	$	177,138	$	106,315
Adjusted net income	$	1,648,807	$	2,203,053

Diluted earnings per share	$	0.05	$	0.06
Add back:
Change in fair value of warrant	$	0.00	$	0.01
Stock-based compensation	$	0.00	$	0.00
Adjusted earnings per share	$	0.05	$	0.07

The adjusted non-GAAP net income of $1,648,807 and the adjusted non-GAAP earnings per share of $0.05 per share for the quarter ended September 30, 2011 in the table above excludes a $90,565 non-cash income due to change in the fair value of warrants and a $177,138 stock-based compensation expense. Our adjusted non-GAAP net income for the quarter ended September 30, 2010 was $2,203,053, or 0.07 per share.

Nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

Revenues. During the nine months ended September 30, 2011, we had net sales of $55,368,905 (10% from biodiesel sales and 90% from specialty chemicals sales), compared to net sales of $40,845,079 (21% from biodiesel sales and 79% from specialty chemicals sales) during the nine months ended September 30, 2010, an increase of approximately 36%. The increase in revenue was driven by sales volume and average selling prices for our specialty chemicals products. For the nine months ended September 30, 2011, domestic sales and international sales were $45,289,273 and $10,079,632, respectively, compared to $32,942,315 and $7,902,764, respectively, for the nine months ended September 30, 2010, an increase of approximately 37% for the domestic sales and 28% for the international sales. We expanded our sales to our existing customers and added new customers for our specialty chemical products for the nine months ended September 30, 2011.

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Gross Profit. The cost of goods sold was $43,995,154 for the nine months ended September 30, 2011, compared to cost of goods sold of $32,910,770 for the nine months ended September 30, 2010. The increase in cost of goods sold was primarily driven by an increase in revenue. For the nine months ended September 30, 2011, feedstock used for production of biodiesel averaged approximately $794 per ton, compared to approximately $607 for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, feedstock used for production of specialty chemicals averaged approximately $1,386 per ton, compared to approximately $1,130 for the nine months ended September 30, 2010. This increase in the cost of specialty chemicals and biodiesel feedstock was primarily due to global economic recovery, which resulted in increased demand for feedstock material, and inflation in the People’s Republic of China.

We had a gross profit of $11,373,751 for the nine months ended September 30, 2011, compared to a gross profit of $7,934,309 for the nine months ended September 30, 2010, representing gross margins of 21% and 19%, respectively. This increase in gross margins was primarily due to the increased sales of specialty chemicals products.

Selling and Marketing. Selling and marketing expenses totaled $399,308 for the nine months ended September 30, 2011, compared to $269,177 for the nine months ended September 30, 2010, an increase of approximately 48%. This increase was primarily due to higher selling costs related to sales volume and domestic shipping fees and commissions.

General and Administrative. General and administrative and other operating expenses totaled $1,571,680 for the nine months ended September 30, 2011, compared to $1,207,336 for the nine months ended September 30, 2010, an increase of approximately 30%. This increase was primarily attributable to additional expenses related to professional services and non-cash charges for employee stock-based compensation.

Net Income. We recorded net income of $8,152,402, or $0.26 per basic and diluted share, for the nine months ended September 30, 2011, compared to net income of $4,144,269, or $0.13 per basic and diluted share, for the nine months ended September 30, 2010. This increase in net income was attributable mainly to the significant increase in revenue and gross profit and non-cash income of $1,752,034 due to the change in fair value measurement of the warrants issued in connection with our 2008 private placement.

Liquidity and Capital Resources

General. As of September 30, 2011 and December 31, 2010, we had cash and cash equivalents of $23,609,392 and $13,648,437, respectively. The increase in cash and cash equivalents was primarily attributable to the $8,152,402 net income from operating activities, $7,090,462 of proceeds we received from bank loans, $1,205,135 of collections of accounts receivable,and $851,539 of additional accounts payable, offset by repayment on bank loans of $5,517,268, payments of $1,502,879 on bankers acceptances and advances of $434,289 for inventory purchases during the nine months ended September 30, 2011.

Net cash provided by operating activities totaled $9,043,270 for the nine months ended September 30, 2011, compared to net cash provided by operating activities of $2,333,148 for the nine months ended September 30, 2010. This increase was primarily due to $8,152,402 from net income, $1,205,135 collections from accounts receivable and $851,539 of additional accounts payable for the nine months ended September 30, 2011. Advances for inventory purchases totaled $434,289 and payments for inventory totaled $67,065 for the nine months ended September 30, 2011, compared to advances for inventory purchases of $711,015 and payments for inventory totaled $4,124,833 for the nine months ended September 30, 2010. This decrease was primarily due to the sufficiency of our inventory during the nine months ended September 30, 2011. In addition, collections of accounts receivable totaled $1,205,135 for the nine months ended September 30, 2011, compared to a decrease in accounts receivable collection of $1,453,337 for the nine months ended September 30, 2010. This increase was primarily due to prompt payments by customers.

Net cash used in investing activities totaled $38,024 for the nine months ended September 30, 2011, primarily a result of the purchase of additional equipment for the Jiangyin plant, compared to net cash used in investing activities of $246,210 for the nine months ended September 30, 2010, which was primarily related to the construction expense for our Jiangyin plant.

Net cash provided by financing activities totaled $473,553 for the nine months ended September 30, 2011 and was due to net proceeds from our bank loan of $7,090,462 for working capital uses and net proceeds from the release of restricted cash of $450,864, partially offset by $5,517,268 payment on bank loans and $1,502,879 payment on bankers acceptances. Net cash provided by financing activities totaled $3,128,703 for the nine months ended September 30, 2010, primarily due to net proceeds from our bank loan of $4,339,354, partially offset by $2,334,200 payments on bank loans. The decrease was primarily due to an adequate amount of working capital for the nine months ended September 30, 2011.

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Accounts Receivable, and Allowance for Doubtful Accounts. Substantial portions of our business operations are conducted in the People’s Republic of China. During the normal course of business, we extend unsecured credit to our customers. Currently, the maximum amount of credit that may be extended to an existing customer is 5 million RMB, or approximately $750,000. Our standard collection term is three months. Management reviews our accounts receivable based on the customers’ financial condition and their prior payment history to determine if the allowance for doubtful accounts is adequate.

Loan Agreements. In February 2010, we secured bank financing from Fujian Haixia Bank, formerly Fuzhou City Commercial Bank. Pursuant to the loan agreement, Zhongde Energy borrowed RMB 33 million, or approximately $4.8 million, at an annual interest rate of 5.94% (the “Base Rate”). The proceeds from the loan are required to be used for working capital. Zhongde Energy must repay RMB 28 million, or approximately $4.37 million, by January 5, 2012. The loan is secured by, among other things, the real property of Zhongde Energy and the bank accounts and real property of Fujian Zhongde. Mr. Tai-Ming Ou, our chief executive officer, has personally guaranteed Zhongde Energy’s obligation under the loan agreement. Zhongde Energy will be subject to a penalty interest rate that is 30% greater than the Base Rate in the event it does not timely repay the loan and 80% greater than the Base Rate in the event that it does not use the proceeds from the loan as specified in the loan agreement. There are no additional financial covenants pursuant to the loan agreement.

On January 7, 2011, we entered into a trade financing agreement with China Construction Bank. Pursuant to the financing agreement, Zhongde Energy can borrow up to RMB 33.4 million, or approximately $5.22 million, with annual interest at the bank’s aggregate adjustable rate. The financing agreement provides for letters of credit, bankers acceptance and other trade-related guarantees and advances, each of which may not exceed RMB 28 million, and a “packing loan” covering borrowings arising from the foregoing, which may not exceed RMB 15 million. No guarantee or collateral is required under the financing agreement. The financing agreement also does not provide for an increase in interest or payment acceleration upon an event of default, but such penalties could be assessed. There are no financial covenants pursuant to the financing agreement. As of September 30, 2011, we had borrowed $7.09 million with annual interest at the bank’s adjustable rate payable through January 2012.

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

We expect that current capital and other existing resources will provide a limited amount of working capital, sufficient to operate at full capacity until the end of 2011. We intend to repay our debt and other obligations through cash generated from our business operations. To the extent that we have excess funds on hand, we intend to reinvest such excess funds in additional equipment.

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

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

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Obligations under Material Contracts. We had no material commitments as of September 30, 2011 other than the loan agreements described above.

Critical Accounting Policies and Estimates

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

In response to the Securities and Exchange Commission’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure about Critical Accounting Policy,” we identified the most critical accounting principles upon which our financial status depends. There have been no changes to the critical accounting policies disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 30, 2011.

The unaudited condensed consolidated financial statements of the Company are expressed in U.S. dollars. All significant intercompany balances and transactions have been eliminated in consolidation.

Item 4. Controls and Procedures.

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

As of September 30, 2011, we conducted an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2011. We believe we have remediated the material weakness in our disclosure controls and procedures described in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 9, 2011, by hiring a consulting firm with expertise in United States GAAP to review our financial statements for the quarter ended September 30, 2011 and going forward.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three month period ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described above with respect to the remediation of the material weakness in our disclosure controls and procedures.

PART II - OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 30, 2011.

Item 6. Exhibits

(a)

Exhibits

See Index to Exhibits.

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SIGNATURES

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

	CHINA CLEAN ENERGY INC.


Date: November 14, 2011	/s/ Tai-ming Ou
	Tai-ming Ou
	President and Chief Executive Officer and Chairman of the Board of Directors
	(Principal Executive Officer)


	/s/ William Chen
	William Chen
	Chief Financial Officer
	(Principal Financial Officer)

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EXHIBIT INDEX

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

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

10.1*		Limited Liability Company Acquisition Agreement, dated as of November 10, 2011, by and between Handan Guanxin Technology Co., Ltd. and Fujian Zhongde Energy Co., Ltd.

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101**		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language), (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income and Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.

_________________________

*	Filed herewith.

Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

CHINA CLEAN ENERGY INC 10-Q