Unassociated Document

10QSB 1 v084165_10qsb.htm Unassociated Document

U.S. Securities and Exchange Commission

Washington, DC 20549

Form 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED

June 30, 2007

Commission File Number 000-30017

Sinoenergy Corporation

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

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

[use china address]234-5149 Country Hills Blvd. NW; Suite 429, Calgary, Alberta, Canada T3A 5K8

(Address of principal executive offices)

Issuer’s telephone number: (832) 274-3766 [use China phone number]

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 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 7, 2007, there were 31,183,377 shares of the common stock, par value $.001 per share, outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No x

SINOENERGY CORPORATION AND SUBSIDIARIES

		Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated balance sheets at June 30, 2007 (unaudited) and December 31, 2006		2
Unaudited consolidated statements of operations for the three months ended June 30, 2007 and 2006		3
Unaudited consolidated statements of operations for the six months ended June 30, 2007 and 2006		4
Unaudited consolidated statement of stockholders’ equity for the six months ended June 30, 2007		5
Unaudited consolidated statements of cash flows for the six months ended June 30, 2007 and 2006		6
Notes to consolidated financial statements		7-35
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 3. Controls and Procedures		51
Part II. Other Information		51
Item 6. Exhibits		53

Sinoenergy Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands of United States dollars)

				June 30, 2007		December 31, 2006
	Note(s)			Unaudited		Audited
ASSETS
CURRENT ASSETS
Cash					4,304		588
Accounts receivable (net)		4
-Related party					516		594
-Third party					4,577		3,777
Other receivables		5
-Related party					912		1,220
-Third party					2,681		1,176
Deposits and prepayments-third party		6(1	)		1,466		3,187
Deferred expenses					-		4
Inventories		7			1,688		937
TOTAL CURRENT ASSETS					16,144		11,483

LONG TERM ASSETS
Long term investment		8			390
Property, plant and equipment (net)		9			6,156		3,556
Intangible assets		10			12,161		12,114
Other long-term asset		6(2	)		6,815
Goodwill		11			676		676
Long term deferred tax asset					4		4
TOTAL ASSETS					42,346		27,833
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short term bank loan		12			4,134		3,160
Accounts payable
- Related party							452
- Third party					1,471		211
Other payables		13
- Related party					345		4,073
- Third party					1,419		2,359
Accrued expenses					163		176
Warranty accrual					60		40
Advances from customers		14			3,162		701
Income taxes payable		15			135		7
TOTAL CURRENT LIABILITIES					10,889		11,179

Minority interests		16			1,216		614
Commitments		23
STOCKHOLDERS’ EQUITY
Common stock- par value$.001 per share; Issued and Outstanding- 31,183,377 shares at June 30, 2007, 14,636,472 shares at December 31, 2006		20			31		15
Series A convertible preferred stock-$0.001 Par Value - 234,688 shares at June 30, 2007, 5,692,307 shares at December 31, 2006		20			-		6
Additional paid-in capital		20			21,633		9,935
Capital surplus					20		20
Statutory surplus reserve fund		18			1,140		1,140
Retained earnings					6,872		4,576
Accumulated other comprehensive income					545		348
Total stockholders’ equity					30,241		16,040
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY					42,346		27,833

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

Sinoenergy Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

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

			Three Months Ended June 30,
	Note(s)		2007			2006(restated)
NET REVENUE				6,181			3,383

COST OF REVENUE				(2,972	)		(2,184	)

GROSS PROFIT				3,209			1,199

OPERATING EXPENSES
Selling expenses				65			58
General and administrative expenses				928			557

TOTAL OPERATING EXPENSES				993			615

INCOME(LOSS) FROM OPERATIONS				2,216			584

OTHER INCOME(EXPENSES)
Other non-operating income				4			7
Interest expense				(123	)		(203	)
Other expenses				(4	)		-
OTHER INCOME (LOSS) NET				(123	)		(196	)

INCOME (LOSS) BEFORE INCOME TAXES				2,093			388
Income tax				(44	)		(240	)
INCOME BEFORE MINORITY INTEREST				2,049			148
Minority interest				(103	)		(11	)
NET INCOME				1,946			137
Other comprehensive income
Foreign currency translation adjustments				177			192
COMPREHENSIVE INCOME				2,123			329
Earnings Per Share -Basic		21		0.07			0.01
Weighted Average Shares Outstanding- Basic				27,780,340			14,366,411
Earnings Per Share-Diluted				0.07			0.01
Weighted Average Shares Outstanding- Diluted				29,158,368			14,366,411

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

Sinoenergy Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

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

			Six Months Ended June 30,
	Note(s)		2007			2006(restated)
NET REVENUE				8,807			5,883

COST OF REVENUE				(4,563	)		(3,580	)

GROSS PROFIT				4,244			2,303

OPERATING EXPENSES
Selling expenses				105			122
General and administrative expenses				1,510			883

TOTAL OPERATING EXPENSES				1,615			1,005

INCOME(LOSS) FROM OPERATIONS				2,629			1,298

OTHER INCOME(EXPENSES)
Other non-operating income				5			9
Interest expense				(178	)		(245	)
Other expenses				(8	)		(3	)
OTHER INCOME (LOSS) NET				(181	)		(239	)

INCOME (LOSS) BEFORE INCOME TAXES				2,448			1,059
Income tax				(44	)		(553	)
INCOME BEFORE MINORITY INTEREST				2,404			506
Minority interest				(108	)		(33	)
NET INCOME				2,296			473
Other comprehensive income
Foreign currency translation adjustments				197			192
COMPREHENSIVE INCOME				2,493			665
Earnings Per Share -Basic		21		0.10			0.03
Weighted Average Shares Outstanding- Basic				22,670,835			14,306,730
Earnings Per Share-Diluted				0.10			0.03
Weighted Average Shares Outstanding- Diluted				23,917,039			14,306,730

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

Sinoenergy Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands of United States dollars)

	Number of Common Shares Issued		Par Value Common Stock		Par Value Series A Preferred Stock			Additional Paid in Capital		Statutory Surplus Reserve Fund		Accumulated Other Comprehensive Income		Retained Earning		Capital Surplus		Total Stock- holder’s equity
Balance, December 31, 2006		14,636,472		15		6			9,935		1,140		348		4,576		20		16,040

Issuance of common stock on conversion of series A preferred stock		5,457,619		6		(6	)												-
Issuance of common stock on exercise of warrants		11,089,286		10					11,316										11,326
Issuance of warrants									37										37
Grant of stock options									345										345
Net income for the period															2,296				2,296
Comprehensive income													197						197
Balance, June 30, 2007		31,183,377		31		-			21,633		1,140		545		6,872		20		30,241

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)

	Six Months ended June 30, 2007			Six Months Ended June 30, 2006 (restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		2,296			473
Issuance of warrants		37			160
Grant of stock options		345
Minority interest		108			33
Depreciation		246			145
Amortization of intangible assets		139			93
Provision for doubtful accounts		(11	)		4
Changes in operating assets and liabilities:
Decrease in accounts receivable		(696	)		(3,359	)
(Increase) in other receivables, deposits and prepayments		(3,899	)		(1,924	)
(Increase)/decrease in inventories		(751	)		29
Increase in accounts payable		808			853
Increase/(decrease) in accrued expenses		6			20
Increase/(decrease) in advances from customers		2,460			(408	)
(Decrease)/increase in other payables		(1,486	)		1,134
Increase in income tax payable		129			591

Net cash (used in ) operating activities		(269	)		(2,158	)

CASH FLOWS FROM INVESTING ACTIVITES
Payment for purchase of property, plant and equipment		(3,032	)		(65	)
Payment for purchase of land use right		(2,659	)		-
Purchase of minority interest in subsidiaries		(2,818	)

Net cash used in investing activities		(8,509	)		(65	)

CASH FLOWS FROM FINANCING ACTIVITES
Cash received from bank loan		971			-
Cash received from capital contribution		-			3,101
Cash received from warrants exercise		11,326			-

Net cash provided in financing activities		12,297			3,101

Effect of changes in exchange rate		197			-

Net increase in cash		3,716			878
Cash at beginning of the year		588			334

Cash at end of the year		4,304			1,212
Supplementary Cash flow disclosure:
Interest Paid		178			86

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

Notes to Consolidated Financial Statements

1.	Management’s Responsibility for Interim Financial Statements

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 its consolidated financial position and the results of its operations 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-KSB annual report for the year ended December 31, 2006. Results for the first six months of 2007 are not necessarily indicative of results for the year.

2.	The Company

(a) Recapitalization Transaction

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

On June 2, 2006, Sinoenergy acquired all of the issued and outstanding capital stock of Sinoenergy Holding Limited (“Sinoenergy Holding”) in exchange for 14,215,385 shares of common stock. Sinoenergy Holding owns all of the registered capital 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 Sinoenergy and the business of Sinogas became the business of Sinoenergy. In connection with this acquisition, the Company purchased 3,305,000 shares of common stock from former stockholders for $213,525. The 14,215,385 shares of common stock issued to the stockholders of Sinoenergy Holding represented a controlling interest in the equity of the Company. Although the legal acquiring party is the Company (then known as Franklyn), the accounting acquiring party is Sinogas. Under generally accepted accounting principles, the acquisition of Sinogas by Sinoenergy Holding and by the Company of Sinoenergy Holding are considered to be capital transactions in substance, rather than business combinations. That is, the acquisitions are equivalent, in the acquisition of Sinoenergy Holding and Sinogas, to the issuance of stock by Sinogas for the net monetary assets of Sinoenergy Holding, and in the Sinoenergy Holding acquisition, the issuance of stock by Sinoenergy Holding for the net monetary assets of Sinoenergy. Each transaction is accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition, except that no goodwill is recorded. Under reverse takeover accounting, the comparative historical financial statements are the financial statements of Sinogas, as the accounting acquirer. The accompanying financial statements reflect the recapitalization of the stockholders’ equity as if the transactions occurred as of the beginning of the first period presented.

(b) Financing Transaction

In connection with the acquisition of Sinoenergy Holding, the Company entered into a securities purchase agreement pursuant to which the Company issued, for $3,700,000, its 6% convertible notes in the principal amount of $3,700,000, 390,087 shares of common stock, and warrants to purchase 6,342,858 shares of common stock at $.85 per share, 6,342,858 shares of common stock at $1.20 per share and 6,342,858 shares of common stock at $1.75 per share. The $1.75 warrants expired unexercised on December 31, 2006. The convertible notes were automatically converted into 5,692,307 shares of series A preferred stock on September 28, 2006 when the Company amended its articles of incorporation and filed a certificate of designation for the series A preferred stock. Each share of series A preferred stock is convertible into one share of common stock, subject to adjustment. For the six months ended June 30, 2007, a total of 5,457,619 shares of series A preferred stock were converted into common stock.

(c) Amendment to Articles of Incorporation

On September 28, 2006, the Company’s articles of incorporation were amended and restated. The restated articles of incorporation changed the Company’s name to Sinoenergy Corporation and created a class of 10,000,000 shares of preferred stock, par value $0.001 per share, with the directors having broad powers to set the rights, preferences, privileges and limitations of one of more series of preferred stock, and increased the authorized common stock to 100,000,000 shares of common stock, par value $0.001 per share. On September 28, 2006, the Company also filed a certificate of designation setting forth the rights, preferences, privileges and limitations of the series A convertible preferred stock. As a result of the filing of the restated articles of incorporation and the certificate of designation for the series A preferred stock, the 6% convertible notes were automatically converted into an aggregate of 5,692,307 shares of series A preferred stock, of which 5,457,619 shares of series A preferred stock were convered into common stock by June 30, 2007.

(d) History of Sinogas

Qingdao Sinogas General Machinery Limited Corporation (“Sinogas”) was registered in Qingdao, China in October 29, 2004, as a limited liability company under the laws of the PRC, and the registered capital was $7.5 million, which was paid in full.

On November 29, 2005, Qingdao Foreign Trade and Economic Cooperation Bureau approved the purchase by Sinoenergy Holding (a company registered in British Virgin Islands) of all the shares from the former shareholders of Sinogas and Sinogas changed from the domestic investment limited liability company into the wholly-owned foreign investment enterprise.

(e) The business of Sinogas

In accordance with provisions of Articles of Association and Business License, the business term of Sinogas is fifteen years, from October 29, 2004 to October 29, 2019.

Sinogas manufactures pressure containers of class 1, 2, 3 petroleum refinery equipment, designs and installs compressed natural gas station equipment, and compressed natural gas storage and transportation equipment.

(f) Subsidiaries of the Company

Sinoenergy Holding is a wholly-owned subsidiary of Sinoenergy, and Sinogas is a wholly-owned subsidiary of Sinoenergy Holding.

Sinogas and Qingdao Kangtai Machinery Equipment Manufacture Co. Limited (“Kangtai”), a non-affiliated party, established Qingdao Sinogas Yuhan Chemical Equipment Co., Ltd. (“Yuhan”), which, at December 31, 2006 and June 30, 2007, was 90% owned by Sinogas and 10% owned by Kangtai. When Yuhan was organized, the Company owned 55% of Yuhan. The Company has entered into an agreement to purchase 35% of Yuhan for approximately $1,500,000. As of June 30, 2007, the Company had paid a total of $1.2 million and owed $300,000 to Kangtai, and held 90% equity of Yuhan. The agreement, as amended, gives the Company the right to buy the remaining 10% interest in Yuhan during the first six months of 2008 for approximately $640,000.

The term of the business of Yuhan is from May 25, 2005 to April 30, 2009 and the business scope is to manufacture, process and install machinery facilities (not including special equipments and cars); as the wholesaler and retailer of steels, machinery and electronic products, hardware, chemical equipment (not including dangerous equipments).

In June 2006, Sinoenergy, Sinogas (through Beijing Sanhuan as its trustee), Wuhan Fukang Automotive Cleaning Energy Company (“Wuhan Cleaning Energy”) and Wuhan Yixiang Industry Trade Company (“Wuhan Yixiang”), signed a cooperation agreement to establish Wuhan Sinoenergy Gas Company (“Wuhan Sinoenergy”) to operate CNG stations. Based on the agreement, the Company, through Sinoenergy and Sinogas, contributed $3,375,000 for a 90% interest, and each of Wuhan Clean Energy and Wuhan Yixiang contributed $190,000 for a 5% interest each. On August 2, 2006, Wuhan Administration Bureau for Industry and Commerce issued a business license to Wuhan Sinoenergy. The term of the business of Wuhan Sinoenergy is from August 2, 2006 to August 2, 2026.

In November 2006, Sinoenergy, Sinogas (through Beijing Sanhuan as its trustee) Pingdingshan Jinlongma Vehicle Company (“Jinglongma”), signed a cooperation agreement to establish Pingdingshan Sinoenergy Gas Company (“Pingdingshan Sinoenergy”) to operate CNG stations. The Company, through Sinoenergy and Sinogas, is to contribute capital of $1,921,000, of which it had contributed $875,000 through June 30, 2007, for which it received a 90% interest. For a 10% interest, Jinglongma agreed to contribute capital of $192,000, of which it contributed $29,074 through June 30, 2007. On December 4, 2006, Pingdingshan Administration Bureau for Industry and Commerce issued a business license to Pingdingshan Sinoenergy. The term of the business of Pingdingshan Sinoenergy is from December 4, 2006 to December 3, 2026.

In connection with the Wuhan Sinoenergy and Pingdingshan Sinoenergy agreement, Sinogas and Beijing Sanhuan signed trust agreement, pursuant to which Sinogas has appointed Beijing Sanhuan as its trustee to hold a portion of its shares of Wuhan Sinoenergy and Pingdingshan Sinoenergy, respectively. According to the trust agreement, except for providing any required information for the entity’s registration, Beijing Sanhuan, as a trustee of Sinogas, does not have any right and liabilities of a stockholder and does not take part in management of the entity.

On February 1, 2007, the Company and Hong Kong China New Energy Development Investment Co. Ltd (“New Energy”), signed a cooperation agreement relating to an investment in the construction and operation of CNG stations with the Huangmei County government. Pursuant to the agreement, New Energy and the Company will form a natural gas company named Hubei Gather Eenergy Gas Co., Ltd (“Hubei Gather”) in Huangmei to construct and operate a super-large CNG mother station with expected annual processing capacity of 100-300 million cubic meters in the Huangmei region. The registered capital is $5 million of which Sinoenergy Holding Ltd will contribute $2,750,000 and New Energy will contribute $2,250,000. On March 23, 2007, Hubei Gather received a business license. The term of the business of Hubei Gather is from March 23, 2007 to March 22, 2027. As of June 30, 2007, $752,474 has been invested in Hubei Gather by the Company and New Energy.

On April 20, 2007, the Company and Green Fuel signed equity purchase agreement, pursuant to which the Company will purchase the 45% equity of Anhui Gather owned by Green Fuel for the price of $2,750,000 including $344,330 register capital paid by Green Fuel and $500,000 for the cost to obtain 200 million cubic meters natural gas quota from Sinopec. As of June 30, 2007, the Company had paid $844,330 to Green Fuel. The Company is to pay the remaining $1,905,670 to Anhui Gagher according to requirement of PRC government. On July 4, 2007, Anhui Gather received PRC government approval for the transfer of the stock interest and its business license was updated accordingly.

Anhui Gather was incorporated on March 23, 2007, with Hong Kong China New Energy Development Investment Co. Ltd owning 55% equity and Green Fuel owning 45% equity. The business scope was to construct and operate a super-large CNG mother station with expected annual processing capacity of 100-300 million cubic meters. As of August 10, 2007, Anhui Gather is in development stage and has not yet commenced operations.

In March 2007, the Company purchased a 60% interest in Jiaxing Lixun Automotive Electronic Co, Ltd (“Lixun”) from its shareholders for approximately $390,000, which has been paid. 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. In connection with the transfer of the shares, Lixun received a new business license. Lixun’s operation has been consolidated with the Company’s financial statements since April 1, 2007.

On March 18, 2007, Sinogas and Shanghai CNPC Enterprise Group signed a cooperation agreement to establish Xuancheng Sinoenergy Vechcle Gas Company (“Xuancheng Sinoenergy”) to operate CNG stations. Shanghai CNPC Enterprise has contributed $905,000 for 70% interest and Sinogas has contributed $388,000 for a 30% interest. On March 26, 2007, Xuancheng Administration Bureau for Industry and Commerce issued a business license to Xuancheng Sinoenergy. Since the Company has a minority interest in Xuancheng Sinoenergy, it records this investment under equity method.

On April 20, 2007, the Company and Shanghai CNPC Enterprise Group (CNPC Enterprise) signed equity purchase agreement, pursuant to which the Company will purchase the 70% of Xuancheng Sinoenergy Gas owned by CNPC Enterprises for the price of $1,772,700. Xuancheng Sinoenergy Gas was incorporated on March 26, 2007. The Company owns 30% and CNPC Enterprise owns 70% of the equity in this enterprise. Xuancheng Sinoenergy is in the development stage and has not yet commenced operation.

As of the date of this report, the transaction has not closed and the Company has paid $722,211 to CNPC Enterprise.

3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements of the Company and its subsidiaries were prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”).

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company’s management believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. Results of operations for the interim periods are not necessarily indicative of results for the entire year.

Use of Estimates

In preparing financial statements in conformity with GAAP, management is required to make estimates 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 revenues and expenses during the reported periods. Significant estimates include depreciation and allowance for doubtful accounts and other receivables, the valuation and costing of inventory, depreciation of property, plant and equipment, impairment of long-lived assets, income taxes and contingencies. Actual results could differ from those estimates.

Goodwill

Goodwill represents the excess of purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually unless business events indicate an impairment test is required. 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 the goodwill is written down to the implied fair value of the goodwill through a charge to expense. The goodwill on the Company’s financial statements was a result of the Yuhan acquisition, and relates entirely to the pressure container reporting segment.

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, 2007 and 2006, the Company did not have any cash equivalents.

Allowance for Doubtful Accounts

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

Inventories

Inventories comprise of raw materials, work in process, finished goods and low value consumable articles and are stated at the lower of cost and market. 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.

Long-term investments

Investments in entities in which the Company owns more than 20% and not more than 50% of the equity and voting rights and does not have a control position are accounted for on the equity method. Investments in entities in which the Company owns less than 20% of the equity and voting rights are stated at cost, and are reviewed periodically to determine whether there is an impairment in the value of the investments.

Property, Plant and Equipment

Management estimates a 10% residual value for its property, plant and equipment according to industry standards in the PRC. The estimated useful lives are as follows:

Buildings and facilities			20 years
Machinery and equipment			8 years
Motor vehicles			10 years
Office equipment and others			5 to 8 years

The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets, and, if any, is recognized in the statements of operations.

Intangible Assets

Intangible assets, representing patents and technical know-how acquired, are stated at cost less accumulated amortization and impairment losses. Amortization is calculated on the straight-line method over the estimated useful lives of 10 years. The technical know-how, which was acquired at the end of 2004 is valued and amortized according to relevant industry standard. The patent was acquired in May 2005, and is amortized over the 10-year life of the patent.

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. The land use right for the land on which Sinogas’ facilities are recorded as an intangible asset.

Impairment of Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the Company evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment. If indicators of impairment exist and if the value of the assets is impaired, an impairment loss would be recognized.

Revenue Recognition

Revenue Recognition - The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to PRC law, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, sales and value added tax laws have been complied with, and collectibility is probable.

The Company recognizes product sales generally at the time the product is shipped. CNG construction and building technical consulting service revenue is recognized on the percentage of completion basis. The revenue is measured by reference to the proportion of construction work completed to the total estimated work according to the report provided by technical department of the Company, and the cost is recognized based on total contracted cost and the percentage of completion basis. Receivables and payables are recorded accordingly. Revenue is presented net of any sales tax and value added tax.

Value Added and Business Taxes - The Company is subject to value added tax (“VAT”) for manufacturing products and business tax for services provided. The applicable VAT tax rate is 17% for products sold in the PRC, and the business tax rate is 5% for services provided in PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT paid on purchases made with the relevant supporting invoices (input VAT). VAT is collected from customers by the Company on behalf of the PRC tax authorities and is therefore not charged to the consolidated statements of operations.

We pay VAT and business tax based on tax invoices issued. The tax invoices may be issued subsequent to the date on which revenue is recognized, and there may be a considerable delay between the date on which the revenue is recognized and the date on which the tax invoice is issued. In the event that the PRC tax authorities dispute the date of which revenue is recognized for tax purposes, the PRC tax office has the right to assess a penalty, which can range from zero to five times the amount of the taxes which are determined to be late or deficient. According to the PRC tax laws, any potential tax penalty payable on late or deficient payments of this tax could be up to five times the amount of the late or deficient tax payable, and will be expenses as a period expense if and when a determination has been made by the taxing authorities that a penalty is due.

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. Based on its experience and industry practice, the Company determined that the warranty rate was is 0.2 % of gross sales.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, 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 expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, 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 reviewed the differences between the tax basis under PRC tax laws and financial reporting under PRC GAAP. Temporary differences, resulting in deferred tax assets or liabilities have been recognized in the financial statement.

Foreign Currency Transactions

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 reporting period. Translation gains and losses are deferred and accumulated as a component of accumulated other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.

Fair Value of Financial Instruments

SFAS No. 107, “Disclosures about Fair Values of Financial Instruments,” requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.

For certain financial instruments, including cash, account receivable, related party and other receivables, accounts payable, other payables and accrued expenses, it was assumed that the carrying amounts approximate fair value because of the near term maturities of such obligations.

Minority Interest

The minority interest refers to the percentage of a subsidiary which is not owned by the Company. The Company eliminates the minority interest portion of any related profits and losses in consolidation.

Stock-Based Compensation

The Company may issue stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services and for financing costs. The Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Accounting for Stock-Based Compensation,” which establishes a fair value method of accounting for stock-based compensation plans. In accordance with SFAS No. 123R, the cost of stock options and warrants issued to employees and non-employees is measured at the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive benefit, which is generally the vesting period.

Earnings Per Share

Basic earnings per share is computed by dividing the earnings for the year by the weighted average number of shares of common stock outstanding for the year. Diluted earnings per share reflects the potential dilution of securities by including shares of common stock issuable upon exercise or conversion of series A preferred stock, stock options granted and warrants, in the weighted average number of common shares outstanding for a period, if dilutive.

Comprehensive Income and Loss

The Company has adopted the provisions of Statement of Financial Accounting Standards No.130, “Reporting Comprehensive Income” (“SFAS No.130”). SFAS No.130 establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. SFAS No.130 defines comprehensive income (loss) to include 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 (loss) is foreign currency translation gain of $176,000 and $195,000 for the three months and six months ended June 30, 2007 respectively. This foreign currency translation gain has been recorded as a separate component of stockholders’ equity.

4. Account Receivables and Allowance for Doubtful Receivables

Details of allowance for doubtful receivables deducted from accounts receivable are as follows (dollars in thousands):

	June 30, 2007		December 31 , 2006
	(unaudited)
Accounts receivable	$	5,165	$	4,468
Less: allowance for doubtful accounts		72		97

Balance	$	5,093	$	4,371

(a) Accounts receivable from related parties

Accounts receivable at June 30, 2007 include the following related party receivables: $515,968 due from Kangtai, the minority stockholder of Yuhan, for sales made by Kangtai on behalf of Yuhan.

Accounts receivable at December 31, 2006 include a $593,821 receivable from Kangtai for sales made by Kangtai on behalf of Sinogas and Yuhan.

(b) Accounts receivable from third parties

Accounts receivable at June 30, 2007 include the following accounts receivable from third parties: $1,196,449 for CNG deposit and transportation equipment sales, $939,593 for pressure container sales; $1,910,577 due from Wuhan Fukang Automotive Cleaning Energy Company, the 5% minority stockholder of Wuhan Sinoenergy, for sales of conversion kits.

Accounts receivable at December 31, 2006 include the following significant accounts receivable from third parties: $1,125,238 representing the balance of a $1.9 million CNG deposit and transportation equipment sales to a petrochemical company in Shanghai; $909,242 representing the balance for CNG station technical supporting and construction consulting service provided to a Shanghai company with the total sales amount of $1.28 million.

5. Other Receivables

(a) Other Receivable from Related Parties

Other receivables from related parties includes $335,237 receivables from Beijing Sanhuan for advances made in connection with the purchase of the land use right from Bejing Sanhuan; $136,314 for rental fee as well as water and power charge to Kangtai, and $177,302 from an unsecured loan due from Kangtai. The balance also includes $262,622 unsecured loan to Xuancheng Sinoenergy Gas Co., of which the Company owns a 30% equity interest.

The related party balance as at December 31, 2006 was the receivable balance from Kangtai for rental fee, water and power fee as well as unsecured loan.

(b) Other Receivable from Third Party

Other receivables from third parties at June 30, 2007 represents primarily $656,555 due from Zhongyuanhang for unsecured loan, $636,622 due from Jiangsu Dongfanghong Fertilizer Co. for unsecured loan; $315,146 for unsecured loan to Qingdao Mechanism Development Co.; $272,702 unsecured loan to China New Energy, which has been repaid in July 2007.

Other receivables from third party at December 31, 2006 mainly represent $502,484 due from Shanghai Zhongyou Group, which in the third quarter of 2006 assumed the debt owned by Xuancheng City Gas (subsidiary of Shanghai Zhongyou Group) to the Company for equipment.

6(1). Deposits and Prepayments

The balance at June 30, 2007 mainly represents $423,269 prepayment to a supplier, Tianjing Green Fuel Co., for components parts of conversion kits purchased by the Company for installing conversion kits as well as several prepayments to other suppliers for routine operating business.

The prepayment balance at December 31, 2006 of $3,187,000 represents deposits to overseas suppliers for CNG station equipment purchase by the Company for use in the construction of CNG filling stations.

6(2). Other long-term assets

The balance at June 30, 2007 represents some prepayments for long-lived assets as well as prepayments for long-term equity investment and prepayments for land use right title deed, payment for a 45% equity interest in Anhui Gather and for a 70% equity interest in Xuancheng Sionenergy.

The detailed background information about the prepayment is as following:

(a)

$2,100,978 temporary unsecured loan to Beijing Sanhuan: On May 8, 2007, in order to acknowledge and compensate Beijing Sanhuan for the increase in the value of land use right and the additional expenses incurred, the Company and Beijing Sanhuan signed loan agreement, pursuant to which Sinogas agreed to lend $2,100,978 to Beijing Sanhuan, and Beijing Sanhuan pledged to complete the transfer of title to the land use right to Sinogas before the end of June 2007,. The loan to Beijing Sanhuan is to be offset against the increase in the purchase price for the land use right. On May 14, 2007, the Company received the land use right title deed.

(b)

$722,211 prepayment to Shanghai CNPC Enterprises (CNPC Enterprises): On April 20, 2007, the Company and CNPC Enterprises signed equity purchase agreement, pursuant to which the Company will purchase 70% of Xuancheng Sinoenergy Gas owned by CNPC Enterprises at the price of $1,772,700. As of June 30, 2007 the transaction has not closed, so the Company recorded the initial payment as prepayment.

(c)

$844,330 prepayment to Tianjin Green Fuel Company (Green Fuel): On April 20, 2007, the Company and Green Fuel signed equity purchase agreement, pursuant to which the Company will purchase the 45% equity of Anhui Gather owned by Green Fuel at the price of $2,750,000. As of June 30, 2007, the transaction has not closed, so the Company recorded the down-payment as prepayment;

(d)

The balance also includes $2,232,000 prepayments for CNG station equipment from overseas. This equipment will be used to construct CNG filling stations as long-term fixed assets.

7. Inventories

Inventories at June 30, 2007 and December 31, 2006 are summarized as follows (in thousand US dollars):

	June 30, 2007		December 31, 2006
Raw materials	$	888	$	339
Work in progress		333		483
Finished goods		467		115
Total	$	1,688	$	937

The Company seeks to keep inventory at a minimum level needed for efficient production.

8. Long-term investment

On March 18, 2007, Sinogas and Shanghai CNPC Enterprise Group signed an agreement to establish Xuancheng to operate CNG stations. Shanghai CNPC Enterprise contributed $905,000 for 70% equity and Sinogas contributed $390,000 for a 30% interest. The Company accounts for this investment under the equity method.

9. Property, Plant and Equipment

As of June 30, 2007 and December 31, 2006, property, plant and equipment consist of following (in thousand US dollars):

	June 30, 2007		December 31, 2006
Cost
Buildings and facility	$	4,949	$	2,736
Machinery equipment		1,583		2,137
Motor vehicles		320		153
Office equipment and others		162		70
	$	7,014	$	5,096
Accumulated depreciation
Buildings and facility	$	435	$	379
Machinery equipment		372		1,139
Motor vehicles		27		8
Office equipment and others		24		14
	$	858	$	1,540
Carrying value
Buildings and facility	$	4,514	$	2,357
Machinery equipment		1,211		998
Motor vehicles		293		145
Office equipment and others		138		56

	$	6,156	$	3,556

Included in the cost of buildings and facility is $1,833,417, representing construction-in-process relating to the construction of CNG stations by Wuhan Sinoenergy and Pingdingshan Sinoenergy and Hubei Gather, which commenced in August 2006, December 2006 and March 2007, respectively.

10. Intangible Assets

	June 30, 2007			December 31, 2006
Cost
Patent, technology know-how	$	294		$	290
Land use right		12,475			12,294
Total	$	12,769		$	12,584

Accumulated amortization		(608	)		(470	)

Carrying value	$	12,161		$	12,114

Patents and technology know how are amortized over 10 years up to September, 2014 Included in the cost of patent and know-how, $91,000 is the technical know how purchased and $226,000 is paid in capital from Kangtai (minority shareholder) when the Yuhan was incorporated.

The land use right is the land use right which was purchased by the Company from Beijing Sanhuan. The Company has an agreement with Beijing Sanhuan, a related party, pursuant to which Beijing Sanhuan is to transfer to Sinogas the land use right relating to the land on which Sinogas’ facilities are located. The purchase price for the land use right was initially approximately $12.3 million. The purchase price for the land use right was increased to $18.6 million pursuant to an amendment to the sales agreement, as a result of increased costs and an increase in the value of the land use right. Pursuant to the amendment, the increase was conditioned upon Beijing Sanhuan providing the Company with a special purpose audit report to support the increased cost, and the management is to engage third party independent professionals to provide a report for the land use right valuation. As of the date of this report, the land use right valuation is under process and Beijing Sanhuan has not provided the Company with the special purpose audit report.

In May 14, 2007, the Company received the land use right title deed, and the land use right have a term of 50 years from the date of approval. As of June 30, 2007, Sinogas has paid $12.3 million to Beijing Sanhuan and advanced Beijing Sanhuan $2.1 million, which will be used to offset the increase in the purchase price of the land use right.

11. Goodwill

On May 25, 2006, the Company and Kangtai formed Yuhan, in which the Company then held a 55% interest and Kangtai held a 45% interest. In August 2006, the Company entered into an agreement to acquire the remaining 45% interest for a purchase price of approximately $1.5 million, which was payable in installments. At June 30, 2007, the Company’s financial statements reflect a 90% ownership of Yuhan, based on having received government approval for the Company’s ownership of a 90% interest in Yuhan. As of June 30, 2007, the Company had paid a total of $503,000 and owed $997,000 with respect to the purchase of a 35% interest in Yuhan, which brought the Company’s interest in Yuhan to 90%. The agreement, as amended, gives the Company the right to buy the remaining 10% interest in Yuhan during the first six months of 2008 for approximately $640,000. The consolidated balance sheet reflects goodwill of $676,000, which represents the excess of the purchase price for 35% of Yuhan’s equity over 35% of Yuhan’s fair value of net asset at date of acquisition. There was no impairment of the goodwill in the six months ended June 30, 2007.

12. Short Term Loan

The Company has a $1.2 million short term loan from Shenzhen Development Bank, Qingdao Branch (“Shenzhen Development Bank”). On November 27, 2006, the Company received a short term loan from Shenzhen Development Bank secured by an account receivable of Sinogas of $1,949,546. The loan bears interest at 5.58% per annum plus 1% service fee and is due on November 26, 2007.

In March 2007, the Company received a $646,479 short term loan from China CITIC Bank Qingdao Branch (CITIC Qingdao). The loan bears interest at 7.02% and is due on March 30, 2008. China Yuanhang Gas Company (Yuanhang Gas), an import agent of the Company signed a ceiling guarantee contract, pursuant to which Yuanhang Gas guarantees the ceiling amount of $2.5 million loan obligations to CITIC Qingdao. There was no guarantee cost incurred for the guarantee contract.

On April 30, 2007, the Company borrowed approximately $2,585,000 from Bank of Communication Qingdao 1st Branch (Qingdao Communication Bank). The loan, which is due on April 30, 2008, bears interest at 6.39% per annum, and is subject to adjustment based on changes in the interest rate charged by China People Bank.

13. Other Payables

(a) Other Payables to Related Parties:

$306,392 payable to Kangtai for the unpaid part of the 35% acquisition of the equity of Yuhan by the Company, $1,293 to Mr. Guiqiang Shi who is a stockholder of Kangtai; and $37,818 payables to Mr. Tanzhou Deng, the chairman of the Company, which are carried forward from the balance of December 31, 2006.

(b) Other Payables to Third Parties

The balance to third party as of June 30, 2007 mainly represents $836,671 value added tax, business tax and other taxes payables and $40,000 payable to auditor for 1^st and 2^nd quarter review;

14. Advances from Customers

Advances from customers at June 30, 2007 and December 31, 2006 were primarily the advances received for sales according to the Company’s sales contracts.

15. Income Taxes Payable

Pursuant to the PRC Income Tax Laws, the Company’s subsidiaries are subject to enterprise income tax at a statutory rate of 33% (30% national income tax plus 3% local income tax).

Being licensed as foreign owned manufacturing enterprise, Sinogas and Yuhan, Wuhan Sinoenergy were granted a corporate income tax holiday, with a 100% corporate tax exemption for the first two years (2006 and 2007) and a 50% corporate tax exemption for the following three years (2008-2010).

No provision for American tax and for British tax is made as Sinoenergy Holding and Sinoenergy are all investment holding companies, and has no assessable income either in the United State or the British Virgin Islands.

16. Minority Interests’ Equity

The activities of the minority interests’ equity during the three months ended June 30, 2007 are summarized as follows:

Beginning balance (December 31, 2006)		614
Minority interests in income		108
Contributions from minority stockholders		494
Balance, June 30, 2007	$	1,216

17. Related Party Relationships and Transactions

The principal related companies and related parties with which the Company had transactions in the three months ended June 30, 2007 and 2006, are as follows:

Name of related party		Relationship
Beijing Sanhuan Technology Development Co., Ltd (Beijing Sanhuan)		Parent company of a subsidiary before November 8, 2005. Legal representative of Beijang Sanhuan is the Company’s CEO .
Qingdao Kangtai Machinery Equipment Manufacture Co. Limited (Kangtai) Xuancheng Sinoenergy Gas (Xuancheng) Name of Related Party Mr. Guili Shi Mr. GuiQiang Shi Mr. Tanzhou Deng		Minority shareholder of a subsidiary (Yuhan) from May 2005 Significant effect (the Company is 30% equity owner of it) Shareholder of Kangtai Shareholder of Kangtai Chairman of the Company

Significant transactions between the Company and its related parties during the three and six months ended June 30, 2007 and 2006 are as follows:

(1)

Sales and purchase transactions with related parties

	For the three months ended June 30,		For the six months ended June 30,
Name of the Company	2007	2006	2007	2006
Kangtai	--	Sales with amount of $672,945	--	Sales with amount of $1,481,503

Kangtai is the predecessor company of Yuhan. Kangtai purchases products from Yuhan to fill open purchase orders. Yuhan completed those contracts that were made by Kantai prior the separation.

The sales and purchases to and from related parties were made according to a price mutually agreed after taking into consolidation of prevailing market prices.

(2)

Related-company receivables

Name of the Company	June 30, 2007 (unaudited)	December 31, 2006
Beijing Sanhuan	-$2,436,215 short-term borrowing

Xuancheng Sionenergy	-$262,622 inter-company loan

Kangtai	-$136,314 receivables for water and power and fee charge; -$177,302 inter-company loan - $515,968 sales received on behalf of the Company	- $837,916 inter-company receivables for rental fee; - $236,313 receivables for water and power fee charge and unsecured loan; - $593,821 sales received on behalf of the Company

(3)

Related-company and related party payables

Name of the Company	June 30, 2007 (unaudited)	December 31, 2006
Beijing Sanhuan		- $3,112,071 payables for land use right; - $451,734 for know-how using of CNG station system integration

Kangtai	- $306,392 unpaid part for 35% equity purchase of Yuhan	- $811,061 payable for 35% equity purchase of Yuhan;

Mr.Tianzhou Deng	- $37,818	- $129,073

Mr. Guili Shi		- $18,996

Mr. GuiQiang Shi	- $1,293	- $1,264

The amounts due from and to related parties are interest free, are unsecured and are with no fixed terms.

18. Statutory Surplus Reserve Fund

In accordance with PRC regulations, Sinogas is required to make appropriations to the statutory surplus reserve fund, based on after-tax net income determined in accordance with PRC GAAP. According to the Memorandum and Articles of Association of Sinogas, appropriation to the statutory surplus reserve fund should be at least 10% of the after-tax net income determined in accordance with the PRC GAAP until the reserve fund is equal to 50% of the entity’s registered capital. Appropriations to the statutory public welfare fund should be at least 5% of the after-tax net income determined in accordance with the PRC GAAP. Statutory surplus reserve is established for the purpose of remedying Sinogas’ losses, expanding operations, or increasing registered capital, and is non-distributable other than in liquidation.

19. Segment Information

Operating segments are defined by SFAS No.131, “Disclosure about Segments of an Enterprise and Related Information,” 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. At June 30, 2007, the Company has four operating segments, which are (i) non-standard pressure containers, (ii) CNG station construction and CNG station service and (iii) CNG operation business, which is in the development stage (iv) CNG vehicle conversion kits, and at June 30, 2006, it has the two segments listed in (i) and (ii).

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

The following tables set forth information relating to our business segments for the three and six months ended June 30, 2007 (dollars in thousands).

Three months ended June 30, 2007	Non-standard pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net revenue	$	1,236		$	2,345			-		$	2,600		$	6,181
Cost of revenues		615			672			-			1,685			2,972
Gross profit		621			1,673			-			915			3,209
Gross margin		50	%		71	%					35	%		52	%
Operating expenses:
Selling expenses	$	22		$	10		$	7		$	26		$	65
General and administrative expenses		214			327			209			178			928
Total operating expense		236			337			216			204			993
Income (loss) from operations	$	385		$	1,336			($ 216	)	$	711		$	2,216

Three months ended June 30, 2006	Non-standard pressure containers			CNG station facilities and construction			CNG station Operation		Total
Net revenue	$	1,997		$	1,386			-	$	3,383
Cost of revenues		1,657			527			-		2,184
Gross profit		340			859			-		1,199
Gross margin		17	%		62	%				35	%
Operating expenses:
Selling expenses	$	54		$	4			-	$	58
General and administrative expenses		185			372			-		557
Total operating expense		239			376			-		615
Income (loss) from operations	$	101		$	483			-	$	584

Six months ended June 30, 2007	Non-standard pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net revenue	$	2,019		$	4,188			-		$	2,600		$	8,807
Cost of revenues		1,229			1,649			-			1,685			4,563
Gross profit		790			2,539			-			915			4,244
Gross margin		39	%		61	%					35	%		48	%
Operating expenses:
Selling expenses	$	27		$	45		$	7		$	26		$	105
General and administrative expenses		294			563			475			178			1,510
Total operating expense		321			608			482			204			1,615
Income (loss) from operations	$	469		$	1,931			($482	)	$	711		$	2,629

Six months ended June 30, 2006	Non-standard pressure containers			CNG station facilities and construction			CNG station Operation		Total
Net revenue	$	3,165		$	2,718			-	$	5,883
Cost of revenues		2,586			994			-		3,580
Gross profit		579			1,724			-		2,303
Gross margin		18	%		63	%				39	%
Operating expenses:
Selling expenses	$	94		$	28			-	$	122
General and administrative expenses		305			578			-		883
Total operating expense		399			606			-		1,005
Income (loss) from operations	$	180		$	1,118			-	$	1,298

20. Capital Stock

(a) Common stock issued on conversion of series A preferred stock and exercise of warrants

As part of the June 2006 private placement, the Company issued (i) notes in the aggregate principal amount of $3,700,000, which were automatically converted into 5,692,307 shares of series A preferred stock in September 2006, (ii) 390,087 shares of common stock and (iii) warrants to purchase 6,342,858 shares of common stock at $0.85 per share, 6,342,858 shares of common stock at $1.20 per share, and 6,342,858 shares of common stock at $1.75 per share. The $1.75 warrants expired unexercised on December 31, 2006. The $0.85 warrants and the $1.20 warrants expire in June 2011.

At December 31, 2006, all of the shares of series A preferred stock and all of the $0.85 warrants and $1.20 warrants were outstanding.

During the six months ended June 30, 2007, 5,457,619 shares of common stock were issued upon conversion of series A preferred stock. At June 30, 2007, 234,688 series A preferred stock left.

(b) Warrants

	Number of shares issuable on exercise of warrants

	$0.85 Warrants		$1.20 Warrants		$1.75 Warrants		$2.10 Warrants

Balance at December 31, 2005		-		-		-		-

Issued during the year		6,342,858		6,342,858		6,342,858		-

Exercised in the year		-		-		-		-

Expired in the year		-		-		-6,342,858		-

Balance at December 31, 2006		6,342,858		6,342,858		-		-

Issued during the six months								150,000

Exercised in the six months		5,657,143		5,432,143		-		-

Balance at June 30, 2007		685,715		910,715		-		150,000

Proceeds from warrant exercise	$	4,808,571	$	6,518,572		-		-

During the six months ended June 30, 2007, 5,657,143 shares of common stock were issued upon exercise of $0.85 warrants, from which the Company received $4,808,571; 5,432,143 shares of common stock were issued upon exercise of $1.20 warrants, from which the Company received $6,518,572, bringing the total received from warrant exercises to $11,327,143.

(c) Stock option

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 30,000 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 5,000 shares of common stock on first trading day in April of each calendar year, at market price, subject to stockholder approval of the plan, commencing in 2007. Pursuant to the automatic grant provisions of the plan, in June 2006, the Company issued to its independent directors, options to purchase an aggregate of 120,000 shares of common stock at $0.65 per share, being the fair market value on the date of grant.

According to 2006 long-term incentive plan, each independent director would be granted stock option to acquire 5,000 shares of common stock on first trading day in April of each calendar year at market price. On April 1, 2007, the four independent directors were granted 20,000 stock options.

On April 9, 2007, according to 2006 long-term inventive plan, the Company granted five year options to its senior managers and key management to acquire 1,180,000 shares of common stock at $2.00 per share, being the fair market value on the date of grant. These options vest as to 50% of the underlying shares of common stock on August 3, 2007 and as to the remaining 50% on August 3, 2008.

	Option Number		Weighted average exercise price		Remaining contractual life
Options outstanding at December 31, 2006		120,000	$	0.65		4.5 years
Options granted during the period		20,000	$	2.03		4.75 years
Options granted during the period		1,180,000	$	2.00		4.75 years
Options outstanding at June 30, 2007		1,320,000	$	1.88		4.73 years

Options exercisable at June 30, 2007		60,000	$	0.65		3.75 years

The fair value of options grant used for purposes of estimating the expense of the option grants is based on the the Black-Scholes option price model.

21. Basic and Diluted Earnings Per Share

Earnings per share is calculated in accordance with the Statement of Financial Accounting Standards No. 128 (“SFAS No. 128”), “Earnings per share.” SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net earning per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. 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 and stock options 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 breakdown for the fully diluted outstanding shares for the three and six months ended June 30, 2007 is as follows:

	Three months ended June 30, 2007		Six months ended June 30, 2007
Weighted average common stock outstanding during period		27,780,340		22,670,835
Common stock issuable upon conversion of series A preferred stock		234,688		234,688
Common stock issuable pursuant to $.85 warrants		436,901		427,813
Common stock issuable pursuant to $1.20 warrants		444,188		427,150
Common stock issuable pursuant to $2.10 warrants		15,531		7,803
Common stock issuable upon exercise of options outstanding during the period		246,720		148,750
Total diluted outstanding shares		29,158,368		23,917,039

22. Restatement for the comparative figure of three and six months ended June 30, 2006

The statement of operations for the three months ended June 30, 2006 did not include an accrual for (i) the amortization of the land use rights of $61,000, which is included in general and administrative expenses, or (ii) a know-how fee of $151,000 to an affiliated party, which is included in cost of revenue. Also the statement of operations’ accrual for the cost of convertible note was $159,380 less than it should be according to EITF0027.

The following table summarized the result before and after restatement (in thousand of US dollars)

	Three months ended June 30, 2006
	As previously reported			Restated
Net revenue		3,383			3,383
Cost of revenue		(2,033	)		(2,184	)

Gross profit		1,350			1,199
Operating expenses
Selling expenses		58			58
General and administrative expenses		495			557

Total operating expenses		553			615

Income from operations		797			584
Other income (expenses)
Other non-operating income		7			7
Interest expense		(356	)		(203	)
Other expenses		-			-
Other income (Loss)		(349	)		(196	)
Income (loss) before income taxes		448			388
Income tax		(240	)		(240	)
Income (loss) before minority interest		208			148
Minority interest		(11	)		(11	)
Net income		197			137

Earnings per share -basic and diluted		0.01			0.01
Weighted average shares outstanding- basic		14,366,411			14,366,411

	Six months ended June 30, 2006
	As previously reported			Restated
Net revenue		5,883			5,883
Cost of revenue		(3,278	)		(3,580	)

Gross profit		2,605			2,303
Operating expenses
Selling expenses		122			122
General and administrative expenses		760			883

Total operating expenses		882			1,005

Income from operations		1,723			1,298
Other income (expenses)
Other non-operating income		9			9
Interest expense		(398	)		(245	)
Other expenses		(3	)		(3	)
Other income (loss) net		(392	)		(239	)
Income (loss) before income taxes		1,331			1,059
Income tax		(553	)		(553	)
Income (loss) before minority interest		778			506
Minority interest		(33	)		(33	)
Net income		745			473

Earnings per share -basic and diluted		0.05			0.03
Weighted average shares outstanding- basic		14,306,730			14,306,730

23. Commitments and Contingencies

(1) Legal Proceedings - The Company is not currently a party to any material threatened or pending legal proceedings.

(2) Commitments - The Company has the following material contractual obligations and capital expenditure commitments:

(a) The Company has a purchase order with Fornovo Gas S.r.l of Italy for the purchase of 36 compressor units and 60 high capacity dispensers for a total purchase price of $9.6 million.

(b) The Company has a purchase order with LOVATO for the purchase of fittings of conversion kits with the total price of $476,000.

(c) The Company has a purchase order with NK Co., Ltd (a Korea company) for the purchase of steel bottles with total price of $1.14million.

At June 30, 2007, the Company has paid a total of $3,878,802 for the purchase, and $1,551,529 goods have been delivered to the Company for the above mentioned purchase orders in paragraphs (a), (b) and (c) .

(d) During the 2^nd quarter, Wuhan Sinoenergy, the subsidiary of the Company, has leased four lands in Wuhan City for its CNG station. The lease terms are from 10 year to 20 years with annual rental fee of a total of $100,000. Wuhan Sinoenergy has purchased a land use right for land located in Wuhan City for its CNG station at a price of $106,000. As of reporting date, $36,842 has been paid.

24. Retirement Benefits

The full-time employees of the Company are entitled to welfare benefits, including medical care, labor injury insurance housing benefits, education benefits, unemployment insurance and pension benefits through a Chinese government-mandated multi-employer defined contribution plan. The Company is required to accrue the employer-portion for these benefits based on certain percentages of the employees’ salaries. The total provision for such employee benefits was $24,164 and $22,370 for the three months ended June 30, 2007 and 2006, respectively, and were 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.

25. Subsequent Events

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

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

Statements in this report may be “forward-looking statements.” 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 annual 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-KSB and in 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 the demand for CNG, 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. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report.

Overview

We design, manufacture and market a range of pressurized containers for CNG. Although our initial business involved the manufacture of non-standard 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, the manufacture of CNG vehicle and gas station equipment, and the design of construction plans for CNG stations, the construction of the CNG stations, and the installation of CNG station equipment and related systems at the CNG station.

In addition to our CNG related products, 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. In addition, we can design and manufacture various types of non-standard equipment.

All of our products and services are performed pursuant to agreements with our customers, which provide the specifications for the products and services. We do not sell our products from inventory. 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. For example, in year 2006, we derived $2.8 million, or 23% of our revenue, from CNG station construction technical consulting service to one customer, Sino-petrol Xinxing Company. In of the first six months of 2007 we did not generate any revenue from CNG station construction consulting services.

Commencing in 2006, we began to construct CNG stations and we intend to operate CNG stations. This aspect of our business is different from our other business since we will be operating CNG filling stations. The business of operating CNG stations requires a substantial capital investment, and we anticipate that we will seek debt funding for a portion of the costs. Further, the nature of the operation of the business and the risks associated with that business are significantly different from the manufacture of equipment or the construction of CNG stations. 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 by price controls by central government and municipal government. The operation of CNG stations is reported as a separate segment.

During 2007, we have entered into two agreements to form joint ventures for the operation natural gas process plants. We have a majority interest in one of these two ventures and a minority interest in another. At June 30, 2007, our total commitments under these agreements was approximately $5.0 million, of which we had paid a total of $750,000. None of these CNG stations are presently operating. These two companies are in the early construction stage. We also have contracted for the purchase of natural gas which is to be delivered through a pipeline which is presently under construction and which is expected to be completed in or about 2009. These contracts do not have specific delivery quantities or prices, all of which are to be determined at a later date.

In the beginning of 2007, we develop the business of installing and sales of CNG vehicle conversion kits to OEM and after market vehicle maintenance plants. That business begans to generate revenue in the second quarter of 2007. In March 2007, we purchased a 60% interest in Jiaxing Lixun Automotive Electronic Co, Ltd (“Lixun”) from its stockholders for $390,000. 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 of electronic part of vehicle conversion kits as well as produce conversion kit is reported as a separate segment in the second quarter of 2007.

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

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

CNG vehicle and gas station equipment manufacture;

Our nonstandard equipment and pressure container business reflects our original business. It is a traditional chemical equipment manufacture business with a relatively lower profit margin.

The gross margin for CNG gas stations technical consulting service was high, as a result of our know-how in CNG system design and the absence of significant competition. Because our company’s emergency into CNG filling station business, we did not receive any CNG station construction service order in the six months ended June 30, 2007.

The pressure container, CNG vehicle and gas station equipment manufacture business, a major raw material for our manufacturing is steel and steel tube supply. We purchase steel plate from a Chinese domestic manufacturer, and we believe that alternative suppliers are available. We had purchased steel bottles, a key raw material for CNG truck trailers, from an Italian supplier, so any interruption in our supply of bottles can materially affect our ability to operate profitably. Accordingly from May 2007, we also began trying to purchase steel tubes from PRC domestic market and consigned the bottles processing to a Korea company.

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

Results of Operations

In the second quarter of 2007, we had four business segments, and in the same period of 2006, we had two business segments. The third segment -- the construction of CNG stations to be operated by us and the operation of those CNG stations -- is in the development stage. The fourth segment -- CNG conversion kits began to generate revenue in the second quarter.

(i) Non-standard pressure container business:

Non-standard equipment and pressure container business has been carried over from the predecessor since Sinogas was set up. It is a traditional chemical equipment manufacture business with low profit margin. It includes design and manufacture of various types of pressure containers:

·	in the petroleum and chemical industries.

·	in the metallurgy and electricity generation industries.

·	in the food and brewery industries

·	various types of non-standard containers

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

CNG station construction business represents:

(1) CNG vehicle and gas station equipment manufacture and installation, which include the following products:

·	CNG trailer

·	CNG deposited system for gas station usage

·	CNG compressor skid

·	CNG dispenser (retail measurement system)

These services were provided by us for other companies that operate CNG stations.

(2) CNG station construction service business

It includes the design of CNG station construction plans, construction of CNG stations, and installation of CNG station equipment and related systems. Due to rapid development and early stage of CNG station business in China, by utilizing its know how and specialty engineering team in this area and early entering into the market, the Company enjoys a very high profit margin in this segment.

(iii) CNG station operation

In 2006, we entered the CNG station business, which involves the design, construction and equipping of CNG stations and the operation of those stations.

(iv) Vehicle fuel conversion equipment

·	CNG vehicle conversion kits manufacturing and sale; and electric control devices for alternative fuel manufacturing

Three months ended June 30, 2007 compared to three months ended June 30, 2006

Three months ended June 30, 2007	Non-standard pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net revenue	$	1,236		$	2,345			-		$	2,600		$	6,181
Cost of revenues		615			672			-			1,685			2,972
Gross profit		621			1,673			-			915			3,209
Gross margin		50	%		71	%					35	%		52	%
Operating expenses:
Selling expenses	$	22		$	10		$	7		$	26		$	65
General and administrative expenses		214			327			209			178			928
Total operating expense		236			337			216			204			993
Income (loss) from operations	$	385		$	1,336			($ 216	)	$	711		$	2,216

Three months ended June 30, 2006	Non-standard pressure containers			CNG station facilities and construction			Total
Net revenue	$	1,997		$	1,386		$	3,383
Cost of revenues		1,657			527			2,184
Gross profit		340			859			1,199
Gross margin		17	%		62	%		35	%
Operating expenses:
Selling expenses	$	54		$	4		$	58
General and administrative expenses		185			372			557
Total operating expense		239			376			615
Income (loss) from operations	$	101		$	483		$	584

Net Revenue. Net revenue for three months ended June 30, 2007 (the “June 2007 quarter”) was approximately $6.2 million, a 82% increase from the net revenue of approximately $3.4 million for the three months ended June 30, 2006 (the “June 2006 quarter”). This increase results from our new developed vehicle conversion kit business, which generated revenue of $2.6 million, or 42% of sales of June 2007 quarter, and an increase of $959,000, or 69%, in sales from CNG station facilities and construction also increased, which were offset by a decline of $761,000, or 38%, from pressure container sales. The decrease of pressure containers is due to product kind adjustment begin in the first quarter of 2007, during which some high value products were manufactured with on relatively longer production cycle, resulting in lower sales during the quarter. The increase in our revenue from CNG station facilities and construction reflected the effects of our efforts to develop this business with the additional funds that were available from our June 2006 private placement.

Cost of Revenue. The cost of revenue for June 2007 quarter was approximately $3 million compared with the $2.1 million in the June 2006 quarter, a 34% increase. The cost increase trend is lower than the net revenue increase, which results a gross margin of total business increased from the 35% of June 2006 quarter to 52% of June 2007 quarter. The overall gross margin increase is the result of each segment’s margin increase

In the beginning of year 2007, we began and completed the restructuring for the product line of pressure containers which make our manufacturing more cost saving, and then together with some other ordinary orders, we obtained two new kind orders with higher margin. One of the new kind orders is for a bio-diesel facilities manufacturing which we recorded revenue and cost according to completion percentage due to not fulfilled as of June 30, 3007, and another for pressure container equipment installation service to a third party’s under-constructed plant, which has been completed ; and

The CNG station facilities and construction business: The key raw material of the segment is steel bottle. We provide our CNG facilities manufacturing business either under the way of directly purchasing that key material by ourselves, or under the way of providing machining, installation and relative service to customers who provide that key material to us. During the June 2007 quarter, we fulfilled all the orders of CNG facilities manufacturing by providing machining, installation and relative service to customers who provided that key raw material, which generated a higher gross margin. While in June 2006 quarter, our manufacturing were under the above mentioned two ways. As a result, our gross margin increased from 62% in the June 2006 quarter to 71% in the June 2007 quarter.

·	The gross margin for the new developed vehicle conversion kits business is 35% which is lower than the gross margins for the other divisions.

Operating Expenses. Operating expenses were approximately $981,000, an increase of $367,000, or 59.7%, from the June 2006 quarter to the June 2007 quarter. The increase was mainly from the $330,000 cost relating to the grant to stock options to purchase 1,380,000 shares of common stock, which is included in general and administrative expenses. Exclusive of this expenses, the operating expenses of June 2007 quarter keeps were consistent with June 2006 quarter, which is the result of cost reduction strategies we put in place.

Income from Operations. Income from operations was approximately $2.2 million for the June 2007 quarter, compared with approximately $585,000 in June 2006 quarter resulted from the above mentioned reasons.

Interest Expense. In the June 2006 quarter, the interest expenses was about $203,000, of which includes $159,000 non-monetary GAAP accrual for convertible notes issued in June 2006.. So the actual interest expense from loan or borrowing is about $44,000 which is $79,000 less than the interest expense of $123,000 in June 2007 quarter The increase was the result of $1 million more short term bank loan incurred in June 2007 quarter connection with the expansion of our business, particularly the development of the CNG service station business as well as the interest rate increase.

Income Taxes. As Sinogas, Yuhan, and Wuhan Sinoenergy have received an exemption from corporate income tax separately in Septemter of 2006 and in the beginning of 2007, so there is no any income tax in 2007. The income tax expenses for current quarter mainly represent income tax accrued by the newly acquired Lixun.

Net income. As a result of the foregoing, we had net income of $1.9 million, or $0.07 per share (basic and diluted), for the June 2007 quarter as compared with net income of $137,000, or $0.01 per share (basic and diluted) for the June 2006 quarter.

Six months ended June 30, 2007 compared to six months ended June 30, 2006

Six months ended June 30, 2007	Non-standard pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net revenue	$	2,019		$	4,188			-		$	2,600		$	8,807
Cost of revenues		1,229			1,649			-			1,685			4,563
Gross profit		790			2,539			-			915			4,244
Gross margin		39	%		61	%					35	%		48	%
Operating expenses:
Selling expenses	$	27		$	45		$	7		$	26		$	105
General and administrative expenses		294			563			475			178			1,510
Total operating expense		321			608			482			204			1,615
Income (loss) from operations	$	469		$	1,931			($482	)	$	711		$	2,629

Six months ended June 30, 2006	Non-standard pressure containers			CNG station facilities and construction			CNG station Operation		Total
Net revenue	$	3,165		$	2,718			-	$	5,883
Cost of revenues		2,586			994			-		3,580
Gross profit		579			1,724			-		2,303
Gross margin		18	%		63	%				39	%
Operating expenses:
Selling expenses	$	94		$	28			-	$	122
General and administrative expenses		305			578			-		883
Total operating expense		399			606			-		1,005
Income (loss) from operations	$	180		$	1,118			-	$	1,298

Net Revenue. Net revenue for six months ended June 30, 2007 (“the first half year of 2007”) was approximately $8.8 million, a 50% increase from the net revenue of approximately $5.9 million for the six months ended June 30, 2006 (“the first half year of 2006”). This increase results from our new developed vehicle conversion kit business, which generated revenue of $2.6 million, or 29.5 % of sales in the first half of 2007, and an increase of $1,5 million, or 54 %, in sales from CNG station facilities and construction also increased, which were offset by a decline of $1.1 million or 36.2%, from pressure container sales. The decrease is sales of pressure containers results from a reconstruction of our pressure container product line in the first quarter of 2007, when our sales from this segment were less than $800,000.

Cost of Revenue. The cost of revenue for the first half year of 2007 was approximately $4.7 million compared with the $3.6 million in the same period of 2006, a 30% increase. The cost increase trend is lower than the net revenue increase, which results a gross margin of total business increased from the 39% of the first half of 2006 to 48% of the same period of 2007. The overall gross margin increase is the result of the following reasons

The Non-standard pressure containers business: In the first half year of 2007, we began and completed the restructuring for the product line of pressure containers which make our manufacturing more cost saving, and then together with some other ordinary orders, we obtained two new kind orders with higher margin. One of the new kind orders is for a bio-diesel facilities manufacturing which we recorded revenue and cost according to completion percentage due to not fulfilled as of June 30, 3007, and another for pressure container equipment installation service to a third party’s under-constructed plant, which has been completed. So the gross margin increased from 18% of the first half year of 2006 to 39% in the same period of 2007; and

The CNG station facilities and construction business: In the first half year of 2006, the CNG station building consulting service generated $2.1 million revenue with profit margin of 74%, which was net of by the 30% margin of CNG facilities manufacturing business. In the first half year of 2007, we did not obtain consulting service contacts since we were entering the CNG filing station business. However, the gross margin for CNG station facilities increased from 30% in the first half of 2006 to 61% in the first half of 2007 as the result of we fulfilled all the orders of CNG facilities manufacturing by providing machining, installation and relative service to customers who provided steel bottles, key raw materials of CNG facilities, to us, which generated a higher gross margin.

·	The gross margin for the new developed vehicle conversion kits business is 35% which is lower than the overall margin of the first half year of 2006, which resulted in an overall decline in gross margin in the first half year of 2007 compared with the first half of 2006.

Operating Expenses. Operating expenses were approximately $1.6 million in the first half year of 2007, an increase of $610,000, or 60.7%, comparing with the same period of 2007. The increase was mainly from the $345,000 cost relating to the grant to stock options to purchase 1,380,000 shares of common stock, which is included in general and administrative expenses and $37,000 cost accrued for warrants issued for IR services in February 2007. If we don’t consider that adjusted non-money expenses, operating expenses increased about $228,000 half year on half year. In the half year of 2007, comparing with the sales increase trend, the operating expenses increasing is lower, which is the result of cost saving strategies we put in place in Yuhan and Sinogas, which results G&A expenses decreased a lot.

Income from Operations. Income from operations was approximately $2.6 million for the first half year of 2007, compared with approximately $1.2 million in the same period of 2006 resulted from the above mentioned reasons.

Interest Expense. In the first half year of 2006, the interest expense was about $245,000, of which includes $159,000 non-monetary GAAP accrual for convertible notes issued in June 2006. Exclude that non-monetary GAAP adjustment, the interest expenses was about $86,000, while the interest expense in the same period of 2007 is $178,000. This increase resulted from an increase of $1.63 million short term bank loan which we incurred in connection with the expansion of our business, particularly the development of the CNG service station business as well as the interest rate increase as well as loan interest rate increase.

Income Taxes. As Sinogas, Yuhan, and Wuhan Sinoenergy have received an exemption from corporate income tax separately in Septemter of 2006 and in the beginning of 2007, so there is no any income tax accrued in the first half year of 2007. The income tax expenses for the six months end June 30, 2007 was mainly represent income tax accrued by the newly acquired Lixun, of which we are applying tax holiday.

Net income. As a result of the foregoing, we had net income of $2.3 million, or $0.10per share (basic and diluted), for the first half of 2007 as compared with net income of $473,000, or $ 0.03 per share (basic and diluted) for the first half of 2006.

Liquidity and Capital Resources

At June 30, 2007, we had cash of approximately $4,304,000, an increase of approximately $3,716,000 from December 31, 2006. At June 30, 2007, we had working capital of approximately $5,256,000 and stockholders’ equity of approximately $30.2 million, compared with working capital of approximately $300,000 and stockholders’ equity of approximately $16.0 million at December 31, 2006. The increase in cash, working capital and stockholders’ equity results largely from the $11.3 million which we received from the exercise of warrants during the first half year of 2007.

On March 23, 2007, we purchased a 60% interest in Lixun for approximately $390,000. 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. These operations has been consolidated with our operations commencing April 1, 2007.

When we formed Yuhan with Kantai, we had a 55% interest in Yuhan. We have since acquired an additional 35% for $1,500,000, of which, at June 30, 2007, we had paid $1.2 million and owed $300,000. We have the right to acquire the remaining 10% interest in Yuhan during the first six months of 2008 for approximately $640,000.

On February 1, 2007, the Company and Hong Kong China New Energy Development Investment Co. Ltd (“New Energy”), signed a cooperation agreement relating to an investment in the construction and operation of CNG stations with the Huangmei County government. Pursuant to the agreement, New Energy and the Company will form a natural gas company named Hubei Gather Eenergy Gas Co., Ltd (“Hubei Gather”) in Huangmei to construct and operate a super-large CNG mother station with expected annual processing capacity of 100-300 million cubic meters in the Huangmei region. The registered capital is $5 million of which Sinoenergy Holding Ltd will contribute $2,750,000 and New Energy will contribute $2, 250,000. On March 23, 2007, Hubei Gather received a business license. The term of the business of Hubei Gather is from March 23, 2007 to March 22, 2027. As of June 30, 2007, $750,000 has been invested in Hubei Gather by the Company and New Energy.

On April 20, 2007, the Company and Shanghai CNPC Enterprise Group (CNPC Enterprise) signed equity purchase agreement, pursuant to which the Company will purchase the 70% of Xuancheng Sinoenergy Gas owned by CNPC Enterprises for $1,772,700. Xuancheng Sinoenergy Gas was incorporated on March 26, 2007, of which the Company owns 30% and CNPC Enterprise is the 70% equity owner. Xuancheng Sinoenergy is in the development stage and has not commenced operations. As of the date of this report, the transaction has not be completed and the Company has paid to CNPC Enterprise $722,211 on account.

On April 20, 2007, the Company and Tianjin Port Free Trade Zone Green Fuel Equipment Corporation (Green Fuel) signed equity purchase agreement, pursuant to which the Company will purchase the 45% equity of Anhui Gather owned by Green Fuel for $2,750,000 including $344,330 register capital paid by Green Fuel and $500,000 for the cost to obtain 200 million cubic meters natural gas quota from Sinopec. As of June 30, 2007, the Company has paid $844,330 to Green Fuel. The Company is to pay the remaining unpaid registered capital of $1,905,670 to Anhui Gagher according to requirement of PRC government. On July 4, 2007, Anhui Gather received PRC government approval for the transfer of the stock to the Company, and its business license was updated accordingly.

Anhui Gather was incorporated on March 23, 2007, with Hong Kong China New Energy Development Investment Co. Ltd owning 55% equity and Green Fuel owning 45% equity. The business scope was to construct and operate a super-large CNG mother station with expected annual processing capacity of 100-300 million cubic meters. As of the date of this report, Anhui Gather is in the development stage and had not commenced operations.

The Company has purchased the land use right for the real property on which the Company’s facilities are located from Beijing Sanhuan. The initial purchase price was $12.3 million. Based on increased expenses incurred by Beijing Sanhuan as well as the increased value of the land, the price was increased to $18.6 million. The increase is subject to the condition that Beijing Sanhuan will provide a special purpose audit to support the increased cost and the Company will obtain a report on the land use valuation. The Company has lent Beijing Sanhuan $2.1 million, which will be offset by the Company’s obligation to pay the additional purchase price.

In addition to our funding obligations described above, we have the following commitments for capital expenditures:

(a) The Company has a purchase order with Fornovo Gas S.r.l of Italy for the purchase of 36 compressor units and 60 high capacity dispensers for a total purchase price of $9.6 million.

(b) The Company has a purchase order with LOVATO for the purchase of fittings of conversion kits with the total price of $476,000.

(c) The Company has a purchase order with NK Co., Ltd (a Korea company) for the purchase of steel bottles with total price of $1,14million.

(d) During the second quarter of 2007, Wuhan Sinoenergy, the subsidiary of the Company, has leased four parcels of land from other land owners in Wuhan City for its CNG stations building. The lease terms are from 10 year to 20 years with annual rental fee of $100,000 totally; Also Wuhan Sinoenergy has purchased a land located in Wuhan city for its CNG station with the price of $106,000. As of reporting date, $36,842 has been paid.

On April 30, 2007, we received a $2,585,000 short term loan from Bank of Communication Qingdao 1st Branch (Qingdao Communication Bank). The loan bears the normal interest rate prevailed by China People Bank of 6.39%, and will be adjusted accordingly. We used the proceeds of this loan to pay in full our obligations under our $1,900,000 loan from 1^ST Branch, and we made a payment of $462,900 on account of our loan from Shenzhen Development Bank, leaving a balance due of approximately $830,000.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts and other receivables, the valuation and costing of inventory, depreciation of property, plant and equipment, impairment of long-lived assets, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believes to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

In estimating the collectability of accounts receivable we analyze historical write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts. Differences may result in the amount and timing of expenses for any period if we make different judgments or uses difference estimates.

Inventories comprise of raw materials, work in process, finished goods and low value consumable articles and are stated at the lower of cost or market. 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 as well as license fees payable to Beijing Sanhuan. Inventory costs do not exceed net realizable value.

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 are capitalized. The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets, and, if any, is recognized in the statements of operations. We perform impairment tests on our long-term assets annually.

Intangible assets are reviewed at least annually for impairment, or more frequently if we have reason to believe that there is impairment. Intangible assets are tested by comparing net book value of the to fair value. Our assumptions about fair values require significant judgment because broad economic factors, industry factors and technology considerations can result in variable and volatile fair values.

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

Revenue Recognition - We recognize revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to PRC law, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, sales and value added tax laws have been complied with, and collectibility is probable. We recognize product sales generally at the time the product is shipped.

Foreign Currency Transactions -Our functional currency is Renminbi (“RMB”), which is the currency of the PRC, and our reporting currency is United States dollars. Our balance sheet accounts are translated into United States dollars at the year-end exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred. The translation and transaction gains and losses were immaterial in the statement of operations for 2006.

The government of the PRC imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on our operations because we have not previously engaged in any significant transactions that are subject to the restrictions.

Stock-Based Compensation - We grant stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services and for financing costs. We have adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Accounting for Stock-Based Compensation,” which establishes a fair value method of accounting for stock-based compensation plans. In accordance with SFAS No. 123R, the cost of stock options and warrants issued to employees and non-employees is measured at the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive benefit, which is generally the vesting period.

New Accounting Pronouncements

In May 2005, The FASB issued Statement No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This statement changes the requirements for the accounting for and reporting of a change in accounting principle. APB Opinion 20 previously required that most voluntary changes in accounting principles be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principal. FASB Statement No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. This statement is effective for accounting changes and corrections of errors made in fiscal periods that begin after December 15, 2005. Management does not anticipate this statement will impact the Company’s consolidated financial position or consolidated results of operations and cash flows.

In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of FASB Statement No.133, “Accounting for Derivative Instruments and Hedging Activities” and FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement permits fair value re measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. Management does not anticipate this Statement will impact the Company’s consolidated financial position or consolidated results of operations and cash flows.

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets,” an amendment of FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement amends Statement No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. Management does not anticipate this Statement will impact the Company’s consolidated financial position or consolidated results of operations and cash flows.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2008. The Company is currently evaluating the impact of SFAS 157 on its consolidated financial statements.

In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which amended several other FASB Statements. SFAS 158 requires recognition in the balance sheet of the funded status of defined benefit pension and other postretirement benefit plans, and the recognition in other comprehensive income of unrecognized gains or losses and prior service costs or credits arising during the period. Additionally, SFAS 158 requires the measurement date for plan assets and liabilities to coincide with sponsor’s year-end. The Company has adopted a defined contribution plan as required in the PRC, and, accordingly we do not believe that the adoption of SFAS 158 will have any impact on us.

The FASB issued FASB Interpretation No.(“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” in July 2006 .This interpretation establishes new standards for the financial statement recognition, measurement and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Then new rules will be effective for Sinoenergy in the first quarter of 2008. We continue to evaluate the impact of this interpretation, and do not anticipate its adoption will have a material effect on our financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements when quantifying misstatements in Current Year Financial Statements,” which eliminated the diversity in practice surrounding the quantification and evaluation of financial statement errors. The guidance outlined in SAB 108 is effective for Sinoenergy and is consistent with our historical practices for assessing such matters when circumstances have required such an evaluation. Accordingly, we do not believe that adoption of SAB 108 will have any impact on us.

In February 2007, the FASB issued SFAX 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of SFAS 115,” which allows for the option to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. We do not presently have any financial assets or liabilities that we would elect to measure at fair value, and therefore we expect this standard will have no impact on our financial statements.

Item 3. Controls and Procedures

As of the end of the period covered by this report, our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures. Based on their evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in alerting them to material information that is required to be included in the reports that we file or submit under the Securities Exchange Act of 1934 and that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal controls over financial reporting during the quarterly period covered by this report that materially affected, or are reasonable likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

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 10 , 2007		/s/ Bo Huang
		Bo Huang, Chief Executive Officer


Dated: August 10 , 2007		/s/ Qiong (Laby) Wu
		Qiong (Laby) Wu, Chief Financial Officer