SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549




FORM 10-Q/A


Amendment
No.
1




þ           Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
quarterly period ended March 31, 2010.




or




 ̈           Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
transition period
from                to                  .




Commission
File Number 000-25413




CHINA
INTEGRATED ENERGY, INC.


(Exact
name of registrant as specified in its charter)





Delaware
                  
                  65-0854589(State
      or Other Jurisdiction of
                    Incorporation
      or Organization)
                  
                  (I.R.S.
      Employer
                    Identification
      No.)





Dongxin
Century Square, 7th Floor


Hi-Tech
Development District


Xi’an, Shaanxi Province,
People’s Republic of China, 710043


(Address
of Principal Executive Offices including zip code)




+86 29 8268
3920


(Registrant’s
Telephone Number, Including Area Code)




Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes þNo
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every, Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). *Yes  ̈  No  ̈*The registrant has not
yet been phased into the interactive data requirements.




Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company




Large
      Accelerated Filer  ̈
            Accelerated
      Filer  ̈
            Non-Accelerated
      Filer  ̈
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company þ




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




As of May
13, 2010, 33,569,091 shares of the issuer’s common stock, par value $0.0001,
were outstanding.







EXPLANATORY
NOTE
  This
quarterly report on Form 10-Q is being filed as Amendment No. 1 to our Quarterly
Report on Form 10-Q which was originally filed on May 13, 2010 (our
“Report”) with the Securities and Exchange Commission.  The
principal changes to our Report in this amendment are as follows:
  ●  In Part I, Item 1
(Financial Statements) of our Report we have reclassified approximately
$30 million in segment assets in Note 18 from our wholesale and retail
distribution of finished oil and heavy oil segment to our retail gas station
segment;
 ● we have
(i) reclassified approximately $30 million in segment assets in the Results
of Operations table for the three months ended March 31, 2010 and 2009 from our
wholesale and retail distribution of finished oil and heavy oil segment to our
retail gas station segment, and (ii) revised the discussion in Results of
Operations for the three months ended March 31, 2010 and 2009 to correct the
disclosure relating to the increase in cost of sales as a percentage of sales
and the decrease in gross profit sales in 2010 to reflect that
such changes were due to a change in our product mix in our wholesale
distribution business and price promotions at our new gas stations;
and
  ●
 
 As
required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended, new
certifications by our principal executive officer and principal financial
officer are being filed as exhibits herewith, and as such, we have included Item
5 of Part II, “Exhibits,” as part of this Form 10-Q/A. As further required by
Rule 12b-15, this Form 10-Q/A sets forth the complete text of each item as
amended.


Table of
Contents





PagePART I FINANCIAL
      INFORMATIONITEM
      1
                FINANCIAL
      STATEMENTS
                1ITEM
      2
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                22ITEM
      3
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                30ITEM
      4T.
                CONTROLS
      AND PROCEDURES.
                30PART II OTHER
      INFORMATIONITEM
      1
                LEGAL
      PROCEEDINGS
                31ITEM
      1A.
                RISK
      FACTORS
                31ITEM
      2
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                34ITEM
      3
                DEFAULTS
      UPON SENIOR SECURITIES
                34ITEM
      4
                OTHER
      INFORMATION
                34ITEM
      5
                EXHIBITS
                34


i




PART
I





FINANCIAL
INFORMATION




ITEM
1     FINANCIAL STATEMENTS





CHINA
INTEGRATED ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





March 31,
                                        
                                        
                                        December 31,2010
                                        
                                        
                                        2009(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                        
                                        $
                                        40,967,385
                                        
                                        
                                        $
                                        62,415,443Accounts
      receivable
                                        
                                        
                                        6,878,367
                                        
                                        
                                        
                                        3,099,587Other
      receivables and deposits
                                        
                                        
                                        1,182,927
                                        
                                        
                                        
                                        7,231,586Prepaid
      expenses
                                        
                                        
                                        3,921,161
                                        
                                        
                                        
                                        3,145,502Advance
      to suppliers
                                        
                                        
                                        48,772,007
                                        
                                        
                                        
                                        34,544,100Inventories,
      net
                                        
                                        
                                        21,843,594
                                        
                                        
                                        
                                        20,954,851Total
      current assets
                                        
                                        
                                        123,565,441
                                        
                                        
                                        
                                        131,391,069Prepaid
      rents
                                        
                                        
                                        30,869,398
                                        
                                        
                                        
                                        24,620,685Property,
      plant and equipment, at cost
                                        
                                        
                                        10,466,490
                                        
                                        
                                        
                                        10,017,987Construction
      in progress
                                        
                                        
                                        7,704,856
                                        
                                        
                                        
                                        -Less
      accumulated depreciation
                                        
                                        
                                        (2,714,157
                                        )
                                        
                                        
                                        (2,456,080
                                        )Property,
      plant and equipment , net
                                        
                                        
                                        15,457,189
                                        
                                        
                                        
                                        7,561,907Intangible
      asset, net
                                        
                                        
                                        10,480,929
                                        
                                        
                                        
                                        -Total
      noncurrent assets
                                        
                                        
                                        56,807,516
                                        
                                        
                                        
                                        32,182,592TOTAL
      ASSETS
                                        
                                        $
                                        180,372,957
                                        
                                        
                                        $
                                        163,573,661LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                        
                                        $
                                        816,880
                                        
                                        
                                        $
                                        -Advance
      from customers
                                        
                                        
                                        7,247,886
                                        
                                        
                                        
                                        1,903,124Taxes
      payable
                                        
                                        
                                        882,254
                                        
                                        
                                        
                                        1,242,931Other
      payables
                                        
                                        
                                        1,131,393
                                        
                                        
                                        
                                        2,700,988Loans
      payable
                                        
                                        
                                        4,395,089
                                        
                                        
                                        
                                        4,395,025Total
      current liabilities
                                        
                                        
                                        14,473,502
                                        
                                        
                                        
                                        10,242,068STOCKHOLDERS'
      EQUITYPreferred
      stock, $.001 par value; authorized shares10,000,000;
      issued and outstanding 2,815,753 and3,115,753
      shares at March 31, 2010 and December 31 2009,
respectively
                                        
                                        
                                        2,815
                                        
                                        
                                        
                                        3,115Common
      stock, $.0001 par value; authorized shares79,000,000;
      issued and outstanding 33,569,091 and33,269,091
      shares at March 31, 2010 and December 31, 2009,
    respectively
                                        
                                        
                                        3,356
                                        
                                        
                                        
                                        3,326Additional
      paid in capital
                                        
                                        
                                        76,986,338
                                        
                                        
                                        
                                        75,858,994Statutory
      reserve
                                        
                                        
                                        4,920,114
                                        
                                        
                                        
                                        4,920,114Accumulated
      other comprehensive income
                                        
                                        
                                        5,554,434
                                        
                                        
                                        
                                        5,473,420Retained
      earnings
                                        
                                        
                                        78,432,398
                                        
                                        
                                        
                                        67,072,624Total
      stockholders' equity
                                        
                                        
                                        165,899,455
                                        
                                        
                                        
                                        153,331,593TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                        
                                        $
                                        180,372,957
                                        
                                        
                                        $
                                        163,573,661




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


1




CHINA
INTEGRATED ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME





(Unaudited)
                    
                    For The Three Months Ended March 31,2010
                    
                    
                    2009Sales
                    
                    $
                    109,416,050
                    
                    
                    $
                    58,658,668Cost
      of goods sold
                    
                    
                    96,120,907
                    
                    
                    
                    50,981,714Gross
      profit
                    
                    
                    13,295,143
                    
                    
                    
                    7,676,954Selling,
      general and administrative expenses
                    
                    
                    1,843,456
                    
                    
                    
                    555,849Income
      from operations
                    
                    
                    11,451,687
                    
                    
                    
                    7,121,105Non-operating
      income (expenses)Interest
      expenses
                    
                    
                    (50,785
                    )
                    
                    
                    (33,518
                    )Subsidy
      income
                    
                    
                    -
                    
                    
                    
                    116,964Other
      expense
                    
                    
                    (41,128
                    )
                    
                    
                    (3,299
                    )Total
      non-operating income (expenses)
                    
                    
                    (91,913
                    )
                    
                    
                    80,147Net
      income
                    
                    
                    11,359,774
                    
                    
                    
                    7,201,252Other
      comprehensive itemForeign
      currency translation gain (Loss)
                    
                    
                    79,883
                    
                    
                    
                    (50,784
                    )Comprehensive
      Income
                    
                    $
                    11,439,657
                    
                    
                    $
                    7,150,468Basic
      and diluted weighted average shares outstandingBasic
                    
                    
                    33,319,091
                    
                    
                    
                    27,169,091Diluted
                    
                    
                    42,807,628
                    
                    
                    
                    34,622,712Basic
      and diluted net earnings per share available to common
      stockholdersBasic
                    
                    $
                    0.34
                    
                    
                    $
                    0.27Diluted
                    
                    $
                    0.27
                    
                    
                    $
                    0.21




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


2




CHINA
INTEGRATED ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF EQUITY




(Unaudited)
                    
                    Preferred stock
                    
                    
                    Common stockShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Additional
                      paid in capital
                    
                    
                    Statutory
                      reserves
                    
                    
                    Other
                      comprehensive
                      income
                    
                    
                    Retained
                      earnings
                    
                    
                    Total
                      stockholders'
                      equityBalance
      at December 31, 2008
                    
                    
                    3,465,753
                    
                    
                    $
                    3,465
                    
                    
                    
                    27,169,091
                    
                    
                    $
                    2,716
                    
                    
                    $
                    44,434,250
                    
                    
                    $
                    4,920,114
                    
                    
                    $
                    5,337,003
                    
                    
                    $
                    29,201,661
                    
                    
                    $
                    83,899,209Preferred
      B conversion
                    
                    
                    (350,000
                    )
                    
                    
                    (350
                    )
                    
                    
                    350,000
                    
                    
                    
                    35
                    
                    
                    
                    315
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Shares
      issued to employees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    30,056
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    30,056Stock
      purchase option - directors
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    155,104
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    155,104Stock-based
      compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    555,710
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    555,710Net
      income for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    37,870,963
                    
                    
                    
                    37,870,963Issuance
      of common stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,750,000
                    
                    
                    
                    575
                    
                    
                    
                    30,683,559
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    30,684,134Foreign
      currency translation gain (loss)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    136,417
                    
                    
                    
                    -
                    
                    
                    
                    136,417Balance
      at December 31, 2009
                    
                    
                    3,115,753
                    
                    
                    
                    3,115
                    
                    
                    
                    33,269,091
                    
                    
                    
                    3,326
                    
                    
                    
                    75,858,994
                    
                    
                    
                    4,920,114
                    
                    
                    
                    5,473,420
                    
                    
                    
                    67,072,624
                    
                    
                    
                    153,331,593Preferred
      B conversion
                    
                    
                    (300,000
                    )
                    
                    
                    (300
                    )
                    
                    
                    300,000
                    
                    
                    
                    30
                    
                    
                    
                    270
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Stock
      purchases option - directors
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    60,702
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    60,702Stock-based
      compensation - consultants
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    363,824
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    363,824Employee
      stock option compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    702,548
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    702,548Net
      income for the period
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    11,359,774
                    
                    
                    
                    11,359,774Foreign
      currency translation gain (loss)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    81,014
                    
                    
                    
                    -
                    
                    
                    
                    81,014Balance
      at March 31, 2010
                    
                    
                    2,815,753
                    
                    
                    $
                    2,815
                    
                    
                    
                    33,569,091
                    
                    
                    $
                    3,356
                    
                    
                    $
                    76,986,338
                    
                    
                    $
                    4,920,114
                    
                    
                    $
                    5,554,434
                    
                    
                    $
                    78,432,398
                    
                    
                    $
                    165,899,455




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


3




CHINA
INTEGRATED ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOW




(Unaudited)
                  
                  For The Three Months Ended March 31,2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  11,359,774
                  
                  
                  $
                  7,201,252Adjustments
      to reconcile net income to net cashprovided
      by (used in) operating activities:Depreciation
      and amortization
                  
                  
                  321,142
                  
                  
                  
                  292,744Stock
      based compensation
                  
                  
                  1,127,074
                  
                  
                  
                  82,590(Increase)
      decrease in current assets:Accounts
      receivable
                  
                  
                  (3,777,960
                  )
                  
                  
                  2,597,481Other
      receivables, deposits and prepaid expenses
                  
                  
                  (924,587
                  )
                  
                  
                  3,789,723Advance
      to suppliers
                  
                  
                  (14,224,483
                  )
                  
                  
                  2,478,674Inventories
                  
                  
                  (888,254
                  )
                  
                  
                  1,627,802Prepaid
      expenses - Rents
                  
                  
                  (8,047,836
                  )
                  
                  
                  322,565Increase
      (decrease) in current liabilities:Accounts
      payable
                  
                  
                  816,713
                  
                  
                  
                  -Advance
      from customers
                  
                  
                  5,343,638
                  
                  
                  
                  (3,703,649
                  )Taxes
      payable
                  
                  
                  (360,621
                  )
                  
                  
                  84,725Other
      payables and accrued expenses
                  
                  
                  (1,991,970
                  )
                  
                  
                  (3,025,122
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  (11,247,370
                  )
                  
                  
                  11,748,785CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                  
                  
                  (4,716
                  )
                  
                  
                  (3,324
                  )Business
      acquisition
                  
                  
                  (2,490,040
                  )
                  
                  
                  -Construction
      in progress
                  
                  
                  (7,703,276
                  )
                  
                  
                  -Net
      cash used in investing activities
                  
                  
                  (10,198,032
                  )
                  
                  
                  (3,324
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash released
                  
                  
                  -
                  
                  
                  
                  522,500Repayment
      of loans and notes payable
                  
                  
                  -
                  
                  
                  
                  (14,473
                  )Net
      cash provided by financing activities
                  
                  
                  -
                  
                  
                  
                  508,027EFFECT
      OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
                  
                  
                  (2,656
                  )
                  
                  
                  14,086NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                  
                  
                  (21,448,058
                  )
                  
                  
                  12,267,574CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                  
                  
                  62,415,443
                  
                  
                  
                  23,119,028CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                  
                  $
                  40,967,385
                  
                  
                  $
                  35,386,602Supplemental
      Cash flow data:Income
      tax paid
                  
                  $
                  -
                  
                  
                  $
                  -Interest
      paid
                  
                  $
                  64,166
                  
                  
                  $
                  38,372




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


4


CHINA
INTEGRATED ENERGY INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




1.  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements of the
Company and its subsidiaries have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission including the instructions
to Form 10-Q and Regulation S-X. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America have been
condensed or omitted from these statements pursuant to such rules and regulation
and, accordingly, they do not include all the information and notes necessary
for comprehensive consolidated financial statements and should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 2009, included in our Annual Report on Form 10-K for the year
ended December 31, 2009.





In the
opinion of the management of the Company, all adjustments, which are of a normal
recurring nature, necessary for a fair statement of the results for three-month
period have been made. Results for the interim periods presented are not
necessarily indicative of the results that might be expected for the entire
fiscal year. When used in these notes, the terms “Company,” “we,” “us” or “our”
means China Integrated Energy Inc. and all entities included in our consolidated
financial statements.





The
unaudited condensed consolidated financial statements include the financial
statements of the Company, and its wholly owned or controlled subsidiaries and
all other entities that it has a controlling financial interest in or are
considered to be the primary beneficiary, pursuant to the rules of the
Accounting Standards Codification. All significant inter-company transactions
and balances between the Company, its subsidiaries and VIEs are eliminated upon
consolidation. The Company has included the results of operations of its
subsidiaries from the dates of acquisition.




Principle
of Consolidation




The
accompanying consolidated financial statements include our accounts and the
accounts of our wholly owned subsidiary, Baorun China Group Limited
(“Baorun China Group”) and Redsky Industrial, (Xi'an) Co. Ltd. (“Redsky
Industrial”) and its consolidated subsidiary, Xi'an Baorun Industrial
Development Co., Ltd. (“Xi'an Baorun Industrial”). All significant inter-company
accounts and transactions have been eliminated in consolidation.





Use
of Estimates




In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets, allowance for doubtful accounts, and
the reserve for obsolete and slow-moving inventories. Actual results could
differ from those estimates.




Cash
and Cash Equivalents




For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.




5


Accounts
Receivable




The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Based on historical collections, no
allowance was deemed necessary at March 31, 2010 and December 31, 2009 as the
Company did not experience any uncollectible accounts receivable and bad debt
write-off over the past years.




Advance
to Suppliers





Advance
to suppliers consist of prepayments to the suppliers for products that have not
yet been received. Any amount paid to the suppliers prior to the Company’s
acceptance of petroleum products are recorded as advance to suppliers. The
Company will record the prepayment as inventory at the time of accepting
delivery of petroleum products from suppliers. Advance to suppliers as of March
31, 2010 and December 31, 2009 were $48,772,007 and $34,544,100,
respectively.




Inventories




Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct labor, and an allocated portion of production
overheads.




Advances
from Customers




Advances
from customers consist of prepayments to the Company for products that have not
yet been shipped to the customers. Any amounts received prior to satisfying the
Company’s revenue recognition criteria are recorded as deferred revenue or
advances from customers. The Company will recognize the prepayments from the
customers as revenue at the time the delivery of goods is made. Advances
from customers as of March 31, 2010 and December 31, 2009 were $7,247,886 and
$1,903,124, respectively.




Property,
Plant, and Equipment




Property,
plant,, and equipment are stated at the actual cost on acquisition less
accumulated depreciation and amortization. Depreciation and amortization are
provided for in amounts sufficient to relate the cost of depreciation assets to
operations over their estimated service lives, principally on a straight-line
basis. Most property, plant and equipment have a residual value of 5% of
actual cost. The estimated lives used in determining depreciation
are:





YearsBuilding
                  
                  20Vehicle
                  
                  5Office
      Equipment
                  
                  5Production
      Equipment
                  
                  10




In
accordance with Statement of accounting standards codification,, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, the Company examines the
possibility of decreases in the value of fixed assets when events or changes in
circumstances reflect the fact that their recorded value may not be recoverable.
There was no fixed asset impairment.




Impairment
of Long-Lived Assets




Long-lived
assets, which include property, plant and equipment and intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.





Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using the
asset’s expected future discounted cash flows or market value, if readily
determinable. Based on its review, the Company believes that, as of March 31,
2010 and December 31, 2009, there were no impairments of its long-lived
assets.




6


Intangible
Assets





Our
intangible assets consist of definite-lived assets subject to amortization such
as gas station operating right, land usage right of a gas station, and land
usage right of agricultural plantation for a pilot program cultivating biodiesel
feedstock. In January 2010, we acquired a retail gas station and allocated the
purchase price to tangible assets, gas station operating right, land usage
right, based on appraised value. The useful lives of the gas station operating
right and land usage right are forty years and determined by the gas station
purchase agreement.  The useful life of the agricultural plantation is
seventy years and determined by the purchase agreement, as well. We calculate
amortization of the definite-lived intangible assets on a straight-line basis
over the useful lives of the related intangible assets.




Income
Taxes




The
Company utilizes accounting standards codification, “Accounting for Income
Taxes”, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized.




The
Company adopted the provisions of accounting standards codification, “Accounting
for Uncertainty in Income Taxes”,on January 1, 2007. As a result of the
implementation of the accounting standards codification, the Company made a
comprehensive review of its portfolio of tax positions in accordance with
recognition standards established by the accounting standards codification. As a
result of the implementation of the accounting standards codification, the
Company recognized no material adjustments to liabilities or stockholders
equity. When tax returns are filed, it is highly certain that some positions
taken would be sustained upon examination by the taxing authorities, while
others are subject to uncertainty about the merits of the position taken or the
amount of the position that would be ultimately sustained. The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not
offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest
associated with unrecognized tax benefits are classified as interest expense and
penalties are classified in selling, general and administrative expenses in the
statements of income. The adoption of the accounting standards codification did
not have a material impact on the Company’s financial statements.




Revenue
Recognition




The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin. For distribution of
finished oil, heavy oil products, and biodiesel, sales revenue is recognized at
the date of shipment to customers when a formal arrangement exists, the price is
fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectability is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are recorded as unearned revenue.  For gas station retail sales,
revenue is recognized and cash is collected upon completion of fuel sales to
customers,




Sales
revenue represents the invoiced value of goods sold, net of value-added tax
(“VAT”). All of the Company’s products that are sold in the PRC are subject to
Chinese value-added tax of 17% of the gross sales price. This VAT may be offset
by VAT paid by the Company on raw materials and other materials or services
included in the cost of producing their finished product. The Company recorded
VAT payable and VAT receivable net of payments in the financial statements. The
VAT tax return is filed offsetting the payables against the
receivables.




7




There
were no sales returns and allowances for the three months ended March 31, 2010
and 2009. The Company does not provide unconditional right of return, price
protection or any other concessions to its customers.




Cost
of Goods Sold




Cost of
goods sold consists primarily of material costs, direct labor, manufacturing
overhead and related expenses, which are directly attributable to the production
of products. Write-down of inventory to lower of cost or market is also recorded
in cost of goods sold.




Concentration
of Credit Risk




Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and other receivables. The Company does not
require collateral or other security to support these receivables. The Company
conducts periodic reviews of its customers’ financial conditions and customer
payment practices to minimize collection risk on accounts
receivable.




The
operations of the Company are located in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.




Statement
of Cash Flows




In
accordance with accounting standards codification, “Statement of Cash Flows,”
cash flows from the Company’s operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities reported on
the statement of cash flows may not necessarily agree with changes in the
corresponding balances on the balance sheet.




Foreign
Currency Translation and Comprehensive Income (Loss)




The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars (“USD”) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments caused by different exchange rates from period to period are
included as a component of stockholders’ equity as “Accumulated other
comprehensive income”. Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.




On July
21, 2005, the central government of China allowed the RMB to fluctuate, ending
its decade old valuation peg to the U.S. dollar. Historically, the Chinese
government has benchmarked the RMB exchange ratio against the U.S. dollar,
thereby mitigating the associated foreign currency exchange rate fluctuation
risk. The Company does not believe that its foreign currency exchange rate
fluctuation risk is significant, especially if the Chinese government continues
to benchmark the RMB against the U.S. dollar. This fluctuation of the exchange
rates does not imply free convertibility of RMB to other foreign currencies. All
foreign exchange transactions continue to take place either through the People’s
Bank of China or other banks authorized to buy and sell foreign currencies at
the exchange rate quoted by the People’s Bank of China.




The
Company uses Statement of accounting standards codification “Reporting
Comprehensive Income”. Comprehensive income is comprised of net income and all
changes to the statements of stockholders’ equity, except those due to
investments by stockholders, changes in paid-in capital and distributions to
stockholders. Comprehensive income for the three months ended March 31, 2010 and
2009 were included net income and foreign currency translation
adjustments.





8




Fair
value of financial instruments




The
accounting standards codification, “Disclosures about Fair Value of Financial
Instruments,” requires that the Company disclose estimated fair values of
financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.





On
January 1, 2008, the Company adopted accounting standards codification, “Fair
Value Measurements.” The accounting standards codification defines fair value,
establishes a three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosures requirements for fair value measures. The
carrying amounts reported in the balance sheets for receivables and current
liabilities each qualify as financial instruments and are a reasonable estimate
of fair value because of the short period oftime
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels are defined as
follow:




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




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




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




As of
March 31, 2010, the Company did not identify any assets and liabilities that are
required to be presented on the balance sheet at fair value.




Stock-Based
Compensation




The
Company accounts for its stock-based compensation in accordance with the
accounting standards codification, “Share-Based Payment.”. The Company measures
the cost of employee services received in exchange an award of equity
instruments based on the grant-date fair value of the award and other
equity-based compensation to employees and non-employees, and recognizes that
cost over the requisite service period. For the three months ended March 31,
2010, the Company recorded approximately $1,127,074 of stock compensation
expense in accordance with accounting standards codification, “Share-Based
Payment”.  Refer to Note 17 for additional information regarding the
Company’s stock non-qualified plan (Plan).





Consolidation of
Variable Interest Entities





VIE’s are
entities that lack one or more voting interest entity characteristics. The
Company consolidates VIEs in which it is the primary beneficiary of its economic
gains or losses. The FASB has issued the accounting standards codification
(Revised December 2004), “Consolidation of Variable Interest Entities.” The
accounting standards codification clarifies the application of Consolidated
Financial Statements, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. It separates
entities into two groups: (1) those for which voting interests are used to
determine consolidation and (2) those for which variable interests are used to
determine consolidation. The accounting standards codification clarifies how to
identify a variable interest entity and how to determine when a business
enterprise should include the assets, liabilities, non-controlling interests and
results of activities of a variable interest entity in its consolidated
financial statements.





Reclassification





Certain
reclassifications have been made to the prior years’ financial statements to
conform to the current year presentation. These reclassifications had no effect
on previously reported results or retained earnings.





9


New
Accounting Pronouncements





Non-controlling Interests in
Consolidated Financial Statements





In
December 2007, the FASB issued an accounting standards codification,
“Non-controlling Interests in Consolidated Financial Statements - An Amendment
of the accounting standards codification,” Non-controlling Interest in
Consolidated Financial Statements.” The amended accounting standards
codification establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the non-controlling interest will be included in
consolidated net income on the face of the income statement.  The
non-controlling Interests in Consolidated Financial Statements clarifies that
changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the non-controlling equity
investment on the deconsolidation date. The non-controlling Interests in
Consolidated Financial Statements also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. The
non-controlling Interests in Consolidated Financial Statements is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company expects the non-controlling Interests
in Consolidated Financial Statements will have an impact on accounting for
business combinations once adopted but the effect is dependent upon acquisitions
at that time.





Business
Combinations





In
December 2007, the FASB issued an accounting standards codification (Revised
2007), “Business Combinations”. The revised accounting standards codification of
“Business Combinations” will significantly change the accounting for business
combinations. Under the revised accounting standards codification of “Business
Combinations”, an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. The revised accounting standards codification of
“Business Combinations will change the accounting treatment for certain specific
items, including:





·
            Acquisition
      costs will be generally expensed as
incurred;





·
            Non-controlling
      interests (formerly known as “minority interests” - see accounting
      standards codification, “non-controlling Interests in Consolidated
      Financial Statements”, discussion above) will be valued at fair value at
      the acquisition date;





·
            Acquired
      contingent liabilities will be recorded at fair value at the acquisition
      date and subsequently measured at either the higher of such amount or the
      amount determined under existing guidance for non-acquired
      contingencies;





·
            In-process
      research and development will be recorded at fair value as an
      indefinite-lived intangible asset at the acquisition
  date;





·
            Restructuring
      costs associated with a business combination will be generally expensed
      subsequent to the acquisition date;
and





·
            Changes
      in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax
      expense.





The
revised accounting standards codification of “Business Combinations also
includes a substantial number of new disclosure requirements. The revised
accounting standards codification of “Business Combinations applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is prohibited. Accordingly, since we
are a calendar year-end company, we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. The
Company expects the revised accounting standards codification of “Business
Combinations will have an impact on accounting for business combinations once
adopted but the effect is dependent upon acquisitions at that time.




10




Defining Warrant Indexed To
A Company’s Own Stock





In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) issue, “Determining
Whether an instrument (of Embedded Feature) is indexed to an Entity’s Own
Stock”. The accounting standards codification mandates a two-step process for
evaluating whether an equity-linked financial instrument or embedded feature is
indexed to the entity’s own stock.  Warrants that a company issues
that contain a strike process adjustment feature, upon the adoption of the
accounting standards codification results in the instruments no longer being
considered indexed to the company’s own stock. Accordingly, adoption of
the  accounting standards codification will change the current
classification (from equity to liability) and the related accounting for such
warrants outstanding at the date. The accounting standards
codification,  “Determining Whether an instrument (of Embedded
Feature) is indexed to an Entity’s Own Stock”, is effective for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years.





The full
ratchet period of the Company’s warrant A-1 and warrant A-2 series expired on
October 22, 2008 one year following the original issue date of October 23, 2007.
The Company does not believe that adoption of the accounting standards
codification would have material effect on the Company’s financial statements
and disclosures.





Interim Disclosures about
Fair Value of Financial Instruments





In
April 2009, the FASB issued guidance regarding “Interim Disclosures
about Fair Value of Financial Instruments.” which amended “Disclosures about
Fair Values of Financial Instruments,” to require disclosures about fair value
of financial instruments in interim financial statements as well as in annual
financial statements. It also amends Accounting Principles Board (“APB”)
“Interim Financial Reporting,” to require those disclosures in all interim
financial statements. This guidance is effective for interim and annual periods
ending after June 15, 2009, with early application permitted.





As of
March31, 2010, the Company did not identify any assets and liabilities that are
required to be presented on the balance sheet at fair value.





Subsequent
Events





In
May 2009, the FASB issued guidance regarding “Subsequent Events”. This
guidance establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date. This guidance is effective for interim and annual reporting
periods ending after June 15, 2009, and shall be applied
prospectively.





Accounting Standards
Codification and the Hierarchy





In June
2009, the financial accounting standards Board (“FASB”) issued an accounting
standards codification, “The FASB  (“ASC”) and the Hierarchy of
Generally Accepted Accounting Principles,” which is a significant restructuring
of accounting and reporting standards designed to simplify user access to all
authoritative U.S. generally accepted accounting principles by providing the
authoritative literature in a topically organized structure.  The Company
has adopted the ASC, which became effective for interim and annual periods
ending after September 15, 2009.





Consolidations –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities





In
December 2009, the FASB issued guidance for Consolidations – Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities
(Topic 810).   The amendments in this update are a result of
incorporating the provisions of accounting standards codification,
“Consolidation of Variable Interest Entities”, Amendments to accounting
standards codification,“, and accounting standards codification, “Interpretation
of Consolidation of Variable Interest Entities, revised December 2004”. The
provisions of such Statement are effective for fiscal years, and interim periods
within those fiscal years, beginning on or after November 15, 2009. Earlier
adoption is not permitted. The presentation and disclosure requirements shall be
applied prospectively for all periods after the effective date. Management
believes this Statement will have immaterial impact on the financial statements
of the Company once adopted.





11


2.  CASH
IN BANK ACCOUNTS





Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at March 31,
2010 and December 31, 2009 amounted to $37,196,137 and $41,905,658,
respectively, of which no deposits are covered by insurance. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
risks on its cash in bank accounts.





3.  PREPAID
RENT




Prepaid
expenses mainly consisted of prepaid rents for the gas stations (see Note 13 -
Commitments) and other expenses. At March 31, 2010 and December 31, 2009, the
current portion of prepaid rental expenses of gas stations was $3,445,872 and
$2,732,546, respectively. At March 31, 2010 and December 31, 2009, the
noncurrent portion of prepaid expenses amounted $30,869,398 and $24,620,685,
respectively, which represents the prepaid rents that will be expensed after one
year.





4.  INVENTORIES




Inventories
consisted of the following:


March 31, 2010
                            (Unaudited)
                          
                          
                          December 31,2009Petroleum
                          
                          $
                          7,395,213
                          
                          
                          $
                          10,449,525Diesel
                          
                          
                          8,964,179
                          
                          
                          
                          5,601,725Raw
      material for manufacturing bio-diesel oil
                          
                          
                          5,484,202
                          
                          
                          
                          4,903,601Subtotal
                          
                          
                          21,843,594
                          
                          
                          
                          20,954,851





5.  OTHER
RECEIVABLES AND DEPOSITS




At March
31, 2010, other receivables represented deposits made for purchase of equipments
and short term cash advances to third parties in the amount of $ 1,182,927. At
December 31, 2009, other receivables represented deposits made for purchase of
equipments and short term cash advances to third parties in the amount of
$7,231,586, of which $6,973,439 was a deposit for the purchase of Jinzhen gas
station.





6.  PROPERTY,
PLANT, AND EQUIPMENT




Plant,
property, and equipment are summarized as follows:


March 31,
                      2010
                      (Unaudited)
                    
                    
                    December 31,
                      2009Building
                    
                    $
                    600,405
                    
                    
                    $
                    336,051Diesel
      Processing Equipment
                    
                    
                    8,360,526
                    
                    
                    
                    8,360,404Office
      Equipment
                    
                    
                    150,176
                    
                    
                    
                    145,456Other
      Equipment
                    
                    
                    213,338
                    
                    
                    
                    34,047Motor
      Vehicles
                    
                    
                    1,142,045
                    
                    
                    
                    1,142,029Construction
      in progress
                    
                    
                    7,704,856
                    
                    
                    
                    -18,171,346
                    
                    
                    
                    10,017,987Less:
      Accumulated Depreciation
                    
                    
                    (2,714,157
                    )
                    
                    
                    (2,456,080
                    )Total
                    
                    $
                    15,457,189
                    
                    
                    $
                    7,561,907




12


Depreciation
expense for the three months ended March 31, 2010, and 2009 were $257,988 and
$292,744, respectively.





7.  INTANGIBLE
ASSETS





In
January 2010, the Company completed an acquisition of an agricultural
plantation, located in Xianyan Chuanhua, Shaanxi Province, PRC, with 20,000 Mu
(approximately 3,295 acres) in size.  The agricultural plantation will
used for pilot programs exploring and experimenting with new feedstock for
the Company’s biodiesel production.  The purchase price of the
plantation was $1,025,521 (RMB 7,000,000) for a 70-year land usage right, where
the land is owned by the government.  The
payment was made in 2009 and recorded as a deposit.  The amount was
reclassified as agricultural plantation land usage right upon completion of
transfer of title in January 2010.See note 14 for gas station
operating right and gas station land usage right.




Intangible
assets are summarized as follows:





March 31,
                      2010
                      (Unaudited)
                    
                    
                    December 31,
                      2009Gas
      station operating right
                    
                    $
                    7,028,553
                    
                    
                    $
                    -Gas
      station land usage right
                    
                    
                    2,490,009
                    
                    
                    
                    -Agricultural
      plantation land usage right
                    
                    
                    1,025,521
                    
                    
                    
                    -10,554,083
                    
                    
                    
                    -Less:
      Accumulated Amortization
                    
                    
                    (63,154
                    )
                    
                    
                    -Total
                    
                    
                    10,480,929
                    
                    
                    
                    -





Amortization
expense for the three months ended March 31, 2010, and 2009 were $63,154 and
$-0-, respectively





8.  MAJOR
CUSTOMERS AND VENDORS




For the
three months ended March 31, 2010, two major customers accounted for
approximately 46.9% of the Company’s total sales, and these two customers
accounted for approximately 20.6% of the Company’s outstanding accounts
receivable. No other major customers accounted for over 10% of the Company’s
total sales. For the three months ended March 31, 2009, one major customer
accounted for approximately 20.8% of the Company’s total sales, and this
customer accounted for approximately 37.2% of the Company’s outstanding accounts
receivable.





For the
three months ended March 31, 2010, ten vendors accounted for approximately 80.9%
of the Company’s total purchase; within them four vendors provided approximately
53.0% of the Company’s total purchases, and each of these four
vendors  provided more than 10% of the Company’s total
purchase.  For the three months ended March 31, 2009, this biggest
vendor accounted for approximately 40.0% of the Company’s total purchases. There
were no accounts payables due to this vendor at March 31, 2009.





9.  TAX
PAYABLE




Tax
payable consisted of the following at March 31, 2010 and December 31,
2009:





March 31,
                          2010
                          (Unaudited)
                        
                        
                        December
                          31,
                          2009Value
      added tax payable
                        
                        $
                        812,075
                        
                        
                        $
                        1,150,725Urban
      maintenance and construction tax payable
                        
                        
                        56,845
                        
                        
                        
                        80,551Other
      tax payable
                        
                        
                        13,334
                        
                        
                        
                        11,655$
                        882,254
                        
                        
                        $
                        1,242,931




13


10.  INCOME
TAXES




Baorun
Industrial obtained approval from the PRC tax authority for the exemption of
income taxes from 2004 to the end of 2010 as the incentive from the Government
for bio energy products.





Effective
January 1, 2008, the PRC government implemented a new corporate income tax law
with a new maximum corporate income tax rate of 25%. Despite the income tax
exemption of Baorun Industrial, the Company is governed by the Income Tax Law of
the PRC concerning privately-run enterprises, which are generally subject to tax
at a statutory rate of 25% (33% prior to 2008) on income reported in the
statutory financial statements after appropriate tax adjustments. Redsky had a
net operating loss of approximately $10,378 and $14,000 for the three months
ended March 31, 2010 and 2009, respectively. A 100% valuation allowance has been
established due to the uncertainty of its realization.





Baorun
China Group is subject to Hong Kong profits tax rate of 16.5%, and has
insignificant net operating losses for three months ended March 31, 2010 and
2009, and has loss carryover of approximately $178,600 at December 31,
2009.  The net operating loss carries forward infinitely for the Hong
Kong profits tax, and may be available to reduce future years’ taxable
income. Management believes that the realization of the benefits from these
losses appears not more than likely due to the Company’s limited operating
history and continuing losses for the Hong Kong profits tax purpose.
Accordingly, the Company has provided a 100% valuation allowance on the deferred
tax asset benefit to reduce the asset to zero. Management will review this
valuation allowance periodically and make adjustments as needed.





The
parent company, China Integrated Energy, Inc. is incorporated in the United
States and has incurred an aggregate net operating loss of $1,127,074 and
$122,456 for the three months ended March 31, 2010 and 2009, respectively,
subject to the Internal Revenue Code Section 382, which places a limitation on
the amount of taxable income that can be offset by net operating losses after a
change in ownership. The net operating loss carries forward for the United
States income taxes, and may be available to reduce future years’ taxable
income. These carryforwards will expire, if not utilized, through 2029.
Management believes that the realization of the benefits from these losses
appears not more that likely due to the Company’s limited operating history and
continuing losses for the United States income tax purposes. Accordingly, the
Company has provided a 100% valuation allowance on the deferred tax asset
benefit to reduce the asset to zero. Management will review this valuation
allowance periodically and make adjustment as warranted





The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the taxable years


2010
                  
                  
                  2009US
      statutory rates
                  
                  
                  34
                  %
                  
                  
                  34
                  %Tax
      rate difference
                  
                  
                  (9
                  )%
                  
                  
                  (9
                  )%Effect
      of tax holiday
                  
                  
                  (25
                  )%
                  
                  
                  (25
                  )%Valuation
      allowance
                  
                  
                  -
                  %
                  
                  
                  -
                  %Tax
      per financial statements
                  
                  
                  -
                  
                  
                  
                  -




The
following table gives the unaudited consolidated pro forma financial impact had
the PRC taxes not been abated.





For the Three Months Ended March 31,2010
                    
                    
                    2009(pro forma)
                    
                    
                    (pro forma)Net
      income before income taxes
                    
                    $
                    11,359,774
                    
                    
                    $
                    7,150,468Tax
      provision
                    
                    
                    (3,136,642
                    )
                    
                    
                    (1,831,475
                    )Net
      income
                    
                    $
                    8,223,132
                    
                    
                    $
                    5,318,993Earnings
      per share (diluted)
                    
                    $
                    0.19
                    
                    
                    $
                    0.15




14


11.  OTHER
PAYABLES




Other
payable mainly consisted of payables for the purchase of equipment, short term
advances from third parties, and other obligations. Other payables balances at
March 31, 2010 and December 31, 2009 were $1,131,393 and $2,700,988,
respectively. At December 31, 2009, there was payable of $1,816,610 for
remaining unpaid leasing cost of the new gas station





12.  LOANS
PAYABLE





The
Company was obligated under one short term loan from a commercial banks in the
PRC. The loan was entered into on October 26, 2009 with maturity to October 25,
2010. The principal will be repaid at maturity and the interest is payable per
quarter, currently the Company’s rate is at 5.841% per annum. This loan is
guaranteed by Xi’an City Economic & Technology Investment Guarantee Co., Ltd
and Shaanxi Security & Trust Guarantee Co. Xi’an City Economic &
Technology Investment Guarantee Co insured $2,930,017 (RMB 20,000,000). Shaanxi
Security & Trust Guarantee Co insured $1,465,008 (RMB 10,000,000). The
guarantee fee was 2.375% of total loan amount or $110,478 (RMB 754,110). Mr. Gao
Xincheng, Chairman and CEO, provided counter guarantee to the guarantee
companies to secure the loan. The Company collateralized its diesel processing
equipment and inventory in the value of approximately $3,516,000 (RMB
24,000,000) for the guarantee. At March 31, 2010 and December 31, 2009, the loan
carried a balance of $4,395,089 and $4,395,025 (RMB 30,000,000).





13.  COMMITMENTS




Lease
Agreements




On
January 4, 2010, the Company entered into a 15-year non-cancelable and renewable
operating lease agreement with Northwest Fire Resistant Factory from
January 5, 2010 to January 4, 2025 for the purpose of constructing a new
50,000-ton biodiesel production plant.  The annual lease payment is
$117,000 (RMB 800,000). The Company has paid approximately $352,000 (RMB
2,400,000) in advance. The amount represented prepaid lease payments over the
next three years and will be amortized accordingly.





On
January 5, 2010, the Company leased a gas station for operation under a ten-year
operating lease with expiration date on January 7, 2010. The annual lease
payment is approximately $381,000 (RMB 2,600,000). The Company is required to
pay in advance of 80% of the sum of the ten year lease payments approximately
$3,047,000 (RMB 20,800,000) upon executing the lease agreement, and pay the
remaining 20% of the sum of the ten-year lease payments approximately $762,000
(RMB 5,200,000) upon delivery of operating permits and related documents from
the lessor.





On
January 9, 2010, the Company leased a gas station for operation under a
fifteen-year operating lease with expiration date on January 9, 2025. The annual
lease payment is approximately $337,000 (RMB 2,300,000). The Company is required
to pay in advance of 80% of the sum of the fifteen-year lease payments
approximately $4,043,000 (RMB 27,600,000) upon executing the lease agreement,
and pay the remaining 20% of the sum of the fifteen-year lease payments
approximately $1,011,000 (RMB 6,900,000) upon delivery of operating permits and
related documents from the lessor.





These
operating lease agreements require that the Company pays certain operating
expenses applicable for the leased premises. According to the lease agreements,
the Company has prepaid lease payments for some or all of the lease terms, and
recorded prepaid lease payments as prepaid rent that will be amortized over the
terms of the lease agreements. Future minimum rental expense recognitions and
obligations required under these operating leases are as follows:





Years
      Ending December 31,
                  
                  Amount2010
                  
                  $
                  3,900,0002011
                  
                  
                  3,783,0002012
                  
                  
                  3,783,0002013
                  
                  
                  3,749,0002014
                  
                  
                  3,681,000Years
      thereafter
                  
                  
                  36,919,000Total
                  
                  $
                  55,815,000




15




Total
rental expense for the three months ended March 31, 2010 and 2009 amounted to
approximately $865,100 and $443,580, respectively.





ShippingAgreement





During
2008, the Company entered a shipping agreement with a transportation company for
transporting the raw materials for manufacturing the biodiesel product for a
period of July 1, 2008 through August 31, 2009. The contact was renewed for
another year. The Company pays RMB 60 per ton for transporting the raw material
from the suppliers to its various oil extract plants, and pays a range of RMB 30
/ ton – RMB 100 / ton for transporting the raw oil from its various oil extract
plants to its bio-diesel production facility. For the three months ended March
31, 2010, the shipping cost paid to this transportation company was
approximately $104,809.





Construction
Contract





On
February 25, 2010, the Company entered into a contract with Tongchuan Gaoyuan
Construction Co., Ltd. to construct the infrastructure for a new 50,000-ton
biodiesel production plant, which is located at Northwest Fire Resistant Factory
adjacent to the current 100,000-ton biodiesel production plant.  The
construction began March 16, 2010 and will be completed by July 30,
2010.  The total construction cost is approximately $1,977,400 (RMB
13,500,000).  Based on the contract, the Company is required to pay
approximately $585,900 (RMB 400,000) or 30% of total construction cost upon
commencement of the construction, and pay approximately $1,281,600 (RMB
8,7500,000) or 65% of the total construction cost within 3 days after a
satisfactory inspection of completed infrastructure.  The remaining
approximately $109,900 (RMB 750,000) serves as retainage for quality assurance,
and will be paid by the Company after 180 days from the commencement
of  the operation.





On
February 26, 2010, the Company entered into a contract with Northwest Fire
Resistant Factory “the landlord” to reimburse the landlord approximately
$292,900 (RMB 2,000,000) for the cost of demolition.  Based on the
contract, the Company is required to pay approximately $175,800 (RMB 1,200,000)
within 10 days after execution of the agreement, and pay the remaining balance
within 5 days after completion of demolition.





Equipment Purchase
Agreements





On March
5, 2010, the Company entered into a equipment purchase agreement with Japan
Micro Energy Corporation (JMEC) to purchase biodiesel production equipment. The
purchase price is approximately $5,858,900 (RMB 40,000,000).  Upon
effective of the purchase agreement, the Company is required to pay
approximately $3,808,300 (RMB 26,000,000) or 65% of the purchase price as down
payment, and pay approximately $1,757,700 (RMB 26,000,000) or 30% of the
purchase price 5 days before of the shipment.  The remaining balance
of approximately $292,900 (RMB 2,000,000) or 5% of purchase price will be paid
within 12 months after the delivery.  JMEC is committed to deliver the
equipment within 150 days after execution of the purchase agreement, and will
provide technical personnel to assist installation, testing of the
equipment.  JMEC will further provide training to the Company’s
personnel to operate and maintain the equipment, and provide free service and
maintenance in one year after satisfactory installation and testing of the
equipment.





On March
8, 2010, the Company entered into a equipment purchase agreement with Japan
Shinwa Shouji Co., Ltd. (JSSC) to purchase biodiesel production
equipment.  The purchase price is approximately $3,368,900 (RMB
23,000,000). Upon effective of the purchase agreement, the Company is required
to pay approximately $1,516,000 (RMB 10,350,000) or 45% of the purchase price as
down payment, and pay approximately $1,684,400 (RMB 11,500,000) or 50% of the
purchase price 7 days before of the shipment.  The remaining balance
of approximately $168,400 (RMB 1,150,000) or 5% of purchase price will be paid
within 12 months after the delivery.  JSSC is committed to deliver the
equipment within 150 days after execution of the purchase agreement, and
will provide technical personnel to assist installation, testing of the
equipment.  JMEC will further provide training to the Company’s
personnel to operate and maintain the equipment, and provide free service and
maintenance in one year after satisfactory installation and testing of the
equipment.





16


14.  BUSINESS
COMBINATION




In December
2009, the Company entered into a share purchase agreement with Yangbaorong
and Wuyang, who held 100% of the equity of Xianyang Jinzheng Petroleum
Sales Co., to acquire 100% of the equity of Xianyang Jinzheng gas
station, a privately owned service gas station, located in Xiangyang City,
Shaanxi Province, PRC.  The acquisition furthers the Company’s growth
strategy and expansion in its retail gas station business
segment.  The total purchase price of Xianyang Jinzheng gas station
was approximately $9,962,202 (RMB 68,000,000) in cash with no assumption of
liabilities.  The first
installment payment of approximately $6,973,440 (RMB 47,600,000) was made in
2009 and recorded as a deposit.  In January 2010, the Company paid
approximately $2.5 million of the unpaid balance.  The total
amount was reclassified to fixed assets and intangible assets according to the
appraised valuation.Assets of Xianyang Jinzheng gas station
consists of a 40-year land usage right of 7 Mu (approximately 1.15 acres) of
land, which is owned by the government; a two-story building with 196 square
meters (approximately 2,130 square feet) in size; 12 gas pumps; 5 petroleum
storage tanks; and gas station including business office and fueling stations
with 988 square meters (approximately 10,620 square feet) in
size.





The
acquisition was accounted for using the purchase method of
accounting.  The total cost of the acquisition has been allocated to
the assets acquired based on their appraised fair value at the date of the
acquisition. Total
assets and expected revenue of Xianyang Jinzheng are immaterial to the
Company’s total assets and total revenue, accordingly pro forma financial
information was not presented.





The
following represents the allocation of the total purchase price.





Assets
                  
                  Purchase Price Allocation
                    (Unaudited)Tangible fixed assets
                  
                  $
                  443,640Land
      usage right
                  
                  
                  2,490,009Gas
      station operating right
                  
                  
                  7,028,553Total
                  
                  $
                  9,962,202





15.
BASIC AND DILUTED EARNING PER SHARES (EPS)




Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similar to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earnings per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution 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), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period. The following table presents a reconciliation of basic and diluted
earnings per share:





March 312010
                    (Unaudited)
                  
                  
                  2009
                    (Unaudited)Net
      income available to common stockholders
                  
                  
                  11,359,774
                  
                  
                  
                  7,201,252Weighted
      average shares outstanding - basic
                  
                  
                  33,319,09
                  
                  
                  
                  27,169,091Effect
      of dilutive securities:Convertible
      preferred stock
                  
                  
                  6,611,208
                  
                  
                  
                  7,011,208Unexercised
      warrants and stock option
                  
                  
                  2,877,329
                  
                  
                  
                  442,413Weighted
      average shares outstanding - diluted
                  
                  
                  42,807,628
                  
                  
                  
                  34,622,712Earnings
      per share - basic
                  
                  $
                  0.34
                  
                  
                  $
                  0.27Earnings
      per share - diluted
                  
                  $
                  0.27
                  
                  
                  $
                  0.21





16.  STOCKHOLDERS’
EQUITY




On
January 22, 2010, the Company and the investor executed agreements to amend the
warrant anti-dilution protection provisions of the warrant agreements for series
warrant A-1 and series warrant A-2 in relation to the Series A Convertible
Preferred Stock Agreement, dated October 23, 2007. Certain expired terms were
deleted from the agreements. Certain terms were modified to reflect current
market conditions. The execution of the amendments solidified the prior verbal
agreement.





17


On March
17, 2010, the investor converted 300,000 shares of Series B Convertible
Preferred stock to 300,000 shares of common stock.  The conversion had
no cash impact.





Following
is a summary of warrant activity for the three months ended March 31,
2010:





Number of
                    Shares
                  
                  
                  Average
                    Exercise
                    Price per Share
                  
                  
                  Weighed
                    Average
                    Remaining
                    Contractual
                    Term in YearsOutstanding
      at December 31, 2009
                  
                  
                  4,007,273
                  
                  
                  $
                  3.82
                  
                  
                  
                  3.43Exercisable
      at December 31, 2009
                  
                  
                  3,977,273
                  
                  
                  
                  -
                  
                  
                  
                  -Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at March 31, 2010
                  
                  
                  4,007,273
                  
                  
                  $
                  3.82
                  
                  
                  
                  3.18Exercisable
      at March 31, 2010
                  
                  
                  4,007,273
                  
                  
                  
                  3.82
                  
                  
                  
                  3.18





17.  SHARED-BASED
PAYMENT ARRANGEMENTS





On
September 10, 2009, the Company issued stock purchase options to financial
advisory consultant to purchase 310,320 shares of common stock and to investor
relations consultant to purchase 206,880 shares of common stock. The exercise
prices of both stock purchase options are at $4.50 per share. The stock purchase
options are remunerations for the financial advisory and investor relations
consulting services provided. The options were accounted for using the fair
value method. The options expire in one year from and are immediately vested
upon the option issuance date. The Company recognized approximately $340,200 of
compensation expense for these options for the three months ended March 31,
2010.





On
December 16, 2009, the Company issued stock purchase options to financial
advisory consultant to purchase 20,000 shares of common stock. The exercise
prices of the stock purchase option are at $7.09 per share. The stock purchase
option is a part of remunerations for the financial advisory consulting service
to be provided in the next 12 months. The option was accounted for using the
fair value method. The option expires in six year from the grant date and is
evenly vested each quarter. The Company recognized approximately $23,700 of
compensation expense for this option for the three months ended March 31,
2010.





On
January 4, 2010, the Company renewed service contracts with the three
independent directors and issued non-transferable stock purchase options to two
independent directors to purchase 20,000 shares of common stock each. The
exercise price is at $7.30 per share. These options were accounted for using the
fair value method. The option shall be terminated on the earlier of (i) the
tenth anniversary of the date of the agreement or (ii) the date as of which the
option has been fully exercised. The option is vested and becomes exercisable
after three months from the grant date. The option is vested in a 25% increment
every 3 months, in which each director provides directorship service to the
Company.  The Company recognized approximately $60,700 of compensation
expense for these options for the three months ended March 31,
2010.





Stock
Option





On
October 10, 2009, the Board of Directors and the Compensation Committee
authorized and approved granting stock option awards to employees under the 2003
Incentive Plan (Plan). The Plan provides for the granting of non-qualified and
incentive stock options to officers, employees, and others.  The stock
option exercise price is determined by the grant-date fair value of the
award.  On January 1, 2010, the Company granted 2,752,000 of options
to employees with the exercise price at $7.04 per share. The options are vested
ratably by quarter over a 5-year period and expire in 6 years from the date of
grant.





18


The
Company uses the Black-Scholes option pricing model to estimate the fair value
of the grants, and amortizes the fair value of the grants over the applicable
vesting period.  The Black-Scholes option-pricing model incorporates
expected various and highly subjective assumptions, including expected
forfeiture and expected volatility. The Company estimates the expected
forfeiture of the grants using the Company’s employment termination patterns,
which it believes are representative of future behalf.  The Company
estimates the expected volatility of of its common stock using a
weighted-average historical volatility of the Company’s common stock. The risk
free interest rate assumption is determined using the Federal Reserve nominal
rates for U.S. Treasury zero-coupon bonds with maturities similar to those of
the expected term of the award being valued.  The Company has not paid
dividend and anticipates not to pay dividend over the term of the
grants.  Therefore, there is no expected dividend yield. The
accounting standards codification requires the Company to estimate option
forfeiture at the time of grant and periodically revise those estimates in
subsequent periods, if actual forfeitures differ from the
estimates.  The Company records stock-based compensation expense only
for those awards expected to vest using an estimated forfeiture
rate.





Following
is a summary of stock option activity for the year ended March 31,
2010:




Options
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighed
                  Average
                  Remaining
                  Contractual
                  Term in Years
                
                
                Aggregate
                  Intrinsic ValueOutstanding
      at December 31, 2009
                
                
                577,200
                
                
                $
                4.56
                
                
                
                1.41
                
                
                $
                1,546,728Issued
                
                
                2,792,000
                
                
                
                7.04
                
                
                
                5.82Exercised
                
                
                259,265
                
                
                
                -
                
                
                
                -Cancelled/Forfeited
                
                
                25,000
                
                
                
                -
                
                
                
                -Outstanding
      at March 31, 2010
                
                
                3,084,935
                
                
                $
                6.79
                
                
                
                5.40
                
                
                $
                11,377,531Exercisable
      at March 31, 2010
                
                
                464,285
                
                
                
                3.89
                
                
                
                1.99
                
                
                $
                1,901,251





Following
is a summary of non-vested options as March 31, 2010 and changes during the
three months then ended:





Options
                  
                  
                  Weighted Average
                    Fair Value at Grant DateNon-vested
      options as of December 31, 2009
                  
                  
                  20,000
                  
                  
                  $
                  7.09Issued
                  
                  
                  2,782,000
                  
                  
                  
                  7.04Exercised
                  
                  
                  -
                  
                  
                  
                  -Cancelled
                  
                  
                  25,000
                  
                  
                  
                  -Non-vested
      options as of March 31, 2010
                  
                  
                  2,552,000
                  
                  
                  $
                  7.04


19


18.
SEGMENT REPORTING




The
accounting standards codification, “Disclosures about Segments of an Enterprise
and Related Information” requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products, services,
and channels.  The management has determined that the Company has
three operating segments as defined by the accounting standards codification:
wholesale distribution of finished oil and heavy oil products, production and
sale of biodiesel, and operation of retail gas stations.




For the three months ended March 31, 2010and 2009




Wholesale
                                    Distribution of
                                    Finished Oil and
                                    HeavyOil
                                  
                                  
                                  Production
                                    and Sale of
                                    Biodiesel
                                  
                                  
                                  Operation of
                                    Retail Gas
                                    Stations
                                  
                                  
                                  Total2010
      (Unaudited)Sales
                                  
                                  $
                                  76,577,124
                                  
                                  
                                  $
                                  14,897,751
                                  
                                  
                                  $
                                  17,941,175
                                  
                                  
                                  $
                                  109,416,050Cost
      of goods sold
                                  
                                  
                                  69,994,017
                                  
                                  
                                  
                                  10,199,535
                                  
                                  
                                  
                                  15,927,355
                                  
                                  
                                  
                                  96,120,907Gross
      profit
                                  
                                  
                                  6,583,107
                                  
                                  
                                  
                                  4,698,216
                                  
                                  
                                  
                                  2,013,820
                                  
                                  
                                  
                                  13,295,143Selling,
      general and administrative expenses
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,843,456Income
      from operations
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  11,451,687Non-operating
      income (expenses)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (91,913
                                  )Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  11,359,774Segment
      assets
                                  
                                  
                                  105,649,673
                                  
                                  
                                  
                                  30,012,833
                                  
                                  
                                  
                                  44,710,451
                                  
                                  
                                  
                                  180,372,957Capital
      expenditures
                                  
                                  
                                  2,463
                                  
                                  
                                  
                                  8,728,797
                                  
                                  
                                  
                                  9,962,202
                                  
                                  
                                  
                                  18,693,4622009
      (Unaudited)Sales
                                  
                                  $
                                  39,299,638
                                  
                                  
                                  $
                                  11,253,616
                                  
                                  
                                  $
                                  8,105,414
                                  
                                  
                                  $
                                  58,658,668Cost
      of goods sold
                                  
                                  
                                  35,232,597
                                  
                                  
                                  
                                  8,582,423
                                  
                                  
                                  
                                  7,166,694
                                  
                                  
                                  
                                  50,981,714Gross
      profit
                                  
                                  
                                  4,067,041
                                  
                                  
                                  
                                  2,671,193
                                  
                                  
                                  
                                  938,720
                                  
                                  
                                  
                                  7,676,954Selling,
      general and administrative expenses
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  555,849Income
      from operations
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  7,121,105Non-operating
      income (expenses)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  80,147Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  7,201,252Segment
      assets
                                  
                                  
                                  68,407,475
                                  
                                  
                                  
                                  18,881,905
                                  
                                  
                                  
                                  8,044,875
                                  
                                  
                                  
                                  95,334,255Capital
      expenditures
                                  
                                  
                                  3,324
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,324




19.  SUBSEQUENT
EVENT





On April
14, 2010, the Company renewed the agreement with investor relations consulting
firm for the investor relations services. As a part of investor relations
consulting fee, the Company issued the investor relations consulting firm
warrants to purchase 30,000 shares of the Company’s common stock with a strike
price at $10.00 per share. The warrants will be vested on the one year
anniversary of the contract signature date and exercisable only for cash;
and will expire 18 months from the date of vesting.





20.  OPERATING
RISK




(a)          
Country risk




Currently,
the Company’s revenues are mainly derived from sale of oil products and
bio-diesel in the PRC. The Company hopes to expand its operations in the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company’s financial condition.


20




(b)       
  Products risk




The
Company competes with larger companies, who have greater resources available for
expansion, marketing, research and development and the ability to attract more
qualified personnel. There can be no assurance that the Company will remain
competitive with larger competitors.




(c)       
   Exchange risk




The
Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could
fluctuate depending on changes in the political and economic environments
without notice.




(d)         
 Political risk




Currently,
the PRC is in a period of growth and is openly promoting business development in
order to bring more business into the PRC. Additionally, the PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company’s ability to operate
in the PRC could be affected.





(e)          
Key personnel risk




The
Company’s future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.


21




ITEM
2              MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




Forward
Looking Statements




This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon beliefs of, and information currently available to, the Company’s
management as well as estimates and assumptions made by Company’s management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof.
When used in the filings, the words “anticipate”, “believe”, “estimate”,
“expect”, “future”, “intend”, “plan”, or the negative of these terms and similar
expressions as they relate to the Company or the Company’s management identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors (including the risks contained in the section of
this report entitled “Risk Factors”) relating to the Company’s industry, the
Company’s operations and results of operations, and any businesses that the
Company may acquire. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may differ significantly from those anticipated, believed, estimated,
expected, intended, or planned.




Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking statements to conform these statements to
actual results. Readers are urged to carefully review and consider the various
disclosures made throughout the entirety of this quarterly report, which attempt
to advise interested parties of the risks and factors that may affect our
business, financial condition, results of operations, and
prospects.




Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application.
There are also areas in which management’s judgment in selecting any available
alternative would not produce a materially different result.





OVERVIEW




The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
operations and our present business environment. MD&A is provided as a
supplement to—and should be read in conjunction with—our consolidated financial
statements and the accompanying notes thereto contained in "Item 1.
Financial Statements of this report. This overview summarizes the MD&A,
which includes the following sections:




• Our Business—a general
overview of our three business segments the material opportunities and
challenges of our business.





• Critical Accounting Policies and
Estimates—a discussion of accounting policies that require critical
judgments and estimates.





• Results of Operations—an
analysis of our Company's consolidated results of operations for the two years
presented in our consolidated financial statements. Except to the extent that
differences among our operating segments are material to an understanding of our
business as a whole, we present the discussion in the MD&A on a consolidated
basis.


22




• Liquidity, Capital Resources and
Financial Position—an analysis of cash flows; an overview of financial
position.





The
following discussion contains forward-looking statements that involve risks,
uncertainties, and assumptions such as statements of our plans, objectives,
expectations, and intentions. Our actual results may differ materially from
those discussed in these forward-looking statements because of the risks and
uncertainties inherent in future events.




Our
Business




Company Overview




We are a
leading non-state-owned integrated energy company in China engaged in three
business segments, wholesale distribution of finished oil and heavy oil
products, production and sale of bio-diesel, and operation of retail gas
stations.





We now
operate four oil depots located in Xi’an, Shaanxi Province, access to a 2.65
kilometer special transportation rail track and one 100,000 ton bio-diesel
production plant located in Tongchuan, Shaanxi Province, China. Our major market
is China. Currently, our products are sold in 14 provinces and municipalities of
China covering Shaanxi Province, Henan Province, Hebei Province, Shangdong
Province, Shanxi Province, Hunan Province, Hubei Province, Sichuan Province,
Guizhou Province, Yunnan Province, Fujian Province, Xinjiang Province, Beijing,
and Shanghai.




Fluctuations
in Fuel Prices During 2010




Up to
2008, China's fuel prices have been controlled by the National Development and
Reform Commission (NDRC) and not set by market supply and demand. Effective
January 1, 2009, the Chinese government implemented a new pricing regime for
refined oil products, aimed to link domestic oil prices more closely to changes
in the global crude oil prices in a controlled manner.




From 2006
to 2008, there were only two oil price adjustments in each
year.  However, there were eight oil price adjustments to date in
2009.  We expect that oil prices in China will be adjusted more
frequently fluctuating in line with global oil prices.





In first
quarter of 2010, the average sales price for China Integrated Energy’s oil
products, which include gasoline, diesel and heavy oil was $846 per ton
(equivalent to approximately $2.48 per gallon of gasoline and $2.80 per gallon
of petro-diesel), compared to an average price of $832 per ton (equivalent to
approximately $2.44 per gallon of gasoline and $2.67 per gallon of
petro-diesel), during the fourth quarter of 2009.  The global crude
oil price had been stable from November 2009 to March 2010.





On April
14, 2010, NDRC subsequently increased the prices of gasoline and diesel by RMB
320 or $46.9 per ton or 4.5% and RMB 320 or $46.9 per ton or 5.0%, respectively,
when global crude oil price reached $87 per barrel.




Tax
Exemptions





NDRC, the
Ministry of Finance and other governmental departments are formulating relevant
policies such as subsidies, refund of Value Added Taxes (“VAT”), relief on
consumption tax, corporate tax, and fuel tax to encourage bio-diesel
consumption. As a result, China Integrated Energy is exempt from the fuel
tax and corporate income taxes.  China integrated Energy is
exempted from the corporate income tax through the end of calendar year
2010.




Growth
and Expansion Plans




Management
plans to focus on growing its biodiesel production, its distribution business,
and expanding the footprint of its retail gas stations. On the distribution and
retail sides, we benefit from our advantageous location, well-established
supplier relationships, as well as an extensive distribution network that has
valuable railway access to reach remote parts of China that other distribution
companies located in Shaanxi Province cannot currently reach. We plan to
strengthen our outreach in certain key distribution areas. We also plan to add
another three retail gas stations through acquisition or lease, which we believe
will benefit our overall distribution profit margins.


23




We also
plan to expand our current biodiesel production capacity of 100,000 tons to
150,000 tons, and have begun constructions to increase this capacity in the
third quarter of 2009. We anticipate $15 million in capital expenditures in 2010
to accomplish this goal. We have secured enough raw materials to supply 150,000
tons of capacity, but will also continue to work towards securing more long-term
sources of raw materials and new technology in the bioenergy field. We continue
pursuing strategic acquisitions that will quickly provide financial benefits to
us.




Management
believes the increase in sales volume from these initiatives will not only
offset the impact from fluctuation in fuel pricing, but also favorably impact
overall profits and cash flow.




Basis
of Presentations




Our
financial statements are prepared in accordance with the U.S. GAAP and the
requirements of Regulation S-X promulgated by the Securities and Exchange
Commission.




Critical
Accounting Policies and Estimates




Accounts
Receivable




Our
policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves.  Based on historical
collections, no allowance was deemed necessary at March 31, 2010 and December
31, 2009, as the Company did not experience any uncollectible accounts
receivable and bad debt write-off over the past years.




Inventories




Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis.  Cost of work in progress and finished goods
comprises direct material, direct labor and an allocated portion of production
overheads.




Property,
Plant and Equipment




Property,
plant, and equipment is stated at the actual cost on acquisition less
accumulated depreciation and amortization. Depreciation and amortization are
provided for in amounts sufficient to relate the cost of depreciation assets to
operations over their estimated service lives, principally on a straight-line
basis. Most property, plant and equipment have a residual value of 5% of actual
cost. The estimated lives used in determining depreciation
are:





Building
                    20
      yearsVehicle
                    5
      yearsOffice
      Equipment
                    5
      yearsProduction
      Equipment
                    10
      years




In
accordance with Statement of accounting standards codification, “Accounting for
the Impairment or Disposal of Long-Lived Assets”, we examine the possibility of
decreases in the value of fixed assets when events or changes in circumstances
reflect the fact that their recorded value may not be recoverable.





Intangible
Assets





Our
intangible assets consist of definite-lived assets subject to amortization such
as gas station operating right, land usage right of a gas station, and land
usage right of agricultural plantation for a pilot program cultivating biodiesel
feedstock. We calculate amortization of the definite-lived intangible assets on
a straight-line basis over the useful lives of the related intangible
assets.


24


Revenue
Recognition




Our
revenue recognition policies are in compliance with Securities and Exchange
Commission Staff Accounting Bulletin 104. Sales revenue is recognized at the
date of shipment to customers when a formal arrangement exists, the price is
fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectability is reasonably
assured.  Payments received prior to meeting all relevant criteria for
revenue recognition are recorded as unearned revenue.  For Retail gas
station sales, revenue is recognized and cash is collected upon completion of
fuel sales to customers,




Foreign
Currency Translation




Our
functional currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars (“USD”) as the reporting
currency. Assets and liabilities are translated at the exchange rate in effect
at the balance sheet date. Revenues and expenses are translated at the average
rate of exchange prevailing during the reporting period. Translation adjustments
caused by different exchange rates from period to period are included as a
component of stockholders’ equity as “Accumulated other comprehensive income.”
Gains and losses resulting from foreign currency transactions are included in
income. There has been no significant fluctuation in exchange rate for the
conversion of RMB to USD after the balance sheet date.




Income
Tax Recognition




We
account for income taxes under accounting standards codification, “Accounting
for Income Taxes”. “Accounting for Income Taxes” requires the recognition of
deferred tax assets and liabilities for both the expected impact of differences
between the financial statements and the tax basis of assets and liabilities,
and for the expected future tax benefit to be derived from tax losses and tax
credit carry forwards. “Accounting for Income Taxes” additionally requires
the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.





Xi’an
Baorun Industrial has obtained income tax exemption for the years from 2004 to
the end of 2010, due to the fact that it uses waste gas, water and residue in
the production of its products. We believe that this exemption is in effect for
all periods presented. Currently, the PRC is in a period of growth and is openly
promoting business development in order to bring more business into the PRC. Tax
exemption is one of the many methods used to promote such business development.
If the exemption should be rescinded for future periods, Xi’an Baorun Industrial
would be subjected to tax liabilities.  Had the abatement for income
taxes not been in effect for Baorun Industrial, we estimate that the pro forma
financial impact would be as follows:




For
      the Three Months  Ended March 31,2010
                  
                  2009(pro
      forma)
                  
                  (pro
      forma)Net
      income before income taxes
                  
                  $
                  11,359,774
                  
                  
                  $
                  7,150,468Tax
      provision
                  
                  
                  (3,136,642
                  )
                  
                  
                  (1,831,475
                  )Net
      income
                  
                  $
                  8,223,132
                  
                  
                  $
                  5,318,993Earnings
      per share (diluted)
                  
                  $
                  0.19
                  
                  
                  $
                  0.15




In
connection with the Share Exchange Agreement dated October 23, 2007, Redsky
Industrial and Xi’an Baorun Industrial, two PRC companies, entered into a series
of contracts whereby Redsky Industrial exercises significant control over Xi’an
Baorun Industrial, including the right to receive 100% of the net income
generated by Xi’an Baorun Industrial. While, as noted above, Xi’an Baorun
Industrial is exempt from income tax for the years from 2004 through 2010,
Redsky Industrial is not exempt from tax in those periods and is obligated for
applicable PRC taxes under PRC tax laws. We account for all income taxes in
accordance with “Accounting for Income Taxes” and “Accounting for Uncertainty in
Income Taxes,”


25


We
believe that the series of contracts entered into between Xi’an Baorun
Industrial and Redsky Industrial do not constitute taxable income for the
purposes of Redsky Industrial. Since commencement of these series of contracts,
Xi’an Baorun Industrial has not remitted any income to Redsky Industrial, nor
has Redsky Industrial demanded any remittance of income, nor is remittance
expected in the future, as Xi’an Baorun Industrial is anticipating to use its
undistributed earnings for future bio energy development as was anticipated when
it obtained its original tax exemption. We have examined our tax position and
have determined that our tax position with regards to both these
entities is in compliance with applicable PRC tax laws. Pursuant to the
accounting standards codification, we have determined that we will reinvest
indefinitely our earnings to the biodiesel production facility and biodiesel
production technology, and accordingly no accrual of deferred tax liabilities
was required as of December 31, 2009 and 2008. We have also analyzed the status
of Redsky Industrial and have determined that based on the aforementioned series
of contracts, if Redsky Industrial should be sold, dissolved or otherwise
disposed of, the obligations of Xi’an Baorun Industrial would be terminated
under the series of contracts, including Redsky Industrial’s right to 100% of
Xi’an Baorun Industrial’s net income. In addition, in accordance with
“Accounting for Uncertainty in Income Taxes”, we have examined our tax position
in the context of “Accounting for Contingencies.”  Accounting for
Uncertainty in Income Taxes is an accounting requirement that discusses tax
issues that have an element of uncertainty. In accordance with “Accounting for
Contingencies”, we have determined that it is probable that our tax position
with regards to both Redsky Industrial and Xi’an Baorun Industrial is correct.
Accordingly, no deferred tax liability has been provided for.





Consolidation of Variable
Interest Entities





VIE’s are
entities that lack one or more voting interest entity characteristics. The
Company consolidates VIEs in which it is the primary beneficiary of its economic
gains or losses. The FASB has issued a accounting standards codification
(Revised December 2004), Consolidation of Variable Interest Entities.
Consolidation of Variable Interest Entities clarifies the application of
Accounting Research Bulletin, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. It separates entities into two groups: (1) those for
which voting interests are used to determine consolidation and (2) those for
which variable interests are used to determine consolidation. Consolidation of
Variable Interest Entities clarifies how to identify a variable interest entity
and how to determine when a business enterprise should include the assets,
liabilities, non-controlling interests and results of activities of a variable
interest entity in its consolidated financial statements.





In
December 2009, the FASB issued guidance for Consolidations – Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities
(Topic 810). The amendments in this update are a result of incorporating the
provisions of accounting standards codification, “Consolidation of Variable
Interest Entities”, Amendments to accounting standards codification, “, and
accounting standards codification, “Interpretation of Consolidation of Variable
Interest Entities, revised December 2004”. Management believes this Statement
will have immaterial impact on the financial statements of the
Company.





Contingencies





Management
assesses the probability of loss for certain contingencies and accrues a
liability and/or discloses the relevant circumstances, as appropriate when
Management believes that any liability to the Company that may arise as a result
of having to pay out additional expenses may have a material adverse effect on
the financial condition of the Company taken as a
whole.


26


Results
of Operations





For the three months ended
March 31, 2010and 2009




Wholesale
                      Distribution of
                      Finished Oil and
                      HeavyOil
                    
                    
                    Production
                      and Sale of
                      Biodiesel
                    
                    
                    Operation of
                      Retail Gas
                      Stations
                    
                    
                    Total2010
      (Unaudited)Sales
                    
                    $
                    76,577,124
                    
                    
                    $
                    14,897,751
                    
                    
                    $
                    17,941,175
                    
                    
                    $
                    109,416,050Cost
      of goods sold
                    
                    
                    69,994,017
                    
                    
                    
                    10,199,535
                    
                    
                    
                    15,927,355
                    
                    
                    
                    96,120,907Segment
      profit
                    
                    
                    6,583,107
                    
                    
                    
                    4,698,216
                    
                    
                    
                    2,013,820
                    
                    
                    
                    13,295,143Selling,
      general and administrative expenses
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,843,456Income
      from operations
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    11,451,687Non-operating
      income (expenses)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (91,913
                    )Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    11,359,774Segment
      assets
                    
                    
                    105,649,673
                    
                    
                    
                    30,012,833
                    
                    
                    
                    44,710,451
                    
                    
                    
                    180,372,957Capital
      expenditures
                    
                    
                    2,463
                    
                    
                    
                    8,728,797
                    
                    
                    
                    9,962,202
                    
                    
                    
                    18,693,4622009
      (Unaudited)Sales
                    
                    $
                    39,299,638
                    
                    
                    $
                    11,253,616
                    
                    
                    $
                    8,105,414
                    
                    
                    $
                    58,658,668Cost
      of goods sold
                    
                    
                    35,232,597
                    
                    
                    
                    8,582,423
                    
                    
                    
                    7,166,694
                    
                    
                    
                    50,981,714Segment
      profit
                    
                    
                    4,067,041
                    
                    
                    
                    2,671,193
                    
                    
                    
                    938,720
                    
                    
                    
                    7,676,954Selling,
      general and administrative expenses
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    555,849Income
      from operations
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,121,105Non-operating
      income (expenses)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    80,147Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,201,252Segment
      assets
                    
                    
                    68,407,475
                    
                    
                    
                    18,881,905
                    
                    
                    
                    8,044,875
                    
                    
                    
                    95,334,255Capital
      expenditures
                    
                    
                    3,324
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,324




The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:




Three Months ended,
                          March 31, 2010
                        
                        
                        Three Months ended,
                          March 31, 2009$
                        
                        
                        % of
                          Sales
                        
                        
                        $
                        
                        
                        % of
                          SalesNet
      sales
                        
                        
                        109,416,050
                        
                        
                        
                        100.0
                        %
                        
                        
                        58,658,668
                        
                        
                        
                        100.0
                        %Cost
      of good sold
                        
                        
                        96,120,907
                        
                        
                        
                        87.8
                        %
                        
                        
                        50,981,714
                        
                        
                        
                        86.9
                        %Gross
      profit
                        
                        
                        13,295,143
                        
                        
                        
                        12.2
                        %
                        
                        
                        7,676,954
                        
                        
                        
                        13.1
                        %Total
      operating expenses
                        
                        
                        1,843,456
                        
                        
                        
                        1.7
                        %
                        
                        
                        555,849
                        
                        
                        
                        0.9
                        %Income
      from Operation
                        
                        
                        11,451,687
                        
                        
                        
                        10.5
                        %
                        
                        
                        7,121,105
                        
                        
                        
                        12.1
                        %Other
      income (expenses)
                        
                        
                        (91,913
                        )
                        
                        
                        -0.1
                        %
                        
                        
                        80,147
                        
                        
                        
                        0.1
                        %Net
      income
                        
                        
                        11,359,774
                        
                        
                        
                        10.4
                        %
                        
                        
                        7,201,252
                        
                        
                        
                        12.2
                        %


27




Net
sales.Net sales forthe three months ended March 31,
2010were approximately $109.4million compared tothe same period in 2009of approximately $58.7million, an increase in revenues of
$50.8million, or86.5%. The increase was mainly due to strong
market demand for finished oil products and sales growth generated by the gas
stations. Sales from wholesale distribution for the three months endedMarch31, 2010was $76.6million, compared to$39.3million in the same period of
2009, an increase of $37.3million, or94.6%.For the three months ended March 31,
2010 and 2009, sales volume of wholesale distributionwere 91,500 tons and 60,400 tons,
respectively,withan increase of
31,100tons or51.2% from the same period in
2009, as a result of increase of sales to
our existing customers to support their business growth and increase the number
of our distributors and end customers. Sales from production and sale of
biodiesel segment for the three months endedMarch31, 2010was 14.9 million, compared to
$11.3million in the same period of
2009. Sales volume of biodieselfor the three months ended March 31,
2010 and 2009 were 18,400 tons and17,300 tons, respectively, with aincreasedof1,100tonsor6.4%,compared to the same period of
2009.Furthermore, average selling price of biodieselincreased by approximately24.1% from the same period in
2009.Sales from our retail gas station for
the three months endedMarch31, 2010was $17.9million, compared to $8.1million in the same period of
2009, an increase of $9.8 million or
121.4%.  Sales
volume of gas stationsfor the three months ended
March 31, 2010 and 2009 were 19,500 tons and 11,100 tons, respectively, anincreased by8,400tons or75.3% from the same period in
2009.Furthermore, average selling price of retail gas stationincreased by approximately22.1% from the same period in
2009.




Cost of sales. Cost of sales
for the first quarter of 2010 was approximately $96.1 million compared to the
cost of sales in the same period of 2009 of approximately $51.0 million, an
increase of $45.1 million, or 88.5%.  The increase in cost of sales
was attributable to an increase in production and sales activities during the
first quarter of 2010. Cost of sales as a percentage of sales was approximately
87.8% for the quarter of 2010 and 86.9% for the same period of
2009.  The increase as a percentage of sales was due to change of
product sales mix in wholesale distribution business
and price promotions at five of our new gas
stations.




Gross profit. Gross profit
was approximately $13.3 million for the first quarter of 2010 as compared to
approximately $7.7 million for the same period of 2009, representing gross
margins of approximately 12.2% and 13.1%, respectively. During the first quarter
of 2010, the gross profit margin for wholesales distribution of finished oil and
heavy oil products was approximately 8.6%, the gross profit margin for
production and sale of biodiesel was approximately 31.5%, the gross margin for
operation of retail gas stations was approximately 11.2%, versus 10.3%, 23.7%,
and 11.6%, respectively, compared to the same period of 2009.  The
decrease in gross profit was due to change of
product sales mix in our wholesale distribution business and price
promotions at five of our new gas stations.




Operating expenses. Selling,
general and administrative expenses for the first quarter of 2010 were
approximately $1.8 million while it was $0.6 million for the same period of 2009
with an increase of $1.2 million or 200%. This increase was mainly attributed
approximately $0.7 million of employee, stock option expense and approximately
$0.4 million of stock options awarded to financial advisors. Total operating
expenses as a percentage of sales was 1.7% and 0.9% for the first quarter of
2010 and 2009, respectively. We expect our professional fees to continue to
increase in 2010, as we continue to engage an outside consulting firm to work on
our Sarbanes Oxley compliance, and recognize compensation expense to employee
stock option awards. We also expect to have an increase in other general and
administrative expenses in future reporting periods, as our business
expands.




Income from Operations.Income from operations for the three months ended March 31, 2010 was
$11.5 million compared to $7.1 million in the same period of
2009.  Income from operations as a percentage of sales for the three
months ended March 31, 2010 and 2009 were 10.5% and 12.1%, respectively. The
decrease as a percentage of sales was attributable to lower gross margin and
additional selling, general and administrative expenses.




Net income. The net income
for the first quarter of 2010 was $11.4 million as compared to $7.2 million in
the same period of 2009.  It was an increase of $4.2 million in net
profit or 57.7%.  This increase was attributable to economies of scale
combined with rapid growth in revenue from wholesale distribution of finished
oil and heavy oil products and operation of retail gas stations segments
especially in wholesale distribution business. Management believes that the net
income increase is the result of the fast and continuing revenue
growth.  Net income will continue to increase as we will continue to
increase sales volume in wholesale distribution and operation of retail gas
stations. Upon
completion of the new 50,000-ton biodiesel production plant in the third quarter
of 2010, we expect that revenue and net
income will grow significantly.


28


Liquidity
and Capital Resources




As of
March 31, 2010 and December 31, 2009, we had cash and cash equivalents of
approximately $41.0 million and $62.4 million, respectively. At March 31, 2010,
current assets were approximately $123.6 million and current liabilities
were approximately $14.5 million, as compared to current assets of approximately
$131.4 million and current liabilities of approximately $10.2 million at
December 31, 2009. Working capital equaled approximately $109.1 million at March
31, 2010, compared to $121.2 million at December 31, 2009, a decrease of
10.0%. The ratio of current assets to current liabilities was 8.5-to-1 at March
31, 2010, compared to 12.8-to-1 at the December 31, 2009. The decrease in
working capital in the first quarter of 2010 was primarily due to a significant
increase approximately $14.2 million of advance to suppliers for additional
petroleum supply to support the growth of wholesale distribution and retail gas
station business segments.  In the first quarter of 2010, we leased
two new gas stations for approximately $8.9 million. Net cash used in operations
was $11.2 million in the first quarter of 2010. We also made approximately $7.7
million of down payments for the new equipments for the new biodiesel production
plant.




We
believe we have sufficient working capital to sustain our current business due
to expected increased sales volume, revenue and net income from operations. We
intend to continue the expansion of our current operations by (i) extending oil
distribution network to other provinces outside of our current territory, (ii)
acquiring biodiesel production plants; (iii) acquiring new technology of
biodiesel production capability, (iv) expanding our 100,000 ton bio-diesel
manufacturing facility by constructing a new 50,000-ton of biodiesel production
plant; and (v) acquiring or leasing several additional gas stations to broaden
retail channels over the next three years. We expect to finance such expansion
through bank loans, the issuance of debt or equity securities, or a combination
thereof.  Failure to obtain such financing could have an adverse
effect on our business expansion.




Our
future capital requirements will depend on a number of factors,
including:





·
            Development
      of new sales territories, sales offices, and sales force for our wholesale
      distribution of finished oil and heavy oil products and required working
      capital to sustain our existing market share and support the growth in
      this business segment. This development can be achieved by organic growth
      or through acquisition;


·
            Expanding
      of market share for our retail gas stations both in terms of quantity and
      geographic location and required working capital to support the
      growth;


·
            Our
      ability to maintain our existing oil suppliers and establish collaborative
      relationships with new suppliers;


·
            Increase
      our biodiesel production capacity through strategic acquisitions or
      construction of a new facility; and


·
            Development
      and commercialization of new technology in biodiesel production
      capacity.





We
anticipate incurring some research and development expenses during the next 12
months.




The
following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended March 31, 2010 and
2009.





Three Months Ended March 31,2010
                    (Unaudited)
                  
                  2009
                    (Unaudited)Cash
      provided by (used in):Operating
      Activities
                  
                  $
                  (11,247,371
                  )
                  
                  $
                  11,748,785Investing
      Activities
                  
                  
                  (10,198,032
                  )
                  
                  
                  (3,324
                  )Financing
      Activities
                  
                  
                  -
                  
                  
                  
                  508,207


29




Net cash
used in operating activities was $11.2 million in the first quarter of 2010,
compared to $11.7 million of cash provided by operation in the same period of
2009. The net cash inflow decreased during the first quarter of 2010 was
primarily due to advance to suppliers, and lease payments for two new gas
stations.




Net cash
used in investing activities was $10.2 million in the first quarter of 2010.
During the first quarter of 2010, we spent approximately $7.7 million to
purchase equipments for constructing a 50,000-ton biodiesel manufacturing
facility, and approximately $2.5 million for of purchase Xianyan Jinzheng gas
station.




There was
no financing activity in the first quarter of 2010. In the first quarter of
2009, we received approximately $0.5 million from releases of restricted
cash from prior financing activities.




Inflation




We do not
believe that inflation had a significant negative impact on our results of
operations during the three months ended March 31, 2010.  However,
there is concern of inflation for the remaining of 2010.




Off-Balance
Sheet Arrangements




We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholders’ equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.




Contractual Obligations and
Commitments




As a
smaller reporting company we are not required to provide information required by
this Item.




Recently
Issued Accounting Pronouncements





Refer to
Note 2 of Notes to Consolidated Financial Statements for a discussion of
recent accounting standards and pronouncements.




ITEM
3              QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As a
smaller reporting company we are not required to provide information required by
this Item




ITEM
4T.          CONTROLS AND
PROCEDURES.




We
maintain “disclosure controls and procedures,” as such term is defined under
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation as required by Rule 13a-15(d) under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2010. Based upon their
evaluation and subject to the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that as of March 31, 2010 our disclosure controls
and procedures were effective in ensuring that material information relating to
us, is made known to the Chief Executive Officer and Chief Financial Officer by
others within our company during the period in which this report was being
prepared.


30




There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation that occurred during the quarter ended March 31,
2010 that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.




PART
II




OTHER
INFORMATION




ITEM
1             LEGAL
PROCEEDINGS




None.




ITEM
1A.         RISK
FACTORS




Risks
Related to our Business
 Our
customer sales base in 2010 has become more concentrated.  If we were
to lose any such customers, our business, operating results and financial
condition could be materially and adversely affected.
 
 Historically,
our customer base has been highly concentrated.  For the years ended
December 31, 2008 and 2009, sales by our five largest customers contributed
23.3% and 39.1% to our total sales, respectively.  In the first
quarter of 2010, sales to two provincial subsidiaries of Sinopec, represented
46.9% of our total sales.  The loss of, or reduction of our sales to,
any of such major customers could have a material adverse effect on our
business, operating results and financial condition.
 We
face risks associated with future acquisitions.
 
 An
important element of our growth strategy is to invest in or acquire businesses
or assets that will enable us, among other things, to expand our retail gas
station business and expand our bio-diesel manufacturing
capacity.  However, we may be unable to identify suitable investment
or acquisition candidates or may be unable to make these investments or
acquisitions on commercially reasonable terms, if at all.
 
 If we
complete an investment or acquisition, we may not immediately realize the
anticipated benefits from the transaction. Integrating an acquired business or
assets is distracting and time consuming, as well as a potentially expensive
process. The successful integration of any acquired businesses or assets
requires us to:
 
 •
              integrate
      and retain personnel;
 
 •
              evaluate
      and assess the acquired technologies to determine if they are
      suitable;
 
 •
              integrate
      and support pre-existing supplier, distribution and customer
      relationships; and
 
 •
              consolidate
      functions and combine back office accounting, order processing and support
      functions.
 
 Geographic
distance between business operations, the compatibility of the technologies and
operations being integrated and the disparate corporate cultures being combined
also present significant challenges.  Acquired businesses are likely
to have different standards, controls, contracts, procedures and policies,
making it more difficult to implement and harmonize company-wide financial,
accounting, billing, information and other systems. Our focus on integrating
operations may also distract attention from our day-to-day business and may
disrupt key research and development, marketing or sales efforts. If we cannot
overcome these challenges, we may not realize actual benefits from future
acquisitions, which will impair our overall business results.
 
 We
may face constraints on our working capital as a result of advancements made to
suppliers, and any shortfall in working capital could restrict our ability to
obtain our raw material supply.
 
 Industry practice for our wholesale
distribution of finished oil segment requires that we prepay our
suppliers.  If at any given time we do not have sufficient working
capital available to make such payments, we may be unable to obtain additional
supplies or, the quantity available to us may be limited.  Although
our inventory balances may vary, we generally maintain inventory expected
to satisfy our distribution cycle and ultimately customer demand for 14
days.  Any failure or delay in procuring additional supplies could
disrupt or inhibit our ability to meet our obligations under customer contracts,
which could cause our customers to seek other suppliers and a significant
decrease in overall sales revenues.
 
 31
  We
may face increased competition from larger domestic competitors in the finished
oil and heavy oil products industry if consolidation
continues.
 
 The requirement for payment in advance
for petroleum supplies has had a disproportionate negative impact on smaller
domestic companies. Many smaller wholesale distributors who do not have access
to adequate capital to make these advances have been acquired by larger
competitors.  As a result, there has been, and we believe that there
will continue to be, consolidation resulting in fewer, larger competitors in the
wholesale distribution of finished oil and heavy oil industry.
 
 An increase in competition arising from
industry consolidation and an increase in the size and financial resources of
our competitors in the wholesale distribution of finished oil and heavy oil
products may result in additional advances having to be made to
suppliers, price reductions, reduced gross profit margins and loss of our
market share, any of which could adversely affect our financial condition and
profitability.
 
 Competition
in the retail gas station business may become intense as international oil and
gas companies begin to enter the retail gas station market in the
PRC.
 
 The retail gas station market in the
PRC is highly fragmented with many privately owned gas stations.  To
date, our operating leases for, and acquisitions of, retail gas stations have
primarily been with or from private owners.  As large
international players, such as Exxon Mobil and Shell, begin to penetrate this
market through partnerships with state-owned entities or others,
competition for small privately-owned gas stations may become intense,
which could significantly increase lease payments and purchase prices paid to
owners.  Companies such as Exxon Mobil and Shell also have greater
financial and other resources than we do, and we may be unable to successfully
finance such acquisitions at potentially higher prices or
otherwise.  Since our growth strategy with respect to our retail gas
station business depends on our ability to continue to acquire, through leases
and otherwise, gas stations, our inability to compete against larger
international companies could significantly hinder revenue  growth for
this segment.
  Our
failure to renew our Dangerous Chemical Operating Permit may have a material
adverse impact on our financial condition and results of
operations.
 PRC law
and regulations on dangerous chemical administration require that a Dangerous
Chemical Operating Permit must be obtained for any entity engaging in the
operation and sale of dangerous chemicals. We obtained a Dangerous Chemical
Operating Permit for our wholesale distribution of finished oil and heavy oil
business in April 2007, which expired in April 2010.  In March 2010,
we submitted an application to renew the permit, which is currently under the
review of the relevant authority.  However, we are unable to ascertain
how long the review process will take and whether we will be able to receive a
renewal or obtain a new permit. On June
3, 2010 we received the following informal written statement confirmed by the
local authority of Shan’xi province Who is responsible for issuing the permit:
“On March 18,
2010, our Bureau received the Company's renewal application for a Dangerous
Chemical Operation Permit (Shaan Sheng You (Jia) [2007] No. 000015). The Company
may continue to conduct the relevant business associated with this permit during
the renewal review period.”
 Operating
our business without a Dangerous Chemical Operating Permit may be deemed a
violation of PRC law and may subject us to severe penalties, including fines and
suspension of operation.  Any failure by us to renew or obtain such
permit could require us to suspend operations and would have a material adverse
effect on the operation of our business.
  Our biodiesel
business will suffer if we cannot obtain or maintain necessary permits or
approvals.
 
 In the
fourth quarter of 2009, to expand our production capacity, we began the
construction of a new 50,000-ton biodiesel production plant on leased land
adjacent to our existing 100,000-ton biodiesel facility.  We leased
the land for both facilities from Northwest Fire Resistant Factory, a former
state-owned enterprise. We do not have all the necessary permits relating to the
construction and operation of these facilities.  With respect to both
biodiesel facilities, we do not have the land planning permit.  For
our existing facility we have several outstanding permits, which we are still
seeking to obtain, and for our new facility we are in the process of applying
for all the required permits.  We have not been informed by any
governmental agency that we should cease use of our existing biodiesel facility
or that we are prohibited from constructing our new biodiesel
facility.  Failure to obtain all necessary approvals/permits may
subject us to various penalties, such as fines or being required to vacate our
biodiesel facilities or to suspend construction of our new biodiesel
plant.
 
 Our
legal right to lease certain properties could be challenged by property owners,
regulatory authorities or other third parties
 
 We lease
the land on which our biodiesel facilities and most of our gas stations are
located.  We cannot be certain that Northwest Fire Resistant Factory,
the lessor of the land on which our biodiesel facilities are located, or our
other lessors have obtained all required consents or approvals for them to lease
the relevant property to us.  Any failure to duly obtain the consents
and approvals by these lessors could potentially result in the invalidation of
our lease or, in serious cases, we may be required to vacate the leased
properties or we may have to pay a fine.
 32
  We
and/or Baorun China Group may be classified as a “resident enterprise” for
PRC enterprise income tax purposes. Such classification could result in PRC tax
consequences to us, our non-PRC resident enterprise investors and/or Baorun
China Group.
  On March 16, 2007, the National
People’s Congress approved and promulgated a new tax law, the PRC Enterprise
Income Tax Law, or “EIT Law,” which took effect on January 1, 2008. Under the
EIT Law, enterprises are classified as “resident enterprise” and “non-resident
enterprises”. An enterprise established outside of the PRC with a “de facto
management body” within the PRC is considered a “resident enterprise,” meaning
that it can be treated in a manner similar to an enterprise organized under the
laws of the PRC for PRC enterprise income tax purposes. The implementing rules
of the EIT Law define “de facto management body” as a managing body that in
practice exercises “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise; however, it remains unclear whether the PRC tax authorities would
deem our managing body or Baorun Group’s managing body as being located within
the PRC. Due to the short history of the EIT Law and lack of applicable legal
precedents, the PRC tax authorities determine the PRC tax resident treatment of
a foreign (non-PRC) company on a case-by-case basis.
 
 If the PRC tax authorities determine
that we and/or Baorun China Group is a “resident enterprise” for PRC
enterprise income tax purposes, a number of PRC tax consequences could follow.
First, we and/or Baorun China Group may be subject to the PRC enterprise
income tax at a rate of 25% on our and/or Baorun china Group’s respective
worldwide taxable incomes, as well as PRC enterprise income tax reporting
obligations. Second, under the
EIT law and its implementing rules, dividends paid between “qualified resident
enterprise”
are exempt from enterprise income tax. As a result, dividends paid by Redsky
Industrial to Baorun Group may be exempt from the statutory 10% PRC withholding
tax normally imposed provided Baorun Group is classified as a resident
enterprise and, similarly, dividends paid by Baorun Group to us may be exempt
from such 10% withholding tax provided we are also classified as a resident
enterprise. If either Baorun Group or we are not classified as a resident
enterprise then the statutory 10% PRC withholding tax on dividends paid would
normally apply to any dividends paid by the resident enterprise to the
non-resident enterprise.
  33
  Finally,
if we are classified as a PRC “resident enterprise”, this
classification could result in a situation in which an up to 10% PRC
tax is imposed on dividends we pay to our enterprise (but not individual)
investors that are not tax residents of the PRC (“non-resident investors”) and
gains derived by them from transferring our common stock, if such income or gain
is considered PRC-sourced income by the relevant PRC tax authorities. In such
event, we may be required to withhold an up to 10% PRC tax on any dividends
paid to our non-PRC resident investors. Our non-PRC resident investors also may
be responsible for paying PRC tax at a rate of 10% on any gain realized from the
sale or transfer of our common stock in certain circumstances if such income is
considered as PRC-sourced income by relevant tax authorities. We would not,
however, have an obligation to withhold PRC tax with respect to such gain under
the PRC tax laws.
  Investors
should consult their own tax advisors regarding the applicability of any such
taxes, the effects of any applicable income tax treaties, and any available
deductions or foreign tax credits.




ITEM
2             UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




On
November 4, 2009, we consummated a public offering pursuant to a Registration
Statement on Form S-1 (File No. 333 - 161831), which was declared effective by
the SEC on October 29, 2009, of 5,000,000 shares of common stock at a public
offering price of $5.75 per share, and subsequently on November 18, 2009, we
consummated a public offering of an additional 750,000 shares of common stock at
the same price as a result of the exercise of the over-allotment
option.  Aggregate gross proceeds were approximately $33.1 million and
we received net proceeds of approximately $30.7 million from the offering, after
deducting underwriting discounts and estimated offering expenses of
approximately $2.4 million.




Since the
consummation of the offering, we have used approximately $15 million of the
net proceeds from the offering to begin construction of a new bio-diesel
facility, and the
remaining $16 million will be used toexpand
our wholesale distribution and retail gas station businesses through both
organic growth and potential acquisitions and for working capital and general
corporate purposes.




ITEM
3             DEFAULTS
UPON SENIOR SECURITIES




None




ITEM
4             OTHER
INFORMATION




None




ITEM
5             EXHIBITS




The
exhibits listed on the Exhibit Index are filed as part of this
report.




(a)        Exhibits:




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


34




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




32.1      Certification
by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.


35




SIGNATURES




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




Dated:
June
3, 2010


CHINA
      INTEGRATED ENERGY, INC.By:
              /s/
      Xincheng GaoName:
      Xincheng GaoTitle:
      Chief Executive Officer and
                President


36




EXHIBIT
INDEX





Exhibit No.
            
            Description31.1
            
            Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
            
            Certification
      by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
            
            Certification
      by Chief Executive Officers and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


37