UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q




(Mark
One)


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


For the
quarterly period ended March 31, 2009


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 Bio Energy Holding
Group Co., Ltd.


(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)
                    
                    (Zip
      Code)





86 29 8268 9320(Registrant’s
      telephone number, including area
code)





(Former name, former address and former fiscal year,
      if changed since last
report)




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




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




Large
Accelerated Filer  ̈  Accelerated
Filer  ̈  Non-Accelerated
Filer  ̈  Smaller
Reporting Company x




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




As of May
13, 2009, there were 27,169,091 shares of the Registrant’s common stock, par
value $0.0001 per share, outstanding.







TABLE
OF CONTENTS





PagePART
      I.FINANCIAL
      INFORMATIONItem 1. Consolidated
      Financial Statements (unaudited)
                1Item 2. Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                19Item 3. Quantitative and
      Qualitative Disclosures About Market Risk
                26Item 4T. Controls and
      Procedures
                26PART
      II.OTHER
      INFORMATIONItem 1. Legal
      Proceedings
                26Item 1A. Risk
      Factors
                26Item 2. Unregistered
      Sales of Equity Securities and Use of Proceeds
                26Item 3. Defaults Upon
      Senior Securities
                26Item 4. Submission of
      Matters to a Vote of Security Holders
                26Item 5. Other
      Information
                26Item 6.
      Exhibits
                27







PART
I. FINANCIAL INFORMATION


Item
1. Consolidated Financial Statements




CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





March 31,
                    2009
                    (Unaudited)
                
                
                December 31,
                    2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                35,386,602
                
                
                $
                23,119,028Restricted
      cash
                
                
                396,857
                
                
                
                919,351Accounts
      receivable
                
                
                5,565,717
                
                
                
                8,164,320Other
      receivables and deposits
                
                
                194,460
                
                
                
                3,986,984Prepaid
      rent
                
                
                2,000,531
                
                
                
                1,884,102Advance
      to suppliers
                
                
                15,467,225
                
                
                
                17,945,487Inventories,
      net
                
                
                20,642,907
                
                
                
                22,268,903Total
      current assets
                
                
                79,654,299
                
                
                
                78,288,175Prepaid
      rents
                
                
                5,970,499
                
                
                
                6,408,568Property
      and equipment, net
                
                
                9,709,457
                
                
                
                9,997,674Total
      noncurrent assets
                
                
                15,679,956
                
                
                
                16,406,242TOTAL
      ASSETS
                
                $
                95,334,255
                
                
                $
                94,694,417LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                
                $
                1,463
                
                
                $
                -Advance
      from customers
                
                
                874,178
                
                
                
                4,580,462Taxes
      payable
                
                
                820,369
                
                
                
                735,461Other
      payables
                
                
                203,259
                
                
                
                3,232,088Loans
      payable
                
                
                2,233,040
                
                
                
                2,247,197Total
      current liabilities
                
                
                4,132,309
                
                
                
                10,795,208TOTAL
      LIABILITIES
                
                
                4,132,309
                
                
                
                10,795,208STOCKHOLDERS'
      EQUITYPreferred
      stock,  $.001 par value;  authorized shares
      10,000,000; issued and outstanding 3,465,753 and 3,465,753 shares at March
      31, 2009 and December 31 2008, respectively
                
                
                3,465
                
                
                
                3,465Common
      stock,  $.0001 par value;  authorized shares
      79,000,000;  issued and outstanding 27,169,091 and 27,169,091
      shares at March 31, 2009 and December 31, 2008,
    respectively
                
                
                2,716
                
                
                
                2,716Additional
      paid in capital
                
                
                44,516,840
                
                
                
                44,434,250Statutory
      reserve
                
                
                4,920,114
                
                
                
                4,920,114Accumulated
      other comprehensive income
                
                
                5,355,898
                
                
                
                5,337,003Retained
      earnings
                
                
                36,402,913
                
                
                
                29,201,661Total
      stockholders' equity
                
                
                91,201,946
                
                
                
                83,899,209TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                95,334,255
                
                
                $
                94,694,417




See
accompanying notes to the consolidated financial statements


1




CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME




(Unaudited)


For The Three Months Ended March 31,2009
                  
                  
                  2008Sales
                  
                  $
                  58,658,668
                  
                  
                  $
                  35,560,840Cost
      of goods sold
                  
                  
                  50,981,714
                  
                  
                  
                  30,547,663Gross
      profit
                  
                  
                  7,676,954
                  
                  
                  
                  5,013,177Selling,
      general and administrative expenses
                  
                  
                  555,849
                  
                  
                  
                  319,806Income
      from operations
                  
                  
                  7,121,105
                  
                  
                  
                  4,693,371Non-operating
      income (expenses)Interest
      expenses
                  
                  
                  (33,518
                  )
                  
                  
                  (28,271
                  )Subsidy
      income
                  
                  
                  116,964
                  
                  
                  
                  -Other
      expense
                  
                  
                  (3,299
                  )
                  
                  
                  (195
                  )Total
      non-operating income (expenses)
                  
                  
                  80,147
                  
                  
                  
                  (28,466
                  )Net
      income
                  
                  
                  7,201,252
                  
                  
                  
                  4,664,905Other
      comprehensive item Foreign currency translation gain
(Loss)
                  
                  
                  (50,784
                  )
                  
                  
                  1,243,160Comprehensive
      Income
                  
                  $
                  7,150,468
                  
                  
                  $
                  5,908,065Basic
      and diluted weighted average shares outstandingBasic
                  
                  
                  27,169,091
                  
                  
                  
                  25,454,545Diluted
                  
                  
                  34,622,712
                  
                  
                  
                  31,459,006Basic
      and diluted net earnings per share available to common
      stockholdersBasic
                  
                  $
                  0.27
                  
                  
                  $
                  0.18Diluted
                  
                  $
                  0.21
                  
                  
                  $
                  0.15




See
accompanying notes to the consolidated financial statements


2




CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW




(Unaudited)


For The Three Months Ended March 31,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                7,201,252
                
                
                $
                4,664,905Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
                
                
                292,744
                
                
                
                225,045Stock
      based compensation
                
                
                82,590
                
                
                
                -(Increase)
      decrease in current assets:Accounts
      receivable
                
                
                2,597,481
                
                
                
                (5,481,284
                )Other
      receivables, deposits and prepaid expenses
                
                
                4,112,288
                
                
                
                251,082Advance
      to suppliers
                
                
                2,478,674
                
                
                
                2,279,926Inventories
                
                
                1,627,802
                
                
                
                162,999Due
      from related party
                
                
                -
                
                
                
                (38,069
                )Increase
      (decrease) in current liabilities:Accounts
      payable
                
                
                -
                
                
                
                (182,927
                )Advance
      from customers
                
                
                (3,703,649
                )
                
                
                1,421,163Taxes
      payable
                
                
                84,725
                
                
                
                156,005Other
      payables and accrued expenses
                
                
                (3,025,122
                )
                
                
                (2,384,782
                )Net
      cash provided by operating activities
                
                
                11,748,785
                
                
                
                1,074,063CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                
                
                (3,324
                )
                
                
                (82,235
                )Construction
      in progress
                
                
                -
                
                
                
                (865,607
                )Net
      cash used in investing activities
                
                
                (3,324
                )
                
                
                (947,842
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash released
                
                
                522,500
                
                
                
                -Repayment
      of auto loans long term notes payable
                
                
                (14,473
                )
                
                
                (12,783
                )Net
      cash provided by (used in) financing activities
                
                
                508,027
                
                
                
                (12,783
                )EFFECT
      OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
                
                
                14,086
                
                
                
                56,410NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                12,267,574
                
                
                
                169,848CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                
                
                23,119,028
                
                
                
                1,382,371CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                35,386,602
                
                
                $
                1,552,219Supplemental
      Cash flow data:Income
      tax paid
                
                $
                -
                
                
                $
                -Interest
      paid
                
                $
                38,372
                
                
                $
                27,658




See
accompanying notes to the consolidated financial statements


3


CHINA
BIO ENERGY HOLDING GROUP CO., LTD. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




1.  ORGANIZATION AND DESCRIPTION OF
BUSINESS





China Bio
Energy Holding Group Co., Ltd. (the “Company” or “CBEH”) was originally
incorporated in the State of Delaware in July 1998 under the corporate name “AMS
Marketing Inc.” and in October 2003, the Company changed its name to
“International Imaging Systems, Inc.” On November 15, 2007, through a merger of
its newly-formed wholly owned subsidiary, China Bio Energy Holding Group Co.,
Ltd. (“Merger Sub”), the Company’s name was changed to “China Bio Energy Holding
Group Co., Ltd.” The separate existence of Merger Sub then ceased after the
merger. The Company is currently engaged in the development, exploration,
production and distribution of bio-diesel and wholesale and processing of heavy
oil and finished oil products, and retail gas stations through its indirect
wholly owned operating subsidiary in China.




On
October 23, 2007, the Company entered into a Share Exchange Agreement, with
Baorun China Group Limited (“Baorun Group”), a company organized under the laws
of Hong Kong, and its shareholders Redsky Group Limited (“Redsky Group”), a
British Virgin Islands company and Princeton Capital Group LLP, a New Jersey
limited liability partnership, and the Company’s then principal stockholders,
Castle Bison, Inc. and Stallion Ventures, LLC. Redsky Group and Princeton
Capital Group owned shares constituting 100% of the issued and outstanding
ordinary shares of Baorun Group. Pursuant to the terms of the Share Exchange
Agreement, Redsky Group and Princeton Capital Group transferred all of their
shares in Baorun Group in exchange for the issuance of 22,454,545 shares of the
Company’s common stock to Redsky Group and 1,500,000 shares of the Company’s
common stock to Princeton Capital Group. As a result of this share exchange,
Baorun Group became wholly owned subsidiary of the Company, and Redsky Group and
Princeton Capital Group acquired an aggregate of approximately 94.11% of the
Company’s outstanding common stock.




Redsky
Industrial (Xi’an) Co., Ltd. (“Redsky Industrial”), a wholly foreign owned
entity (“WFOE”) and a subsidiary of Baorun Group in the People’s Republic of
China (the “PRC”), executed a series of exclusive contractual agreements
(“Redsky Contracts”) with Xi’an Baorun Industrial Development Co., Ltd. (“Baorun
Industrial”). These contractual agreements allow Redsky Industrial to, among
other things, exercise significant rights to influence Baorun Industrial’s
business operations, policies and management, approve all matters requiring
shareholder approval, and the right to include 100% of the net income earned by
Baorun Industrial as part of our Consolidated Financial Statements. In addition,
to ensure that Baorun Industrial and its shareholders perform their obligations
under these contractual arrangements, Baorun Industrial’s shareholders have
pledged to Redsky Industrial all of their equity interests in Baorun Industrial.
At such time that current restrictions under PRC law on foreign ownership of
Chinese companies engaging in the finished oil industry in China are lifted,
Redsky Industrial may exercise its option to purchase the equity interests in
Baorun Industrial directly.




Baorun
Industrial was registered as a privately owned company on November 11, 1999 in
the PRC. Its business operations consist of processing and distributing heavy
oil and finished oil. It also engages in the research and development,
manufacturing and distribution of bio-diesel. Baorun Industrial distributes its
oil products to clients primarily located in the Shaanxi, Shandong, Henan,
Hunan, Sichuan, Hubei, Guizhou, Yunnan, and Xinjiang provinces of the
PRC.




As Baorun
Group owns Redsky Industrial, which effectively controls Baorun Industrial,
Baorun Industrial is deemed a subsidiary of Baorun Group, a legal subsidiary of
the Company. Based on Baorun Industrial’s contractual relationship with Redsky
Industrial, the Company has determined that a variable interest entity has been
created in accordance with FASB Interpretations - FIN 46(R): Consolidation of
Variable Interest Entities (as amended) (“FIN 46(R)”). Under FIN 46(R),
subsequent to the Redsky Contract and the Exchange Agreement, Baorun Industrial
is to be presented as a consolidated subsidiary of the Company.





Prior to
the acquisition of Baorun Group, the Company was a non-operating public shell
corporation. Pursuant to Securities and Exchange Commission rules, the merger or
acquisition of a private operating company into a non-operating public shell
corporation with nominal net assets is considered a capital transaction in
substance, rather than a business combination. Accordingly, for accounting
purposes, the transaction has been treated as a reverse acquisition and a
recapitalization, and pro-forma information is not presented. Transaction costs
incurred in the reverse acquisition have been charged to
expense.


4





The
Company believes that current PRC corporate rules and regulations do not
preclude Redsky Industrial, and thereby the Company, from exercising effective
control of Baorun Industrial, the operating entity of the
Company.  Pursuant to the terms of the Business Cooperation Agreement,
as amended (“Cooperation Agreement”) entered into between Redsky Industrial and
Baorun Industrial, Baorun Industrial granted to Redsky Industrial the right to
claim 100% of the net income, or loss, of Baorun Industrial in consideration for
the services provided by Redsky Industrial. Under the Cooperation Agreement,
Baorun Industrial cannot assign its rights under such agreement to a third party
without Redsky Industrial’s consent. Redsky Industrial must notify Baorun
Industrial of its intent to assign the agreement to a third party, but does not
need the consent of Baorun Industrial for such assignment. Under the Cooperation
Agreement Redsky Industrial is to absorb 100% of the net income, or loss, of
Baorun Industrial. In addition, Baorun Industrial granted to Redsky Industrial
the right to any residual returns and dividends from Baorun Industrial.
Accordingly, as Redsky Industrial is a wholly owned subsidiary of Baorun Group,
which is ultimately a subsidiary of the Company, 100% of Baorun Industrial will
be consolidated into Redsky Industrial and ultimately the Company. The right to
absorb these benefits, and expenses, are in place for the entire life of the
Cooperation Agreement, or until such time that the Cooperation Agreement is
voided or cancelled.




The
assets and liabilities of Baorun Industrial are accounted for at their
historical rate, similar to the manner in which Baorun Group was treated by the
Company in the Share Exchange. Baorun Industrial is not a self-supporting entity
and requires the support of Redsky Industrial and its related entities. Redsky
Industrial and its related entities financed Baorun Industrial through the
issuance of shares of preferred stock by the Company, Redsky Industrial’s
ultimate parent. This financing enabled Baorun Industrial to pursue bio-energy
production projects and to expand existing conventional oil/energy
projects.





Under the
series of agreements between Redsky Industrial and the shareholders of Baorun
Industrial, prior to the sale of an equity interest of Baorun Industrial to
Redsky Industrial, the shareholder of Baorun Industrial selling his or her
proportional equity interest must inform the other remaining shareholders of
Baorun Industrial of such a transaction.  Pursuant to the terms of the
Exclusive Option Agreements among Redsky Industrial, Baorun Industrial and all
three shareholders of Baorun Industrial, the purchase price for the equity
interest of Baorun Industrial was not established. The purchase price is to be
designated by Redsky Industrial to the extent allowed by relevant laws and
regulations of the PRC.





2.  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, 2008, included in our Annual Report on Form 10-K for the year
ended December 31, 2008.





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 the
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 Bio Energy Holding Group Co., Ltd. and all entities included
in our consolidated financial statement





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 FIN - 46R.
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.




The
Company, its subsidiaries and VIEs referenced above are hereinafter collectively
referred to as the (“Company”).


5





Principle
of Consolidation




The
accompanying consolidated financial statements include our accounts and the
accounts of our wholly owned subsidiary, Baorun Group and Redsky Industrial, and
its consolidated subsidiary, Baorun Industrial (collectively, the “Company”).
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.




As of
March 31, 2009 and December 31, 2008, the Company maintained restricted cash of
$396,857 and $919,351, respectively.  Of the restricted cash, $250,000
was held in an escrow account and will be released upon the appointment of a new
Chief Financial Officer; $110,195 was the remaining balance of $200,000 which
was also held in the escrow account for the purpose of paying investment
relations expense only; and $36,662 was the cash collateral held in the bank for
the short term loan of RMB 5 million which was entered on August 31,
2008.





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, 2009 and December 31, 2008 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.




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, 2009 and December 31, 2008 were $874,178 and
$4,580,462, respectively.


6


Plant,
Property and Equipment




Plant,
property 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 Financial Accounting Standards (SFAS) No. 144,
“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,
2009 and December 31, 2008, there were no impairments of its long-lived
assets.





Income
Taxes




The
Company utilizes SFAS No. 109, “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 FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of FIN 48, the Company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48. As a result of the implementation of Interpretation 48, 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 FIN 48 did not have a material impact on
the Company’s financial statements.


7




Revenue
Recognition




The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (“SAB”) 104. For
distribution of finished oil and bio-diesel, 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 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.




There
were no sales returns and allowances for the three months ended March 31, 2009
and 2008. 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 clients’ financial condition 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 SFAS No. 95, “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.




Fair
Value of Financial Instruments




SFAS No.
107, “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.




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.


8


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 Financial Accounting Standards No. 130 (SFAS 130)
“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, 2009
and 2008 were included net income and foreign currency translation
adjustments.





Fair
value of financial instruments




On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.”
“SFAS 157 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, 2009, 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 SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.”  The
Company recognizes in the statement of operations the grant-date fair value of
stock options and other equity-based compensation issued to employees and
non-employees.





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 Interpretation No. 46 (FIN-46R) (Revised
December 2004), Consolidation of Variable Interest Entities. FIN-46R
clarifies the application of Accounting Research Bulletin No. 51, 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 subject of FIN-46R). FIN-46R clarifies how to
identify a variable interest entity and how to determine when a business
enterprise should include the assets, liabilities, noncontrolling interests and
results of activities of a variable interest entity in its consolidated
financial statements.


9





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.





New
Accounting Pronouncements





Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No.
51





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling 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 noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 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 noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
The Company expects SFAS 160 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 SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, 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. SFAS 141R will change
the accounting treatment for certain specific items, including:





·
            Acquisition
      costs will be generally expensed as incurred;·
            Noncontrolling
      interests (formerly known as “minority interests” - see SFAS 160
      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.





SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R
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 SFAS 141R 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 – EIFT 07-05





In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) issue No. 07-05,
“Determining Whether an instrument (of Embedded Feature) is indexed to an
Entity’s Own Stock” (“EITF 07-05”).  EITF 07-05 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
EITF 07-05, results in the instruments no longer being considered indexed to the
company’s own stock.  Accordingly, adoption of EITF 07-05 will change
the current classification (from equity to liability) and the related accounting
for such warrants outstanding at the date.  EITF 07-05 is effective
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years.


The
Company does not believe that adoption of EITF 07-05 would have material effect
on the Company’s financial statements and disclosures.





3.  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,
2009 and December 31, 2008 amounted to $34,881,671 and $21,901,405,
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.





4.  PREPAID
RENT




Prepaid
expenses mainly consisted of prepaid rents for the gas stations (see Note 14 -
Commitments). At March 31, 2009 and December 31, 2008, the current portion of
prepaid expenses was $2,000,531 and $1,884,102, respectively.  At
March 31, 2009 and December 31, 2008, the noncurrent portion of prepaid expenses
amounted $5,970,499 and $6,408,568, respectively, which represents the prepaid
rents that will be expensed after one year.





5.  INVENTORIES




Inventories
consisted of the following:


March 31,
                              2009
                              (Unaudited)
                            
                            
                            December 31,
                              2008Petroleum
                            
                            $
                            9,103,831
                            
                            
                            $
                            5,676,454Diesel
                            
                            
                            4,044,720
                            
                            
                            
                            8,727,090Heavy
      Oil
                            
                            
                            535,289
                            
                            
                            
                            -Raw
      material for manufacturing bio-diesel oil
                            
                            
                            6,959,067
                            
                            
                            
                            8,018,594Subtotal
                            
                            
                            20,642,907
                            
                            
                            
                            22,422,138Less:
      Allowance for inventory
                            
                            
                            -
                            
                            
                            
                            (153,235
                            )Total
                            
                            $
                            20,642,907
                            
                            
                            $
                            22,268,903





6.  OTHER
RECEIVABLES AND DEPOSITS




At March
31, 2009, other receivables represented deposits made for purchase of equipments
and short term cash advances to third parties in the amount of
$194,460.  At December 31, 2008, other receivables represented an
advance to Ningxia Yuanshun Petrochemical Co. in the amount of $3,047,242 (see
Note 12 - Other Payables), and deposits made for purchase of equipments and
short term cash advances to third parties in the amount of
$939,742.


11


7.  PLANT,
PROPERTY AND EQUIPMENT




Plant,
property and equipment are summarized as follows:


March 31,
                          2009
                          (Unaudited)
                        
                        
                        December 31,
                          2008Building
                        
                        $
                        335,672
                        
                        
                        $
                        335,624Diesel
      Processing Equipment
                        
                        
                        10,326,514
                        
                        
                        
                        10,325,005Office
      Equipment
                        
                        
                        123,933
                        
                        
                        
                        120,588Other
      Equipment
                        
                        
                        31,893
                        
                        
                        
                        31,888Motor
      Vehicles
                        
                        
                        797,137
                        
                        
                        
                        797,02011,615,149
                        
                        
                        
                        11,610,125Less:
      Accumulated Depreciation
                        
                        
                        (1,905,692
                        )
                        
                        
                        (1,612,451
                        )Total
                        
                        $
                        9,709,457
                        
                        
                        $
                        9,997,674




Depreciation
expense for the three months ended March 31, 200 and 2008 were $292,744 and
$225,045, respectively.





8.  MAJOR
CUSTOMERS AND VENDORS




For the
three months ended March 31, 2009, one major customer accounted for
approximately 21% of the Company’s total sales, and this customer accounted for
approximately 37% 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, 2008, no major customers
accounted for over 10% of the Company’s total sales.





For the
three months ended March 31, 2009, ten vendors accounted for approximately 87%
of the Company’s total purchase of oil; within them one vendor provided
approximately 40% of the Company’s total purchases of oil.  For the
three months ended March 31, 2008, this vendor accounted for approximately 29%
of the Company’s total purchases of oil.  There were no accounts
payables due by this vendor at March 31, 2009 and 2008.





9.  TAX
PAYABLE




Tax
payable consisted of the following at March 31, 2009 and December 31,
2008:





March 31,
                        2009
                        (Unaudited)
                      
                      
                      December 31,
                        2008Value
      added tax payable
                      
                      $
                      764,222
                      
                      
                      $
                      683,842Urban
      maintenance and construction tax payable
                      
                      
                      53,496
                      
                      
                      
                      48,879Other
      tax payable
                      
                      
                      2,651
                      
                      
                      
                      2,740$
                      820,369
                      
                      
                      $
                      735,461





10.  INCOME
TAXES




Baorun
Industrial obtained approval from the PRC tax authority for the exemption of
income taxes from 2004 to 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
$14,000 and $6,000 for the three months ended March 31, 2009 and 2008,
respectively. A 100% valuation allowance has been established due to the
uncertainty of its realization.





Baorun
Group is subject to Hong Kong profits tax rate of 16.5%, and has insignificant
net operating losses for the three months ended March 31, 2009 and has carryover
of approximately $769,300 at December 31, 2008.  A 100% valuation
allowance has been established due to the uncertainty of its
realization.





The
parent company, China Bio Energy Holding Group Co., Ltd., is taxed in the U.S.
and has a net operating loss approximately of $122,456 and $0 for the three
months ended March 31, 2009 and 2008, respectively. A 100% valuation allowance
has been established due to the uncertainty of its realization.


12





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




2009
                          
                          
                          2008US
      statutory rates
                          
                          
                          34
                          %
                          
                          
                          34
                          %Tax
      rate difference
                          
                          
                          (9.1
                          )%
                          
                          
                          (1.1
                          )%Effect
      of tax holiday
                          
                          
                          (25.2
                          )%
                          
                          
                          (36.1
                          )%Valuation
      allowance
                          
                          
                          0.3
                          %
                          
                          
                          3.2
                          %Tax
      per financial statements
                          
                          
                          -
                          
                          
                          
                          -





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





For the Three Months Ended March 31,2009
                        
                        2008(pro
      forma)
                        
                        (pro
      forma)Net
      income before income taxes
                        
                        $
                        7,150,468
                        
                        
                        $
                        4,664,905Tax
      provision
                        
                        
                        (1,831,475
                        )
                        
                        
                        (1,166,226
                        )Net
      income
                        
                        $
                        5,318,993
                        
                        
                        $
                        3,498,679





12.  OTHER
PAYABLES




Other
payable mainly consisted of payables for the purchase of equipment, short term
advances from third parties.  Other payables balances at March 31,
2009 and December 31, 2008 were $203,259 and $3,232,088,
respectively.  At December 31, 2008, there was an advance of
$3,047,242 from Ningxia Yuanshun Petrochemical Co. to Baorun Industrial;
concurrently, Ningxia Yuanshun received $3,047,242 prepayment from Redsky
Industrial.





13.  LOANS
PAYABLE





The
Company is obligated under two short term loans from commercial banks in the
PRC. The first loan of $1,463,358 (RMB 10,000,000) was entered into on
September 1, 2008 with maturity to August 31, 2009. The principal will be repaid
at maturity and the interest is payable per quarter with an adjustable interest
rate of 15% mark up the China national prime rate, currently the Company’s rate
is at 6.1065%  per annum. This loan is guaranteed by Xi’an City
Economic & Technology Investment Guarantee Co., Ltd. The Company
paid them the guarantee fee of 2.375% of the loan principal, and
collateralized the Company’s diesel processing equipments in the value of
approximately $2,919,000 (RMB 20,260,000) and stock of the Company owned by its
majority shareholder in the value of approximately $2,130,000 (RMB 14,700,000)
for the guarantee.




The
second loan of $731,678 (RMB 5,000,000) was entered into on August 31, 2008 with
maturity on August 31, 2009. The principal will be repaid at maturity and the
interest is payable per month with an interest rate of 8.217% per
annum.





At March
31, 2009, automobile loan carried a balance of $38,004.




14.  COMMITMENTS




Lease
Agreements




The
Company leased one oil storage facility with Northwest Naihuo Material Factory
under a long term, non-cancelable, and renewable operating lease agreement since
2006 with expiration date on June 30, 2008. This lease has been renewed for
additional six years with annual lease payment of $102,000 (RMB
700,000).


13




The
Company leases another two oil storage facilities under one year,
non-cancelable, and renewable operating lease agreements expiring on December
31, 2007. One lease agreement with Shanxi Continental Petroleum Co. Ltd. has
been renewed for one year with expiration date on December 31, 2008, and renewed
again at the end of 2008 for another one year lease with annual lease payment of
$57,000 (RMB 400,000). The other lease agreement has been terminated as lease
term expired. The Company then entered into a new one year, non-cancelable and
renewable lease agreement with 456 Oil Storage Warehouse for a new oil storage
facility with expiration date on December 31, 2008, which was renewed again at
the end of 2008 for another one year lease with lease payment charged at RMB 30
per ton for the first month of leasing, and RMB 7 per ton for the months
thereafter.


In August
of 2008, the Company entered into another non-cancelable and renewable operating
lease agreement with 68103 Troops for five years oil storage from November 16,
2008 to November 16, 2013 with lease payment charged at RMB 30 per ton for the
first month of leasing, and RMB 10 per ton for the months
thereafter.  The Company has paid approximately $507,000 (RMB
3,500,000) in advance to help the lessee to rebuild and improve the oil storage
warehouse with the commitment from the lessee that such rebuild will be
completed within 70 days. The prepaid lease payment will be used to against
future lease payment at RMB 700,000 per annum for five years.





On February
1, 2007, the Company leased one gas station for operation under a long term,
non-cancelable operating lease agreement with expiration date on December 31,
2027. The annual lease payment is approximately $17,500 (RMB 125,000) with a 5%
increase every five year. The Company is required to pay in advance 50% of
the sum of the first three year lease payments $53,000 (RMB 375,000) upon
receiving the operating permits and related documents from the lessor, and pay
the remaining 50% at the time of officially taking over the operation. The
Company will pay the 4th year
lease payment at the end of the second year of leasing, and pay the rents
annually thereafter. This lease is classified as operating lease.




On May
20, 2008, the Company leased additional four gas stations for operation under a
long term operating lease agreement with an initial term expiring on May 31,
2023. The annual lease payment for each gas station is approximately $437,000
(RMB 3,000,000). The Company is required to make the lease payments for all four
gas stations in the amount of $8,747,631 (RMB 60,000,000) in advance in
five-year increments. The Company has paid $8,747,631 (RMB 60,000,000) for the
lease payments during year 2008.  This lease is classified as
operating lease.




These
operating lease agreements require that the Company pays certain operating
expenses applicable for the leased premises. Future minimum rental payments
required under these operating leases are as follows:




Years
      Ending December 31,
                      
                      Amount2010
                      
                      $
                      1,970,0002011
                      
                      
                      1,970,0002012
                      
                      
                      1,971,0002013
                      
                      
                      1,957,0002014
                      
                      
                      1,817,000Years
      thereafter
                      
                      
                      14,968,000Total
                      
                      $
                      24,653,000




Total
rental expense for the three months ended March 31, 2009 and 2008 amounted to
approximately $443,580 and $29,700, respectively.





ShippingAgreement





During
2008, the Company entered a shipping agreement with a transportation company for
transporting the raw materials for manufacturing the bio-diesel product for a
period of July 1, 2008 through August 31, 2009.  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, 2009, the
shipping cost paid to this transportation company was approximately
$185,256.





14





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 earning 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 312009
                        (Unaudited)
                      
                      
                      2008
                        (Unaudited)Net
      income available to common stockholders
                      
                      
                      7,201,252
                      
                      
                      
                      4,664,905Weighted
      average shares outstanding - basic
                      
                      
                      27,169,091
                      
                      
                      
                      25,454,545Effect
      of dilutive securities:Convertible
      preferred stock
                      
                      
                      7,011,208
                      
                      
                      
                      4,545,455Unexercised
      warrants and stock option
                      
                      
                      442,413
                      
                      
                      
                      1,459,006Weighted
      average shares outstanding - diluted
                      
                      
                      34,622,712
                      
                      
                      
                      31,459,006Earnings
      per share - basic
                      
                      $
                      0.27
                      
                      
                      $
                      0.18Earnings
      per share - diluted
                      
                      $
                      0.21
                      
                      
                      $
                      0.15





16.  STATUTORY
RESRVES




Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company is
required to maintain one statutory reserve by appropriating from its after-tax
profit before declaration or payment of dividends. The statutory reserve
represents restricted retained earnings.





Surplus reserve
fund




The
Company is required to transfer 10% of its net income, as determined under PRC
accounting rules and regulations, to a statutory surplus reserve fund until such
reserve balance reaches 50% of the Company’s registered capital.




The
surplus reserve fund is non-distributable, other than during liquidation, and
can be used to fund previous years’ losses, if any, and may be utilized for
business expansion or converted into share capital by issuing new shares to
existing shareholders in proportion to their shareholding or by increasing the
par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the registered
capital.





17.  STOCKHOLDERS’
EQUITY




Series A Convertible
preferred stock with series A-1 and series A-2 warrants issued for
cash




Concurrently
with the share exchange, the Company entered into a securities purchase
agreement (the “Purchase Agreement”) with one accredited investor for the sale
of securities consisting of (i) 1,000,000 shares of the Company’s Series A
convertible preferred stock, (ii) a series A-1 warrant to purchase 3,409,091
shares of the Company’s common stock at an exercise price of US$3.00 per share,
and (iii) a Series A-2 warrant to purchase 2,272,728 shares of the Company’s
common at an exercise price of US$4.40 per share (the Series A-1 and Series A-2
warrants, collectively the “Warrants”), for aggregate gross proceeds equal to
$10,000,000. Net proceeds of $9,774,993 have been received by the
Company.




15




Each
share of preferred stock is convertible into a number of fully paid and
non-assessable shares of common stock equal to the quotient of the liquidation
preference amount per share of preferred stock, or $10.00, divided by the
conversion price, which initially is $2.20 per share, subject to certain
adjustments, or approximately 4,545,455 shares of common stock if all 1,000,000
shares of preferred stock converted. No dividend is declared during the
year.





Deemed
dividend allocated to warrants is $1,585,631. The value of warrants mentioned
was determined by allocation of principal using the Black-Scholes pricing model
with the following assumptions:  discount rate – 1.37%; dividend yield –
0%; expected volatility – 30% and term of 5 years.  Additionally, the
Company recorded $1,812,903 as dividend from a beneficial conversion feature,
which reflects the difference between the fair market price and effective
conversion rate. Pursuant to EITF 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" and EITF 00-27, “Application of Issue No. 98-5 in Certain Convertible
Instruments,” the total value of $3,398,534 was recorded as a deemed dividend in
2007.




On
October 14, 2008, the Company entered into a securities purchase agreement
(“Debenture Purchase Agreement”) with an institutional investor for the issuance
and sale of a non-interest bearing convertible debenture in an aggregate amount
of $9,000,000, which will automatically convert into 2,465,753 shares of Series
B Convertible Preferred Stock at $3.65 per share upon the date of the filing
with the Secretary of the State of Delaware of an amendment to the Company’s
Certificate of Incorporation to increase the authorized shares of preferred
stock from 1,000,000 shares to 10,000,000 shares and the filing of a certificate
of designation of the Series B Preferred Stock. Because the Debenture
Purchase Agreement lacked of the characteristics of liability, such as no
repayment term of the principal, no stipulated interest rate, and no maturity
date, as defined in the paragraph 36 of Financial Concepts Statement No. 6, the
Company recorded $863,013 deemed dividend for the beneficial conversion feature
in connection with the issuance of convertible debenture as it was the
preferred stock in substance as per FAS 150.





The
Company also received an additional $5,113,635 from the exercise of
approximately1.7 million issued and outstanding warrants at a strike price of
$3.00.





In
February 2009, the Company retained an 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 a
warrant to purchase 30,000 shares of the Company’s common stock with a strike
price at $6.00 per share.  The warrant 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.  Deemed dividend
allocated to warrants is $90,564. The value of warrants mentioned was determined
by allocation of principal using the Black-Scholes pricing model with the
following assumptions:  discount rate – 3.25%; dividend yield – 0%;
expected volatility – 149% and term of 18 months.





Following
is a summary of warrant activity for the three months ended March 31,
2009:




Number of
                          Shares
                        
                        Average
                          Exercise
                          Price per Share
                        
                        Weighed
                          Average
                          Remaining
                          Contractual
                          Term in YearsOutstanding
      at December 31, 2008
                        
                        3,977,273
                        
                        $
                        3.80
                        
                        3.81Exercisable
      at December 31, 2008
                        
                        3,977,273
                        
                        
                        -
                        
                        -Granted
                        
                        30,000
                        
                        
                        6.00
                        
                        2.35Exercised
                        
                        -
                        
                        
                        -
                        
                        -Forfeited
                        
                        -
                        
                        
                        -
                        
                        -Outstanding
      at March 31, 2009
                        
                        4,007,273
                        
                        $
                        3.82
                        
                        3.80Exercisable
      at March 31, 2009
                        
                        3,977,273
                        
                        
                        -
                        
                        -




18.  ESCROW
AGREEMENT





In
connection with the Financing, the Company also entered into a Management Escrow
Agreement with the Investor, pursuant to which $750,000 of the Financing
proceeds was delivered into an escrow account, which funds will be released in
installments of $250,000 upon the appointment of (i) a new Chief Financial
Officer, (ii) a Vice President of Investor Relations, and (iii) upon the
Company’s compliance with NASDAQ’s corporate governance requirements, including
but not limited to appointing three persons to serve as “independent” directors
(as such term is defined under the NASDAQ Stock Market rules) on our Board of
Directors, and form the Audit Committee and the Compensation Committee of our
Board of Directors.




16




For
the three months ended March 31, 2009, $500,000 was released from the escrow
account to the Company for the appointments of a Vice President of Investor
Relations and three independent directors of the Company’s Board of
Directors.





19.  SHARED-BASED
PAYMENT ARRANGEMENTS





On
November 17, 2008, the Company issued non-transferable stock purchase options to
two newly appointed independent directors to purchase 20,000 shares of common
stock each.  The exercise price is at $4.00 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 $62,700
of compensation expense for these options for the three months ended March 31,
2009.





Following
is a summary of stock option activity for the three months ended March 31,
2009:





Options
                
                
                WeightedAverage
                  Exercise
                  Price
                
                
                Weighed
                  Average
                  Remaining
                  Contractual
                  Term in Years
                
                
                AggregateIntrinsicValueOutstanding
      at December 31, 2008
                
                
                40,000
                
                
                $
                4.00
                
                
                
                9.90
                
                
                
                -Exercised
                
                
                -
                
                
                
                -
                
                
                
                -Cancelled
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding
      at March 31, 2009
                
                
                40,000
                
                
                $
                4.00
                
                
                
                9.63
                
                
                
                10,000Exercisable
      at March 31, 2009
                
                
                10,000
                
                
                
                4.00
                
                
                
                9.63
                
                
                
                2,500





Following
is a summary of non-vested options as of March 31, 2009 and changes during the
three months then ended:





Options
                  
                  
                  Weighted
      Average
                    Fair
      Value at Grant DateNon-vested  options
      as of December 31, 2008
                  
                  
                  40,000
                  
                  
                  $
                  4.00Exercised
                  
                  
                  -
                  
                  
                  
                  -Cancelled
                  
                  
                  -
                  
                  
                  
                  -Non-vested
      options as of March 31, 2009
                  
                  
                  30,000
                  
                  
                  $
                  4.00





20.
SEGMENT REPORTING




SFAS No.
131, “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 SFAS 131: distribution of finished oil,
bio-diesel production, and retail gas stations.




17




For
the three months ended March 31, 2009 and 2008




Distribution offinished oil
                      
                      
                      Bio-Dieselproduction
                      
                      
                      Retail gasstations
                      
                      
                      Total2009
      (Unaudited)Net
      sales
                      
                      $
                      39,299,638
                      
                      
                      $
                      11,253,616
                      
                      
                      $
                      8,105,414
                      
                      
                      $
                      58,658,668Depreciation
                      
                      
                      37,556
                      
                      
                      
                      255,188
                      
                      
                      
                      -
                      
                      
                      
                      292,744Interest
      expense
                      
                      
                      33,518
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      33,518Net
      income
                      
                      
                      3,765,746
                      
                      
                      
                      2,562,848
                      
                      
                      
                      872,658
                      
                      
                      
                      7,201,252Segment
      assets
                      
                      
                      68,407,475
                      
                      
                      
                      18,881,905
                      
                      
                      
                      8,044,875
                      
                      
                      
                      95,334,255Capital
      expenditure
                      
                      
                      3,324
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,3242008
      (Unaudited)Net
      sales
                      
                      $
                      27,930,660
                      
                      
                      $
                      6,750,159
                      
                      
                      $
                      880,021
                      
                      
                      $
                      35,560,840Depreciation
                      
                      
                      44,232
                      
                      
                      
                      180,813
                      
                      
                      
                      -
                      
                      
                      
                      225,045Interest
      expense
                      
                      
                      7,620
                      
                      
                      
                      20,038
                      
                      
                      
                      -
                      
                      
                      
                      27,658Net
      income
                      
                      
                      2,792,937,
                      
                      
                      
                      1,771,863
                      
                      
                      
                      100,105
                      
                      
                      
                      4,664,905Segment
      assets
                      
                      
                      35,349,267
                      
                      
                      
                      13,078,416
                      
                      
                      
                      610,303
                      
                      
                      
                      49,037,986Capital
      expenditure
                      
                      
                      150,152
                      
                      
                      
                      797,690
                      
                      
                      
                      -
                      
                      
                      
                      947,842





21.  OPERATING
RISK





(a)              Country
risk




Currently,
the Company’s revenues are mainly derived from sale of oil products 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.




(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.




18




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.




19




• Results of Operations—an
analysis of our Company's consolidated results of operations for the three
months ended March 31, 2009 and 2008 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.





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





Our Business





Company
Overview




We are
engaged in three business segments, the development, exploration, production and
distribution of bio-diesel, wholesale distribution and processing of heavy oil
and finished oil products , and retail gas station sales of gasoline and
diesel through certain contractual agreements between our wholly owned
indirect subsidiary Redsky Industrial and Baorun Industrial. Redsky Industrial,
a registered WFOE in the People’s Republic of China, is a subsidiary of Baorun
Group, our direct wholly owned subsidiary.





We now
operate four oil depots located in Xi’an, Shaanxi Province, 2.65 km 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 covering the
Shaanxi Province, Henan Province, Hebei Province, Shangdong Province, Shanxi
Province, Hunan Province, Hubei Province, Jiangxi Province, Guizhou Province,
Yunnan Province, Beijing, Shanghai, Fujian Province and Xinjiang.




Recent
Development




For the
past 9 years, 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.




In
January 2009, the Chinese government halved sales tax to 5% on purchases of cars
with engines less than 1.6 liters. The tax cut is aimed at boosting
domestic auto purchases which will likely increase overall domestic oil
consumption and provide a stimulus for the steel sector. We expect that the
sales tax cut on the purchase of vehicles with small engines will drive
more fuel consumption.




In
January 2009, the average sales price for China Bio Energy Holding’s oil
products, which include gasoline, diesel and heavy oil decreased 22.3% to
$641 per ton (equivalent to approximately $1.77 per gallon of gasoline and
$2.04 per gallon of petro-diesel), compared to an average price of $825 per
ton (equivalent to approximately $2.28 per gallon of gasoline and $2.62 per
gallon of petro-diesel), during the year 2008. This decrease is substantially
less than the drop in world crude oil prices during the same period because the
NDRC had held the domestic prices at lower levels during 2008.





On March
25, 2009, the NDRC increased the price of gasoline and diesel by RMB 290 or $42
per ton and RMB 180 or $26 per ton, respectively, to reflect rebound of global
oil price.  As a result of this oil price increase, the retail prices
of gasoline and diesel have increased accordingly.  In April 2009, the
average sales price for China Bio Energy Holding’s oil products, which include
gasoline, diesel and heavy oil was approximately $745 per ton (equivalent to
approximately $2.55 per gallon of gasoline and $2.83 per gallon of
petro-diesel)





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 Bio Energy is exempt from the fuel tax and
corporate income taxes.  China Bio Energy Holding is exempt from
the corporate income tax through the end of calendar year 2010.




20




China Bio
Energy’s management plans to focus on growing its biodiesel production, its
distribution business, and expanding the footprint of its retail service
stations. On the distribution and retail side, the Company benefits from its
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 cannot currently reach. The
company plans to strengthen its outreach in certain key distribution areas. It
also plans to add another five to seven retail gas stations through acquisition
or lease, which will benefit its overall distribution profit
margins.




The
Company also plans to expand its current bio-diesel production capacity of
100,000 tons to 150,000 tons, either through strategic acquisitions or through a
new build-out in 2009. The Company anticipates $15 million in capital
expenditures to accomplish this goal. China Bio Energy has 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.




Management
believes the increase in sales volume from these initiatives will not only
offset the impact of current decrease in fuel prices but also favorably impact
overall profits.




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, 2009 and December
31, 2008, 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.




Plant,
Property and Equipment




Plant,
property 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 Financial Accounting Standards (SFAS) No. 144,
“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.




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,




21




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 Statement of Financial Accounting Standards No.
109, “Accounting for Income Taxes” “SFAS 109.” SFAS 109 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. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.




Baorun
Industrial has obtained income tax abatements for the years ended December 31,
2004 through 2010, due to the fact that it uses waste gas, water and residue in
the production of its products. We believe that this abatement 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 abatements are one of the many methods used to promote such business
development. If the abatement should be rescinded for future periods, Baorun
Industrial would be subjected to tax liabilities. Had the abatement for income
taxes not been effect for Baorun Industrial, we estimate that the pro forma
financial impact would be as follows:





For the Three Months  Ended March 31,2009
                        
                        2008(pro forma)
                        
                        (pro forma)Net
      income before income taxes
                        
                        $
                        7,150,468
                        
                        
                        $
                        4,664,905Tax
      provision
                        
                        
                        (1,831,475
                        )
                        
                        
                        (1,166,226
                        )Net
      income
                        
                        $
                        5,318,993
                        
                        
                        $
                        3,498,679




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 Interpretation No. 46 (FIN-46R) (Revised
December 2004), Consolidation of Variable Interest Entities. FIN-46R clarifies
the application of Accounting Research Bulletin No. 51, 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 subject of FIN-46R). FIN-46R clarifies how to identify a
variable interest entity and how to determine when a business enterprise should
include the assets, liabilities, noncontrolling interests and results of
activities of a variable interest entity in its consolidated financial
statements.





Contingencies





Management
assesses the probability of loss for certain contingencies and accrues a
liability and/or disclose 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 that may have a material adverse effect
on the financial condition of the Company taken as a whole.




22




Results
of Operations




Comparison
of Three Months Ended March 31, 2009 and 2008





Distribution
      offinished oil
                  
                  
                  Bio-Dieselproduction
                  
                  
                  Retail
      gasstations
                  
                  
                  Total2009Net
      sales
                  
                  $
                  39,299,638
                  
                  
                  $
                  11,253,616
                  
                  
                  $
                  8,105,414
                  
                  
                  $
                  58,658,668Depreciation
                  
                  
                  37,556
                  
                  
                  
                  255,188
                  
                  
                  
                  -
                  
                  
                  
                  292,744Interest
      expense
                  
                  
                  38,372
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  38,372Net
      income
                  
                  
                  3,765,746
                  
                  
                  
                  2,562,848
                  
                  
                  
                  872,658
                  
                  
                  
                  7,201,252Segment
      assets
                  
                  
                  68,407,475
                  
                  
                  
                  18,881,905
                  
                  
                  
                  8,044,875
                  
                  
                  
                  95,334,255Capital
      expenditure
                  
                  
                  3,324
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,3242008Net
      sales
                  
                  $
                  27,930,660
                  
                  
                  $
                  6,750,159
                  
                  
                  $
                  880,021
                  
                  
                  $
                  35,560,840Depreciation
                  
                  
                  44,232
                  
                  
                  
                  180,813
                  
                  
                  
                  -
                  
                  
                  
                  225,045Interest
      expense
                  
                  
                  7,620
                  
                  
                  
                  20,038
                  
                  
                  
                  -
                  
                  
                  
                  27,658Net
      income
                  
                  
                  2,792,937
                  
                  
                  
                  1,771,863
                  
                  
                  
                  100,105
                  
                  
                  
                  4,664,905Segment
      assets
                  
                  
                  35,349,267
                  
                  
                  
                  13,078,416
                  
                  
                  
                  610,303
                  
                  
                  
                  49,037,986Capital
      expenditure
                  
                  
                  150,152
                  
                  
                  
                  797,690
                  
                  
                  
                  -
                  
                  
                  
                  947,842





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





2009
                            
                            
                            2008$
                            
                            
                            % ofSales
                            
                            
                            $
                            
                            
                            % ofSalesSales
                            
                            
                            58,658,668
                            
                            
                            
                            100.0
                            %
                            
                            
                            35,560,840
                            
                            
                            
                            100.0
                            %Cost
      of Sales
                            
                            
                            50,981,714
                            
                            
                            
                            86.9
                            %
                            
                            
                            30,547,663
                            
                            
                            
                            85.9
                            %Gross
      Profit
                            
                            
                            7,676,954
                            
                            
                            
                            13.1
                            %
                            
                            
                            5,013,177
                            
                            
                            
                            14.1
                            %Total
      Operating Expenses
                            
                            
                            555,849
                            
                            
                            
                            0.9
                            %
                            
                            
                            319,806
                            
                            
                            
                            0.9
                            %Income
      from Operation
                            
                            
                            7,121,105
                            
                            
                            
                            12.2
                            %
                            
                            
                            4,693,371
                            
                            
                            
                            13.2
                            %Other
      Income (expenses), net
                            
                            
                            80,147
                            
                            
                            
                            -
                            %
                            
                            
                            (28,466
                            )
                            
                            
                            -
                            %Net
      Income
                            
                            
                            7,201,252
                            
                            
                            
                            12.3
                            %
                            
                            
                            4,664,905
                            
                            
                            
                            13.2
                            %




Net sales. Net sales for
the three months ended March 31, 2009 were approximately $58.66 million compared
to the same period in 2008 of approximately $35.56 million, an increase in
revenues of $23.1 million, or 65%. The increase was mainly attributed to three
reasons. First, the highly increased production and sales of bio-diesel during
the first quarter of 2009 contributed significantly to net sales, the sales of
bio-diesel increased to 17,300 tons in the first quarter of 2009 from 8,000 tons
in same period of 2008 when we just had commenced bio-diesel mass production,
which brought us $4.5 million additional sales. Revenue generated by
bio-diesel accounted for 19.2% of the Company total sales.  Second,
we were expanding new sales channels and increased demand for oil
products from our existing customers as their businesses grew and expanded.
Third, we had increased revenue of $7.2 million or 13.8% of total revenue as the
result of the five fully operational gas stations.




Cost of sales. Cost of sales
for the first quarter of 2009 was approximately $50.98 million compared to the
cost of sales in the same period of 2008 of approximately $30.55 million, an
increase of $20.43 million, or 67%.  The increase in cost of sales was
attributable to an increase in production and sales activities during the first
quarter of 2009. Cost of sales as a percentage of sales was approximately 86.9%
for the quarter of 2009 and 85.9% for the same period of 2008.  The
increase as a percentage of sales was due to higher inventory cost of finished
oil carried over from the fourth quarter of 2008, the cost increase in raw
material of bio-diesel production, and rental expense for the four additional
gas stations.




23




Gross profit. Gross profit
was approximately $7.68 million for the first quarter of 2009 as compared to
approximately $5.01 million for the same period of 2008, representing gross
margins of approximately 13.1% and 14.1%, respectively. During the first quarter
of 2009, the gross profit margin for making and selling bio-diesel oil was
approximately 23.98%, and the gross profit margin for distribution of oil
products like gasoline and diesel oil was approximately 10.45%, versus 27.24%
and 10.96%, respectively, compared to the same period of 2008.  The
decrease in gross margin of oil distribution was attributed to higher inventory
costs carried over from the fourth quarter of 2008.  The decrease in
gross margin of bio-diesel was attributed to the cost increase of raw
material.  We expect the gross margin will improve with upwards
pricing adjustments in the China domestic market.




Operatingexpenses. Selling, general
and administrative expenses for the first quarter of 2009 were approximately
$0.56 million while it was $0.32 million for the same period of 2008 with an
increase of $0.24 million or 74%. This increase was mainly attributed
approximately $200,000 of legal, consulting, stock option expenses for the
independent directors and employees, and filing expenses in connection with the
Company becoming public in the U.S..  Total operating expenses as a
percentage of sales was 0.9% for the first quarter of 2009 and 2008. We expect
our professional fees to continue to increase in 2009, as we will hire an
outside consulting firm to work on our Sarbanes Oxley compliance. We also expect
to have an increase in other general and administrative expenses in future
reporting periods, as our business expands.




Net income. The net income
for the first quarter of 2009 was $7.2 million as compared to $4.66 million in
the same period of 2008.  It was an increase of $2.54 million in net profit
or 55%.  This increase was attributable to economies of scale combined
with rapid growth in revenue among all three business segments especially in
bio-diesel and retail gas stations, and efficiency of operations. Management
believes that the net income increase is the result of the fast and continuing
revenue growth, as well as controlling costs and operating expenses. Net income
will continue to increase as we will continue to offer better quality products,
improve our manufacturing efficiency, and control our
expenses.  .





Liquidity
and Capital Resources




As of
March 31, 2009 and December 31, 2008, we had cash and cash equivalents of
approximately $35.39 million and $23.12 million, respectively. At March 31,
2009, current assets were approximately $79.65 million and current liabilities
were approximately $4.13 million, as compared to current assets of approximately
$78.29 million and current liabilities of approximately $10.8 million at
December 31, 2008. Working capital equaled approximately $75.52 million at March
31, 2009, compared to $67.49 million at December 31, 2008, an increase of
11.9%. The ratio of current assets to current liabilities was 19.3-to-1 at March
31, 2009, compared to 7.3-to-1 at the December 31, 2008. The increase in working
capital in the first quarter of 2009 was primarily due to the increased sales
volume and net income. The increase in the current ratio in the first quarter of
2009 was primarily related to increase in cash, and reduction of advance from
customers. At March31, 2009 and December 31, 2008, our cash and cash equivalent
included approximately $14 million of proceeds from a financing agreement in
October 2008.  The funding was initially for an acquisition
initiative, which was suspended. Without the $14 million financing proceeds,
working capital equaled approximately $61.52 million, a 15% or 8.03 million
increase from December 31, 2008.  The current ratio still achieved
15.9-to-1.





We
believe we have sufficient working capital to sustain our current business
through December 31, 2009 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 bio-diesel production plants; (iii)
acquiring new technology of bio-diesel production capability, (iv) expanding our
100,000 ton bio-diesel manufacturing facility; 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:





·
              Successfully
      raising necessary capital for
expansion;




24




·
            competing
      technological and market
developments;




·
            our
      ability to maintain our existing, and establish new collaborative
      relationships; and




·
            development
      of commercialization activities and arrangements in alternative
      energy.




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, 2009 and 2008.





Three Months Ended December 31,2009
                    (Unaudited)
                  
                  2008
                    (Unaudited)Cash
      provided by (used in):Operating
      Activities
                  
                  $
                  11,748,785
                  
                  
                  $
                  1,074,063Investing
      Activities
                  
                  
                  (3,324
                  )
                  
                  
                  (947,842
                  )Financing
      Activities
                  
                  
                  508,207
                  
                  
                  
                  (12,783
                  )





Net cash
provided by operating activities was $11,748,785 in the first quarter of 2009,
compared to $1,074,063 in the same period of 2008. The net cash inflow
increased during the first quarter of 2009 was primarily due to a large increase
in net income, significant reductions in various current assets amounting to
$10.8 million, offsetting by $6.7 million of reduction of current
liabilities.





Net cash
used in investing activities was insignificant in the first quarter of 2009, as
compared to net cash used in investing activities of $947,842 in the same period
of 2008.  During the first quarter of 2008, we spent approximately
$798,000 to complete the bio-diesel manufacturing facility, and spent
approximately $150,000 for various fixed asset improvements.




Net cash
provided by financing activities was $508,027 in the first quarter of
2009 as compared to net cash used by financing activities of $12,783 in the
same period of 2008. The increase of net cash provided by financing activities
in the first quarter of 2009 was mainly due to 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, 2009 and for the remaining of
2009.




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.





Recently
Issued Accounting Pronouncements





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




25




ITEM
3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
required.




ITEM
4T – CONTROL AND PROCEDURES




Evaluation of disclosure controls
and procedures. We maintain disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the “Exchange Act”)) designed to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. Based upon
their evaluation of those controls and procedures performed as of March 31,
2009, the end of the period covered by this report, our chief executive officer
and the principal financial officer concluded that our disclosure controls and
procedures were effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.




Changes in internal control over
financial reporting. There were no changes in our internal control over
financial reporting that occurred during the three months ended March 31,
2009,  that has materially affected, or is reasonably likely to
materially affect our internal control over financial reporting.




PART
II - OTHER INFORMATION




Item
1. Legal Proceedings




None.




Item
1A. Risk Factors




The risk factors included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 have not
materially changed as of March 31, 2009.




Item
3. Defaults Upon Senior Securities




None.




Item
4. Submission of Matters to a Vote of Security Holders




None.




Item
5. Other Information




On May
12, 2009, the board of directors of the Company appointed Mr. Albert C. Pu as
the Chief Financial Officer of the Company.  Mr. Pu joined the Company
in February, 2009 as the Vice President of Finance. Ms. Li Gaihong who served as
Chief Financial Officer of the Company shall continue with the Company in the
position as Financial Controller.
  Prior to
joining the Company, from 2005 through 2009, Mr. Pu served as Global Controller
of Amphenol Corporation Industrial Operations, a division of Amphenol
Corporation (NYSE:APH), a U.S. based multi-national manufacturing company
specializing in interconnect systems, at which he was in charge of facilities in
the U.S., Mexico and China. From 2004 through 2005, Mr. Pu was the Director of
Finance of Endicott Interconnect Technologies, Inc., a U.S. based company
specializing in high –end interconnect technologies for industrial and military
applications.  Mr. Pu has over 19 years of accounting and auditing
experience.  Mr. Pu has a B.S. in Accounting from the State University
of New York, Institute of Technology in 1990.  He is a New York State
Certified Public Accountant.
  Mr. Pu
has no family relationships with any of the executive officers or directors of
the Company.  There were no arrangements or understandings between Mr.
Pu and any other person pursuant to which he was selected as Chief Financial
Officer.  Mr. Pu was hired in February by the Company with the intent
that after a three month probationary period, during which time the Company and
the board could evaluate his performance, he would be recommended to the Board
to be appointed to serve as the new Chief Financial Officer.  There
have been no related party transactions in the past two years in which the
Company or any of its subsidiaries was or is to be a party, in which Ms. Pu had,
or will have, a direct or indirect material interest.
  Mr. Pu
entered into an employment agreement with the Company on January 22,
2009.  Mr. Pu receives an annual salary of US$70,000, including an
allowance for housing and social insurance, as well as reimbursement of
reasonable out of pocket expenses and travel for business purposes.  A
copy of his employment agreement is attached hereto as Exhibit
10.1.
  In
connection with a private placement of the Company’s securities in October 2008,
under the terms of a securities purchase agreement and a management escrow
agreement, entered into by the Company at that time (the “Agreements”), the
Company agreed to maintain $250,000 from the proceeds of the private placement
in an escrow account, pending the appointment of a new Chief Financial Officer,
which was subject to the approval of the investor.  The appointment of
Mr. Pu as the Chief Financial Officer, was approved by the
investor.  Accordingly, the Company has fulfilled its obligation under
the Agreements.




26




Item
6. Exhibits


ExhibitNo.
                
                Description10.1
                
                Employment
      Agreement between Xi’an Baorun
      Industrial Development Co., Ltd. and Mr. Albert Pu, dated January 22,
      200931.1
                
                Certification
      of the Chief Executive Officer (Principal Executive Officer) pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2
                
                Certification
      of the Chief Financial Officer (Principal Financial Officer) pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32
                
                Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.




27




SIGNATURES




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




China
      Bio Energy Holding Group Co., Ltd.Dated:  May
      13, 2009
              By:
              /s/
      Gao XinchengName:
      Gao XinchengTitle:  
      Chief Executive Officer and President




28