UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q




(Mark
One)




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




For the
quarterly period ended June 30, 2009


Or




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


For the
transition period
from____________________________to___________________________________________




Commission
File Number:  000-25413




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 3920













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.  ý Yes  o 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 o Accelerated Filer
o Non-Accelerated
Filer o Smaller Reporting
Company ý




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




As of
June 30, 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
      INFORMATION
                                                1Item
      1
                                                FINANCIAL
      STATEMENTS
                                                1Item
      2
                                                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                                20Item
      3
                                                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                29Item
      4T
                                                CONTROLS
      AND PROCEDURES
                                                29PART II.
                                                OTHER
      INFORMATION
                                                29Item
      1
                                                LEGAL
      PROCEEDINGS
                                                29Item
      1A
                                                RISK
      FACTORS
                                                29Item
      2
                                                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                                                29Item
      3
                                                DEFAULTS
      UPON SENIOR SECURITIES
                                                29Item
      4
                                                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                30Item
      5
                                                OTHER
      INFORMATION
                                                30Item
      6
                                                EXHIBITS
                                                30




i


PART
I.                FINANCIAL
INFORMATION




Item
1                  FINANCIAL
STATEMENTS




Item
1. Consolidated Financial Statements


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


CONDENSED
CONSOLIDATED BALANCE SHEETS





June
      30
                  
                  
                  December
      31,2009
                  
                  
                  2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  42,527,363
                  
                  
                  $
                  23,119,028Restricted
      cash
                  
                  
                  121,379
                  
                  
                  
                  919,351Accounts
      receivable
                  
                  
                  6,283,319
                  
                  
                  
                  8,164,320Other
      receivables and deposits
                  
                  
                  189,368
                  
                  
                  
                  3,986,984Prepaid
      rent
                  
                  
                  2,263,533
                  
                  
                  
                  1,884,102Advance
      to suppliers
                  
                  
                  16,915,970
                  
                  
                  
                  17,945,487Inventories,
      net
                  
                  
                  20,938,731
                  
                  
                  
                  22,268,903Total
      current assets
                  
                  
                  89,239,663
                  
                  
                  
                  78,288,175Prepaid
      rents
                  
                  
                  8,048,235
                  
                  
                  
                  6,408,568Property
      and equipment, net
                  
                  
                  9,507,476
                  
                  
                  
                  9,997,674Total
      noncurrent assets
                  
                  
                  17,555,711
                  
                  
                  
                  16,406,242TOTAL
      ASSETS
                  
                  $
                  106,795,374
                  
                  
                  $
                  94,694,417LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAdvance
      from customers
                  
                  $
                  2,678,238
                  
                  
                  $
                  4,580,462Taxes
      payable
                  
                  
                  782,081
                  
                  
                  
                  735,461Other
      payables
                  
                  
                  1,000,623
                  
                  
                  
                  3,232,088Loans
      payable
                  
                  
                  2,219,218
                  
                  
                  
                  2,247,197Total
      current liabilities
                  
                  
                  6,680,160
                  
                  
                  
                  10,795,208TOTAL
      LIABILITIES
                  
                  
                  6,680,160
                  
                  
                  
                  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 June
      30, 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 June 30, 2009 and December 31, 2008,
respectively
                  
                  
                  2,716
                  
                  
                  
                  2,716Additional
      paid in capital
                  
                  
                  44,565,782
                  
                  
                  
                  44,434,250Statutory
      reserve
                  
                  
                  4,920,114
                  
                  
                  
                  4,920,114Accumulated
      other comprehensive income
                  
                  
                  5,393,490
                  
                  
                  
                  5,337,003Retained
      earnings
                  
                  
                  45,229,647
                  
                  
                  
                  29,201,661Total
      stockholders' equity
                  
                  
                  100,115,214
                  
                  
                  
                  83,899,209TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  $
                  106,795,374
                  
                  
                  $
                  94,694,417


1





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


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND


OTHER
COMPREHENSIVE INCOME





(Unaudited)
                              
                              For
      The Six Months Ended
                                June
      30,
                              
                              
                              For
      The Three Months Ended
                                June
      30,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Sales
                              
                              $
                              123,902,907
                              
                              
                              $
                              93,987,652
                              
                              
                              $
                              65,244,239
                              
                              
                              $
                              58,426,812Cost
      of goods sold
                              
                              
                              106,750,036
                              
                              
                              
                              80,394,701
                              
                              
                              
                              55,768,322
                              
                              
                              
                              49,847,038Gross
      profit
                              
                              
                              17,152,871
                              
                              
                              
                              13,592,951
                              
                              
                              
                              9,475,917
                              
                              
                              
                              8,579,774Selling,
      general and administrative expenses
                              
                              
                              1,166,575
                              
                              
                              
                              571,495
                              
                              
                              
                              610,726
                              
                              
                              
                              251,689Income
      from operations
                              
                              
                              15,986,296
                              
                              
                              
                              13,021,456
                              
                              
                              
                              8,865,191
                              
                              
                              
                              8,328,085Non-operating
      income (expenses)Interest
      expenses
                              
                              
                              (69,180
                              )
                              
                              
                              (59,223
                              )
                              
                              
                              (35,662
                              )
                              
                              
                              (30,952
                              )Subsidy
      income
                              
                              
                              116,964
                              
                              
                              
                              (2,544
                              )
                              
                              
                              -
                              
                              
                              
                              (2,474
                              )Other
      expense
                              
                              
                              (6,094
                              )
                              
                              
                              (46
                              )
                              
                              
                              (2,796
                              )
                              
                              
                              79Total
      non-operating expenses
                              
                              
                              41,690
                              
                              
                              
                              (61,813
                              )
                              
                              
                              (38,458
                              )
                              
                              
                              (33,347
                              )Net
      income
                              
                              
                              16,027,986
                              
                              
                              
                              12,959,643
                              
                              
                              
                              8,826,733
                              
                              
                              
                              8,294,738Other
      comprehensive itemForeign
      currency translation gain (Loss)
                              
                              
                              (14,074
                              )
                              
                              
                              2,788,712
                              
                              
                              
                              36,710
                              
                              
                              
                              1,548,300Comprehensive
      Income
                              
                              $
                              16,013,912
                              
                              
                              $
                              15,748,355
                              
                              
                              $
                              8,863,443
                              
                              
                              $
                              9,843,038Basic
      and diluted weighted average shares outstandingBasic
                              
                              
                              27,169,091
                              
                              
                              
                              25,454,545
                              
                              
                              
                              27,169,091
                              
                              
                              
                              25,454,545Diluted
                              
                              
                              34,629,111
                              
                              
                              
                              32,891,850
                              
                              
                              
                              34,635,447
                              
                              
                              
                              32,685,185Basic
      and diluted net earnings per share available to common
      stockholdersBasic
                              
                              $
                              0.59
                              
                              
                              $
                              0.51
                              
                              
                              $
                              0.32
                              
                              
                              $
                              0.33Diluted
                              
                              $
                              0.46
                              
                              
                              $
                              0.39
                              
                              
                              $
                              0.25
                              
                              
                              $
                              0.25


2





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


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW





(Unaudited)
                                        
                                        For
      The Six Months Ended June 30,2009
                                        
                                        
                                        2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                        
                                        $
                                        16,027,986
                                        
                                        
                                        $
                                        12,959,643Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
                                        
                                        
                                        589,927
                                        
                                        
                                        
                                        457,061Stock
      based compensation
                                        
                                        
                                        131,533
                                        
                                        
                                        
                                        -(Increase)
      decrease in current assets:Accounts
      receivable
                                        
                                        
                                        1,885,008
                                        
                                        
                                        
                                        (6,910,513
                                        )Other
      receivables, deposits and prepaid expenses
                                        
                                        
                                        1,784,914
                                        
                                        
                                        
                                        (8,112,208
                                        )Advance
      to suppliers
                                        
                                        
                                        1,039,421
                                        
                                        
                                        
                                        (491,096
                                        )Inventories
                                        
                                        
                                        1,342,443
                                        
                                        
                                        
                                        363,945Increase
      (decrease) in current liabilities:Accounts
      payable
                                        
                                        
                                        (1,463
                                        )
                                        
                                        
                                        220,212Advance
      from customers
                                        
                                        
                                        (1,904,172
                                        )
                                        
                                        
                                        4,431,338Taxes
      payable
                                        
                                        
                                        46,183
                                        
                                        
                                        
                                        354,840Other
      payables and accrued expenses
                                        
                                        
                                        (2,231,051
                                        )
                                        
                                        
                                        (1,408,412
                                        )Net
      cash provided by operating activities
                                        
                                        
                                        18,710,729
                                        
                                        
                                        
                                        1,864,810CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                                        
                                        
                                        (91,176
                                        )
                                        
                                        
                                        (1,038,203
                                        )Net
      cash used in investing activities
                                        
                                        
                                        (91,176
                                        )
                                        
                                        
                                        (1,038,203
                                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash released
                                        
                                        
                                        797,993
                                        
                                        
                                        
                                        -Payment
      of auto loans long term notes payable
                                        
                                        
                                        (29,255
                                        )
                                        
                                        
                                        (26,208
                                        )Repayment
      from (Advance to) shareholder
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (44,683
                                        )Net
      cash provided by (used in) financing activities
                                        
                                        
                                        768,738
                                        
                                        
                                        
                                        (70,891
                                        )EFFECT
      OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
                                        
                                        
                                        20,044
                                        
                                        
                                        
                                        109,413NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                                        
                                        
                                        19,408,335
                                        
                                        
                                        
                                        865,129CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                                        
                                        
                                        23,119,028
                                        
                                        
                                        
                                        1,382,371CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                                        
                                        $
                                        42,527,363
                                        
                                        
                                        $
                                        2,247,500Supplemental
      Cash flow data:Income
      tax paid
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Interest
      paid
                                        
                                        $
                                        77,344
                                        
                                        
                                        $
                                        61,680


3


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


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




1.  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Basis
of Presentation





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





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.


4


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
June 30, 2009 and December 31, 2008, the Company maintained restricted cash of
$121,379 and $919,351, respectively.  $84,702 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 $36,677 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 June 30, 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 June 30, 2009 and December 31, 2008 were $2,678,238 and
$4,580,462, respectively.




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


5


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 June 30, 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.


6


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 or services
included in the cost of producing their finished product. The Company recorded
VAT payable and VAT receivable net of payments in the financial statements. The
VAT tax return is filed offsetting the payables against the
receivables.




There
were no sales returns and allowances for the six months ended June 30, 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 customers’ financial conditions and customer
payment practices to minimize collection risk on accounts
receivable.




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





Statement
of Cash Flows




In
accordance with 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.


7


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 six months ended June 30, 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
June 30, 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.


8


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;


9


·
            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.





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.





Interim Disclosures about
Fair Value of Financial Instruments





In
April 2009, the FASB issued guidance regarding “Interim Disclosures
about Fair Value of Financial Instruments.” which amended SFAS No. 107,
“Disclosures about Fair Values of Financial Instruments,” to require disclosures
about fair value of financial instruments in interim financial statements as
well as in annual financial statements. It also amends Accounting Principles
Board (“APB”) Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in all interim financial statements. This guidance is
effective for interim and annual periods ending after June 15, 2009, with
early application permitted.





As of
June 30, 2009, the Company did not identify any assets and liabilities that are
required to be presented on the balance sheet at fair value.





Subsequent
Events





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


10


2.  CASH
IN BANK ACCOUNTS





Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at June 30,
2009 and December 31, 2008 amounted to $41,772,479 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.





3.  PREPAID
RENT




Prepaid
expenses mainly consisted of prepaid rents for the gas stations (see Note 12 -
Commitments). At June 30, 2009 and December 31, 2008, the current portion of
prepaid expenses was $2,263,533 and $1,884,102, respectively.  At
June 30, 2009 and December 31, 2008, the noncurrent portion of prepaid expenses
amounted $8,048,235 and $6,408,568, respectively, which represents the prepaid
rents that will be expensed after one year.





4.  INVENTORIES




Inventories
consisted of the following:


June
      30,
                              2009
                              (Unaudited)
                            
                            
                            December 31,
                              2008Petroleum
                            
                            $
                            7,914,440
                            
                            
                            $
                            5,676,454Diesel
                            
                            
                            6,169,357
                            
                            
                            
                            8,727,090Heavy
      Oil
                            
                            
                            441,258
                            
                            
                            
                            -Raw
      material for manufacturing bio-diesel oil
                            
                            
                            6,413,676
                            
                            
                            
                            8,018,594Subtotal
                            
                            
                            20,938,731
                            
                            
                            
                            22,422,138Less:
      Allowance for inventory
                            
                            
                            -
                            
                            
                            
                            (153,235
                            )Total
                            
                            $
                            20,938,731
                            
                            
                            $
                            22,268,903




5.  OTHER
RECEIVABLES AND DEPOSITS




At June
30, 2009, other receivables represented deposits made for purchase of equipments
and short term cash advances to third parties in the amount of
$189,368.  At December 31, 2008, other receivables represented an
advance to Ningxia Yuanshun Petrochemical Co. in the amount of $3,047,242 (see
Note 10 - Other Payables), and deposits made for purchase of equipments and
short term cash advances to third parties in the amount of
$939,742.





6.  PLANT,
PROPERTY AND EQUIPMENT




Plant,
property and equipment are summarized as follows:


June
      30,
                          2009
                          (Unaudited)
                        
                        
                        December 31,
                          2008Building
                        
                        $
                        335,815
                        
                        
                        $
                        335,624Diesel
      Processing Equipment
                        
                        
                        10,330,916
                        
                        
                        
                        10,325,005Office
      Equipment
                        
                        
                        125,748
                        
                        
                        
                        120,588Other
      Equipment
                        
                        
                        33,672
                        
                        
                        
                        31,888Motor
      Vehicles
                        
                        
                        881,828
                        
                        
                        
                        797,02011,707,979
                        
                        
                        
                        11,610,125Less:
      Accumulated Depreciation
                        
                        
                        (2,200,503
                        )
                        
                        
                        (1,612,451
                        )Total
                        
                        $
                        9,507,476
                        
                        
                        $
                        9,997,674




Depreciation
expense for the six months ended June 30, 2009 and 2008 were $589,927 and
$457,061, respectively; and approximately $297,000 and $232,000 for the three
months ended June 30, 2009 and 2008, respectively.


11


7.  MAJOR
CUSTOMERS AND VENDORS




For the
three months and six months ended June 30, 2009, one major customer accounted
for approximately 22% of the Company’s total sales, and this customer accounted
for approximately 31% 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 and six months ended June 30, 2008, no
major customers accounted for over 10% of the Company’s total
sales.





For the
three months and six months ended June 30, 2009, ten vendors accounted for
approximately 82% of the Company’s total purchase; within them one vendor
provided approximately 35% of the Company’s total purchases.  For the
six months ended June 30, 2008, this vendor accounted for approximately 52% of
the Company’s total purchases.  There were no accounts payables due to
this vendor at June 30, 2009 and 2008.




8.  TAX
PAYABLE




Tax
payable consisted of the following at June 30, 2009 and December 31,
2008:





June
      30,
                          2009
                          (Unaudited)
                        
                        
                        December
      31,
                          2008Value
      added tax payable
                        
                        $
                        728,391
                        
                        
                        $
                        683,842Urban
      maintenance and construction tax payable
                        
                        
                        50,987
                        
                        
                        
                        48,879Other
      tax payable
                        
                        
                        2,703
                        
                        
                        
                        2,740$
                        782,081
                        
                        
                        $
                        735,461





9.  INCOME
TAXES




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





Effective
January 1, 2008, the PRC government implemented a new corporate income tax law
with a new maximum corporate income tax rate of 25%. Despite the income tax
exemption of Baorun Industrial, the Company is governed by the Income Tax Law of
the PRC concerning privately-run enterprises, which are generally subject to tax
at a statutory rate of 25% (33% prior to 2008) on income reported in the
statutory financial statements after appropriate tax
adjustments.  Redsky had a net operating loss of approximately $4,000
and $13,000 for the six months ended June 30, 2009 and 2008,
respectively; and approximately $2,000 and $7,000 for the three months
ended June 30, 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 six months ended June 30, 2009 and 2008, 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 $206,000 and $0 for the six months
ended June 30, 2009 and 2008, respectively; . and approximately $84,000 and
$0 for the three months ended June 30, 2009 and 2008, respectively.  A
100% valuation allowance has been established due to the uncertainty of its
realization.




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


12





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 Six Months  Ended June 30,2009
                        
                        2008(pro
      forma)
                        
                        (pro
      forma)Net
      income before income taxes
                        
                        $
                        16,237,975
                        
                        
                        $
                        12,973,735Tax
      provision
                        
                        
                        (4,059,494
                        )
                        
                        
                        (3,243,434
                        )Net
      income
                        
                        $
                        12,178,481
                        
                        
                        $
                        9,730,301





10.  OTHER
PAYABLES




Other
payable mainly consisted of payables for the purchase of equipment, short term
advances from third parties, and other obligations.  Other payables
balances at June 30, 2009 and December 31, 2008 were $1,000,623and $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.





11.  LOANS
PAYABLE





The
Company is obligated under two short term loans from commercial banks in the
PRC. The first loan of $1,463,981 (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 8.07%  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 $2,966,000 (RMB
20,260,000) and stock of the Company owned by its majority shareholder in the
value of approximately $2,152,000 (RMB 14,700,000) for the
guarantee.




The
second loan of $731,990 (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 June
30, 2009, automobile loan carried a balance of $23,247.




12.  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.  Due to upkeep of the storage tank, occupancy of the 456
Oil Storage Warehouse actually took place in June 2009.  Therefore the
lease term has been extended to May 2010.





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.





On May
28, 2009, the Company leased a gas station for operation under a thirty-year
operating lease with expiration date on May 31, 2039.  The annual
lease payment is approximately $88,000 (RMB 600,000).  The Company is
required to pay in advance of 80% of the sum of the thirty year lease payments
approximately $2,108,000 (RMB 14,400,000) upon executing the lease agreement,
and pay the remaining 20% of the sum of the thirty year lease payments
approximately $527,000 (RMB 3,600,000) upon delivery of operating permits and
related documents from the lessor.




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




Years
      Ending December 31,
                    
                    Amount2010
                    
                    $
                    2,058,0002011
                    
                    
                    2,058,0002012
                    
                    
                    2,059,0002013
                    
                    
                    2,045,0002014
                    
                    
                    1,905,000Years
      thereafter
                    
                    
                    16,110,000Total
                    
                    $
                    26,235,000


14


Total
rental expense for the six months ended June 30, 2009 and 2008 amounted to
approximately $894,000 and $124,000, respectively; and approximately $451,000
and $94,000 for the three months ended June 30, 2009 and 2008,
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 six months ended June 30, 2009, the shipping
cost paid to this transportation company was approximately $311,000 for the six
months ended June 30, 2009; and approximately $185,000 for the three months
ended March 31, 2009.





13.
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:





For
      the Six Months
                                    Ended, June 30
                                  
                                  
                                  For
      the Three Months
                                    Ended, June 302009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Net
      income available to common shareholders
                                  
                                  $
                                  16,027,986
                                  
                                  
                                  $
                                  12,959,643
                                  
                                  
                                  $
                                  8,826,733
                                  
                                  
                                  $
                                  8,294,738Weighted
      average shares outstanding - basic
                                  
                                  
                                  27,169,091
                                  
                                  
                                  
                                  25,454,545
                                  
                                  
                                  
                                  27,169,091
                                  
                                  
                                  
                                  25,454,545Effect
      of dilutive securities:Convertible
      preferred stock
                                  
                                  
                                  7,011,208
                                  
                                  
                                  
                                  4,545,455
                                  
                                  
                                  
                                  7,011,208
                                  
                                  
                                  
                                  4,545,455Unexercised
      warrants
                                  
                                  
                                  448,812
                                  
                                  
                                  
                                  2,891,850
                                  
                                  
                                  
                                  455,148
                                  
                                  
                                  
                                  2,685,185Weighted
      average shares outstanding - diluted
                                  
                                  
                                  34,629,111
                                  
                                  
                                  
                                  32,891,850
                                  
                                  
                                  
                                  34,635,447
                                  
                                  
                                  
                                  32,685,185Earnings
      per share - basic
                                  
                                  $
                                  0.59
                                  
                                  
                                  $
                                  0.51
                                  
                                  
                                  
                                  0.32
                                  
                                  
                                  
                                  0.33Earnings
      per share – diluted
                                  
                                  $
                                  0.46
                                  
                                  
                                  $
                                  0.39
                                  
                                  
                                  
                                  0.25
                                  
                                  
                                  
                                  0.25





14.  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.


15


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.





15.  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.




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.





Following
is a summary of warrant activity for the three months ended June 30,
2009:


16





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 June 30, 2009
                    4,007,273
                    
                    $
                    3.82
                    
                    3.80Exercisable
      at June 30, 2009
                    3,977,273
                    
                    
                    -
                    
                    -





16.  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.





For
the six months ended June 30, 2009, $750,000 was released from the escrow
account to the Company as the Company has successfully completed the
appointments of a Vice President of Investor Relations and three independent
directors of the Company’s Board of Directors, and Chief Financial
Officer.





17.  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 $101,000
of compensation expense for these options for the six months ended June 30, 2009
and $62,700 for the three months ended March 31, 2009.





Following
is a summary of stock option activity for the six months ended June 30,
2009:




Options
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  Weighed
                    Average
                    Remaining
                    Contractual
                    Term in Years
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at December 31, 2008
                  40,000
                  
                  $
                  4.00
                  
                  9.90
                  
                  -Exercised
                  -
                  
                  
                  -
                  
                  -Cancelled
                  -
                  
                  
                  -
                  
                  -Outstanding
      at June 30, 2009
                  40,000
                  
                  $
                  4.00
                  
                  9.63
                  $
                  52,400Exercisable
      at June 30, 2009
                  20,000
                  
                  
                  4.00
                  
                  9.63
                  $
                  26,200


17


Following
is a summary of non-vested options as of June 30, 2009 and changes during the
six 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 June 30, 2009
                
                
                20,000
                
                
                $
                4.00





18.
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.





For
the three months ended June 30, 2009 and 2008




Distribution
      of
                  finished
      oil
                
                
                Bio-Diesel
                  production
                
                
                Retail
      gas
                  stations
                
                
                Total2009
      (Unaudited)Net
      sales
                
                $
                45,452,242
                
                
                $
                11,753,849
                
                
                $
                8,038,148
                
                
                $
                65,244,239Depreciation
                
                
                38,478
                
                
                
                258,705
                
                
                
                -
                
                
                
                297,183Interest
      expense
                
                
                38,972
                
                
                
                -
                
                
                
                -
                
                
                
                38,972Net
      income
                
                
                4,345,247
                
                
                
                3,289,192
                
                
                
                1,192,294
                
                
                
                8,826,733Segment
      assets
                
                
                72,134,768
                
                
                
                23,861,023
                
                
                
                10,799,583
                
                
                
                106,795,374Capital
      expenditure
                
                
                87,852
                
                
                
                -
                
                
                
                -
                
                
                
                87,8522008
      (Unaudited)Net
      sales
                
                $
                37,453,191
                
                
                $
                16,459,664
                
                
                $
                4,513,957
                
                
                $
                58,426,812Depreciation
                
                
                42,044
                
                
                
                189,972
                
                
                
                -
                
                
                
                232,016Interest
      expense
                
                
                34,022
                
                
                
                -
                
                
                
                -
                
                
                
                34,022Net
      income
                
                
                2,776,141
                
                
                
                5,029,911
                
                
                
                488,686
                
                
                
                8,294,738Segment
      assets
                
                
                35,420,357
                
                
                
                19,278,891
                
                
                
                9,960,906
                
                
                
                64,660,154Capital
      expenditure
                
                
                17,612
                
                
                
                72,768
                
                
                
                -
                
                
                
                90,380





For
the six months ended June 30, 2009 and 2008




Distribution
      of
                  finished
      oil
                
                
                Bio-Diesel
                  production
                
                
                Retail
      gas
                  stations
                
                
                Total2009
      (Unaudited)Net
      sales
                
                $
                82,563,217
                
                
                $
                25,195,466
                
                
                $
                16,144,224
                
                
                $
                123,902,907Depreciation
                
                
                76,034
                
                
                
                513,893
                
                
                
                -
                
                
                
                589,927Interest
      expense
                
                
                77,344
                
                
                
                -
                
                
                
                -
                
                
                
                77,344Net
      income
                
                
                7,538,376
                
                
                
                6,417,834
                
                
                
                2,071,776
                
                
                
                16,027,986Segment
      assets
                
                
                72,134,768
                
                
                
                23,861,023
                
                
                
                10,799,583
                
                
                
                106,795,374Capital
      expenditure
                
                
                91,176
                
                
                
                -
                
                
                
                -
                
                
                
                91,1762008
      (Unaudited)Net
      sales
                
                $
                65,249,030
                
                
                $
                23,363,056
                
                
                $
                5,375,566
                
                
                $
                93,987,652Depreciation
                
                
                86,276
                
                
                
                370,785
                
                
                
                -
                
                
                
                457,061Interest
      expense
                
                
                41,642
                
                
                
                20,038
                
                
                
                -
                
                
                
                61,680Net
      income
                
                
                5,610,048
                
                
                
                6,760,184
                
                
                
                589,411
                
                
                
                12,959,643Segment
      assets
                
                
                35,420,357
                
                
                
                19,278,891
                
                
                
                9,960,906
                
                
                
                64,660,154Capital
      expenditure
                
                
                153,697
                
                
                
                884,506
                
                
                
                -
                
                
                
                1,038,203


18




19.
SUBSEQUENT EVENT





Effective
this quarter, the Company implemented Statement of Financial Accounting
Standards No. 165, Subsequent Events,(“FAS
No. 165”). This standard establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued. The adoption of FAS 165 did not impact our
financial position or results of operations. The Company evaluated all events or
transactions that occurred after June 30, 2009 up through August 7, 2009,
the date these financial statements were issued.





On July
27, 2009, the Company leased a gas station for operation under a twenty nine
year operating lease with expiration date on July 31, 2038.  The
annual lease payment is approximately $293,000 (RMB 2,000,000).  On
August 1, 2009, the Company, based on the lease agreement, paid the lessor an
advance of 80% of the sum of the twenty nine year lease payments approximately
$6,794,000 (RMB 46,400,000).  The remaining 20% of the sum of the
twenty nine year lease payments approximately $1,698,000 (RMB 11,600,000) will
be paid upon delivery of operating permits and related documents from the
lessor.





20.  OPERATING
RISK





(a)            Country
risk




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





(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.


19


(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.





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.


20


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 and the material opportunities and
challenges of our business.





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





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





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





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





Our
Business





Company Overview




We are
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 through certain contractual agreements, and retail gas
station sales of gasoline and diesel 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, a 2.65 kilometer
special transportation rail track and one 100,000 ton bio-diesel production
plant located in Tongchuan, Shaanxi Province, China. Our major market is China.
Currently, our products are sold in 14 provinces and municipalities of China
covering Shaanxi Province, Henan Province, Hebei Province, Shangdong Province,
Shanxi Province, Hunan Province, Hubei Province, Sichuan Province, Guizhou
Province, Yunnan Province, Fujian Province, Xinjiang Province, Beijing, and
Shanghai.




Recent
Developments




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 was aimed at boosting domestic
auto purchases which will likely increase overall domestic oil consumption and
provide a stimulus for the steel sector. We believe that the sales tax cut on
purchases of vehicles with small engines will drive more fuel
consumption.


21




In
January 2009, the average sales price for our 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 2008. This decrease is substantially less than the drop in
world crude oil prices during the same period because the NDRC had held domestic
prices at lower levels during 2008.





On March
25, 2009, the NDRC increased the prices of gasoline and diesel by RMB 290 or $42
per ton or 5.33% and RMB 180 or $26 per ton or 3.74%, respectively, to reflect a
rebound of global oil prices.  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 our oil
products was approximately $745 per ton (equivalent to approxi0mately $2.55 per
gallon of gasoline and $2.83 per gallon of petro-diesel)





On June
1, 2009, the NDRC increased the prices of gasoline and diesel by RMB 400 or $59
per ton or 6.98% and RMB 400 or $59 per ton or 8.02%, respectively, to reflect
the continued climb of global oil prices.  As a result of this oil
price increase, the retail prices of gasoline and diesel have increased
accordingly.  In June 2009, the average sales price for our oil
products was approximately $815 per ton (equivalent to approximately $2.72 per
gallon of gasoline and $3.01 per gallon of petro-diesel)





On June
30, 2009, NDRC subsequently increased the prices of gasoline and diesel by RMB
600 or $88 per ton or 9.79% and RMB 600 or $88 per ton or 11.1%,
respectively.  On July 29, 2009 NDRC decreased the prices of gasoline
and diesel by RMB 220 or $32 per ton for each petroleum
products.  Both price increase and decrease reflect the fluctuation of
global oil market prices.





From 2006
to 2008, there were only two oil price adjustments in each
year.  However, there were five oil price adjustments over the first
seven months in 2009.  It is foreseeable that oil prices in China will
be adjusted more frequently fluctuating in line with global oil
prices.





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




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 sides, the we benefit from our advantageous location,
well-established supplier relationships, as well as an extensive distribution
network that has valuable railway access to reach remote parts of China that
other distribution companies cannot currently reach. We plan to strengthen our
outreach in certain key distribution areas. We also plan to add another five
retail gas stations through acquisition or lease, which we believe will benefit
our overall distribution profit margins.




We also
plan to expand our 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 expansion of bio-diesel production capacity is more focused on
strategic acquisition that will quickly provide financial benefits to
us.  We anticipate $15 million in capital expenditures in 2009 to
accomplish this goal. We have secured enough raw materials to supply 150,000
tons of capacity, but will also continue to work towards securing more long-term
sources of raw materials and new technology in the bio-energy
field.




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




Basis
of Presentations




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


22


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 June 30, 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 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:





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.




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.


23


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 in effect for Baorun Industrial, we estimate that the pro forma
financial impact would be as follows:





For
      the six months ended
                    June
      30,
                  
                  For
      the three months ended
                    June
      30,2009
                  
                  2008
                  
                  2009
                  
                  2008Net
      income before income taxes
                  
                  $
                  16,027,986
                  
                  
                  $
                  12,959,643
                  
                  
                  $
                  8,826,733
                  
                  
                  $
                  8,294,738Tax
      provision
                  
                  
                  4,006,997
                  
                  
                  
                  3,239,911
                  
                  
                  
                  2,206,683
                  
                  
                  
                  2,073,685Net
      income
                  
                  $
                  12,020,989
                  
                  
                  $
                  9,719,732
                  
                  
                  $
                  6,620,050
                  
                  
                  $
                  6,221,053





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 discloses the relevant circumstances, as appropriate when
Management believes that any liability to the Company that may arise as a result
of having to pay out additional expenses that may have a material adverse effect
on the financial condition of the Company taken as a whole.


24


Results
of Operations





Operations
Results for the Three Months Ended June 30, 2009





Distribution
      of
                    finished
      oil
                  
                  
                  Bio-Diesel
                    production
                  
                  
                  Retail
      gas
                    stations
                  
                  
                  Total2009
      (Unaudited)Net
      sales
                  
                  $
                  45,452,242
                  
                  
                  $
                  11,753,849
                  
                  
                  $
                  8,038,148
                  
                  
                  $
                  65,244,239Depreciation
                  
                  
                  38,478
                  
                  
                  
                  258,705
                  
                  
                  
                  -
                  
                  
                  
                  297,183Interest
      expense
                  
                  
                  38,972
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  38,972Net
      income
                  
                  
                  4,345,247
                  
                  
                  
                  3,289,192
                  
                  
                  
                  1,192,294
                  
                  
                  
                  8,826,733Segment
      assets
                  
                  
                  72,134,768
                  
                  
                  
                  23,861,023
                  
                  
                  
                  10,799,583
                  
                  
                  
                  106,795,374Capital
      expenditure
                  
                  
                  87,852
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  87,8522008
      (Unaudited)Net
      sales
                  
                  $
                  37,453,191
                  
                  
                  $
                  16,459,664
                  
                  
                  $
                  4,513,957
                  
                  
                  $
                  58,426,812Depreciation
                  
                  
                  42,044
                  
                  
                  
                  189,972
                  
                  
                  
                  -
                  
                  
                  
                  232,016Interest
      expense
                  
                  
                  34,022
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  34,022Net
      income
                  
                  
                  2,776,141
                  
                  
                  
                  5,029,911
                  
                  
                  
                  488,686
                  
                  
                  
                  8,294,738Segment
      assets
                  
                  
                  35,420,357
                  
                  
                  
                  19,278,891
                  
                  
                  
                  9,960,906
                  
                  
                  
                  64,660,154Capital
      expenditure
                  
                  
                  17,612
                  
                  
                  
                  72,768
                  
                  
                  
                  -
                  
                  
                  
                  90,380





Net sales. Net sales for
the three months ended June 30, 2009 were approximately $65.2 million compared
to $58.4 Million in the same period in 2008, an increase of $6.8 million,
or 11.6%. The increase was mainly attributed to the growths in distribution and
retail gas stations. The increase was mainly due to strong market demand for
finished oil, and sales generated by the gas stations.  The
distribution volume increased by 26,400 ton or 56.4% from the same period in
2008.  Sales volume of gas stations increased by 5,800 ton or 116%
from the same period in 2008.





Cost of sales. Cost of sales
for the three months ended June 30, 2009 was approximately $55.8 million
compared to $49.8 million in the same period of 2008, an increase of $6
million, or 12.1%.  The increase in cost of sales was attributable to an
increase in production and sales activities during the second quarter of 2009.
Cost of sales as a percentage of sales was approximately 85.6% for the second
quarter of 2009 and 85.3% for the same period in 2008.  The increase
as a percentage of sales was due to lower selling prices compared to the same
period in 2008, and the cost increase in rental expense for the four additional
gas stations.




Gross profit. Gross profit
was approximately $9.5 million for the three months ended June 30, 2009 as
compared to approximately $8.6 million for the same period in 2008, representing
gross margins of approximately 14.4% and 14.7%, respectively.  For the
three months ended June 30, 2009, the gross profit margin for making and selling
bio-diesel oil was approximately 29.1%, and the gross profit margin for
distribution of oil products, such as gasoline and diesel oil, was approximately
12.7%, versus 31.2% and 10%, respectively, in the same period of
2008.  The increase in gross margin of oil distribution was attributed
to favorable frequent pricing adjustments by the NDRC reflecting global oil
pricing.  The decrease in the gross margin of bio-diesel was
attributed to the lower selling price of diesel oil compared to the same period
in 2008.




Operatingexpenses. Selling, general
and administrative expenses for the three months ended June 30, 2009 were
approximately $0.61 million compared to $0.25 million for the same period in
2008, an increase of $0.36 million or 144%. This increase was mainly attributed
to approximately $275,000 of legal, consulting fees, stock option expenses for
our 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% and 0.4% for the three months ended June 30, 2009
and 2008, respectively. We expect our professional fees to continue to increase
in 2009, as we have hired an outside consulting firm to work on our Sarbanes
Oxley compliance and implement employee incentive programs. We also expect to
have an increase in other general and administrative expenses in future
reporting periods, as our business expands.


25





Net income. The net income
for the three months ended June 30, 2009 was $8.8 million compared to $8.3
million in the same period in 2008, an increase of $0.5
million.  Although revenue grew by 11.7%, net income stayed flat
quarter on quarter.  Additional rental expenses for the gas stations
and costs associated with us being a U.S. publicly traded company depressed the
net income.





Comparison
of Six Months Ended June 30, 2009 and 2008





Distribution
      of
                    finished
      oil
                  
                  
                  Bio-Diesel
                    production
                  
                  
                  Retail
      gas
                    stations
                  
                  
                  Total2009
      (Unaudited)Net
      sales
                  
                  $
                  82,563,217
                  
                  
                  $
                  25,195,466
                  
                  
                  $
                  16,144,224
                  
                  
                  $
                  123,902,907Depreciation
                  
                  
                  76,034
                  
                  
                  
                  513,893
                  
                  
                  
                  -
                  
                  
                  
                  589,927Interest
      expense
                  
                  
                  77,344
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  77,344Net
      income
                  
                  
                  7,538,376
                  
                  
                  
                  6,417,834
                  
                  
                  
                  2,071,776
                  
                  
                  
                  16,027,986Segment
      assets
                  
                  
                  72,134,768
                  
                  
                  
                  23,861,023
                  
                  
                  
                  10,799,583
                  
                  
                  
                  106,795,374Capital
      expenditure
                  
                  
                  91,176
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  91,1762008
      (Unaudited)Net
      sales
                  
                  $
                  65,249,030
                  
                  
                  $
                  23,363,056
                  
                  
                  $
                  5,375,566
                  
                  
                  $
                  93,987,652Depreciation
                  
                  
                  86,276
                  
                  
                  
                  370,785
                  
                  
                  
                  -
                  
                  
                  
                  457,061Interest
      expense
                  
                  
                  41,642
                  
                  
                  
                  20,038
                  
                  
                  
                  -
                  
                  
                  
                  61,680Net
      income
                  
                  
                  5,610,048
                  
                  
                  
                  6,760,184
                  
                  
                  
                  589,411
                  
                  
                  
                  12,959,643Segment
      assets
                  
                  
                  35,420,357
                  
                  
                  
                  19,278,891
                  
                  
                  
                  9,960,906
                  
                  
                  
                  64,660,154Capital
      expenditure
                  
                  
                  153,697
                  
                  
                  
                  884,506
                  
                  
                  
                  -
                  
                  
                  
                  1,038,203





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





2009
                  
                  
                  2008$
                  
                  
                  
                  % of
                    Sales
                  
                  
                  $
                  
                  
                  
                  % of
                    SalesSales
                  
                  
                  123,902,907
                  
                  
                  
                  100.0
                  %
                  
                  
                  93,987,652
                  
                  
                  
                  100.0
                  %Cost
      of Sales
                  
                  
                  106,750,036
                  
                  
                  
                  86.2
                  %
                  
                  
                  80,394,701
                  
                  
                  
                  85.6
                  %Gross
      Profit
                  
                  
                  17,152,871
                  
                  
                  
                  13.8
                  %
                  
                  
                  13,592,951
                  
                  
                  
                  14.4
                  %Total
      Operating Expenses
                  
                  
                  1,166,575
                  
                  
                  
                  0.9
                  %
                  
                  
                  571,495
                  
                  
                  
                  0.6
                  %Income
      from Operation
                  
                  
                  15,986,296
                  
                  
                  
                  12.9
                  %
                  
                  
                  13,021,456
                  
                  
                  
                  13.8
                  %Other
      Income (expenses), net
                  
                  
                  41,690
                  
                  
                  
                  -
                  %
                  
                  
                  (61,813
                  )
                  
                  
                  -
                  %Net
      Income
                  
                  
                  16,027,986
                  
                  
                  
                  12.9
                  %
                  
                  
                  12,959,643
                  
                  
                  
                  13.8
                  %




Operations
Results for the Six Months Ended June 30, 2009





Net sales. Net sales for
the six months ended June 30, 2009 were approximately $123.9 million compared to
$94 Million in the same period in 2008, an increase of $29.9 million, or
31.8%. The increase was mainly attributed to the growths in distribution and
retail gas stations. We have continued to expand new sales channels and
territories.  We are conducting business in fourteen provinces and
special districts compared to nine provinces in the same period of
2008.  We have also  increased in-depth penetration to our
existing customers creating more demand for oil products as their
businesses grow and expand.  The volume [of ?] increased by 67% from
the same period in 2008.  Secondly, in our retail gas station segment
we had increased revenue of $10.7 million or 200% compared to the same period in
2008  as the result of the five fully operational gas
stations.  Sales of bio-diesel increased by 46.5%  in volume
compared to the same period in 2008.  However the selling price
decreased by 17% from the same period in 2008.


26





Cost of sales. Cost of sales
for the six months ended June 30, 2009 was approximately $106.8 million compared
to $80.4 million in the same period of 2008, an increase of $26.4 million, or
33%.  The increase in cost of sales was attributable to an increase in
production and sales activities during the first six months of 2009. Cost of
sales as a percentage of sales was approximately 86.2% for the six months of
2009 and 85.5% for the same period in 2008.  The increase as a
percentage of sales was due to lower selling prices compared to the same period
in 2008, and the cost increase in rental expense for the four additional gas
stations.




Gross profit. Gross profit was
approximately $17.2 million for the six months ended June 30, 2009 as compared
to approximately $13.6 million for the same period in 2008, representing gross
margins of approximately 13.8% and 14.5%, respectively.  For the six
months ended June 30, 2009, the gross profit margin for making and selling
bio-diesel oil was approximately 27.4%, and the gross profit margin for
distribution of oil products, such as gasoline and diesel oil, was approximately
11.6%, versus 30.6% and 10%, respectively, in the same period of
2008.  The increase in gross margin of oil distribution was attributed
to favorable frequent pricing adjustments by the NDRC reflecting global oil
pricing.  The decrease in the gross margin of bio-diesel was
attributed to the lower selling price of diesel oil compared to the same period
in 2008.  We expect our gross margin to improve with upwards pricing
adjustments in the China domestic market.




Operatingexpenses. Selling, general
and administrative expenses for the six months ended June 30, 2009 were
approximately $1.1 million compared to $0.57 million for the same period in
2008, an increase of $0.53 million or 93%. This increase was mainly attributed
to approximately $430,000 of legal, consulting fees, stock option expenses for
our independent directors and employees, and filing expenses in connection with
the Company becoming public in the U.S.  Payroll and related expenses
of sales and administrative staff increased  by approximately $100,000
as a result of business growth and expansion of distribution channels and
territories.  Total operating expenses as a percentage of sales was 0.9%
and 0.6% for the six months ended June 30, 2009 and 2008, respectively. We
expect our professional fees to continue to increase in 2009, as we have hired
an outside consulting firm to work on our Sarbanes Oxley compliance and
implement employee incentive programs. 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 six months ended June 30, 2009 was $16 million compared to $13
million in the same period in 2008, an increase of $3 million or
23%.  This increase was attributable to economies of scale combined
with rapid growth in revenue in our distribution and retail business segments.
Management believes that the net income increase is the result of the rapid 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 capacity, and control
our expenses





Liquidity
and Capital Resources




As of
June 30, 2009 and December 31, 2008, we had cash and cash equivalents of
approximately $42.5 million and $23.1 million, respectively. At June 30, 2009,
current assets were approximately $89.2 million and current liabilities were
approximately $6.7million, as compared to current assets of approximately $78.2
million and current liabilities of approximately $10.8 million at December 31,
2008. Working capital equaled approximately $82.5 million at June 30, 2009,
compared to $67.5 million at December 31, 2008, an increase of 22.2%. The
ratio of current assets to current liabilities was 13.3-to-1 at June 30, 2009,
compared to 7.3-to-1 at the December 31, 2008. The increase in working capital
as of June 30, 2009 was primarily due to the increased sales volume and net
income. The increase in the current ratio as of June 30, 2009 was primarily
related to an increase in cash, and reduction of advance from customers. At June
30, 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 $68.5 million, a 21.9% or 15 million increase from
December 31, 2008.  The current ratio still achieved
11.2-to-1.


27





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 our oil distribution network to other provinces
outside of our current territory, (ii) acquiring bio-diesel production plants;
(iii) acquiring new technology for 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 our 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;





·
            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 six months ended June 30, 2009 and
2008.





Six Months Ended June 30,2009
                    (Unaudited)
                  
                  
                  2008
                    (Unaudited)Cash
      provided by (used in):Operating
      Activities
                  
                  $
                  18,710,729
                  
                  
                  $
                  1,864,810Investing
      Activities
                  
                  
                  (91,176
                  )
                  
                  
                  (1,038,203
                  )Financing
      Activities
                  
                  
                  768,738
                  
                  
                  
                  (70,891
                  )





Net cash
provided by operating activities was $18,710,729 in the six months ended June
30, 2009, compared to $1,864,810 in the same period of 2008. The net cash
inflow increased during the six months of 2009 was primarily due to a large
increase in net income of $16 million, with a decrease in current assets
amounting to $6 million and offset by $4 million of reduction of current
liabilities.





Net cash
used in investing activities was $91,176 in the six months ended June 30, 2009,
as compared to net cash used in investing activities of $1,038,203in the same
period of 2008.  During the six months ended June 30 2008, we spent
approximately $885,000 to complete the bio-diesel manufacturing facility, and
spent approximately $154,000 for various fixed asset improvements.




Net cash
provided by financing activities was $768,738 in the six months ended June 30,
2009 compared to net cash used by financing activities of $70,891 in the
same period of 2008. The increase of net cash provided by financing activities
in 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 June 30, 2009 and for the remaining of
2009.


28


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.




ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Not
required.


ITEM
      4T.
              CONTROLS
      AND PROCEDURES


(a)
            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 June 30, 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.




(b)
            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 June 30, 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 June 30, 2009.




Item
2                   UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




None.




Item
3                   DEFAULTS
UPON SENIOR SECURITIES




None.


29




Item
4                   SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS




None.




Item
5                   OTHER
INFORMATION





On May 28, 2009, the Company entered
into a lease agreement (the “Agreement”) with Shanxi Fang Wei Road Gas
Station (the “Lessor”), whereby the Company leased one gas station located in
Xi’an for operation for a thirty-year term, commencing on June 1, 2009 and
expiring on May 31, 2039. The annual lease payment is approximately $88,235(RMB
600,000). The Company  is  required to pay 80% of the sum of
the thirty year lease payments, equal to approximately $2,117,647 (RMB
14,400,000), in advance upon signing the Agreement and taking over the
operations.  The remaining  20% shall be paid upon the
completion of the related registration and process, including the transfer of
the refined oil business license and dangerous chemical certificate to the
Company.




If during
the lease period the Company cannot operate the business normally, because there
are any disputes with respect to title, or the gas station is demolished,
relocated or a governmental authority determines that the gas station should
become a planning site, the Lessor shall return all rent for the remainder of
the term to the Company and Lessor shall assume all of the actual losses of the
Company.  If Lessor violates the Agreement, it shall return all rent
paid by the Company and pay an additional 10% of the rent amount as a default
payment.  If the Company defaults it shall have no right to the return
of the prepaid rent and shall pay 10% of the rent amount as a default
payment.  Further, if the gas station cannot continue normal
operations due to a dispute over title, which causes the Agreement to be unable
to be fulfilled, the Company has the right to terminate the Agreement without
any default payment and the Lessor shall return the rent of the remainder of the
Agreement to the Company.
 
 There are
no material relationships between the Lessor and the Company or any of their
respective affiliates.




Item
6                   EXHIBITS





Exhibit
                  No.
              
              Description10.1
              
              Lease
      Agreement by and between the Registrant and Shanxi Fang Wei Lu Gas
      Station , dated May 28, 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.


30




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:  August
      11, 2009
              By:
              /s/ Gao XinchengName:
              Gao
      XinchengTitle:
              Chief
      Executive Officer and
                President


31