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
period ended September 30, 2009




Or




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




For the
transition period from _______________________ to
_______________________




Commission
File Number: 000-25413




China Integrated Energy,
Inc.


(Exact
name of registrant as specified in its charter)





Delaware
              65-0854589(State
      or other jurisdiction of incorporation)
              (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(Registrant’s
      telephone number, including area code)(Former
      name, former address and former fiscal year, if changed since last
      report)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


xYes    ̈No





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




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




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




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).




 ̈ Yes  x No




As of
November 4, 2009, there were 32,519,091 shares of the Registrant’s common stock,
par value $0.0001 per share, outstanding.











PagePART
      I.
                      FINANCIAL
      INFORMATION
                      
                      
                      3Item
      1     Financial
      Statements
                      
                      
                      3Item
      2     Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      
                      25Item
      3     Quantitative
      and Qualitative Disclosures About Market Risk
                      
                      
                      39Item
      4T   Control
      and Procedures
                      
                      
                      39PART
      II.
                      OTHER
      INFORMATION
                      
                      
                      40Item
      1     Legal
      Proceedings
                      
                      
                      40Item
      1A Risk
      Factors
                      
                      
                      40Item
      2     Unregistered
      Sales of Equity Securities and Use of Proceeds
                      
                      
                      47Item
      3     Defaults
      Upon Senior Securities
                      
                      
                      47Item
      4     Submission
      of Matters to a Vote of Security Holders
                      
                      
                      47Item
      5     Other
      Information
                      
                      
                      47Item
      6     Exhibits
                      
                      
                      47




2




PART
      I.
            FINANCIAL
      INFORMATION




Item
1     Financial Statements




CHINA
INTEGRATED ENERGY HOLDING INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





September
      30
                              
                              
                              December
      31,2009
                              
                              
                              2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                              
                              $
                              40,900,053
                              
                              
                              $
                              23,119,028Restricted
      cash
                              
                              
                              -
                              
                              
                              
                              919,351Accounts
      receivable
                              
                              
                              5,438,876
                              
                              
                              
                              8,164,320Other
      receivables and deposits
                              
                              
                              199,609
                              
                              
                              
                              3,986,984Prepaid
      expenses
                              
                              
                              2,490,888
                              
                              
                              
                              1,884,102Advance
      to suppliers
                              
                              
                              25,469,113
                              
                              
                              
                              17,945,487Inventories,
      net
                              
                              
                              20,972,582
                              
                              
                              
                              22,268,903Total
      current assets
                              
                              
                              95,471,121
                              
                              
                              
                              78,288,175Prepaid
      rents
                              
                              
                              16,014,278
                              
                              
                              
                              6,408,568Property
      and equipment, net
                              
                              
                              9,330,277
                              
                              
                              
                              9,997,674Total
      noncurrent assets
                              
                              
                              25,344,555
                              
                              
                              
                              16,406,242TOTAL
      ASSETS
                              
                              $
                              120,815,676
                              
                              
                              $
                              94,694,417LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                              
                              $
                              891,418
                              
                              
                              $
                              -Advance
      from customers
                              
                              
                              6,612,341
                              
                              
                              
                              4,580,462Taxes
      payable
                              
                              
                              827,653
                              
                              
                              
                              735,461Other
      payables
                              
                              
                              2,293,935
                              
                              
                              
                              3,232,088Loans
      payable
                              
                              
                              4,724
                              
                              
                              
                              2,247,197Total
      current liabilities
                              
                              
                              10,630,071
                              
                              
                              
                              10,795,208TOTAL
      LIABILITIES
                              
                              
                              10,630,071
                              
                              
                              
                              10,795,208STOCKHOLDERS'
      EQUITYPreferred
      stock,  $.001 par value;  authorized
      shares10,000,000;
      issued and outstanding 3,115,753 and3,465,753
      shares at September 30, 2009 and December 31 2008,
      respectively
                              
                              
                              3,115
                              
                              
                              
                              3,465Common
      stock,  $.0001 par value;  authorized
      shares79,000,000;  issued
      and outstanding 27,519,091 and27,169,091
      shares at September 30, 2009 and December 31, 2008,
      respectively
                              
                              
                              2,751
                              
                              
                              
                              2,716Additional
      paid in capital
                              
                              
                              44,691,244
                              
                              
                              
                              44,434,250Statutory
      reserve
                              
                              
                              4,920,114
                              
                              
                              
                              4,920,114Accumulated
      other comprehensive income
                              
                              
                              5,464,713
                              
                              
                              
                              5,337,003Retained
      earnings
                              
                              
                              55,103,668
                              
                              
                              
                              29,201,661Total
      stockholders' equity
                              
                              
                              110,185,605
                              
                              
                              
                              83,899,209TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                              
                              $
                              120,815,676
                              
                              
                              $
                              94,694,417





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


3





CHINA
INTEGRATED ENERGY HOLDING INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME





(Unaudited)
                    
                    For
      The Nine Months Ended September 30,
                    
                    
                    For
      The Three Months Ended September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Sales
                    
                    $
                    196,303,917
                    
                    
                    $
                    156,878,997
                    
                    
                    $
                    72,401,010
                    
                    
                    $
                    62,891,345Cost
      of goods sold
                    
                    
                    168,295,024
                    
                    
                    
                    134,134,971
                    
                    
                    
                    61,544,988
                    
                    
                    
                    53,740,270Gross
      profit
                    
                    
                    28,008,893
                    
                    
                    
                    22,744,026
                    
                    
                    
                    10,856,022
                    
                    
                    
                    9,151,075Selling,
      general and administrative expenses
                    
                    
                    2,163,179
                    
                    
                    
                    962,445
                    
                    
                    
                    996,604
                    
                    
                    
                    390,950Income
      from operations
                    
                    
                    25,845,714
                    
                    
                    
                    21,781,581
                    
                    
                    
                    9,859,418
                    
                    
                    
                    8,760,125Non-operating
      income (expenses)Interest
      expenses
                    
                    
                    (91,228
                    )
                    
                    
                    (93,487
                    )
                    
                    
                    (22,048
                    )
                    
                    
                    (34,264
                    )Subsidy
      income
                    
                    
                    155,174
                    
                    
                    
                    381,892
                    
                    
                    
                    38,210
                    
                    
                    
                    381,892Other
      expense
                    
                    
                    (8,226
                    )
                    
                    
                    (2,618
                    )
                    
                    
                    (2,132
                    )
                    
                    
                    (28
                    )Total
      non-operating expenses
                    
                    
                    55,720
                    
                    
                    
                    285,787
                    
                    
                    
                    14,030
                    
                    
                    
                    347,600Net
      income
                    
                    
                    25,901,434
                    
                    
                    
                    22,067,368
                    
                    
                    
                    9,873,448
                    
                    
                    
                    9,107,725Other
      comprehensive itemForeign
      currency translation gain (Loss)
                    
                    
                    55,787
                    
                    
                    
                    3,189,717
                    
                    
                    
                    69,861
                    
                    
                    
                    401,005Comprehensive
      Income
                    
                    $
                    25,957,221
                    
                    
                    $
                    25,257,085
                    
                    
                    $
                    9,943,309
                    
                    
                    $
                    9,508,730Basic
      and diluted weighted average shares outstandingBasic
                    
                    
                    27,287,040
                    
                    
                    
                    25,454,545
                    
                    
                    
                    27,287,040
                    
                    
                    
                    25,454,545Diluted
                    
                    
                    35,017,932
                    
                    
                    
                    32,584,227
                    
                    
                    
                    35,757,432
                    
                    
                    
                    33,227,052Basic
      and diluted net earnings per share available to common
      stockholdersBasic
                    
                    $
                    0.95
                    
                    
                    $
                    0.87
                    
                    
                    $
                    0.36
                    
                    
                    $
                    0.36Diluted
                    
                    $
                    0.74
                    
                    
                    $
                    0.68
                    
                    
                    $
                    0.28
                    
                    
                    $
                    0.27





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


4





CHINA
INTEGRATED ENERGY HOLDING INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW





(Unaudited)
                  
                  For
      The Nine Months Ended September 30,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  25,901,434
                  
                  
                  $
                  22,067,368Adjustments
      to reconcile net income to net cashprovided
      by (used in) operating activities:Depreciation
                  
                  
                  883,778
                  
                  
                  
                  749,501Stock
      based compensation
                  
                  
                  256,679
                  
                  
                  
                  -(Increase)
      decrease in current assets:Accounts
      receivable
                  
                  
                  2,733,209
                  
                  
                  
                  (6,352,376
                  )Other
      receivables, deposits and prepaid expenses
                  
                  
                  (6,404,662
                  )
                  
                  
                  (9,380,479
                  )Advance
      to suppliers
                  
                  
                  (7,495,285
                  )
                  
                  
                  (999,417
                  )Inventories
                  
                  
                  1,322,620
                  
                  
                  
                  (9,842,506
                  )Due
      from related party
                  
                  
                  
                  
                  
                  
                  513,752Increase
      (decrease) in current liabilities:Accounts
      payable
                  
                  
                  889,211
                  
                  
                  
                  (187,632
                  )Advance
      from customers
                  
                  
                  2,024,552
                  
                  
                  
                  3,246,659Taxes
      payable
                  
                  
                  91,211
                  
                  
                  
                  (37,134
                  )Other
      payables and accrued expenses
                  
                  
                  (939,882
                  )
                  
                  
                  (187,315
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  19,262,865
                  
                  
                  
                  (409,579
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                  
                  
                  (204,646
                  )
                  
                  
                  (1,200,352
                  )Net
      cash used in investing activities
                  
                  
                  (204,646
                  )
                  
                  
                  (1,200,352
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash released
                  
                  
                  919,367
                  
                  
                  
                  -Repayment
      of auto loans and notes payable
                  
                  
                  (2,243,366
                  )
                  
                  
                  (40,138
                  )Proceeds
      from short term loan
                  
                  
                  -
                  
                  
                  
                  716,025Net
      cash provided by (used in) financing activities
                  
                  
                  (1,323,999
                  )
                  
                  
                  675,887EFFECT
      OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
                  
                  
                  46,805
                  
                  
                  
                  73,686NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                  
                  
                  17,781,025
                  
                  
                  
                  (860,358
                  )CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                  
                  
                  23,119,028
                  
                  
                  
                  1,382,371CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                  
                  $
                  40,900,053
                  
                  
                  $
                  522,013Supplemental
      Cash flow data:Income
      tax paid
                  
                  $
                  -
                  
                  
                  $
                  -Interest
      paid
                  
                  $
                  105,966
                  
                  
                  $
                  91,278







5


CHINA
INTEGRATED ENERGY INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  1.  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 
 Basis
of Presentation
 
 The
accompanying unaudited condensed consolidated financial statements of the
Company and its subsidiaries have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission including the instructions
to Form 10-Q and Regulation S-X. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America have been
condensed or omitted from these statements pursuant to such rules and regulation
and, accordingly, they do not include all the information and notes necessary
for comprehensive consolidated financial statements and should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 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
nine-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 Integrated Energy Inc. 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 the Financial
Accounting Standards. 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.
  6
 
 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
September 30, 2009 and December 31, 2008, the Company maintained restricted cash
of $-0- and $919,351, respectively. Restricted cash was held from the
proceeds of private placements for the purposes of investor relations
expenditure and recruitment of independent board of directors, VP of investor
relations, and chief financial officer (see note number 16, Escrow
Agreement).
 
 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 September 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 September 30, 2009 and December 31, 2008 were $6,612,341 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
  In
accordance with Statement of financial accounting standards, 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.
  7
 
 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
determinedusing the asset’s expected future discounted cash flows
or market value, if readily determinable. Based on its review, the Company
believes that, as ofSeptember30, 2009 andDecember31, 2008, there were no impairments of its
long-lived assets.
 
 Income
Taxes
  The
Company utilizes the financial accounting standards, 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 a financial accounting standard on
January 1, 2007. As a result of the implementation of the financial accounting
standard, the Company made a comprehensive review of its portfolio of tax
positions in accordance with recognition standards established by the financial
accounting standard. As a result of the implementation of the financial
accounting standard, the Company recognized no material adjustments to
liabilities or stockholders equity. When tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination. Interest associated with unrecognized tax benefits
are classified as interest expense and penalties are classified in selling,
general and administrative expenses in the statements of income. The adoption of
the financial accounting standard did not have a material impact on the
Company’s financial statements.
 
 Revenue
Recognition
  The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission (SEC) Staff Accounting Bulletin. For distribution of
finished oil, heavy oil products, and 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.
  8
  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 September 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 the financial accounting standards “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
  The
financial accounting standards, “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.
  9
  Foreign
Currency Translation and Comprehensive Income (Loss)
  The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars (“USD”) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments caused by different exchange rates from period to period are
included as a component of stockholders’ equity as “Accumulated other
comprehensive income”. Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
  On July
21, 2005, the central government of China allowed the RMB to fluctuate, ending
its decade old valuation peg to the U.S. dollar. Historically, the Chinese
government has benchmarked the RMB exchange ratio against the U.S. dollar,
thereby mitigating the associated foreign currency exchange rate fluctuation
risk. The Company does not believe that its foreign currency exchange rate
fluctuation risk is significant, especially if the Chinese government continues
to benchmark the RMB against the U.S. dollar.
  This fluctuation of the exchange rates
does not imply free convertibility of RMB to other foreign
currencies. All foreign exchange transactions continue to take place either
through the People’s Bank of China or other banks
authorized to buy and sell foreign currencies at the exchange rate quoted by the
People’s Bank of China.
  The
Company uses Statement of financial accounting standards “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 September 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 the financial accounting standards “Fair
Value Measurements.” The financial accounting standards 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
September 30, 2009, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.
  10
 
 Stock-Based
Compensation
  The
Company accounts for its stock-based compensation in accordance with the
financial accounting standards, “Share-Based Payment”. 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 the financial accounting standards (Revised
December 2004), Consolidation of Variable Interest Entities. The financial
accounting standards clarifies the application of Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. It separates entities into
two groups: (1) those for which voting interests are used to determine
consolidation and (2) those for which variable interests are used to determine
consolidation. The financial accounting standards clarifies how to identify a
variable interest entity and how to determine when a business enterprise should
include the assets, liabilities, non-controlling interests and results of
activities of a variable interest entity in its consolidated financial
statements.
 
 Reclassification
 
 Certain
reclassifications have been made to the prior years’ financial statements to
conform to the current year presentation. These reclassifications had no effect
on previously reported results or retained earnings.
 
 New
Accounting Pronouncements
 
 Non-controlling Interests in
Consolidated Financial Statements
 
 In
December 2007, the FASB issued “Non-controlling Interests in Consolidated
Financial Statements - An Amendment of the financial accounting standards”. The
amended financial accounting standards establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a non-controlling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income
statement.  The non-controlling Interests in Consolidated Financial
Statements clarifies that changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value of
the non-controlling equity investment on the deconsolidation date. The
non-controlling Interests in Consolidated Financial Statements also includes
expanded disclosure requirements regarding the interests of the parent and its
non-controlling interest. The non-controlling Interests in Consolidated
Financial Statements is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Company
expects the non-controlling Interests in Consolidated Financial Statements will
have an impact on accounting for business combinations once adopted but the
effect is dependent upon acquisitions at that time.
 
 11
 
 Business
Combinations
 
 In
December 2007, the FASB issued a financial accounting standard (Revised 2007),
“Business Combinations”. The revised Financial accounting standard of “Business
Combinations” will significantly change the accounting for business
combinations. Under the revised financial accounting standard of “Business
Combinations”, an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. The revised financial accounting standard of
“Business Combinations will change the accounting treatment for certain specific
items, including:
 
 ·
              Acquisition
      costs will be generally expensed as incurred;·
              Non-controlling
      interests (formerly known as “minority interests” - see SFAS 160
      discussion above) will be valued at fair value at the acquisition
      date;·
              Acquired
      contingent liabilities will be recorded at fair value at the acquisition
      date and subsequently measured at either the higher of such amount or the
      amount determined under existing guidance for non-acquired
      contingencies;·
              In-process
      research and development will be recorded at fair value as an
      indefinite-lived intangible asset at the acquisition
  date;·
              Restructuring
      costs associated with a business combination will be generally expensed
      subsequent to the acquisition date; and·
              Changes
      in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax
      expense.
 
 The
revised financial accounting standard of “Business Combinations also includes a
substantial number of new disclosure requirements. The revised financial
accounting standard of “Business Combinations applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited. Accordingly, since we are a calendar year-end
company, we will continue to record and disclose business combinations following
existing GAAP until January 1, 2009. The Company expects The revised
financial accounting standard of “Business Combinations 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
 
 In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) issue, “Determining
Whether an instrument (of Embedded Feature) is indexed to an Entity’s Own
Stock”. The financial accounting standard mandates a two-step process for
evaluating whether an equity-linked financial instrument or embedded feature is
indexed to the entity’s own stock.  Warrants that a company issues
that contain a strike process adjustment feature, upon the adoption of the
financial accounting standard results in the instruments no longer being
considered indexed to the company’s own stock. Accordingly, adoption of the
financial accounting standard will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
the date. The financial accounting standard,  “Determining Whether an
instrument (of Embedded Feature) is indexed to an Entity’s Own Stock”.is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years.
 
 The full
ratchet period of the Company’s warrant A-1 and warrant A-2 series expired on
October 22, 2008 one year following the original issue date of October 23, 2007.
The Company does not believe that adoption of the financial accounting standard
would have material effect on the Company’s financial statements and
disclosures.
  12
 
 Interim Disclosures about
Fair Value of Financial Instruments
 
 In
April 2009, the FASB issued guidance regarding “Interim Disclosures
about Fair Value of Financial Instruments.” which amended “Disclosures about
Fair Values of Financial Instruments,” to require disclosures about fair value
of financial instruments in interim financial statements as well as in annual
financial statements. It also amends Accounting Principles Board (“APB”)
“Interim Financial Reporting,” to require those disclosures in all interim
financial statements. This guidance is effective for interim and annual periods
ending after June 15, 2009, with early application permitted.
 
 As of
September 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.
 
 Accounting Standards
Codification and the Hierarchy
 
 In June
2009, the financial accounting standards Board (“FASB”) issued FASB Statement,
“The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of
Generally Accepted Accounting Principles,” which is a significant restructuring
of accounting and reporting standards designed to simplify user access to all
authoritative U.S. generally accepted accounting principles by providing the
authoritative literature in a topically organized structure.  The Company
has adopted the ASC, which became effective for interim and annual periods
ending after September 15, 2009.
 
 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 atSeptember30, 2009 andDecember31, 2008 amounted to$40,145,232and$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) and other expenses. At September 30, 2009 and December
31, 2008, the current portion of prepaid rental expenses of gas stations was
$2,359,486 and $1,884,102, respectively. At September 30, 2009 and December
31, 2008, the noncurrent portion of prepaid expenses amounted $16,014,278
and $6,408,568, respectively, which represents the prepaid rents that will be
expensed after one year.
 
 13
 
 4.  INVENTORIES
  Inventories
consisted of the following:
 September 30,
                                2009
                                (Unaudited)
                              
                              
                              December 31,
                                2008Petroleum
                              
                              $
                              9,900,246
                              
                              
                              $
                              5,676,454Diesel
                              
                              
                              5,353,137
                              
                              
                              
                              8,727,090Heavy
      Oil
                              
                              
                              355,843
                              
                              
                              
                              -Raw
      material for manufacturing bio-diesel oil
                              
                              
                              5,363,356
                              
                              
                              
                              8,018,594Subtotal
                              
                              
                              20,972,582
                              
                              
                              
                              22,422,138Less:
      Allowance for inventory
                              
                              
                              -
                              
                              
                              
                              (153,235
                              )Total
                              
                              $
                              20,972,582
                              
                              
                              $
                              22,268,903
 
 5.  OTHER
RECEIVABLES AND DEPOSITS
  At
September 30, 2009, other receivables represented deposits made for purchase of
equipments and short term cash advances to third parties in the amount of
$199,609. 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:
 September 30,
                        2009
                        (Unaudited)
                      
                      
                      December 31,
                        2008Building
                      
                      $
                      336,036
                      
                      
                      $
                      335,624Diesel
      Processing Equipment
                      
                      
                      10,337,710
                      
                      
                      
                      10,325,005Office
      Equipment
                      
                      
                      141,336
                      
                      
                      
                      120,588Other
      Equipment
                      
                      
                      34,046
                      
                      
                      
                      31,888Motor
      Vehicles
                      
                      
                      980,100
                      
                      
                      
                      797,02011,829,228
                      
                      
                      
                      11,610,125Less:
      Accumulated Depreciation
                      
                      
                      (2,498,951
                      )
                      
                      
                      (1,612,451
                      )Total
                      
                      $
                      9,330,277
                      
                      
                      $
                      9,997,674
  Depreciation
expense for the nine months ended September 30, 2009 and 2008 were $883,778
and $749,501, respectively; and approximately $297,000 and $293,000 for the
three months ended September 30, 2009 and 2008, respectively.
 
 7.  MAJOR
CUSTOMERS AND VENDORS
  For the
nine months ended September 30, 2009, one major customer accounted for
approximately 22.0% of the Company’s total sales, and this customer accounted
for approximately 19.8% 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 nine months ended September 30, 2008, no major customers
accounted for over 10% of the Company’s total sales.
  14
  For the
three months and nine months ended September 30, 2009, ten vendors accounted for
approximately 76.7% of the Company’s total purchase; within them one vendor
provided approximately 32.3% of the Company’s total purchases. For the
nine months ended September 30, 2008, this vendor accounted for
approximately 43.1% of the Company’s total purchases. There were no accounts
payables due to this vendor at September 30, 2009 and 2008.
 
 8.  TAX
PAYABLE
  Tax
payable consisted of the following at September 30, 2009 and December 31,
2008:
 
 September
      30,
                      2009
                      (Unaudited)
                    
                    
                    December
      31,
                      2008Value
      added tax payable
                    
                    $
                    762,920
                    
                    
                    $
                    683,842Urban
      maintenance and construction tax payable
                    
                    
                    58,395
                    
                    
                    
                    48,879Other
      tax payable
                    
                    
                    6,338
                    
                    
                    
                    2,740$
                    827,653
                    
                    
                    $
                    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 nine months ended
September 30, 2009 and 2008, respectively; and approximately $-0- and $-0-
for the three months ended September 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 nine months ended September 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 Integrated Energy, Inc. is taxed in the U.S. and has a net
operating loss approximately of $389,000 and $-0- for the nine months ended
September 30, 2009 and 2008, respectively; . and approximately $183,000 and
$-0- for the three months ended September 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,
  15
  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 Nine Months  Ended September 30,2009
                          
                          2008(pro
      forma)
                          
                          (pro
      forma)Net
      income before income taxes
                          
                          $
                          26,294,718
                          
                          
                          $
                          22,081,413Tax
      provision
                          
                          
                          (6,573,680
                          )
                          
                          
                          (5,520,353
                          )Net
      income
                          
                          $
                          19,721,038
                          
                          
                          $
                          16,561,060
 
 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
September 30, 2009 and December 31, 2008 were $2,293,935and $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 was obligated under two short term loans from commercial banks in the
PRC. The first loan 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 loan was paid off at
September 30, 2009.
  The
second loan 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. This loan was paid off at
September 30, 2009.
 
 At
September 30, 2009, automobile loan carried a balance of $4,724.
  16
  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).
  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. The lease term
has subsequently been extended to December 30, 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 the thirty year lease payments approximately $2,635,000 (RMB
18,000,000).
  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). The Company is required to
pay in advance of 80% of the sum of the twenty-nine year lease payments
approximately $6,797,000 (RMB 46,400,000) upon executing the lease agreement,
and pay the remaining 20% of the sum of the twenty-nine year lease payments
approximately $1,699,000 (RMB 11,600,000) 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:
  17
 
 Years
      Ending December 31,
                      
                      Amount2010
                      
                      $
                      2,468,0002011
                      
                      
                      2,351,0002012
                      
                      
                      2,351,0002013
                      
                      
                      2,338,0002014
                      
                      
                      2,198,000Years
      thereafter
                      
                      
                      24,023,000Total
                      
                      $
                      35,729,000
  Total
rental expense for the nine months ended September 30, 2009 and 2008 amounted to
approximately $1,606,000 and $724,000, respectively; and approximately $595,000
and $536,000 for the three months ended September 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 contact was renewed for
another year. The Company pays RMB 60 per ton for transporting the raw material
from the suppliers to its various oil extract plants, and pays a range of RMB 30
/ ton – RMB 100 / ton for transporting the raw oil from its various
oil extract plants to its bio-diesel production facility. For the
nine months ended September 30, 2009, the shipping cost paid to this
transportation company was approximately $543,000; and approximately $224,000
for the three months ended September 30, 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:
 
 18
 
 For
      the Nine Months
                                  Ended, September 30
                                
                                
                                For
      the Three Months
                                  Ended, September 302009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008Net
      income
                                
                                $
                                25,901,434
                                
                                
                                $
                                22,067,368
                                
                                
                                $
                                9,873,448
                                
                                
                                $
                                9,107,725Weighted
      average shares outstanding - basic
                                
                                
                                27,287,040
                                
                                
                                
                                25,454,545
                                
                                
                                
                                27,287,040
                                
                                
                                
                                25,454,545Effect
      of dilutive securities:Convertible
      preferred stock
                                
                                
                                6,893,259
                                
                                
                                
                                4,545,455
                                
                                
                                
                                6,893,259
                                
                                
                                
                                4,545,455Unexercised
      warrants
                                
                                
                                837,633
                                
                                
                                
                                2,584,227
                                
                                
                                
                                1,577,133
                                
                                
                                
                                3,227,052Weighted
      average shares outstanding - diluted
                                
                                
                                35,017,932
                                
                                
                                
                                32,584,227
                                
                                
                                
                                35,757,432
                                
                                
                                
                                33,227,052Earnings
      per share - basic
                                
                                $
                                0.95
                                
                                
                                $
                                0.87
                                
                                
                                
                                0.36
                                
                                
                                
                                0.36Earnings
      per share – diluted
                                
                                $
                                0.74
                                
                                
                                $
                                0.68
                                
                                
                                
                                0.28
                                
                                
                                
                                0.27
 
 14.  STATUTORY
RESERVES
  Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company is
required to maintain one statutory reserve by appropriating from its after-tax
profit before declaration or payment of dividends. The statutory reserve
represents restricted retained earnings.
 
 Surplus reserve
fund
  The
Company is required to transfer 10% of its net income, as determined under PRC
accounting rules and regulations, to a statutory surplus reserve fund until such
reserve balance reaches 50% of the Company’s registered capital.
  The
surplus reserve fund is non-distributable, other than during liquidation, and
can be used to fund previous years’ losses, if any, and may be utilized for
business expansion or converted into share capital by issuing new shares to
existing shareholders in proportion to their shareholding or by increasing the
par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the registered
capital.
 
 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.
  19
  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 the financial accounting standard, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and the financial accounting standard,
“Application of Issue 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,, 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 the financial accounting
standard.
 
 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.
 
 On July
1, 2009, the investor converted 350,000 shares of Series B Convertible Preferred
stock to 350,000 shares of common stock.
 
 Following
is a summary of warrant activity for the nine months ended September 30,
2009:
  Number of
                              Shares
                            
                            Average
                              Exercise
                              Price per Share
                            
                            Weighed
                              Average
                              Remaining
                              Contractual
                              Term in YearsOutstanding
      at December 31, 2008
                            
                            3,977,273
                            
                            $
                            3.80
                            
                            3.70Exercisable
      at December 31, 2008
                            
                            3,977,273
                            
                            
                            -
                            
                            -Granted
                            
                            30,000
                            
                            
                            6.00
                            
                            1.87Exercised
                            
                            -
                            
                            
                            -
                            
                            -Forfeited
                            
                            -
                            
                            
                            -
                            
                            -Outstanding
      at September 30, 2009
                            
                            4,007,273
                            
                            $
                            3.82
                            
                            3.68Exercisable
      at September 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.
  20
 
 As
of 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.  As of
September 30, 2009, the Company had satisfied the requirements of the escrow
agreement and annulled the escrow account.
 
 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 $140,000 of
compensation expense for these options for the nine months ended September 30,
2009 and $101,000 for the six months ended June 30, 2009.
 
 On
September 10, 2009, the Company issued stock purchase options to financial
advisory consultant to purchase 310,320 shares of common stock and to investor
relations consultant to purchase 206,880 shares of common stock. The exercise
prices of both stock purchase options are at $4.50 per share. The stock purchase
options are remunerations for the financial advisory and investor relations
consulting services provided in the past year. The options were accounted for
using the fair value method. The options expire in one year from and are
immediately vested upon the option issuance date. The Company recognized $86,000
of compensation expense for these options for the three months ended September
30, 2009.
 
 Following
is a summary of stock option activity for the nine months ended September
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
                                  
                                  9.13
                                  
                                  
                                  -Issued
                                  
                                  517,200
                                  
                                  
                                  4.50
                                  
                                  1.00Exercised
                                  
                                  -
                                  
                                  
                                  -
                                  
                                  -Cancelled
                                  
                                  -
                                  
                                  
                                  -
                                  
                                  -Outstanding
      at September 30, 2009
                                  
                                  557,200
                                  
                                  $
                                  4.46
                                  
                                  1.53
                                  
                                  $
                                  1,546,728Exercisable
      at September 30, 2009
                                  
                                  547,200
                                  
                                  
                                  4.47
                                  
                                  1.39
                                  
                                  $
                                  1,514,328
 
 Following
is a summary of non-vested options as of September 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
                  
                  
                  10,000
                  
                  
                  $
                  4.00
 
 21
 
 18.
SEGMENT REPORTING
  The
financial accounting standard  “Disclosures about Segments of an Enterprise
and Related Information” requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products, services,
and channels.  The management has determined that the Company has
three operating segments as defined by the financial accounting standard:
wholesale distribution of finished oil and heavy oil products, production and
sale of biodiesel, and operation of retail gas stations.
 
 For
the three months ended September 30, 2009 and 2008
  Wholesale
                    Distribution
      of
                    Finished
      Oil
                    and Heavy Oil
                  
                  
                  Production
      and
                    Sale of
                    Biodiesel
                  
                  
                  Operation
      of
                    Retail
      Gas
                    Stations
                  
                  
                  Total2009
      (Unaudited)Sales
                  
                  $
                  42,734,076
                  
                  
                  $
                  14,941,786
                  
                  
                  $
                  10,225,148
                  
                  
                  $
                  72,401,010Cost
      of goods sold
                  
                  
                  42,099,609
                  
                  
                  
                  10,538,597
                  
                  
                  
                  8,906,782
                  
                  
                  
                  61,544,988Gross
      profit
                  
                  
                  5,134,467
                  
                  
                  
                  4,403,189
                  
                  
                  
                  1,318,366
                  
                  
                  
                  10,856,022Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  966,604Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,859,418Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14,030Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,873,448Segment
      assets
                  
                  
                  82,004,195
                  
                  
                  
                  20,270,489
                  
                  
                  
                  18,540,992
                  
                  
                  
                  120,815,676Capital
      expenditures
                  
                  
                  113,470
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  113,4702008
      (Unaudited)Sales
                  
                  $
                  34,206,001
                  
                  
                  $
                  18,415,938
                  
                  
                  $
                  10,269,406
                  
                  
                  $
                  62,891,345Cost
      of goods sold
                  
                  
                  31,290,607
                  
                  
                  
                  13,106,221
                  
                  
                  
                  9,343,442
                  
                  
                  
                  53,740,270Gross
      profit
                  
                  
                  2,915,394
                  
                  
                  
                  5,309,717
                  
                  
                  
                  925,964
                  
                  
                  
                  9,151,075Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  390,950Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,760,125Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  347,600Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,107,725Segment
      assets
                  
                  
                  39,381,535
                  
                  
                  
                  23,410,821
                  
                  
                  
                  9,700,860
                  
                  
                  
                  72,493,216Capital
      expenditures
                  
                  
                  8,241
                  
                  
                  
                  153,908
                  
                  
                  
                  -
                  
                  
                  
                  162,149
 
 22
 
 For
the nine months ended September 30, 2009 and 2008
 
 Wholesale
                    Distribution
      of
                    Finished
      Oil
                    and Heavy Oil
                  
                  
                  Production
      and
                    Sale of Biodiesel
                  
                  
                  Operation
      of
                    Retail
      Gas
                    Stations
                  
                  
                  Total2009
      (Unaudited)Sales
                  
                  $
                  129,797,293
                  
                  
                  $
                  40,137,252
                  
                  
                  $
                  26,369,372
                  
                  
                  $
                  196,303,917Cost
      of goods sold
                  
                  
                  116,273,857
                  
                  
                  
                  29,194,733
                  
                  
                  
                  22,826,434
                  
                  
                  
                  168,295,024Gross
      profit
                  
                  
                  13,523,436
                  
                  
                  
                  10,942,519
                  
                  
                  
                  3,542,938
                  
                  
                  
                  28,008,893Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,163,179Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,845,714Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  55,720Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,901,434Segment
      assets
                  
                  
                  82,004,195
                  
                  
                  
                  20,270,489
                  
                  
                  
                  18,540,992
                  
                  
                  
                  120,815,676Capital
      expenditures
                  
                  
                  204,646
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  204,6462008
      (Unaudited)Sales
                  
                  $
                  99,455,031
                  
                  
                  $
                  41,778,994
                  
                  
                  $
                  15,644,972
                  
                  
                  $
                  156,878,997Cost
      of goods sold
                  
                  
                  90,489,928
                  
                  
                  
                  29,551,668
                  
                  
                  
                  14,093,375
                  
                  
                  
                  134,134,971Gross
      profit
                  
                  
                  8,965,103
                  
                  
                  
                  12,227,326
                  
                  
                  
                  1,551,597
                  
                  
                  
                  22,744,026Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  962,445Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21,781,581Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  285,787Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  22,067,368Segment
      assets
                  
                  
                  39,381,535
                  
                  
                  
                  23,410,821
                  
                  
                  
                  9,700,860
                  
                  
                  
                  72,493,216Capital
      expenditures
                  
                  
                  161,938
                  
                  
                  
                  1,038,414
                  
                  
                  
                  -
                  
                  
                  
                  1,200,352
 
 19.
SUBSEQUENT EVENT
 
 Effective
this quarter, the Company implemented Statement of financial accounting
standards, Subsequent
Events,. 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 the financial accounting
standard 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
November 4, 2009, the Company completed a public equity offering of 5,000,000
common shares at a price of $5.75 per share, raising approximately $28.8 million
before offering costs. We paid approximately $1.6 million in underwriting
commissions and approximately $0.5 million in offering expenses. There is an
over-allotment option of 750,000 shares exercisable within one month from the
date of the completion of the public offering.
 
 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)     
Productsrisk
  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.
  23
  (c)     
Exchange risk
 
 The
Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate could
fluctuate depending on changes in the political and economic environments
without notice.
  (d) Political
risk
  Currently,
the PRC is in a period of growth and is openly promoting business development in
order to bring more business into the PRC. Additionally, the PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company’s ability to operate
in the PRC could be affected.
 
 (e)     
Key personnel
risk
  The
Company’s future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
  24




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




Forward
Looking Statements
  This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon beliefs of, and information currently available to, the Company’s
management as well as estimates and assumptions made by Company’s management.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof.
When used in the filings, the words “anticipate”, “believe”, “estimate”,
“expect”, “future”, “intend”, “plan”, or the negative of these terms and similar
expressions as they relate to the Company or the Company’s management identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors (including the risks contained in the section of
this report entitled “Risk Factors”) relating to the Company’s industry, the
Company’s operations and results of operations, and any businesses that the
Company may acquire. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may differ significantly from those anticipated, believed, estimated,
expected, intended, or planned.
  Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking statements to conform these statements to
actual results. Readers are urged to carefully review and consider the various
disclosures made throughout the entirety of this quarterly report, which
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, results of operations, and
prospects.
  Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable
based upon information available to us at the time that these estimates,
judgments and assumptions are made. These estimates, judgments and assumptions
can affect the reported amounts of assets and liabilities as of the date of the
financial statements as well as the reported amounts of revenues and expenses
during the periods presented. Our financial statements would be affected to the
extent there are material differences between these estimates and actual
results. In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require management’s judgment in its
application. There are also areas in which management’s judgment in selecting
any available alternative would not produce a materially different
result.
 
 OVERVIEW
  The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
operations and our present business environment. MD&A is provided as a
supplement to—and should be read in conjunction with—our consolidated financial
statements and the accompanying notes thereto contained in "Item 1.
Financial Statements of this report. This overview summarizes the MD&A,
which includes the following sections:
  • Our Business—a general
overview of our three business segments 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.
  25
 
 • 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 a
leading non-state-owned integrated energy company in China engaged in three
business segments, wholesale distribution of finished oil and heavy oil products
through certain contractual agreements, production and sale of bio-diesel, and
operation of retail gas stations..
 
 We now
operate four oil depots located in Xi’an, Shaanxi Province, access to a 2.65
kilometer special transportation rail track and one 100,000 ton bio-diesel
production plant located in Tongchuan, Shaanxi Province, China. Our major market
is China. Currently, our products are sold in 14 provinces and municipalities of
China covering Shaanxi Province, Henan Province, Hebei Province, Shandong
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.
  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).
  26
 
 On June
1, 2009, the NDRC increased the prices of gasoline and diesel by RMB 400 or $59
per ton or 7.0% and RMB 400 or $59 per ton or 8.0%, 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 9.8% 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.
 
 On
September 2, 2009, the NDRC decreased the prices of gasoline and diesel by RMB
300 or $44 per ton.
 
 On
September 30, 2009, the NDRC decreased the prices of gasoline and diesel by RMB
190 or $27.80 per ton.
 
 On
November 10, the NDRC increased the prices of gasoline and diesel by RMB 480 or
$70.32 per ton.
 
 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 have been eight oil price adjustments to
date 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 gas 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 located in Shaanxi Province cannot currently reach.
We plan to strengthen our outreach in certain key distribution areas. We also
plan to add another three retail gas stations through acquisition or lease,
which we believe will benefit our overall distribution profit
margins.
  We also
plan to expand our current bio-diesel production capacity of 100,000 tons to
150,000 tons, and have begun constructions to increase this capacity in the
third quarter of 2009. We anticipate $15 million in capital expenditures in
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.
We continue pursuing strategic acquisition that will quickly provide financial
benefits to us.
  Management
believes the increase in sales volume from these initiatives will not only
offset the impact from fluctuation in fuel pricing, but also favorably
impact overall profits and cash flow.
  On
November 4, 2009, the Company completed a public equity offering of 5,000,000
common shares at a price of $5.75 per share, raising approximately $28.8 million
before offering costs. We paid approximately $1.6 million in underwriting
commissions and approximately $0.5 million in offering expenses. There is an
over-allotment option of 750,000 shares exercisable within one month from the
date of the completion of the public offering.
  27
 
 Basis
of Presentations
  Our
financial statements are prepared in accordance with the U.S. GAAP and the
requirements of Regulation S-X promulgated by the Securities and Exchange
Commission.
 
 Critical
Accounting Policies and Estimates
  Accounts
Receivable
  Our
policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves.  Based on historical
collections, no allowance was deemed necessary at September 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, “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. 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.
  28
  Foreign
Currency Translation
  Our
functional currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars (“USD”) as the reporting
currency. Assets and liabilities are translated at the exchange rate in effect
at the balance sheet date. Revenues and expenses are translated at the average
rate of exchange prevailing during the reporting period. Translation adjustments
caused by different exchange rates from period to period are included as a
component of stockholders’ equity as “Accumulated other comprehensive income.”
Gains and losses resulting from foreign currency transactions are included in
income. There has been no significant fluctuation in exchange rate for the
conversion of RMB to USD after the balance sheet date.
  Income
Tax Recognition
  We
account for income taxes under Statement of Financial Accounting Standards,
“Accounting for Income Taxes”. “Accounting for Income Taxes” requires the
recognition of deferred tax assets and liabilities for both the expected impact
of differences between the financial statements and the tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from tax
losses and tax credit carry forwards. “Accounting for Income
Taxes” additionally requires the establishment of a valuation allowance to
reflect the likelihood of realization of deferred tax assets.
  Xi’an
Baorun Industrial has obtained income tax exemption for the years from 2004 to
the end of 2010, due to the fact that it uses waste gas, water and residue in
the production of its products. We believe that this exemption is in effect for
all periods presented. Currently, the PRC is in a period of growth and is openly
promoting business development in order to bring more business into the PRC. Tax
exemption is one of the many methods used to promote such business development.
If the exemption should be rescinded for future periods, Xi’an Baorun Industrial
would be subjected to tax liabilities.
  In
connection with the Share Exchange Agreement dated October 23, 2007, Redsky
Industrial and Xi’an Baorun Industrial, two PRC companies, entered into a series
of contracts whereby Redsky Industrial exercises significant control over Xi’an
Baorun Industrial, including the right to receive 100% of the net income
generated by Xi’an Baorun Industrial. While, as noted above, Xi’an Baorun
Industrial is exempt from income tax for the years from 2004 through 2010,
Redsky Industrial is not exempt from tax in those periods and is obligated for
applicable PRC taxes under PRC tax laws. We account for all income taxes in
accordance with “Accounting for Income Taxes” and “Accounting for Uncertainty in
Income Taxes,”
 
 We
believe that the series of contracts entered into between Xi’an Baorun
Industrial and Redsky Industrial do not constitute taxable income for the
purposes of Redsky Industrial. Since commencement of these series of contracts,
Xi’an Baorun Industrial has not remitted any income to Redsky Industrial, nor
has Redsky Industrial demanded any remittance of income, nor is remittance
expected in the future, as Xi’an Baorun Industrial is anticipating to use its
undistributed earnings for future bio energy development as was anticipated when
it obtained its original tax exemption. We have examined our tax position and
have determined that our tax position with regards to both these entities is in
compliance with applicable PRC tax laws. Pursuant to the Financial Accounting
Standard, we have determined that we will reinvest indefinitely our earnings to
the biodiesel production facility and biodiesel production technology, and
accordingly no accrual of deferred tax liabilities was required as of December
31, 2007 and 2008. We have also analyzed the status of Redsky Industrial and
have determined that based on the aforementioned series of contracts, if Redsky
Industrial should be sold, dissolved or otherwise disposed of, the obligations
of Xi’an Baorun Industrial would be terminated under the series of contracts,
including Redsky Industrial’s right to 100% of Xi’an Baorun Industrial’s net
income. In addition, in accordance with “Accounting for Uncertainty in Income
Taxes”, we have examined our tax position in the context of “Accounting for
Contingencies.”  Accounting for Uncertainty in Income Taxes is an
accounting requirement that discusses tax issues that have an element of
uncertainty. In accordance with “Accounting for Contingencies”, we have
determined that it is probable that our tax position with regards to both Redsky
Industrial and Xi’an Baorun Industrial is correct. Accordingly, no deferred tax
liability has been provided for.
  29
  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 nine months ended
                        September
      30,
                      
                      
                      For
      the three months ended
                        September
      30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Net
      income before income taxes
                      
                      $
                      26,294,718
                      
                      
                      $
                      22,081,413
                      
                      
                      $
                      9,873,448
                      
                      
                      $
                      9,107,725Tax
      provision
                      
                      
                      (6,573,680
                      )
                      
                      
                      (5,520,353
                      )
                      
                      
                      (2,468,362
                      )
                      
                      
                      (2,276,931
                      )Net
      income
                      
                      $
                      19,721,038
                      
                      
                      $
                      16,561,060
                      
                      
                      $
                      7,405,086
                      
                      
                      $
                      6,830,794
 
 Consolidation of
Variable Interest Entities
 
 VIE’s are
entities that lack one or more voting interest entity characteristics. The
Company consolidates VIEs in which it is the primary beneficiary of its economic
gains or losses. The FASB has issued a Financial Accounting Standard (Revised
December 2004), Consolidation of Variable Interest Entities. Consolidation of
Variable Interest Entities clarifies the application of Accounting Research
Bulletin, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. It
separates entities into two groups: (1) those for which voting interests are
used to determine consolidation and (2) those for which variable interests are
used to determine consolidation. Consolidation of Variable Interest
Entities clarifies how to identify a variable interest entity and how to
determine when a business enterprise should include the assets, liabilities,
non-controlling interests and results of activities of a variable interest
entity in its consolidated financial statements.
 
 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.
  30
 
 Results
of Operations
 
 Operations
Results for the Three Months Ended September 30, 2009 and 2008
  Wholesale
                    Distribution
      of
                    Finished
      Oil
                    and Heavy Oil
                  
                  
                  Production
      and
                    Sale of
                    Biodiesel
                  
                  
                  Operation
      of
                    Retail
      Gas
                    Stations
                  
                  
                  Total2009
      (Unaudited)Sales
                  
                  $
                  47,234,076
                  
                  
                  $
                  14,941,786
                  
                  
                  $
                  10,225,148
                  
                  
                  $
                  72,401,010Cost
      of goods sold
                  
                  
                  42,099,609
                  
                  
                  
                  10,538,597
                  
                  
                  
                  8,906,782
                  
                  
                  
                  61,544,988Gross
      profit
                  
                  
                  5,134,467
                  
                  
                  
                  4,403,189
                  
                  
                  
                  1,318,366
                  
                  
                  
                  10,856,022Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  996,604Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,859,418Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14,030Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,873,448Segment
      assets
                  
                  
                  82,004,195
                  
                  
                  
                  20,270,489
                  
                  
                  
                  18,540,992
                  
                  
                  
                  120,815,676Capital
      expenditures
                  
                  
                  113,470
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  113,4702008
      (Unaudited)Sales
                  
                  $
                  34,206,001
                  
                  
                  $
                  18,415,938
                  
                  
                  $
                  10,269,406
                  
                  
                  $
                  62,891,345Cost
      of goods sold
                  
                  
                  31,290,607
                  
                  
                  
                  13,106,221
                  
                  
                  
                  9,343,442
                  
                  
                  
                  53,740,270Gross
      profit
                  
                  
                  2,915,394
                  
                  
                  
                  5,309,717
                  
                  
                  
                  925,964
                  
                  
                  
                  9,151,075Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  390,950Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,760,125Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  347,600Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,107,725Segment
      assets
                  
                  
                  39,381,535
                  
                  
                  
                  23,410,821
                  
                  
                  
                  9,700,860
                  
                  
                  
                  72,493,216Capital
      expenditures
                  
                  
                  8,241
                  
                  
                  
                  153,908
                  
                  
                  
                  -
                  
                  
                  
                  162,149
 
 The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
 
 Three Months ended,
                                            September 30, 2009
                                          
                                          
                                          Three Months ended,
                                            September 30, 2008$
                                          
                                          
                                          % of
                                            Sales
                                          
                                          
                                          $
                                          
                                          
                                          % of
                                            SalesNet
      sales
                                          
                                          
                                          72,401,010
                                          
                                          
                                          
                                          100.0
                                          %
                                          
                                          
                                          62,891,345
                                          
                                          
                                          
                                          100.0
                                          %Cost
      of good sold
                                          
                                          
                                          61,544,988
                                          
                                          
                                          
                                          85.0
                                          %
                                          
                                          
                                          53,740,270
                                          
                                          
                                          
                                          85.5
                                          %Gross
      profit
                                          
                                          
                                          10,856,022
                                          
                                          
                                          
                                          15.0
                                          %
                                          
                                          
                                          9,151,075
                                          
                                          
                                          
                                          14.5
                                          %Total
      operating expenses
                                          
                                          
                                          996,604
                                          
                                          
                                          
                                          1.4
                                          %
                                          
                                          
                                          390,950
                                          
                                          
                                          
                                          0.6
                                          %Income
      from Operation
                                          
                                          
                                          9,859,418
                                          
                                          
                                          
                                          13.6
                                          %
                                          
                                          
                                          8,760,125
                                          
                                          
                                          
                                          13.9
                                          %Other
      income (expenses)
                                          
                                          
                                          (14,030
                                          )
                                          
                                          
                                          -
                                          %
                                          
                                          
                                          347,600
                                          
                                          
                                          
                                          0.6
                                          %Net
      income
                                          
                                          
                                          9,873,448
                                          
                                          
                                          
                                          13.6
                                          %
                                          
                                          
                                          9,107,725
                                          
                                          
                                          
                                          14.5
                                          %
 
 Sales. Net sales for the
three months ended September 30, 2009 were approximately $72.4 million compared
to $62.9 Million in the same period in 2008, an increase of $9.5 million,
or 15.1%. The increase was mainly due to strong market demand for finished oil
and heavy oil products and sales growth generated by the gas stations. Sales
from wholesale distribution for the three months ended September 30, 2009 was
$47.2 million, compared to $34.2 million in the same period of 2008, an increase
of $13 million, or 38.0%. Wholesale distribution volume increased by 25,000 tons
or 67.4% from the same period in 2008, as a result of increase of sales to our
existing customers to support their business growth and increase the number of
our distributors and end customers. Sales from production and sale of biodiesel
segment for the three months ended September 30, 2009 was 14.9 million, compared
to $18.4 million in the same period of 2008. Sales volume of biodiesel increased
by 728 ton or 3.4%. compared to the same period of 2008.  However,
average selling price of biodiesel decreased by approximately 17% from the same
period in 2008. Sales from our retail gas station for the three months ended
September 30, 2009 was $10.2 million, compared to $10.3 million in the same
period of 2008.  Sales volume of gas stations increased by 1,243 tons
or 11.6% from the same period in 2008. However, average selling price of retail
gas station decreased by approximately 12.1% from the same period in
2008.
  31
 
 Cost ofgoodssold. Cost of sales for the
three months ended September 30, 2009 was approximately $61.5 million
compared to $53.7 million in the same period of 2008, an increase of $7.8
million, or 14.5%.  The increase in cost of sales was attributable to and
in line with an increase in production and sales activities during the third
quarter of 2009. Cost of sales as a percentage of sales was approximately 85.0%
for the third quarter of 2009 and 85.5% for the same period in
2008.  For our wholesales distribution of finished oil and heavy oil
products, cost of good sold as a percentage of sales for the three months ended
September 30, 2009 and 2008 were 81.9% and 91.5%, respectively. The decrease as
a percentage of sales was due to an increase of 6,000 tons of heavy oil products
with better margin and our success in sourcing and developing new suppliers. For
the production and sale of biodiesel, cost of goods sold as a percentage of
sales for the three months ended September 30, 2009 and 2008 were 70.5% and
71.2%, respectively. For our retail gas station, cost of goods sold as a
percentage of sales for three months ended September 30, 2009 and 2008 were
87.1% and 91%, respectively. The decrease as a percentage of sales in our retail
gas station was attributable to improvement of efficiency of gas station
operations.
 
 Gross profit. Gross profit
was approximately $10.9 million for the three months ended September 30, 2009 as
compared to approximately $9.2 million for the same period in 2008, representing
gross margins of approximately 15.0% and 14.5%, respectively.  For the
three months ended September 30, 2009, the gross profit margin for
wholesale distribution of finished oil and heavy oil products was approximately
10.9%, production and sales of biodiesel was approximately 29.5%, and the gross
profit margin for operation of retail gas stations was approximately 12.9%,
compared to 8.2%, 28.8% and 9.0%, respectively, in the same period of
2008.  The increase in gross margin of wholesale distribution,
production and sale of biodiesel, and retail gas station was attributable to
favorable frequent pricing adjustments by the NDRC reflecting global oil
pricing.
  Selling,general and administrative
expenses. Selling, general and administrative expenses for the three
months ended September 30, 2009 were approximately $1.0 million compared to $0.4
million for the same period in 2008, an increase of $0.6 million or 150%. This
increase was mainly attributable to approximately $506,000 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 1.4% and
0.6% for the three months ended September 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
financial advisory services. We also expect to have an increase in other general
and administrative expenses in future reporting periods, as our business
expands.
  Income from operations.
Income from operations for the three months ended September 30, 2009 was $9.9
million, compared to $8.8 million in the same period of 2008.  Income
from operations as a percentage of sales for the three months ended September
30, 2009 and 2008 were 13.6% and 13.9%, respectively. The decrease as a
percentage of sales was attributable to additional selling, general and
administrative expense related to us becoming a public company in the
U.S..
 
 Non-operating income
(expenses). Non-operating income
consists mainly of governmental subsidies received in respect of our biodiesel
production.  The subsidy varies year to year depending upon available
government funding. We received insignificant government subsidy for the three
months ended September 30, 2009, compared to receipt of $0.4 million of
government subsidy in the same period of 2008. Non-operating expenses mainly
consists of interest expenses and bank service charges.
  32
 
 Net income. Net income for
the three months ended September 30, 2009 was $9.9 million compared to $9.1
million in the same period in 2008, an increase of
$0.8 million.  Although sales grew by 15.1%, net income only grew
by 8.8% quarter on quarter due to the additional costs we incurred as a result
of being a U.S. publicly traded company. Our net margin for the three months
ended September 30, 2009 and 2008 were 13.6% and 14.5%,
respectively.
 
 Comparison
of Nine Months Ended September 30, 2009 and 2008
 
 Wholesale
                    Distribution
      of
                    Finished
      Oil and
                    Heavy Oil
                  
                  
                  Production
      and
                    Sale of Biodiesel
                  
                  
                  Operation
      of
                    Retail
      Gas
                    Stations
                  
                  
                  Total2009
      (Unaudited)Sales
                  
                  $
                  129,797,293
                  
                  
                  $
                  40,137,252
                  
                  
                  $
                  26,369,372
                  
                  
                  $
                  196,303,917Cost
      of goods sold
                  
                  
                  116,273,857
                  
                  
                  
                  29,194,733
                  
                  
                  
                  22,826,434
                  
                  
                  
                  168,295,024Gross
      profit
                  
                  
                  13,523,436
                  
                  
                  
                  10,942,519
                  
                  
                  
                  3,542,938
                  
                  
                  
                  28,008,893Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,163,179Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,845,714Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  55,720Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,901,434Segment
      assets
                  
                  
                  82,004,195
                  
                  
                  
                  20,270,489
                  
                  
                  
                  18,540,992
                  
                  
                  
                  120,815,676Capital
      expenditures
                  
                  
                  204,646
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  204,6462008
      (Unaudited)Sales
                  
                  $
                  99,455,031
                  
                  
                  $
                  41,778,994
                  
                  
                  $
                  15,644,972
                  
                  
                  $
                  156,878,997Cost
      of goods sold
                  
                  
                  90,489,928
                  
                  
                  
                  29,551,668
                  
                  
                  
                  14,093,375
                  
                  
                  
                  134,134,971Gross
      profit
                  
                  
                  8,965,103
                  
                  
                  
                  12,227,326
                  
                  
                  
                  1,551,597
                  
                  
                  
                  22,744,026Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  962,445Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21,781,581Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  285,787Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  22,067,368Segment
      assets
                  
                  
                  39,381,535
                  
                  
                  
                  23,410,821
                  
                  
                  
                  9,700,860
                  
                  
                  
                  72,493,216Capital
      expenditures
                  
                  
                  161,938
                  
                  
                  
                  1,038,414
                  
                  
                  
                  -
                  
                  
                  
                  1,200,352
 
 The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
  Nine
      Months ended,
                          September
      30, 2009
                        
                        
                        Nine
      Months ended,
                          September
      30, 2008$
                        
                        
                        % of
                          Sales
                        
                        
                        $
                        
                        
                        % of
                          SalesNet
      sales
                        
                        
                        196,303,917
                        
                        
                        
                        100.0
                        %
                        
                        
                        156,878,997
                        
                        
                        
                        100.0
                        %Cost
      of sales
                        
                        
                        168,295,024
                        
                        
                        
                        85.7
                        %
                        
                        
                        134,134,971
                        
                        
                        
                        85.5
                        %Gross
      profit
                        
                        
                        28,008,893
                        
                        
                        
                        14.3
                        %
                        
                        
                        22,744,026
                        
                        
                        
                        14.5
                        %Total
      operating expenses
                        
                        
                        2,163,179
                        
                        
                        
                        1.1
                        %
                        
                        
                        962,445
                        
                        
                        
                        0.6
                        %Income
      from Operation
                        
                        
                        25,845,714
                        
                        
                        
                        13.2
                        %
                        
                        
                        21,781,581
                        
                        
                        
                        13.9
                        %Other
      income (expenses), net
                        
                        
                        55,720
                        
                        
                        
                        -
                        %
                        
                        
                        285,787
                        
                        
                        
                        0.2
                        %Net
      income
                        
                        
                        25,901,434
                        
                        
                        
                        13.2
                        %
                        
                        
                        22,067,368
                        
                        
                        
                        14.1
                        %
  33
 
 Operations
Results for the Nine Months Ended September 30, 2009
 
 Sales. Net sales for the
nine months ended September 30, 2009 were approximately $196.3 million compared
to $156.9 Million in the same period in 2008, an increase of $39.4 million,
or 25.1%. The increase was mainly attributable to the growths in wholesale
distribution and retail gas station segments. 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 the existing sales territories and our existing
customers. The number of our customer in our wholesale distribution
segment has grown from 936 in 2008 to over 1,170 in 2009.  For
the nine months ended September 30, 2009, sales from wholesale distribution of
finished oil and heavy oil products was $129.8 million compared to $99.5 million
in the same period of 2008, an increase of $30.3 million or 30.5%. The sales
volume of wholesale distribution of finished oil and heavy oil products
increased by 75,000 tons or 64.5% from the same period in 2008.  For
the nine months ended September 30, 2009, sales from our retail gas station
segment was $26.4 million, compared to $15.6 million in the same period of 2008,
an increase of $10.8 million or 69.2%.as a result of two additional fully
operational gas stations and an increase in sale volume per gas
station. For the nine months ended September 30, 2009, sales from
production and sales of biodiesel was $40.1 million compared to $41.8 million in
the same period of 2008.  The sales volume of production and sales of
biodiesel increased by 13,000 ton or 28.8% from the same period in
2008.  However the average selling price decreased by 15.1% from the
same period in 2008 and as a result, net sales fell by 4.4% from the same period
of 2008.
  Cost ofgoodssold. Cost of sales fortheninemonths endedSeptember30, 2009was approximately $168.3million compared to$134.1millioninthe same period of 2008, an increaseof $34.2million, or25.5%.The increase in cost of sales was
attributable toand in
line withan increase in
production and sales activities duringthe firstninemonths of 2009. Cost of sales as a percentage of
sales was approximately85.7% fortheninemonths of 2009relatively stable, compared
to85.5% forthe same period in 2008.For wholesales distribution of
finished oil and heavy oil products, cost of goodssold as a percentage of sales for the
nine months ended September 30, 2009 and 2008 were 89.6% and 91.0%, respectively. For
production and sale of biodiesel, cost of goods sold as a percentage of sales
for the nine months ended September 30, 2009 and 2008 were 72.7% and 70.7%,
respectively. The increase as a percentage of sales in production
andsale of biodiesel was attributable to
lower average selling price in 2009. For our retail gas station operation, cost
of goods sold as a percentage of sales for the nine months ended September 30,
2009 and 2008 were 86.6% and 90.1%, respectively. The decrease as a percentage of
salesof our retail gas
station was attributable to operational efficiency improvements and sales volume
increase per gas station.
  Gross profit. Gross profit
was approximately $28.0 million for the nine months ended September 30, 2009 as
compared to approximately $22.7 million in the same period of 2008, representing
gross margins of approximately 14.3% and 14.5%, respectively.  For the
nine months ended September 30, 2009, the gross profit margin of wholesale
distribution of finished oil and heavy oil products was 10.4%, production and
sale of biodiesel was 27.3%, and operation of retail station was 13.4%, compared
9.0%, 29.3%, and 9.9%, respectively, in the same period of 2008.  The
increase in gross margin of wholesale distribution and retail gas station was
attributed to favorable frequent pricing adjustments by the NDRC reflecting
global oil pricing.  The decrease in the gross margin of biodiesel was
attributed to the lower selling price of diesel oil compared to the same period
in 2008.  We expect our overall gross margin to improve with upwards
pricing adjustments in the China domestic market.
  Selling, general and administrative
expenses. Selling, general and administrative expenses for the nine
months ended September 30, 2009 were approximately $2.2 million compared to $1.0
million for the same period in 2008, an increase of $1.2 million or 120.0%. This
increase was mainly attributable to approximately $1.0 million 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 $200,000 as a result of business growth and
expansion of distribution channels and territories.  Total operating
expenses as a percentage of sales was 1.1% and 0.6% for the nine months ended
September 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 financial advisory services. We also
expect to have an increase in other general and administrative expenses in
future reporting periods, as our business expands.
  34
  Income from Operations.Income from operations
for the nine months ended September 30, 2009 was $25.8 million compared to $21.8
million in the same period of 2008. Income from operations as a percentage of
sales for the nine months ended September 30, 2009 and 2008 were 13.2% and
13.9%, respectively. The decrease as a percentage of sales was attributable to
additional selling, general and administrative expenses related to us becoming a
public company in the U.S..
 
 Non-operating income
(expenses).
Non-operating income consists mainly of governmental subsidies received in
respect of our biodiesel production. For the nine months ended September 30,
2009, we received insignificant government subsidy, compared to receipt of $0.4
million of government subsidy in the same period of 2008. Non-operating expenses
mainly consists of interest expenses and bank service charges.
 
 Net income. The net income
for the nine months ended September 30, 2009 was
$26.0 million compared to $22.1 million in the same period in
2008, an increase of $3.9 million or 17.7%. For the nine months ended September
30, 2009, although sales grew by 25.1% from the same period of 2008, net income
only grew by 17.2% due to the additional costs we incurred as a result of being
a U.S. public traded company.  Our net margin for the nine months
ended September 30, 2009 and 2008 were 13.2% and 14.1%,
respectively.
 
 Liquidity
and Capital Resources
  As of
September 30, 2009 and December 31, 2008, we had cash and cash equivalents of
approximately $40.1 million and $23.1 million, respectively. At September
30, 2009, current assets were approximately $95.5 million and current
liabilities were approximately $10.3 million, 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 $84.9
million at September 30, 2009, compared to $67.5 million at December 31,
2008, an increase of 25.8%. The ratio of current assets to current liabilities
was 9-to-1 at September 30, 2009, compared to 7.3-to-1 at the December 31, 2008.
The increase in working capital as of September 30, 2009 was primarily due to
the increased sales volume and net income. The increase in the current ratio as
of September 30, 2009 was primarily related to an increase in cash, and
reduction of advance from customers. At September 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 will
be used to construct a 50,000 ton bio-diesel manufacturing facility adjacent to
the existing plant.  Construction of the new facility has begun at the end
of third quarter.
 
 The
following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 2009 and
2008.
  Nine
      Months Ended September 30,2009
                            (Unaudited)
                          
                          2008
                            (Unaudited)Cash
      provided by (used in):Operating
      Activities
                          
                          $
                          19,262,865
                          
                          
                          $
                          (409,579
                          )Investing
      Activities
                          
                          
                          (204,646
                          )
                          
                          
                          (1,200,352
                          )Financing
      Activities
                          
                          
                          (1,323,999
                          )
                          
                          
                          675,887
  35
 
 Net cash
provided by operating activities was $19,262,865 in the nine months ended
September 30, 2009, compared to $409,579 of cash used in operating activities in
the same period of 2008. The net cash inflow increased during the nine
months of 2009 was primarily due to a large increase in net income of $25.9
million, with an increase in current assets amounting to $8.8 million
and an increase of $2,1 million in current liabilities.
 
 Net cash
used in investing activities was $204,646 in the nine months ended
September 30, 2009, as compared to net cash used in investing activities of
$1,200,352 in the same period of 2008.  During the nine months ended
September 30 2008, we spent approximately $1.0 million to add our bio-diesel
manufacturing related facilities and approximately $0.2 million for various
fixed asset improvements.
  Net cash
used in financing activities was $1.3 million in the nine months ended September
30, 2009 compared to net cash used by financing activities of $0.7
million in the same period of 2008 In September 2009, we paid off
approximately $2.2 million of revolving credit facilities with local
banks. . In the nine months ended September 30, 2009, we received
approximately $0.9 million released from the escrow agreement as a result of us
having satisfied the escrow requirements. In the same period of 2008, we
received approximately $0.7 million of proceeds from a short term
loan.
  On
November 4, 2009, we completed a public offering of 5,000,000 shares of our
common stock, raising net proceeds of approximately
$26.7 million.  As a result of the public offering and cash
provided by operating activities, we believe we have sufficient working capital
to sustain our current business for the next 12 months due to expected increased
sales volume and net income from operations. We intend to continue the expansion
of our current operations by spending approximately $15 million to expand our
bio-diesel manufacturing facility by 50,000 ton through construction of a new
facility. We continue to expand our wholesale distribution and retail gas
station businesses through both organic growth and potential acquisition. We
expect to finance such expansions through the net proceeds from the public
offering that was just completed.
  Our
future capital requirements will depend on a number of factors,
including:
 
 ·
              Development of new sales
      territories, sales offices, and sales force for our wholesale distribution
      of finished oil and
      heavy oil products and required working capital to sustain our existing
      market share and support the growth in this business segment. This
      development can be achieved by organic growth or through
      acquisition;
 ·
              Expanding of market share for our
      retail gas stations both in terms of quantity and geographic location and
      required working capital to support the
  growth;
 ·
              our ability to maintain our
      existing oil suppliers and establish collaborative relationships with new
      suppliers;
 ·
              Increase our biodiesel production
      capacity through strategic acquisitions or construction of a new facility;
      and
 ·
              Development and commercialization
      of new technology in biodiesel production
  capacity.
 
 We
anticipate incurring some research and development expenses during the next 12
months.
 
 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.
  36
  Contractual
Obligations and Commitments
  The
following table summarizes our contractual obligations and commitments as of
June 30, 2009:
  Total
                                  
                                  
                                  Less
      than
                                    One
      Year
                                  
                                  
                                  One
      to
                                    Three
      Years
                                  
                                  
                                  Three
      to
                                    Five
      Years
                                  
                                  
                                  More
      than
                                    Five
      YearsLoan
      payable(1)
                                  
                                  $
                                  4,724
                                  
                                  
                                  $
                                  4,724
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Operating
      lease obligations(2)
                                  
                                  
                                  35,729,000
                                  
                                  
                                  
                                  2,468,000
                                  
                                  
                                  
                                  7,040,000
                                  
                                  
                                  
                                  4,345,000
                                  
                                  
                                  
                                  21,876,000Total
                                  
                                  $
                                  35,733,724
                                  
                                  
                                  $
                                  2,472,724
                                  
                                  
                                  $
                                  7,040,000
                                  
                                  
                                  $
                                  4,345,000
                                  
                                  
                                  $
                                  21,876,000
 
 (1)
                Loan
      payable auto loan.(2)
                Operating
      lease obligations represent minimum rental commitments under
      non-cancelable leases for retail gas stations and oil storage
      depots.
  The
following table summarizes our contractual obligations and commitments as of
December 31, 2008:
  Total
                          
                          
                          Less
      than
                            One
      Year
                          
                          
                          One
      to
                            Three
      Years
                          
                          
                          Three
      to
                            Five
      Years
                          
                          
                          More
      than
                            Five
      YearsLoan
      payable(1)
                          
                          $
                          2,247,197
                          
                          
                          $
                          2,247,197
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Operating
      lease obligations(2)
                          
                          
                          26,510,000
                          
                          
                          
                          2,330,000
                          
                          
                          
                          5,880,000
                          
                          
                          
                          3,777,000
                          
                          
                          
                          14,523,000Total
                          
                          $
                          28,757,197
                          
                          
                          $
                          4,577,197
                          
                          
                          $
                          5,880,000
                          
                          
                          $
                          3,777,000
                          
                          
                          $
                          14,523,000
 
 (1)
              Loan
      payable primarily consists of two one-year bank credit
      facilities.(2)
              Operating
      lease obligations represent minimum rental commitments under
      non-cancelable leases for retail gas stations and oil storage
      depots.
  Market
Risks
  Economic
risk
  We are
subject to risks resulting from the PRC economic downturn. The PRC economy has
recently experienced a slowing of its growth rate attributable to the global
financial crisis and economic recession. Slowing economic growth in PRC could
result in slowing demand for our oil products and could affect our sales. In the
event of recovery in PRC, renewed high growth levels may lead to inflation.
Government actions aimed to control inflation may adversely affect the business
climate and economic growth. Our profitability maybe adversely affected if
prices of our products rise at rate that is insufficient to compensate for the
rise in inflation.
  Oil
and Commodity Price Risk
  We are
subject to risks resulting from fluctuations in the market prices of finished
oil and heavy oil and raw materials we purchase for our biodiesel production.
Effective January 1, 2009, the NDRC implemented a new pricing regime for refined
oil products to link domestic oil prices more in line with changes in the global
crude oil prices. There were seven pricing adjustments in the first nine months
of 2009. Although purchase prices of raw materials for our biodiesel production
have been relatively stable in 2009, future fluctuations in the prices of raw
materials for our biodiesel production, including non-edible oil seeds, waste
cooking oil, and vegetable oil residue, will affect the profitability of our
production and sale of biodiesel segment.
  37
  Inflation
Risk
  Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although in the first five months of 2009, China’s
consumer price index and producer price index declined, the inflation rate may
increase in the second half of the year. In recent years, the Chinese economy
has experienced periods of rapid expansion and high rates of inflation. During
the past ten years, the rates of inflation ranged from as high as 20.7% to as
low as -2.2%. Because of various inflation cycles, the Chinese government
adopted different corrective measures designed to restrict the availability of
credit, regulate growth and contain inflation. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, high inflation in the future may cause the Chinese
government to impose controls on credit and prices, or take other actions, which
may negatively influence economic activities in China, and thereby affect our
business.
 Interest
Rate Risk
  We are
subject to risks resulting from fluctuations in prevailing interest rates on our
bank credit facilities and foreign prevailing interest rate. In the event that
we may need to raise debt financing in the future, upward fluctuations in
interest rates will increase the cost of borrowing. We currently do not use any
derivative instrument to mitigate our interest rate risk.
  Foreign
Exchange Risk
  We carry
out all of our transactions in Renminbi. Therefore, we have limited exposure to
foreign exchange fluctuations. A substantial portion of our cash is held in
China in bank deposits denominated in Renminbi. For our financial reporting
purposes, Renminbi has been translated into U.S. dollars as the reporting
currency. On July 21, 2005, the PRC government changed its policy of pegging the
value of the Renminbi to the U.S. dollar. This change in policy resulted in an
approximately 17.5% appreciation in the value of the Renminbi against the U.S.
dollar between July 21, 2005 and September 30, 2009. See “Risk
Factors — Risks Related to Doing Business in
China — Fluctuation in the value of the Renminbi may have a material
adverse effect on your investment.” A decline in the value of Renminbi against
the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial
results, the value of your investment in our company and the dividends we may
pay in the future, if any, all of which may have a material adverse effect
on the prices of our common stock.
  Recently
Issued Accounting Pronouncements
 
 Refer to
Note 2 of Notes to Consolidated Financial Statements for a discussion of
recent accounting standards and pronouncements.
  38




Item
3      Quantitative and Qualitative Disclosures
About Market Risk




Not
required.




Item
4T   Control 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 September 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 September 30, 2009,  that has materially affected, or is
      reasonably likely to materially affect our internal control over financial
      reporting.


39




PART
      II.
            OTHER
      INFORMATION




Item
1      Legal Proceedings




None.




Item1A    Risk
Factors




Except
as set forth below, there have been no material changes to the risk factors
disclosed in the Company’s Form 10-K for the fiscal year 2008. The information
below updates, and should be read in conjunction with, the risk factors and
information disclosed in the Company’s Form 10-K for the fiscal year
2008.
  Risks
Related to Our Business
  We
are highly dependent on the revenue contribution from our wholesale distribution
of finished oil and heavy oil business segment. A reduction in sales from this
segment would cause our revenues to decline and materially harm our
business.
  We
currently derive a significant majority of our sales from our wholesale
distribution of finished oil and heavy oil products business segment, which
accounted for 95.2%, 66.3% and 66.6% of our total sales in the years ended
December 31, 2007 and 2008 and in the six months ended June 30, 2009,
respectively. As a result, should there be an adverse industry trend in the
petroleum sector, our limited diversification could result in our results of
operations declining substantially and suffering disproportionately compared to
our competitors that have diversified their revenue sources.
  We
face substantial competition in our wholesale distribution of finished oil and
heavy oil business segment.
  We are
one of the only four non-state-owned enterprises that are licensed to distribute
both finished oil and heavy oil products in Shaanxi Province. Although barriers
to entry in our industry are high due to stringent licensing requirements and
the need for significant storage capacity for products, we face competition from
companies located in other provinces and within Shaanxi Province that also
engage in the wholesale distribution of finished and heavy oils. Such companies
may have greater financial resources, sales resources, storage capacity and
transportation capability than we do, and may have exclusive supply and purchase
arrangements with suppliers as a result of long-term relationships.
  Our
competitors include China Petroleum and Chemical Corporation, or SINOPEC, and
PetroChina Co., Ltd., or PetroChina, both of which have greater resources, brand
recognition and access to more extensive distribution channels than we
do.
  In
addition, we estimate that we have approximately ten major non-state-owned
competitors in Shaanxi Province that also distribute finished oil and heavy oil
products similar to ours, including Shaanxi Dongda Petro-Chemical Co., Ltd.,
Shaanxi Dayun Petrochemical Material Co., Ltd., and Baoji Huahai Industry
Corp.
  An
increase in competition arising from an increase in the number or size of
competitors in the wholesale distribution of finished oil and heavy oil may
result in price reductions, reduced gross profit margins, loss of our market
share and departure of key management personnel, any of which could adversely
affect our financial condition and profitability.
  Our
biodiesel products face substantial competition. Other companies may discover,
develop, acquire or commercialize products earlier or more successfully than we
do.
  Existing
and future domestic competitors in the biodiesel industry, who may have a
greater presence in other regions through government support, may be able to
secure a significant market share in regions where we currently do not have
operations. In addition, our potential competitors might be able to secure raw
materials at lower costs than we can and could therefore threaten our
competitive position, which could significantly impact our profitability and
future prospects. Our domestic competitors include Gushan Environment Energy
Ltd., China Biodiesel International Holdings Co., Ltd., China Clean Energy Inc.,
East River Energy Resources and Science Technology (Zhejiang) Ltd., SINOPEC,
China National Offshore Oil Corporation, or CNOOC, and PetroChina, most of which
have greater resources, brand recognition and access to more extensive
distribution channels than we do.
  40
  We also
face potential competition from foreign producers of biodiesel, which may have
greater financial research and development resources than we do. Biodiesel is a
relatively new product that was initially introduced outside the PRC, and the
technology for producing biodiesel may be more advanced in countries other than
the PRC. If foreign competitors, or domestic competitors relying on alliances
with or support from foreign producers, enter the PRC biodiesel market, they may
develop biodiesel that is more economically viable, which would adversely affect
our ability to compete and our results of operations.
  In
addition, new technologies may be developed or implemented for alternative
energy sources and products that use such energy sources. Advances in the
development of fuels other than biodiesel or diesel, or the development of
products that use energy sources other than diesel, such as gasoline hybrid
vehicles and plug-in electric vehicles, could significantly reduce demand for
biodiesel and thus affect our sales. Biodiesel also faces competition from fuel
additives that help diesel burn cleaner and therefore reduce the comparative
environmental benefits of biodiesel in relation to diesel. Other clean energy
sources such as ethanol, liquefied petroleum gas, hydrogen and electricity from
clean sources may be more cost-effective to produce, store, distribute or use,
more environmentally friendly, or otherwise more successfully developed for
commercial production in the PRC than our products. These other energy sources
may also receive greater government support than our products in the form of
subsidies, incentives or minimum use requirements. As a result, demand for our
products may decline, our business model may no longer be viable, and our
results of operations and financial condition may be materially and adversely
affected.
  Any
increase in competition arising from an increase in the number or size of
competitors or from competing technologies or other clean energy sources may
result in price reductions, reduced gross profit margins, loss of our market
share and departure of key management, any of which could adversely affect our
financial condition and profitability.
  The
distribution of finished oil is primarily dependent on the sufficiency of
necessary infrastructure and access to means of transport, including rail
transportation, which may not be available on a cost-effective basis, if at
all.
  Our
wholesale distribution of finished oil and heavy oil business segment depends
heavily on the availability of infrastructure and means of transportation,
including but not limited to adequate highway or rail capacity, including
sufficient numbers of dedicated tanker trucks or cars and sufficient storage
facilities.
  In
connection with entering into oil storage services agreements through which we
use two state-owned oil depots, we currently benefit from convenient railway
freight access located near such depots, which enables us to reach certain parts
of China, including Sichuan, Yunnan and Guizhou Provinces, to which other
distribution companies in Shaanxi Province currently do not have easy access.
There can be no assurance that the PRC government will continue to allow us to
utilize this railway.
  Our
gross margins in our wholesale distribution of finished oil and heavy oil
products and in our operation of retail gas station segments are principally
dependent on the spread between the average purchase price and the average
selling price. If the average purchase price increases and the average selling
price of our products does not similarly increase or if the average selling
price of our products decreases and the average purchase price does not
similarly decrease, our margins will decrease and results of operations will be
harmed.
  Our gross
margins in the wholesale distribution of finished oil and heavy oil products and
in the operation of retail gas stations depend principally on the spread between
the average purchase price and the average selling price we are able to realize
for our products. The spread between the average purchase price for petroleum
and the average selling price of our products has been relatively stable since
2007. Prices for petroleum in the PRC are primarily influenced by the guidance
prices set by the National Development and Reform Commission, or the NDRC, and
supply and demand for petroleum-based fuel, rather than production costs. Any
decrease in the spread between the average purchase price and the prices we are
able to realize for our products, whether as a result of an increase in purchase
prices or policy determinations by the NDRC, would adversely affect our
financial performance and cash flows.
  41
  Our
gross margin in our production and sale of biodiesel segment is principally
dependent on the spread between feedstock prices and biodiesel prices. If the
unit cost of feedstock increases and the average selling price of biodiesel does
not similarly increase or if the average selling price of biodiesel decreases
and the unit cost of feedstock does not similarly decrease, our margin will
decrease and results of operations will be harmed.
  Our gross
margin in the production and sale of biodiesel segment depends principally on
the spread between feedstock and biodiesel prices. The spread between biodiesel
prices and feedstock prices has narrowed significantly since September 2008.
Prices for vegetable oil residue, waste cooking oil and non-edible oil seeds,
which have historically been our principal feedstocks and comprised
approximately 88.3% of total cost of goods sold of our production and sale of
biodiesel segment during the year ended December 31, 2008, do not necessarily
have a direct price relationship to the price of biodiesel in a particular
period. Prices for non-edible oil seeds, vegetable oil residue and waste cooking
oil are principally influenced by general inflation, market and regulatory
factors. Biodiesel prices, however, are primarily influenced by the guidance
prices set by the NDRC and supply and demand for petroleum-based diesel fuel,
rather than biodiesel production costs. This lack of correlation between
production costs and product prices means that we may be unable to pass
increased feedstock costs on to our customers. In the last two years, the prices
of vegetable oil residue, waste cooking oil and non-edible oil seeds have
fluctuated substantially due to increased demand in China resulting from its
rapid economic development. Any decrease in the spread between biodiesel prices
and feedstock prices, whether as a result of an increase in feedstock prices or
a reduction in biodiesel prices, would adversely affect our financial condition
and results of operations.
  Our
biodiesel business depends on the sufficiency of necessary infrastructure which
may not occur on a timely basis, if at all, and our operations could be
adversely affected by the failure to develop infrastructure or disruptions to
that infrastructure.
  Substantial
development of infrastructure will depend upon persons and entities outside of
our control, and the control of others in the biodiesel industry, generally.
Areas requiring expansion include, but are not limited to:
  ·
              adequate
      highway or rail capacity, including sufficient numbers of dedicated tanker
      trucks or cars;
  ·
              sufficient
      storage facilities for feedstock and
biodiesel;
  ·
              increases
      in truck fleets capable of transporting biodiesel within localized
      markets; and
  ·
              expansion
      of independent filling stations.
  Substantial
investments required for these infrastructure changes and expansions may not be
made or they may not be made on a timely basis. Any delay or failure in making
the changes to or expansion of infrastructure could hurt the demand or prices
for our biodiesel products, impede our delivery of biodiesel products, impose
additional costs on us or otherwise have a material adverse effect on our
results of operations or financial position. Our business is dependent on the
continuing availability of infrastructure and any infrastructure disruptions
could have a material adverse effect on our business.
  Our
business will suffer if we cannot obtain, maintain or renew necessary permits or
licenses.
  All PRC
enterprises in the finished oil and biodiesel industries are required to obtain
from various PRC governmental authorities certain permits and licenses,
including, without limitation, an Approval Certificate for Wholesale
Distribution of Finished Oil, a Dangerous Chemical Distribution License and a
Safe Production Permit. We have obtained permits and licenses required for the
distribution of finished oil. In addition, in connection with the construction
of our new biodiesel factory, which was completed in October 2007, we obtained
an environmental impact assessment report in January 2008. However, certain
other necessary permits relating to our biodiesel factory are outstanding.
Failure to obtain all necessary approvals/permits may subject us to various
penalties, such as fines or being required to vacate from the facilities where
we currently operate our business.
  These
permits and licenses are subject to periodic renewal and/or reassessment by the
relevant PRC government authorities and the standards of compliance required in
relation thereto may from time to time be subject to change. We intend to apply
for renewal and/or reassessment of such permits and licenses when required by
applicable laws and regulations, however, we cannot assure you that we can
obtain, maintain or renew the permits and licenses or accomplish the
reassessment of such permits and licenses in a timely manner. Any changes in
compliance standards, or any new laws or regulations that may prohibit or render
it more restrictive for us to conduct our business or increase our compliance
costs may adversely affect our operations or profitability. Any failure by us to
obtain, maintain or renew the licenses, permits and approvals, may have a
material adverse effect on the operation of our business. In addition, we may
not be able to carry on business without such permits and licenses being renewed
and/or reassessed.
  42
  Our
legal right to lease certain properties or accept oil storage services from
third parties could be challenged by property owners, regulatory authorities or
other third parties, which could prevent us from continuing to utilize our oil
storage depots, biodiesel production facility and retail gas stations, which are
located on such leased properties, or could increase the costs associated with
utilizing those facilities.
  Although
all land in the PRC is owned by the government or by collectives, private
individuals and businesses are permitted to use, lease and develop land for a
specified term without owning the land, the duration of which depends on the
purpose of land use. These rights to use land are termed land use rights. We do
not hold any land use rights with respect to our biodiesel production facility,
oil storage depots or retail gas stations. Instead, our business model relies on
leases with third parties who either own the properties or lease the properties
from the ultimate property owner and, with respect to two of the oil storage
depots that we use, we rely on the oil storage service agreements with two
state-owned entities. There may be challenges to the title of the properties and
the rights to provide oil storage services which, if successful, could impair
the development or operations of our oil storage depots, biodiesel production
facility and retail gas stations on such properties. In addition, we are subject
to the risk of potential disputes with property owners. Such disputes, whether
resolved in our favor or not, may divert management attention, harm our
reputation or otherwise disrupt our business.
  In most
instances, our immediate lessors do not possess the ultimate land use rights or
proper property use rights, or have not obtained consents or approvals from the
holders of the land use rights or relevant regulatory authorities to sublease
the land or storage space to us. A lessor’s failure to duly obtain the title to
the property or to receive any necessary approvals from the ultimate holders of
the land use rights, the primary lease holder or relevant regulatory
authorities, as applicable, could potentially result in the invalidation of our
lease, the renegotiation of such lease leading to less favorable terms or, in
serious cases, require us to vacate the properties that we occupy or pay a fine.
With regard to the two state-owned depots that provide storage services to us,
their failure to obtain necessary approvals or to fulfill their obligations of
filing or registering with relevant regulatory authorities of such storage
services under PRC laws and regulations could invalidate such storage service
agreements and we may have to stop using such storage services. The building
ownership or leasehold in connection with our oil storage depots, biodiesel
production facility and gas retail operations could be subject to similar
challenges.
  In
addition, three of our gas stations and our three oil extracting plants are
located on pieces of land which are not permitted to be used for any
non-agricultural purposes. We have not been informed by any regulatory authority
that we shall cease to use such land. However, we cannot assure you that we will
be able to continue to use such land in the future. If we are required to vacate
from such land by any regulatory authorities, our business and results of
operations may be adversely affected.
  The
failure of our lessors to transfer gas station operating permits to us may
materially affect our ability to conduct retail gas business.
  Under PRC
law, the operation of gas stations requires various permits. In this regard, we
conduct our retail gas station business by leasing seven gas stations from third
parties who have obtained the requisite permits. To date, we have obtained all
of the necessary operating permits for six gas stations. The operating permits
for the remaining retail gas station are still in the process of being
transferred subject to the approval of relevant regulatory authorities. While
the lease agreement requires the lessor to transfer its operating permits to us,
we cannot guarantee that such permits will be transferred to us in a timely
manner. If the lessor fails to transfer any of the necessary operating permits,
we may not be able to conduct business at such retail gas station, and may be
subject to warning, suspension of business, a fine of up to three times the
illegal gains, or a fine of up to RMB 30,000.
  43
  Our
lessors’ failure to comply with lease registration and other compliance
requirements under PRC law may subject these lessors or us to fines or other
penalties that may negatively affect our ability to utilize our oil storage
depots, our biodiesel production facility or our retail gas
stations.
  We are
subject to a number of land and property-related legal requirements. For
instance, under PRC law, all lease agreements are required to be registered with
the local housing bureau. Currently, none of the owners of the oil storage
depots, biodiesel production facility and retail gas stations we operate and
manage has obtained registrations or approval of their leases from the relevant
regulatory authorities as required although we continue to request that they
obtain such registrations or approvals. The failure of our lessors to register
these leases and agreements as required by law or to have the leases approved
may subject these lessors or us to fines, result in our being required to vacate
the properties or other penalties which may negatively affect our ability to
operate or use the biodiesel production facility, the oil storage depots and
retail gas stations covered under those leases.
  Risks
Related to Our Corporate Structure
  Our
contractual arrangements with Xi’an Baorun Industrial may be subject to scrutiny
by the PRC tax authorities and we could be required to pay additional taxes,
which could substantially reduce our consolidated net income and the value of
your investment.
  We could
face material and adverse tax consequences if the PRC tax authorities determine
that our contractual arrangements with Xi’an Baorun Industrial were not priced
at arm’s length for purposes of determining tax liabilities. If the PRC tax
authorities determine that these contracts were not entered into on an
arm’s-length basis, they may adjust our income and expenses for PRC tax purposes
in the form of a transfer pricing adjustment. A transfer pricing adjustment
could result in a reduction, for PRC tax purposes, of deductions recorded by
Xi’an Baorun Industrial, which could adversely affect us by increasing the tax
liabilities of Xi’an Baorun Industrial. This increased tax liability could
further result in late payment fees and other penalties to Xi’an Baorun
Industrial for underpaid taxes. Any payments we make under these arrangements or
adjustments in payments under these arrangements that we may decide to make in
the future will be subject to the same risk. Prices for such services will be
set prospectively and therefore we do not know whether any of the payments to be
made under the contracts will or will not be considered at arm’s length for
purposes of determining tax liabilities.
  Risks
Related to Doing Business in China
  There
are significant uncertainties under the EIT Law regarding our PRC enterprise
income tax liabilities, such as tax on dividends paid to us by our PRC
subsidiary and tax on any dividends we pay to our non-PRC corporate
stockholders.
  The EIT
Law provides that enterprises established outside of the PRC whose “de facto
management bodies” are located in the PRC are considered as a “tax-resident
enterprise” and are generally subject to the uniform 25.0% enterprise income tax
rate on global income. Under the implementation regulations to EIT Law, “de
facto management body” refers to a managing body that in practice exercises
overall management control over the production and business, personnel,
accounting and assets of an enterprise. In addition, on April 22, 2009, the
State Administration of Taxation of the PRC issued the Notice on the Issues Regarding
Recognition of Overseas Incorporated Enterprises that are Domestically
Controlled as PRC Resident Enterprises Based on the De Facto Management Body
Criteria, which was retroactively effective as of January 1, 2008. This
notice provides that an overseas incorporated enterprise that is controlled
domestically will be recognized as a “tax-resident enterprise” if it satisfies
all of the following conditions: (i) the senior management responsible for daily
production/business operations are primarily located in the PRC, and the
location(s) where such senior management execute their responsibilities are
primarily in the PRC; (ii) strategic financial and personnel decisions are made
or approved by organizations or personnel located in the PRC; (iii) major
properties, accounting ledgers, company seals and minutes of board meetings and
stockholder meetings, etc, are maintained in the PRC; and (iv) 50.0% or more of
the board members with voting rights or senior management habitually reside in
the PRC. If the PRC tax authorities determine that we are a “tax-resident
enterprise,” we may be subject to enterprise income tax at a rate of 25.0% on
our worldwide income. This may have an impact on our effective tax rate, and may
result in a material adverse effect on our net income and results of operations.
In addition, dividends paid by us to our non-PRC corporate stockholders as well
as gains realized by such stockholders from the sale or transfer of our stock
may be subject to a PRC tax under the EIT Law, and we may be required to
withhold PRC tax on dividends paid to our non-PRC corporate
stockholders.
  44
  In
addition, under the EIT Law and the Arrangement between the PRC and the Hong
Kong Special Administrative Region on the Avoidance of Double Taxation and
Prevention of Fiscal Evasion, or the Double Taxation Arrangement, which became
effective on January 1, 2007, if both we and our Hong Kong subsidiary, Baorun
Group, are considered as “non-tax-resident enterprises,” dividends from our PRC
subsidiaries paid to us through our Hong Kong subsidiary may be subject to a
withholding tax at a rate of 5.0%. Furthermore, the ultimate tax rate will be
determined by treaty between the PRC and the tax residence of the holder of the
PRC subsidiary. We are actively monitoring the application of the withholding
tax and are evaluating appropriate organizational changes to minimize the
corresponding tax impact.
  Our
business benefits from certain government incentives. Expiration of, or changes
to, these incentives could have a material adverse effect on our operating
results by significantly increasing our tax expenses.
  A number
of PRC government initiatives promote the adoption of clean energy sources, such
as biodiesel. For example, pursuant to the Renewable Energy Medium and
Long-Term Development Plan issued by the NDRC in September 2007, the PRC
targets to increase its consumption of energy from renewable sources to 15.0% of
total energy consumption in the PRC by 2020. The plan also includes the
promotion of renewable energy sources. Under the plan, the PRC aims to increase
its annual consumption of biofuel, with the consumption of biodiesel targeted at
two million tons per year by 2020. According to the Renewable Energy Law of the
PRC, local governments are required to prepare a renewable energy
development plan and provide financial support to renewable energy projects in
rural areas. Further, the government may grant businesses engaged in biodiesel
production certain benefits and incentives, while petroleum marketing
enterprises are required to include biodiesel products that comply with the
state standard with respect to fuel sales. These government initiatives could be
modified or eliminated altogether. Such a change in policy could adversely
affect the growth of the biodiesel market and cause our revenues to decline.
Changes to or elimination of initiatives designed to increase general acceptance
of clean energy sources could result in decreased demand for our products and
have a material adverse effect on our business, results of operations and
financial condition.
  Furthermore,
we cannot assure you that demand for our products will increase or that we will
otherwise benefit from such regulations. For example, the PRC Ministry of
Finance has issued the Temporary Regulation on the
Management of Special Funds for the Development of Renewable Resources.
Pursuant to this regulation, special funds will be provided to companies for the
development of renewable resources, including petroleum substitutes. These funds
may be used to promote advancement in the development of energy sources that
compete with biodiesel, which may in turn reduce demand for
biodiesel.
  If
environmental regulations are relaxed in the future, or if the enforcement of
environmental regulations is not sufficiently rigorous, we may not be able to
compete effectively against other manufacturers of energy products, including
traditional and other clean energy source products. For example, under the Rules on the Management of Waste Oil
for Food Producers, food producers must properly dispose of waste cooking
oil or sell waste cooking oil to waste cooking oil processing entities or waste
collection entities rather than discharging waste cooking oil into the
environment or reusing it for human consumption. However, in practice, these
rules may not be strictly enforced and waste oil may be disposed of through
illegal means by some food producers, which would reduce the supply of waste
cooking oil available for our production. Our business prospects and results of
operations may be adversely affected as a result of any of the foregoing
factors.
  Our
business benefits from preferential tax treatment and changes to this treatment
could adversely affect our operating results.
  Prior to
the effectiveness of the EIT Law, the rate of income tax on companies in China
may vary depending on the availability of preferential tax treatment or
subsidies based on their industry or location. However, pursuant to the EIT Law,
a uniform enterprise income tax of 25.0% is generally applied to all
“tax-resident enterprises” under the EIT Law as to their global income, and
“High and New Technology Enterprises” enjoy a preferential tax rate of 15.0%.
Two notices issued by the local State Taxation Bureau stipulate that Xi’an
Baorun Industrial is to enjoy an enterprise tax exemption for the years from
2004 to the end of 2010. In this connection, the EIT Law provides that
enterprises enjoying a fixed-term tax exemption or tax reduction shall, in
accordance with the provisions of the State Council, continue to enjoy such
exemption or reduction after the implementation hereof until the expiration of
the term of such exemption or reduction.
  45
  The EIT
Law further provides grandfather treatment for enterprises which were qualified
as “High and New Technology Enterprises” under the previous income tax laws and
were established before March 16, 2007, provided that they continue to meet the
criteria for New Technology Enterprises after January 1, 2008. The grandfather
provision allows these enterprises to continue to enjoy the tax holidays
provided by the previous income tax laws and regulations. Xi’an Baorun
Industrial was qualified as a High and New Technology Enterprise in 2009 and
thus, subject to the approval by competent authorities, will be subject to a
15.0% tax rate starting from 2011 in accordance with the EIT Law and other
relevant regulations.
  Given the
short history of the EIT Law, uncertainties remain with respect to its future
interpretation and implementation. We cannot guarantee that the preferential tax
treatment granted to Xi’an Baorun Industrial will not be challenged and repealed
by higher level tax authorities, or that any future implementation rules will be
issued that are inconsistent with the current interpretation of the EIT Law. If
our operating entities are unable to qualify for income tax holidays, our
effective income tax rate will increase significantly and we may have to pay
additional income taxes to make up for amounts previously unpaid. This could
have a material adverse effect on our operations.
  Recent
PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents limit our ability to inject capital into our PRC
subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or
otherwise adversely affect us.
  The SAFE
issued a public notice in October 2005, requiring PRC residents to register with
the local SAFE branch before establishing or acquiring the control of any
company outside of China for the purpose of financing that offshore company with
assets or equity interest in a PRC company. Anytime such special purpose
vehicles, or SPVs, have a major capital change event (including overseas equity
or convertible bonds financing), all PRC resident stockholders must conduct a
registration relating to the change within 30 days of occurrence of the event.
On May 29, 2007, the SAFE issued an additional notice, clarifying some
outstanding issues and providing standard operating procedures for implementing
the prior notice. According to the new notice, the SAFE set up seven schedules
that track registration requirements for offshore fundraising and roundtrip
investments.
  In March
2008, Xincheng Gao, who indirectly controls our company, registered with the
SAFE’s Shaanxi Branch. We understand that he plans to update his registration to
reflect the latest capital changes to each of our SPVs. However, we cannot
guarantee that the SAFE will issue the updated registration certificate in a
timely manner.
  Further,
pursuant to the above notices, if our PRC resident stockholders or beneficial
owners such as Mr. Xincheng Gao fail to adhere to any of the registration
requirements, or if they make any false representations to obtain the
registration for roundtrip investments in onshore entities or the SPVs, they may
face fines and other legal sanctions. In addition, such actions may also impede
our ability to contribute additional capital or extend loans to our PRC
subsidiaries, impede our PRC subsidiaries’ ability to pay dividends or otherwise
distribute profits to us, or otherwise adversely affect us.
  Risks
Related Our Common Stock
  We
do not anticipate paying cash dividends on our common stock in the foreseeable
future.
  We do not
anticipate paying cash dividends in the foreseeable future. Presently, we intend
to retain all of our earnings, if any, to finance development and expansion of
our business. PRC capital and currency regulations may also limit our ability to
pay dividends. Consequently, your only opportunity to achieve a positive return
on your investment in us will be if the market price of our common stock
appreciates.
  46
  One
of our directors and officers controls a majority of our common stock and his
interests may not align with the interests of our other
stockholders.
  Mr.
Xincheng Gao, our chairman, chief executive officer and president, through
Redsky Group, which he controls, currently beneficially owns approximately 79.7%
of our issued and outstanding common stock as of August 31, 2009. This
significant concentration of share ownership may adversely affect the trading
price of our common stock because investors often perceive a disadvantage in
owning shares in a company with one or several controlling stockholders.
Furthermore, our directors and officers, as a group, have the ability to
significantly influence or control the outcome of all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, such as mergers, consolidations or the sale
of substantially all of our assets. This concentration of ownership may have the
effect of delaying or preventing a change in control of our company which could
deprive our stockholders of an opportunity to receive a premium for their shares
as part of a sale of our company and might reduce the price of our common stock.
In addition, without the consent of Mr. Gao or Redsky Group, we could be
prevented from entering into transactions that could be beneficial to us. Mr.
Gao or Redsky Group may cause us to take actions that are opposed by other
stockholders as his interests may differ from those of other
stockholders.
  Item
2      Unregistered Sales of Equity Securities and
Use of Proceeds




None.




Item
3      Defaults Upon Senior
Securities




None.




Item
4      Submission of Matters to a Vote of Security
Holders




On July
30, 2009, Redsky Group Limited, the holder of 22,454,545 shares of our issued
and outstanding common stock, or 81.59% of the 27,519,091 issued and outstanding
shares of common stock on that date, authorized, by written consent, an
amendment to our certificate of incorporation to effect the change of our name
from China Bio Energy Holding Group Co., Ltd. to “China Integrated Energy,
Inc.”   On September 17, 2009, the Company filed the amendment to
the certificate of incorporation with the Secretary of State of the State of
Delaware, effecting the name change on September 18, 2009.




Item
5      Other Information




None.




Item
6      Exhibits





Exhibit
      No.
            
            Description31.1
            
            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 2002.32.1
            
            Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002


47




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
      Integrated Energy, Inc.Dated:
      November 16, 2009
                  By:
                  /s/
      Gao XinchengName:
      Gao XinchengTitle:
      Chief Executive Officer and
President


48