SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549




FORM
10-Q




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




For the
quarterly period ended June 30, 2010.




or




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




For the
transition period from
to                 .




Commission
File Number 000-25413




CHINA
INTEGRATED ENERGY, INC.


(Exact
name of registrant as specified in its charter)





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




Dongxin
Century Square, 7th Floor


Hi-Tech
Development District


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


(Address
of Principal Executive Offices including zip code)




+86 29 8268
3920


(Registrant’s
Telephone Number, Including Area Code)




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




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




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





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




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




As of
August 12, 2010, 33,829,091shares of the issuer’s common stock, par value
$0.0001, were outstanding.







TABLE OF
CONTENTS





Part
      I
                                                      
                                                      FINANCIAL
      INFORMATIONITEM
      1
                                                      
                                                      CONSOLIDATED
      FINANCIAL STATEMENTS
                                                      
                                                      1ITEM
      2
                                                      
                                                      MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                                      
                                                      22ITEM
      3
                                                      
                                                      QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                      
                                                      32ITEM
      4T.
                                                      
                                                      CONTROLS
      AND PROCEDURES.
                                                      
                                                      32Part
      II
                                                      
                                                      OTHER
      INFORMATIONITEM
      1
                                                      
                                                      LEGAL
      PROCEEDINGS
                                                      
                                                      32ITEM
      1A.
                                                      
                                                      RISK
      FACTORS
                                                      
                                                      33ITEM
      2
                                                      
                                                      UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                                                      
                                                      33ITEM
      3
                                                      
                                                      DEFAULTS
      UPON SENIOR SECURITIES
                                                      
                                                      33ITEM
      4
                                                      
                                                      OTHER
      INFORMATION
                                                      
                                                      33ITEM
      5
                                                      
                                                      EXHIBITS
                                                      
                                                      33







Part
I


FINANCIAL
INFORMATION




ITEM
      1
            CONSOLIDATED
      FINANCIAL STATEMENTS




CHINA
INTEGRATED ENERGY, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





June 30, 2010
                  (Unaudited)
              
              
              December 31,
                  2009
                  (Audited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              58,733,880
              
              
              $
              62,415,443Accounts
      receivable
              
              
              7,837,740
              
              
              
              3,099,587Other
      receivables and deposits
              
              
              2,826,031
              
              
              
              7,231,586Prepaid
      expenses
              
              
              4,111,817
              
              
              
              3,145,502Advance
      to suppliers
              
              
              33,401,720
              
              
              
              34,544,100Inventories,
      net
              
              
              24,791,994
              
              
              
              20,954,851Total
      current assets
              
              
              131,703,182
              
              
              
              131,391,069Prepaid
      rents
              
              
              30,178,918
              
              
              
              24,620,685Property,
      plant and equipment, at cost
              
              
              10,203,460
              
              
              
              10,017,987Construction
      in progress
              
              
              8,379,169
              
              
              
              -Less
      accumulated depreciation
              
              
              (2,676,837
              )
              
              
              (2,456,080
              )Property,
      plant and equipment , net
              
              
              15,905,792
              
              
              
              7,561,907Intangible
      asset, net
              
              
              10,427,760
              
              
              
              -Total
      noncurrent assets
              
              
              56,512,470
              
              
              
              32,182,592TOTAL
      ASSETS
              
              $
              188,215,652
              
              
              $
              163,573,661LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAdvance
      from customers
              
              
              253,631
              
              
              
              1,903,124Taxes
      payable
              
              
              1,163,651
              
              
              
              1,242,931Other
      payables and accruals
              
              
              899,728
              
              
              
              2,700,988Loans
      payable
              
              
              4,423,800
              
              
              
              4,395,025Total
      current liabilities
              
              
              6,740,810
              
              
              
              10,242,068STOCKHOLDERS'
      EQUITYPreferred
      stock,  $.001 par value;  authorized shares
      10,000,000; issued and outstanding 2,594,753 and 3,115,753 shares at June
      30, 2010 and December 31 2009, respectively
              
              
              2,594
              
              
              
              3,115Common
      stock,  $.0001 par value;  authorized shares
      79,000,000;  issued and outstanding 33,829,091 and 33,269,091
      shares at June 30, 2010 and December 31, 2009,
respectively
              
              
              3,382
              
              
              
              3,326Additional
      paid in capital
              
              
              78,143,607
              
              
              
              75,858,994Statutory
      reserve
              
              
              4,920,114
              
              
              
              4,920,114Accumulated
      other comprehensive income
              
              
              6,573,577
              
              
              
              5,473,420Retained
      earnings
              
              
              91,831,568
              
              
              
              67,072,624Total
      stockholders' equity
              
              
              181,474,842
              
              
              
              153,331,593TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              188,215,652
              
              
              $
              163,573,661




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


1




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




CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME




(Unaudited)
                  
                  For The Three Months Ended
                    June 30,
                  
                  
                  For The Six Months Ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Sales
                  
                  $
                  104,423,890
                  
                  
                  $
                  65,244,239
                  
                  
                  $
                  213,839,940
                  
                  
                  $
                  123,902,907Cost
      of goods sold
                  
                  
                  88,884,791
                  
                  
                  
                  55,768,322
                  
                  
                  
                  185,005,698
                  
                  
                  
                  106,750,036Gross
      profit
                  
                  
                  15,539,099
                  
                  
                  
                  9,475,917
                  
                  
                  
                  28,834,242
                  
                  
                  
                  17,152,871Selling,
      general and administrative expenses
                  
                  
                  2,028,262
                  
                  
                  
                  610,726
                  
                  
                  
                  3,871,718
                  
                  
                  
                  1,166,575Income
      from operations
                  
                  
                  13,510,837
                  
                  
                  
                  8,865,191
                  
                  
                  
                  24,962,524
                  
                  
                  
                  15,986,296Non-operating
      income (expenses)Interest
      expenses
                  
                  
                  (46,933
                  )
                  
                  
                  (35,662
                  )
                  
                  
                  (97,718
                  )
                  
                  
                  (69,180
                  )Subsidy
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  116,964Other
      expense
                  
                  
                  (64,734
                  )
                  
                  
                  (2,796
                  )
                  
                  
                  (105,862
                  )
                  
                  
                  (6,094
                  )Total
      non-operating income (expenses)
                  
                  
                  (111,667
                  )
                  
                  
                  (38,458
                  )
                  
                  
                  (203,580
                  )
                  
                  
                  41,690Net
      income
                  
                  
                  13,399,170
                  
                  
                  
                  8,826,733
                  
                  
                  
                  24,758,944
                  
                  
                  
                  16,027,986Other
      comprehensive itemForeign
      currency translation gain (Loss)
                  
                  
                  1,020,274
                  
                  
                  
                  36,710
                  
                  
                  
                  1,100,157
                  
                  
                  
                  (14,074
                  )Comprehensive
      Income
                  
                  $
                  14,419,444
                  
                  
                  $
                  8,863,443
                  
                  
                  $
                  25,859,101
                  
                  
                  $
                  16,013,912Basic
      and diluted weighted average shares outstandingBasic
                  
                  
                  33,710,190
                  
                  
                  
                  27,169,091
                  
                  
                  
                  33,515,721
                  
                  
                  
                  27,169,091Diluted
                  
                  
                  43,956,280
                  
                  
                  
                  34,635,447
                  
                  
                  
                  43,245,677
                  
                  
                  
                  34,629,111Basic
      and diluted net earnings per share available to common
      stockholdersBasic
                  
                  $
                  0.40
                  
                  
                  $
                  0.32
                  
                  
                  $
                  0.74
                  
                  
                  $
                  0.59Diluted
                  
                  $
                  0.30
                  
                  
                  $
                  0.25
                  
                  
                  $
                  0.57
                  
                  
                  $
                  0.46




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


2




CHINA
INTEGRATED ENERGY, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF EQUITY





(Unaudited)
                  
                  Preferred stock
                  
                  
                  Common stockShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Additional
                      paid in
                      capital
                  
                  
                  Statutory
                      reserves
                  
                  
                  Other
                      comprehensive
                      income
                  
                  
                  Retained
                      earnings
                  
                  
                  Total
                      stockholders'
                      equityBalance
      at December 31, 2008
                  
                  
                  3,465,753
                  
                  
                  $
                  3,465
                  
                  
                  
                  27,169,091
                  
                  
                  $
                  2,716
                  
                  
                  
                  44,434,250
                  
                  
                  $
                  4,920,114
                  
                  
                  $
                  5,337,003
                  
                  
                  $
                  29,201,661
                  
                  
                  $
                  83,899,209Preferred
      B conversion
                  
                  
                  (350,000
                  )
                  
                  
                  (350
                  )
                  
                  
                  350,000
                  
                  
                  
                  35
                  
                  
                  
                  315
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Shares
      issued to employees
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,056
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,056Stock
      purchase option – directors
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  155,104
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  155,104Stock-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  555,710
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  555,710Net
      income for the year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  37,870,963
                  
                  
                  
                  37,870,963Issuance
      of common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,750,000
                  
                  
                  
                  575
                  
                  
                  
                  30,683,559
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,684,134Foreign
      currency translation gain
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  136,417
                  
                  
                  
                  -
                  
                  
                  
                  136,417Balance
      at December 31, 2009
                  
                  
                  3,115,753
                  
                  
                  
                  3,115
                  
                  
                  
                  33,269,091
                  
                  
                  
                  3,326
                  
                  
                  
                  75,858,994
                  
                  
                  
                  4,920,114
                  
                  
                  
                  5,473,420
                  
                  
                  
                  67,072,624
                  
                  
                  
                  153,331,593Preferred
      A conversion
                  
                  
                  (11,000
                  )
                  
                  
                  (11
                  )
                  
                  
                  50,000
                  
                  
                  
                  5
                  
                  
                  
                  6
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Preferred
      B conversion
                  
                  
                  (510,000
                  )
                  
                  
                  (510
                  )
                  
                  
                  510,000
                  
                  
                  
                  51
                  
                  
                  
                  459
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
      purchase option – directors
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  121,404
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  121,404Stock-based
      compensation – consultants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  757,648
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  757,648Employee
      stock option compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,405,096
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,405,096Net
      income for the period
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  24,758,944
                  
                  
                  
                  24,758,944Foreign
      currency translation gain
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,100,157
                  
                  
                  
                  -
                  
                  
                  
                  1,100,157Balance
      at June 30, 2010
                  
                  
                  2,594,753
                  
                  
                  $
                  2,594
                  
                  
                  
                  33,829,091
                  
                  
                  $
                  3,382
                  
                  
                  $
                  78,143,607
                  
                  
                  $
                  4,920,114
                  
                  
                  $
                  6,573,577
                  
                  
                  $
                  91,831,568
                  
                  
                  $
                  181,474,842




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


3




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


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW





(Unaudited)
                  
                  For The Six Months Ended June 30,2010
                  
                  
                  2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  24,758,944
                  
                  
                  $
                  16,027,986Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Loss
      on disposal of property and equipment
                  
                  
                  22,676
                  
                  
                  
                  -Depreciation
      and amortization
                  
                  
                  642,344
                  
                  
                  
                  589,927Stock
      based compensation
                  
                  
                  2,284,148
                  
                  
                  
                  131,533(Increase)
      decrease in current assets:Accounts
      receivable
                  
                  
                  (4,686,692
                  )
                  
                  
                  1,885,008Other
      receivables, deposits and prepaid expenses
                  
                  
                  (1,012,036
                  )
                  
                  
                  4,683,889Advance
      to suppliers
                  
                  
                  1,366,467
                  
                  
                  
                  1,039,421Inventories
                  
                  
                  (3,676,447
                  )
                  
                  
                  1,342,443Prepaid
      expenses-Rental
                  
                  
                  (8,863,000
                  )
                  
                  
                  (2,898,975
                  )Increase
      (decrease) in current liabilities:Accounts
      payable
                  
                  
                  -
                  
                  
                  
                  (1,463
                  )Advance
      from customers
                  
                  
                  (1,654,006
                  )
                  
                  
                  (1,904,172
                  )Taxes
      payable
                  
                  
                  (86,709
                  )
                  
                  
                  46,183Other
      payables and accrued expenses
                  
                  
                  (2,305,317
                  )
                  
                  
                  (2,231,051
                  )Net
      cash provided by operating activities
                  
                  
                  6,790,372
                  
                  
                  
                  18,710,729CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                  
                  
                  (10,797
                  )
                  
                  
                  (91,176
                  )Business
      acquisition
                  
                  
                  (2,490,040
                  )
                  
                  
                  -Construction
      in progress
                  
                  
                  (8,323,361
                  )
                  
                  
                  -Net
      cash used in investing activities
                  
                  
                  (10,824,198
                  )
                  
                  
                  (91,176
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash released
                  
                  
                  -
                  
                  
                  
                  797,993Repayment
      of auto loans long term notes payable
                  
                  
                  -
                  
                  
                  
                  (29,255
                  )Net
      cash provided by financing activities
                  
                  
                  -
                  
                  
                  
                  768,738EFFECT
      OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
                  
                  
                  352,263
                  
                  
                  
                  20,044NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                  
                  
                  (3,681,563
                  )
                  
                  
                  19,408,335CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                  
                  
                  62,415,443
                  
                  
                  
                  23,119,028CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                  
                  $
                  58,733,880
                  
                  
                  $
                  42,527,363Supplemental
      Cash flow data:Income
      tax paid
                  
                  $
                  -
                  
                  
                  $
                  -Interest
      paid
                  
                  $
                  112,554
                  
                  
                  $
                  77,344Non-cash
      activities:Investing  activitiesReclassification
      from other receivables and prepaid rents recorded at December 31, 2009
      to  intangible assets for the period ended June 30,
      2010.
                  
                  $
                  7,994,143
                  
                  
                  $
                  -Financing
      activitiesConversion
      of preferred stock to common stock
                  
                  $
                  61
                  
                  
                  $
                  -




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


4




CHINA
INTEGRATED ENERGY INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




1.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES




Basis
of Presentation




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




In the
opinion of the management of the Company, all adjustments, which are of a normal
recurring nature, necessary for a fair statement of the results for three-month
period have been made. Results for the interim periods presented are not
necessarily indicative of the results that might be expected for the entire
fiscal year. When used in these notes, the terms "Company," "we," "us" or "our"
means China Integrated Energy Inc. and all entities included in our consolidated
financial 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 is considered to be the primary beneficiary, pursuant to the rules of the
Accounting Standards Codification. All significant inter-company transactions
and balances between the Company, its subsidiaries and VIEs are eliminated upon
consolidation. The Company has included the results of operations of its
subsidiaries from the dates of acquisition.




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 subsidiaries, Baorun Group and Redsky Industrial,
and our consolidated subsidiary, Baorun Industrial (collectively, the
“Company”). All significant inter-company accounts and transactions have been
eliminated in consolidation.




Use
of Estimates




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




Cash
and Cash Equivalents




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


5




Accounts
Receivable




The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Based on historical collections, no
allowance was deemed necessary at June 30, 2010 and December 31, 2009 as the
Company did not experience any uncollectible accounts receivable and bad debt
write-off over the past years.




Advance
to Suppliers




Advance
to suppliers consist of prepayments to the suppliers for products that have not
yet been received. Any amount paid to the suppliers prior to the Company’s
acceptance of petroleum products and biodiesel feedstock are recorded as advance
to suppliers. The Company will record the prepayment as inventory at the time of
accepting delivery of petroleum products from suppliers. Advance to suppliers as
of June 30, 2010 and December 31, 2009 were $33,401,720 and $34,544,100,
respectively. Based on the customers’ purchase plans, we usually work with
suppliers by advancing prepayments of inventory to ensure on time delivery to
meet customers’ demands.




Inventories




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




Advances
from Customers




Advances
from customers consist of prepayments to the Company for products that have not
yet been shipped to the customers. Any amounts received prior to satisfying the
Company’s revenue recognition criteria are recorded as deferred revenue or
advances from customers. The Company will recognize the prepayments from the
customers as revenue at the time the delivery of goods is made. Advances from
customers as of June 30, 2010 and December 31, 2009 were $253,631 and
$1,903,124, respectively.




Property,
Plant, and Equipment




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





YearsBuilding
            20Vehicle
            5Office
      Equipment
            5Production
      Equipment
            10




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




Impairment
of Long-Lived Assets




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


6




Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
Based on its review, the Company believes that, as of June 30, 2010 and December
31, 2009, there were no impairments of its long-lived assets.




Intangible
Assets




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




Income
Taxes




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




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




Revenue
Recognition




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


7




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 records
VAT payable and VAT receivable net of payments in the financial statements. The
VAT tax return is filed offsetting the payables against the
receivables.




There
were no sales returns and allowances for the three months ended June 30, 2010
and 2009. The Company does not provide unconditional right of return, price
protection or any other concessions to its customers.




Cost
of Goods Sold




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




Concentration
of Credit Risk




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




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




Statement
of Cash Flows




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




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. Since then the RMB has strengthened and risen more than 21% against the
USD.  On June 19, 2010, the Chinese central bank announced that it
would further the reform of the RMB exchange rate mechanism to improve
flexibility. The Company does not believe that its foreign currency exchange
rate fluctuation risk is significant. 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.


8




The
Company uses Statement of accounting standards codification “Reporting
Comprehensive Income”. Comprehensive income is comprised of net income and all
changes to the statements of stockholders’ equity, except those due to
investments by stockholders, changes in paid-in capital and distributions to
stockholders. Comprehensive income for the three months ended June 30, 2010 and
2009 were included net income and foreign currency translation
adjustments.




Fair
value of financial instruments




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




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




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




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




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




As of
June 30, 2010, the Company did not identify any assets and liabilities that are
required to be presented on the balance sheet at fair value.




Stock-Based
Compensation




The
Company accounts for its stock-based compensation in accordance with the
accounting standards codification, “Share-Based Payment.”. The Company measures
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and other
equity-based compensation to employees and non-employees, and recognizes that
cost over the requisite service period. For the three months ended June 30,
2010, the Company recorded approximately $1,157,074 of stock compensation
expense in accordance with accounting standards codification, “Share-Based
Payment”.  Refer to Note 17 for additional information regarding the
Company’s stock non-qualified plan (Plan).




Consolidation
of Variable Interest Entities




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


9





Reclassification





Certain
reclassifications have been made to the prior years’ financial statements to
conform to the current year presentation. In presenting the Company’s
condensed consolidated statements of cash flow for the six months ended June 30,
2009, the Company presented $1,784,914 in the decrease in other receivables
deposits and prepaid expenses. In presenting the Company’s condensed
consolidated statements of cash flow for the six months ended June 30,
2010, the Company presented $4,683,889 in the decrease in other receivables
deposits and $2,898,975 in the increase in prepaid rents. These
reclassifications had no effect on previously reported results or retained
earnings.




Litigation




In the
normal course of business, the Company may be involved in legal proceedings. The
Company accrues a liability for such matters, when it is probable that a
liability has been incurred and the amount can be reasonably estimated. When
only a range of possible loss can be established, the most probable amount in
the range is accrued. If no amount within this range is a better estimate than
any amount within the range, the minimum amount in the range is accrued. The
accrual for a litigation loss contingency might include, for example, estimates
of potential damages, outside legal fees and other directly related costs
expected to be incurred. There is no material litigation against the
Company.




New
Accounting Pronouncements




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




In
December 2009, the FASB issued guidance for Consolidations – Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities
(Topic 810).   The amendments in this update are a result of
incorporating the provisions of accounting standards codification,
“Consolidation of Variable Interest Entities”, Amendments to accounting
standards codification,“, and accounting standards codification, “Interpretation
of Consolidation of Variable Interest Entities, revised December 2004”. The
provisions of such Statement are effective for fiscal years, and interim periods
within those fiscal years, beginning on or after November 15, 2009. Earlier
adoption is not permitted. The presentation and disclosure requirements shall be
applied prospectively for all periods after the effective date. Management
believes this Statement will have no material impact on the financial statements
of the Company once adopted.




Stock
based Compensation




In April
2010, the FASB issued an Accounting Standard update, an amendment of the
accounting standards codification Topic 718, “Compensation – Stock
Compensation”. The amendment clarifies that a share-based payment award with an
exercise price denominated in the currency of a market in which a substantial
portion of the entity’s equity securities trades should not be considered to
contain a condition that is not a market, performance, or service condition.
Therefore, such an award should not be classified as a liability if it otherwise
qualifies as equity.




The
amendment in the update is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2010. The
amendment in this update should be applied by recording a cumulative-effect
adjustment to the opening balance of retained earnings. The cumulative-effect
adjustment should be calculated for all awards outstanding as of the beginning
of the fiscal year in which the amendment is initially applied, as if the
amendment had been applied consistently since the inception of the award. The
cumulative-effect adjustment should be presented separately. Earlier application
is permitted. The Company does not believe that amendment of the accounting
standards codification would have material effect on the Company’s financial
statements and disclosures.




2.  CASH
IN BANK ACCOUNTS




Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at June 30,
2010 and December 31, 2009 amounted to $55,314,058 and $41,905,658,
respectively, of which no deposits are covered by insurance. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
risks on its cash in bank accounts.


10




3.  PREPAID
RENT




Prepaid
expenses mainly consisted of prepaid rents for the gas stations (see Note 13 -
Commitments) and other expenses. At June 30, 2010 and December 31, 2009, the
current portion of prepaid rental expenses of gas stations was $3,489,497 and
$2,732,546, respectively. At June 30, 2010 and December 31, 2009, the noncurrent
portion of prepaid expenses amounted $30,178,918 and $24,620,685, respectively,
which represents the prepaid rents that will be expensed after one
year.




4.  INVENTORIES




Inventories
consisted of the following:





June30,2010
                          (Unaudited)
                        
                        
                        December 31,2009
                          (Audited)Petroleum
                        
                        $
                        12,092,615
                        
                        
                        $
                        10,449,525Diesel
                        
                        
                        6,614,765
                        
                        
                        
                        5,601,725Raw
      material for manufacturing bio-diesel oil
                        
                        
                        6,084,614
                        
                        
                        
                        4,903,601Total
                        
                        
                        24,791,994
                        
                        
                        
                        20,954,851




5.  OTHER
RECEIVABLES AND DEPOSITS




At June
30, 2010, other receivables represented deposits made for purchase of equipment
and for short term cash advances to third parties in the amount of $2,826,031,
of which $1,474,600 was a deposit for a non-binding letter of intent (LOI) to
acquire a Sichuan-based biodiesel producer with 50,000 MT of production
capacity. At December 31, 2009, other receivables represented deposits made for
purchase of equipments and short term cash advances to third parties in the
amount of $7,231,586, of which $6,973,439 was a deposit for the purchase of
Jinzheng gas station, which was completed in the first quarter of
2010.




6.  PROPERTY,
PLANT, AND EQUIPMENT




Plant,
property, and equipment are summarized as follows:





June 30,
                  
                  
                  December 31,2010
                  
                  
                  2010(Unaudited)
                  
                  
                  (Audited)Building
                  
                  $
                  604,328
                  
                  
                  $
                  336,051Biodiesel
      Processing Equipment
                  
                  
                  8,415,141
                  
                  
                  
                  8,360,404Office
      Equipment
                  
                  
                  127,238
                  
                  
                  
                  145,456Other
      Equipment
                  
                  
                  198,211
                  
                  
                  
                  34,047Motor
      Vehicles
                  
                  
                  858,542
                  
                  
                  
                  1,142,029Construction
      in progress
                  
                  
                  8,379,169
                  
                  
                  
                  -18,582,629
                  
                  
                  
                  10,017,987Less:
      Accumulated Depreciation
                  
                  
                  (2,676,837
                  )
                  
                  
                  (2,456,080
                  )Total
                  
                  $
                  15,905,792
                  
                  
                  $
                  7,561,907




Depreciation
expense for the six months ended June 30, 2010 and 2009 were $516,021 and
$589,927, respectively; and approximately $258,033 and $297,000 for the three
months ended June 30, 2010 and 2009, respectively.


11




7.  INTANGIBLE
ASSETS




In
January 2010, the Company completed an acquisition of an agricultural
plantation, located in Xianyang Chuanhua, Shaanxi Province, PRC, with 20,000 Mu
(approximately 300,000 acres) in size.  The agricultural plantation
will be used for pilot programs, which will explore and experiment with new
feedstock for the Company’s biodiesel production.  The purchase price
of the plantation was $1,025,521 (RMB 7,000,000) for a 70-year land usage right,
where the land is owned by the government. See note 14 for gas station operating
right and gas station land usage right.




Intangible
assets are summarized as follows:





June 30,
                  2010
                  (Unaudited)
                
                
                December 31,
                  2009
                  (Audited)Gas
      station operating right
                
                $
                7,028,553
                
                
                $
                -Gas
      station land usage right
                
                
                2,490,009
                
                
                
                -Agricultural
      plantation land usage right
                
                
                1,025,521
                
                
                
                -10,554,083
                
                
                
                -Less:
      Accumulated Amortization
                
                
                (126,323
                )
                
                
                -Total
                
                
                10,427,760
                
                
                
                -




Amortization
expense for the six months ended June 30, 2010 and 2009 were $126,323 and $-0-,
respectively; and approximately $ 63,169 and $-0-for the three months ended June
30, 2010 and 2009, respectively.




8.  MAJOR
CUSTOMERS AND VENDORS




For the
three months ended June 30, 2010, two major customers accounted for
approximately 37.1% of the Company’s total sales, and these two customers
accounted for approximately 32.8% 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 ended June 30, 2009, one major customer
accounted for approximately 23.9% of the Company’s total sales, and this
customer accounted for approximately 18.8% of the Company’s outstanding accounts
receivable.




For the
three months ended June 30, 2010, ten vendors accounted for approximately 80.4%
of the Company’s total purchase; within them two vendors provided approximately
46.4% of the Company’s total purchases, and each of these vendors provided more
than 20% of the Company’s total purchase.  For the three months ended
June 30, 2009, this biggest vendor accounted for approximately 25.8% of the
Company’s total purchases. There were no accounts payables due to this vendor at
June 30, 2010.




For the
six months ended June 30, 2010, three major customers accounted for
approximately 43.1% of the Company’s total sales, and each of these customers
provided more than 10% of the Company’s total sales.




For the
six months ended June 30, 2010, ten vendors accounted for approximately 72.1% of
the Company’s total purchase; two vendors provided approximately 29.9% of the
Company’s total purchases, and each of these vendors provided more than 10% of
the Company’s total purchase.


12




9.  TAX
PAYABLE




Tax
payable consisted of the following at June 30, 2010 and December 31,
2009:





June 30,
                  2010
                  (Unaudited)
              
              
              December 31,
                  2009
                  (Audited)Value
      added tax payable
              
              $
              1,075,291
              
              
              $
              1,150,725Urban
      maintenance and construction tax payable
              
              
              75,270
              
              
              
              80,551Other
      tax payable
              
              
              13,090
              
              
              
              11,655$
              1,163,651
              
              
              $
              1,242,931




10.  INCOME
TAXES




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




Effective
January 1, 2008, the PRC government implemented a new corporate income tax law
with a new maximum corporate income tax rate of 25%. Despite the income tax
exemption of Baorun Industrial, the Company is governed by the Income Tax Law of
the PRC concerning privately-run enterprises, which are generally subject to tax
at a statutory rate of 25% (33% prior to 2008) on income reported in the
statutory financial statements after appropriate tax adjustments. Redsky had a
net operating loss of approximately $20,000 and $4,000 for the six months ended
June 30, 2010 and 2009, respectively; and approximately $9,200 and $2,000 for
the three months ended June 30, 2010 and 2009, respectively.  A 100%
valuation allowance has been established due to the uncertainty of its
realization.




Baorun
China Group Limited is subject to Hong Kong profits tax rate of 16.5%, and has
insignificant net operating losses for three months ended June 30, 2010 and
2009, and has loss carryover of approximately $178,600 at December 31,
2009.  The net operating loss carries forward infinitely for the Hong
Kong profits tax, and may be available to reduce future years’ taxable income.
Management believes that the realization of the benefits from these losses
appears not more than likely due to the Company’s limited operating history and
continuing losses for the Hong Kong profits tax purpose. Accordingly, the
Company has provided a 100% valuation allowance on the deferred tax asset
benefit to reduce the asset to zero. Management will review this valuation
allowance periodically and make adjustments as needed.




The
parent company, China Integrated Energy, Inc. is incorporated in the United
States and has incurred an aggregate net operating loss of $2,284,000 and
$206,000  for the six months ended June 30, 2010 and 2009,
respectively; and approximately $1,157,000 and $84,000  for the three
months ended June 30, 2010 and 2009, respectively., respectively, subject to the
Internal Revenue Code Section 382, which places a limitation on the amount of
taxable income that can be offset by net operating losses after a change in
ownership. The net operating loss carries forward for the United States income
taxes, and may be available to reduce future years’ taxable income. These
carryforwards will expire, if not utilized, through 2029. Management believes
that the realization of the benefits from these losses appears not more than
likely due to the Company’s limited operating history and continuing losses for
the United States income tax purposes. Accordingly, the Company has provided a
100% valuation allowance on the deferred tax asset benefit to reduce the asset
to zero. Management will review this valuation allowance periodically and make
adjustment as warranted




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





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


13




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




For the three months ended
                    June 30,
                
                
                For the six months ended
                    June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      income before income taxes
                
                $
                13,399,170
                
                
                $
                8,826,733
                
                
                $
                24,758,944
                
                
                $
                16,027,986Tax
      provision
                
                
                (3,641,637
                )
                
                
                (2,206,683
                )
                
                
                (6,778,279
                )
                
                
                (4,059,494
                )Net
      income
                
                $
                9,757,533
                
                
                $
                6,620,050
                
                
                $
                17,980,665
                
                
                $
                11,968,492Earnings
      per share (Basic)
                
                $
                0.29
                
                
                $
                0.19
                
                
                $
                0.54
                
                
                $
                0.44Earnings
      per share (diluted)
                
                $
                0.22
                
                
                $
                0.15
                
                
                $
                0.42
                
                
                $
                0.35




11.  OTHER
PAYABLES AND ACCRUALS




Other
payable mainly consisted of payables for the purchase of equipment, short term
advances from third parties, and other obligations. Other payables balances at
June 30, 2010 and December 31, 2009 were $899,728 and $2,700,988, respectively.
At December 31, 2009, there was payable of $1,816,610 for remaining unpaid
leasing cost of the new gas station.




12.  LOANS
PAYABLE




The
Company was obligated under one short term loan from a commercial bank in the
PRC. The loan was entered into on October 26, 2009 with maturity to October 25,
2010. The principal will be repaid at maturity and the interest is payable per
quarter, currently the Company’s rate is at 5.841% per annum. This loan is
guaranteed by Xi’an City Economic & Technology Investment Guarantee Co., Ltd
and Shaanxi Security & Trust Guarantee Co. Xi’an City Economic &
Technology Investment Guarantee Co insured $2,930,017 (RMB 20,000,000). Shaanxi
Security & Trust Guarantee Co insured $1,465,008 (RMB 10,000,000). The
guarantee fee was 2.375% of total loan amount or $110,478 (RMB 754,110). Mr. Gao
Xincheng, Chairman and CEO, provided counter guarantee to the guarantee
companies to secure the loan. The Company collateralized its diesel processing
equipment and inventory in the value of approximately $3,516,000 (RMB
24,000,000) for the guarantee. At June 30, 2010 and December 31, 2009, the loan
carried a balance of $ 4,423,800 and $4,395,025 (RMB 30,000,000),
respectively.




13.  COMMITMENTS




Lease
Agreements




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




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




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


14




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





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




Total
rental expense for the six months ended June 30, 2010 and 2009 amounted to
approximately $1,731,000 and $894,000, respectively; and approximately $865,000
and $451,000 for the three months ended June 30, 2010 and 2009,
respectively.




Shipping
Agreement




During
2008, the Company entered a shipping agreement with a transportation company for
transporting the raw materials for manufacturing the biodiesel product for a
period of July 1, 2008 through August 31, 2009. The contract was renewed for
another year. The Company pays RMB 60 per ton for transporting the raw material
from the suppliers to our facilities and pays a range of RMB 30 / ton – RMB 100
/ ton for transporting the raw oil from its various oil extract plants to its
bio-diesel production facility. For the six months ended June 30, 2010 and 2009,
the shipping cost paid to this transportation company was approximately $212,000
and $311,000, respectively; and approximately $107,000 and $185,000,
respectively, for the three months ended June 30, 2010 and 2009.




Construction
Contract




On
February 25, 2010, the Company entered into a contract with Tongchuan Gaoyuan
Construction Co., Ltd. to contract infrastructure for a new 50,000-ton biodiesel
production plant, which will be located at Northwest Naihuo Material Factory
adjacent to the current 100,000-ton biodiesel production plant.  The
construction began March 16, 2010 and was expected to be completed by July 30,
2010. As of July 30, 2010, there is only a small portion of the infrastructure
that has yet to be completed.   The total construction cost is
approximately $1,977,400 (RMB 13,500,000).  Based on the contract, the
Company paid approximately $585,900 (RMB 4,000,000) or 30% of total construction
cost upon commencement of the construction, and will pay approximately
$1,281,600 (RMB 8,7500,000) or 65% of the total construction cost within 3 days
after a satisfactory inspection of completed infrastructure.  The
remaining approximately $109,900 (RMB 750,000) serves as retainage for quality
assurance, and will be paid by the Company 180 days after the commencement of
operations.




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




On April
30, 2010, the Company entered into a contract with Shaanxi Pinyi Decoration
Construction Co., Ltd. to renovate storage tanks, raw material storage,
production building, and research and development facility for the new
50,000-ton biodiesel production plant that located at Northwest Naihuo Material
Factory adjacent to the current 100,000-ton biodiesel production
plant.  The construction began May 1, 2010 and was expected to be
completed by July 30, 2010.  As of July 30, 2010, there is only a
small portion of the renovation work that has yet to be
completed.  The total construction cost is approximately $1,459,900
(RMB 9,900,000).  Based on the contract, the Company paid
approximately $442,000 (RMB 3,000,000) or 30% of total construction cost upon
commencement of the construction, and will pay approximately $943,700 (RMB
6,400,000) or 65% of the total construction cost within 3 days after a
satisfactory inspection of completed infrastructure.  The remaining
approximately $73,700 (RMB 500,000) serves as retainage for quality assurance,
and will be paid by the Company 180 days after the commencement of
operations.


15




Equipment Purchase
Agreements




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




On March
8, 2010, the Company entered into an equipment purchase agreement with Japan
Shinwa Shouji Co., Ltd. (JSSC) to purchase biodiesel production
equipment.  The purchase price is approximately $3,368,900 (RMB
23,000,000). At the execution of the purchase agreement, the paid approximately
$1,516,000 (RMB 10,350,000) or 45% of the purchase price as a down payment, and
pay approximately $1,684,400 (RMB 11,500,000) or 50% of the purchase price 7
days before of the shipment.  The remaining balance of approximately
$168,400 (RMB 1,150,000) or 5% of purchase price will be paid within 12 months
after the delivery.  JSSC is committed to deliver the equipment within
150 days after execution of the purchase agreement, and will provide technical
personnel to assist installation, testing of the equipment.  JMEC will
further provide training to the Company’s personnel to operate and maintain the
equipment, and provide free service and maintenance in one year after
satisfactory installation and testing of the equipment. As of July 30, 2010, the
equipment was in the process of clearing customs.




14.  BUSINESS
COMBINATION




In
January 2010, the Company completed an acquisition of 100% of Xianyang Jinzheng
gas station, a privately owned service gas station, located in Xiangyang City,
Shaanxi Province, PRC.  The acquisition furthers the Company’s growth
strategy and expansion in operation of its retail gas station business
segment.  The total purchase price of Xianyang Jinzheng gas station
was approximately $9,962,202 (RMB 68,000,000) in cash with no assumption of
liabilities.  Assets of Xianyang Jinzheng gas station consists of a
40-year land usage right of 7 Mu (approximately 105 acres) of land, which is
owned by the government; a two-story building with 196 square meters
(approximately 1,960 square feet) in size; 12 gas pumps; 5 petroleum storage
tanks; and gas station including business office and fueling stations with 988
square meters (approximately 9,880 square feet) in size.




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




The
following represents the allocation of the total purchase price.





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


16




15.
BASIC AND DILUTED EARNING PER SHARES (EPS)




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





For the Three Months
                  Ended, June 30
              
              
              For the Six Months
                  Ended, June 30(Unaudited)
              
              2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      income available to common shareholders
              
              $
              13,399,170
              
              
              $
              8,826,733
              
              
              $
              24,758,944
              
              
              $
              16,027,986Weighted
      average shares outstanding
                –
      basic
              
              
              33,710,190
              
              
              
              27,169,091
              
              
              
              33,515,721
              
              
              
              27,169,091Effect
      of dilutive securities:Convertible
      preferred stock
              
              
              6,220,109
              
              
              
              7,011,208
              
              
              
              6,414,578
              
              
              
              7,011,208Unexercised
      warrants and options
              
              
              3,327,981
              
              
              
              455,148
              
              
              
              3,315,378
              
              
              
              448,812Weighted
      average shares outstanding
                –
      diluted
              
              
              43,956,280
              
              
              
              34,635,447
              
              
              
              43,245,677
              
              
              
              34,629,111Earnings
      per share – basic
              
              
              0.40
              
              
              
              0.32
              
              
              $
              0.74
              
              
              $
              0.59Earnings
      per share – diluted
              
              
              0.30
              
              
              
              0.25
              
              
              $
              0.57
              
              
              $
              0.46




16.  STOCKHOLDERS’
EQUITY




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




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




On May
11, 2010, the investor converted 11,000 shares of Series A Convertible Preferred
stock into 50,000 shares of common stock, at a conversion rate of one share of
Series A Convertible Preferred stock for 4.54 shares of common stock. The
conversion had no cash impact.




On May
13, 2010, the investor converted 210,000 shares of Series B Convertible
Preferred stock to 210,000 shares of common stock.  The conversion had
no cash impact.




Following
is a summary of warrant activity for the six months ended June 30,
2010:





Number of Shares
              
              
              Average Exercise
                  Price per Share
              
              
              Weighed Average
                  Remaining
                  Contractual Term in
                  YearsOutstanding
      at December 31, 2009
              
              
              4,007,273
              
              
              $
              3.82
              
              
              
              3.43Exercisable
      at December 31, 2009
              
              
              3,977,273
              
              
              
              3.80
              
              
              
              3.44Granted
              
              
              30,000
              
              
              
              10.00
              
              
              
              2.29Exercised
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      at June 30, 2010
              
              
              4,037,273
              
              
              $
              3.86
              
              
              
              2.86Exercisable
      at June 30, 2010
              
              
              4,007,273
              
              
              
              3.82
              
              
              
              2.84




17






17. 
SHARED-BASED PAYMENT ARRANGEMENTS




On
September 10, 2009, the Company issued a stock  option to a financial
advisory consultant to purchase 310,320 shares of common stock and to an
investor relations consultant to purchase 206,880 shares of common stock. The
exercise prices of both stock  options are $4.50 per share. The stock
options are provided as remuneration for the financial advisory and investor
relations consulting services.. The options were accounted for using the fair
value method. The options expire one year from the date of grant and immediately
vested on the grant date. The Company recognized approximately $710,300 of
compensation expense for these options for the six months ended June 30,
2010.




On
December 16, 2009, the Company issued a stock option to a financial advisory
consultant to purchase 20,000 shares of common stock. The exercise price of the
stock option is $7.09 per share. The stock  option is a part of partial
remuneration for the financial advisory consulting service to be provided over
the course of 12 months. The option was accounted for using the fair value
method. The option expires  six years from the grant date and is evenly
vests each quarter. The Company recognized approximately $47,300 of compensation
expense for this option for the six months ended June 30, 2010.




On
January 4, 2010, the Company renewed service contracts with the three
independent directors and issued non-transferable stock purchase options to two
independent directors to purchase 20,000 shares of common stock each. The
exercise price is at $7.30 per share. These options were accounted for using the
fair value method. The option shall be terminated on the earlier of (i) the
tenth anniversary of the date of the agreement or (ii) the date as of which the
option has been fully exercised. The option is vested and becomes exercisable
after three months from the grant date. The option is vested in a 25% increment
every 3 months, in which each director provides directorship service to the
Company.  The Company recognized approximately $121,400 of compensation
expense for these options for the six months ended June 30, 2010.




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




Stock
Option Grants




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




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


18




Following
is a summary of stock option activity for the year ended June 30,
2010:





Options
              
              
              Weighted
                  Average
                  Exercise Price
              
              
              Weighed
                  Average
                  Remaining
                  Contractual
                  Term in Years
              
              
              Aggregate
                  Intrinsic ValueOutstanding
      at December 31, 2009
              
              
              577,200
              
              
              $
              4.56
              
              
              
              1.41
              
              
              $
              1,546,728Issued
              
              
              2,792,000
              
              
              
              7.04
              
              
              
              5.82Exercised
              
              
              259,265
              
              
              
              -
              
              
              
              -Cancelled/Forfeited
              
              
              25,000
              
              
              
              -
              
              
              
              -Outstanding
      at June 30, 2010
              
              
              3,084,935
              
              
              $
              6.79
              
              
              
              6.04
              
              
              $
              4,652,373Exercisable
      at June 30, 2010
              
              
              454,285
              
              
              
              5.02
              
              
              
              3.22
              
              
              $
              1,489,954




Following
is a summary of non-vested options as June 30, 2010 and changes during the three
months then ended:





Options
              
              
              Weighted Average Fair
                  Value at Grant DateNon-vested 
      options as of December 31, 2009
              
              
              20,000
              
              
              $
              7.09Issued
              
              
              2,792,000
              
              
              
              7.04Exercised
              
              
              -
              
              
              
              -Cancelled
              
              
              25,000
              
              
              
              7.04Non-vested
      options as of June 30, 2010
              
              
              2,630,650
              
              
              $
              7.04




18.
SEGMENT REPORTING




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




For
the three months ended June 30, 2010 and 2009





Wholesale
                  Distribution of
                  Finished Oil
                  and Heavy Oil
              
              
              Production and
                  Sale of
                  Biodiesel
              
              
              Operation of
                  Retail Gas
                  Stations
              
              
              Total2010
      (Unaudited)Sales
              
              $
              63,931,502
              
              
              $
              18,479,533
              
              
              $
              22,012,855
              
              
              $
              104,423,890Cost
      of goods sold
              
              
              56,786,157
              
              
              
              12,914,297
              
              
              
              19,184,337
              
              
              
              88,884,791Segment
      profit
              
              
              7,145,345
              
              
              
              5,565,236
              
              
              
              2,828,518
              
              
              
              15,539,099Selling,
      general and administrative expenses
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,028,262Income
      from operations
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,510,837Non-operating
      income (expenses)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (111,667
              )Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,399,170Segment
      assets
              
              
              112,720,142
              
              
              
              31,032,740
              
              
              
              44,462,770
              
              
              
              188,215,652Capital
      expenditures
              
              
              6,120
              
              
              
              623,980
              
              
              
              -
              
              
              
              630,1002009
      (Unaudited)Sales
              
              $
              45,452,242
              
              
              $
              11,753,849
              
              
              $
              8,038,148
              
              
              $
              65,244,239Cost
      of goods sold
              
              
              40,354,864
              
              
              
              8,213,380
              
              
              
              7,200,078
              
              
              
              55,768,322Segment
      profit
              
              
              5,097,378
              
              
              
              3,540,469
              
              
              
              838,070
              
              
              
              9,475,917Selling,
      general and administrative expenses
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              610,726Income
      from operations
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,865,191Non-operating
      income (expenses)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (38,458
              )Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,826,733Segment
      assets
              
              
              72,134,768
              
              
              
              23,861,023
              
              
              
              10,799,583
              
              
              
              106,795,374Capital
      expenditures
              
              
              87,852
              
              
              
              -
              
              
              
              -
              
              
              
              87,852


19




For the
six months ended June 30, 2010 and 2009





Wholesale
                  Distribution of
                  Finished Oil and
                  Heavy Oil
              
              
              Production and
                  Sale of Biodiesel
              
              
              Operation of
                  Retail Gas
                  Stations
              
              
              Total2010
      (Unaudited)Sales
              
              $
              140,508,626
              
              
              $
              33,377,284
              
              
              $
              39,954,030
              
              
              $
              213,839,940Cost
      of goods sold
              
              
              126,780,174
              
              
              
              23,113,832
              
              
              
              35,111,692
              
              
              
              185,005,698Segment
      profit
              
              
              13,728,452
              
              
              
              10,263,452
              
              
              
              4,842,338
              
              
              
              28,834,242Selling,
      general and administrative expenses
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,871,718Income
      from operations
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              24,962,524Non-operating
      income (expenses)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (203,580
              )Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              24,758,944Segment
      assets
              
              
              112,720,142
              
              
              
              31,032,740
              
              
              
              44,462,770
              
              
              
              188,215,652Capital
      expenditures
              
              
              10,797
              
              
              
              8,323,361
              
              
              
              2,490,040
              
              
              
              10,824,1982009
      (Unaudited)Sales
              
              $
              82,563,217
              
              
              $
              25,195,466
              
              
              $
              16,144,224
              
              
              $
              123,902,907Cost
      of goods sold
              
              
              74,174,248
              
              
              
              18,656,136
              
              
              
              13,919,652
              
              
              
              106,750,036Segment
      profit
              
              
              8,388,969
              
              
              
              6,539,330
              
              
              
              2,224,572
              
              
              
              17,152,871Selling,
      general and administrative expenses
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,166,575Income
      from operations
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,986,296Non-operating
      income (expenses)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              41,690Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              16,027,986Segment
      assets
              
              
              72,134,768
              
              
              
              23,861,023
              
              
              
              10,799,583
              
              
              
              106,795,374Capital
      expenditures
              
              
              91,176
              
              
              
              -
              
              
              
              -
              
              
              
              91,176




19. 
OPERATING RISK




(a)
Country risk




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


20




(b)
Products risk




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




(c)
Exchange risk




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




(d)
Political risk




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




(e) Key
personnel risk




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


21




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




Forward
Looking Statements




This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon the belief of, and information currently available to, the Company’s
management, as well as estimates and assumptions made by Company 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  and consider the various disclosures
made throughout the entirety of this quarterly report, as well as in the
Company’s other Filings, which include other disclosures of the risks and
factors that may affect our business, financial condition, results of
operations, and prospects.




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




OVERVIEW




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




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




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




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


22




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




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




Our
Business




Company
Overview




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




We now
operate four oil depots located in Xi’an, Shaanxi Province, have access to a
2.65 kilometer special transportation rail track and own one 100,000 ton
bio-diesel production plant located in Tongchuan, Shaanxi Province, China. Our
only market is China. Currently, our products are sold in 14 provinces and
municipalities of China covering Shaanxi Province, Henan Province, Hebei
Province, Shangdong Province, Shanxi Province, Hunan Province, Hubei Province,
Sichuan Province, Guizhou Province, Yunnan Province, Fujian Province, Xinjiang
Province, Beijing, and Shanghai.  We currently also operate 12 gas stations
surrounding Xi’an city.




Fluctuations
in Fuel Prices During 2010




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




From 2006
to 2008, there were only two oil price adjustments in each year.  However,
there were eight oil price adjustments in 2009. There have been two oil price
adjustments in 2010. We expect that oil prices in China will be adjusted more
frequently fluctuating in line with global oil prices.




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




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




On June
1, 2010, NDRC subsequently decreased the prices of gasoline and diesel by RMB
230 or $33.7 per ton or 3.1% and RMB 220 or $32.2 per ton or 3.2%, respectively,
when global crude oil price declined $74 per barrel.




Tax
Exemptions




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


23




Growth
and Expansion Plans




Management
plans to focus on growing its biodiesel production, its distribution business,
and expanding the footprint of its retail gas stations. On the distribution and
retail sides, we benefit from our advantageous location, well-established
supplier relationships, as well as an extensive distribution network that has
valuable railway access to reach remote parts of China that other distribution
companies located in Shaanxi Province cannot currently reach. We plan to
strengthen our outreach in certain key distribution areas. We also plan to add
another three retail gas stations through acquisition or lease in 2010, which we
believe will benefit our overall distribution profit margins.




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




On June
26, 2010, we signed a non-binding letter of intent (LOI) to acquire a
Sichuan-based biodiesel producer with 50,000 MT of production capacity. We
believe that profit margins of the acquired company are similar to our current
biodiesel production. The acquisition cost is estimated at $16.5 million. We are
completing negotiations and due diligence, and expect to complete the
transaction by the end of the third quarter.  The LOI is non- binding and
there are risks that this transaction will not occur.




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




Basis
of Presentations




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




Critical
Accounting Policies and Estimates




Accounts
Receivable




Our
policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves.  Based on historical collections,
no allowance was deemed necessary at June 30, 2010 and December 31, 2009, as the
Company did not experience any uncollectible accounts receivable and bad debt
write-off over the past years.




Inventories




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




Property,
Plant and Equipment




Property,
plant, and equipment 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


24




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




Intangible
Assets




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




Revenue
Recognition




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




Foreign
Currency Translation




Our
functional currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars (“USD”) as the reporting
currency. Assets and liabilities are translated at the exchange rate in effect
at the balance sheet date. Revenues and expenses are translated at the average
rate of exchange prevailing during the reporting period. Translation adjustments
caused by different exchange rates from period to period are included as a
component of stockholders’ equity as “Accumulated other comprehensive income.”
Gains and losses resulting from foreign currency transactions are included in
income. On June 19, 2010, the Chinese central bank announced that it would
further the reform of the RMB exchange rate mechanism to improve flexibility.
The Company does not believe that its foreign currency exchange rate fluctuation
risk is significant in a short period of time.. 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. There has been no
significant fluctuation in exchange rate for the conversion of RMB to USD after
the balance sheet date.




Income
Tax Recognition




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




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





For the three months ended
                      June 30,
                  
                  
                  For the six months ended
                      June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      income before income taxes
                  
                  $
                  13,399,170
                  
                  
                  $
                  8,826,733
                  
                  
                  $
                  24,758,944
                  
                  
                  $
                  16,027,986Tax
      provision
                  
                  
                  (3,641,637
                  )
                  
                  
                  (2,206,683
                  )
                  
                  
                  (6,778,279
                  )
                  
                  
                  (4,059,494
                  )Net
      income
                  
                  $
                  9,757,533
                  
                  
                  $
                  6.620.050
                  
                  
                  $
                  17,980,665
                  
                  
                  $
                  11,968,492Earnings
      per share (Basic)
                  
                  $
                  0.29
                  
                  
                  $
                  0.19
                  
                  
                  $
                  0.54
                  
                  
                  $
                  0.44Earnings
      per share (diluted)
                  
                  $
                  0.23
                  
                  
                  $
                  0.15
                  
                  
                  $
                  0.42
                  
                  
                  $
                  0.35


25




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 accounting standards
codification, we have determined that we will reinvest indefinitely our earnings
to the biodiesel production facility and biodiesel production technology, and
accordingly no accrual of deferred tax liabilities was required as of June 30,
2010 and December 31, 2009  We have also analyzed the status of Redsky
Industrial and have determined that based on the aforementioned series of
contracts, if Redsky Industrial should be sold, dissolved or otherwise disposed
of, the obligations of Xi’an Baorun Industrial would be terminated under the
series of contracts, including Redsky Industrial’s right to 100% of Xi’an Baorun
Industrial’s net income. In addition, in accordance with “Accounting for
Uncertainty in Income Taxes”, we have examined our tax position in the context
of “Accounting for Contingencies.”  Accounting for Uncertainty in Income
Taxes is an accounting requirement that discusses tax issues that have an
element of uncertainty. In accordance with “Accounting for Contingencies”, we
have determined that it is probable that our tax position with regards to both
Redsky Industrial and Xi’an Baorun Industrial is correct. Accordingly, no
deferred tax liability has been provided for.




Consolidation
of Variable Interest Entities




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




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


26


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.




Litigation




In the
normal course of business, the Company may be involved in legal proceedings. The
Company accrues a liability for such matters, when it is probable that a
liability has been incurred and the amount can be reasonably estimated. When
only a range of possible loss can be established, the most probable amount in
the range is accrued. If no amount within this range is a better estimate than
any amount within the range, the minimum amount in the range is accrued. The
accrual for a litigation loss contingency might include, for example, estimates
of potential damages, outside legal fees and other directly related costs
expected to be incurred. There is no material litigation against the
Company.




Results
of Operations




For
the three months ended June 30, 2010 and 2009





Wholesale
                      Distribution of
                      Finished Oil and
                      Heavy Oil
                  
                  
                  Production and
                      Sale of Biodiesel
                  
                  
                  Operation of
                      Retail Gas
                      Stations
                  
                  
                  Total2010
      (Unaudited)Sales
                  
                  $
                  63,931,502
                  
                  
                  $
                  18,479,533
                  
                  
                  $
                  22,012,855
                  
                  
                  $
                  104,423,890Cost
      of goods sold
                  
                  
                  56,786,157
                  
                  
                  
                  12,914,297
                  
                  
                  
                  19,184,337
                  
                  
                  
                  88,884,791Segment
      profit
                  
                  
                  7,145,345
                  
                  
                  
                  5,565,236
                  
                  
                  
                  2,828,518
                  
                  
                  
                  15,539,099Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,028,262Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13,510,837Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (111,667
                  )Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13,399,170Segment
      assets
                  
                  
                  112,720,142
                  
                  
                  
                  31,032,740
                  
                  
                  
                  44,462,770
                  
                  
                  
                  188,215,652Capital
      expenditures
                  
                  
                  6,120
                  
                  
                  
                  623,980
                  
                  
                  
                  -
                  
                  
                  
                  630,1002009
      (Unaudited)Sales
                  
                  $
                  45,452,242
                  
                  
                  $
                  11,753,849
                  
                  
                  $
                  8,038,148
                  
                  
                  $
                  65,244,239Cost
      of goods sold
                  
                  
                  40,354,864
                  
                  
                  
                  8,213,380
                  
                  
                  
                  7,200,078
                  
                  
                  
                  55,768,322Segment
      profit
                  
                  
                  5,097,378
                  
                  
                  
                  3,540,469
                  
                  
                  
                  838,070
                  
                  
                  
                  9,475,917Selling,
      general and administrative expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  610,726Income
      from operations
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,865,191Non-operating
      income (expenses)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (38,458
                  )Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,826,733Segment
      assets
                  
                  
                  72,134,768
                  
                  
                  
                  23,861,023
                  
                  
                  
                  10,799,583
                  
                  
                  
                  106,795,374Capital
      expenditures
                  
                  
                  87,852
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  87,852





Netsales. Net sales for the three
months ended June 30, 2010 were approximately $104.4 million compared to the
same period in 2009 of approximately $65.2 million, an increase in revenues of
$39.2 million, or 60.1%. The increase was mainly due to strong market demand for
finished oil and heavy oil products, sales growth generated by the gas stations,
and increase in average selling prices. Sales from wholesale distribution for
the three months ended June 30, 2010 was $63.9 million, compared to $45.5
million in the same period of 2009, an increase of $18.4 million, or 40.4%. For
the three months ended June 30, 2010 and 2009, sales volume of wholesale
distribution were 80,700 tons and 69,800 tons, respectively, with an increase of
10,900 tons or 15.6% from the same period in 2009, as a result of increase of
sales to our existing customers to support their business growth and increase
the number of our distributors and end customers. Average selling prices of
wholesale distribution also increased approximately by 21.1% from the same
quarter 2009. Sales from production and sale of biodiesel segment for the three
months ended June 30, 2010 was 18.5 million, compared to $11.8 million in the
same period of 2009, an increase of $6.7 million or 56.8%. Sales volume of
biodiesel for the three months ended June 30, 2010 and 2009 were 22,500 tons and
17,400 tons, respectively, with a increased of 5,100 tons or 29.3%, compared to
the same period of 2009.   Furthermore, average selling price of
biodiesel increased approximately by 21.3% in line with increases of average
selling prices in petro-diesel. Sales from our retail gas station for the three
months ended June 30, 2010 was $22.0 million, compared to $8.0 million in the
same period of 2009, an increase of $14.0 million or 175.0%.  Sales volume
of gas stations for the three months ended June 30, 2010 and 2009 were 22,200
tons and 10,800 tons, respectively, an increased by 11,400 tons or 105.6% from
the same period in 2009. The increased was attributed to an increase of number
gas stations from 7 gas stations in the second quarter of 2009 to 12 gas
stations in the same period of 2010. Furthermore, average selling price of
retail gas station increased by approximately 21.7% from the same period in
2009.


27





Costofsales. Cost of sales for the
second quarter of 2010 was approximately $88.9 million compared to the cost of
sales in the same period of 2009 of approximately $55.8 million, an increase of
$33.1 million, or 59.3%. The increase in cost of sales was attributable to an
increase in production and sales activities during the second quarter of 2010.
Cost of sales as a percentage of sales was approximately 85.1% for the second
quarter of 2010 and 85.5%for the same period of 2009.  The decrease as a
percentage of sales was due to mix of product sales in the wholesale
distribution business.





Grossprofit. Gross profit was
approximately $15.5 million for the second quarter of 2010 as compared to
approximately $9.5 million for the same period of 2009, representing gross
margins of approximately 14.9% and 14.5%, respectively. During the second
quarter of 2010, the gross profit margin for wholesales distribution of finished
oil and heavy oil products was approximately 11.2%, the gross profit margin for
production and sale of biodiesel was approximately 30.1%, the gross margin for
operation of retail gas stations was approximately 12.9%, versus 11.2%, 30.1%,
and 10.4%, respectively, compared to the same period of 2009.  The increase
in gross profit was due to change of product sales mix in wholesale distribution
business as a result of sales volume of heavy oil products that have high gross
margin increased by 186.8% from the same period of 2009.





Operatingexpenses. Selling, general and
administrative expenses for the second quarter of 2010 were approximately $2.0
million while it was $0.6 million for the same period of 2009 with an increase
of $1.4 million or 233.3%. This increase was mainly attributed approximately
$0.7 million of employee stock option expense and approximately $0.5 million of
stock options awarded to financial advisors. Total operating expenses as a
percentage of sales was 1.9% and 0.9% for the second quarter of 2010 and 2009,
respectively. We expect our professional fees will at least maintain at current
level for the remainder of 2010, as we continue to engage an outside consulting
firm to work on our Sarbanes Oxley compliance, and recognize compensation
expense to employee stock option awards. We also expect to have an increase in
other general and administrative expenses in future reporting periods, as our
business expands.





IncomefromOperations. Income from operations for
the three months ended June 30, 2010 was $13.5 million compared to $8.9 million
in the same period of 2009.  Income from operations as a percentage of
sales for the three months ended June 30, 2010 and 2009 were 12.9% and 13.6%,
respectively. The decrease in income from operations as a percentage of sales
was attributable to the additional selling, general and administrative
expenses.





Netincome. The net income for the
second quarter of 2010 was $13.4 million as compared to $8.8 million in the same
period of 2009.  It was an increase of $4.6 million in net profit or
52.3%.  This increase was attributable to economies of scale combined with
rapid growth in revenue from wholesale distribution of finished oil and heavy
oil products and operation of retail gas stations segments. Management believes
that the net income increase is the result of the fast and continuing revenue
growth.   Net income will continue to increase as we will continue to
increase sales volume in wholesale distribution and operation of retail gas
stations.  Upon completion of the new 50,000-ton biodiesel production plant
in the third quarter of 2010, and completion of the acquisition of biodiesel
producer with 50,000-ton production capacity at the end of the third quarter, we
expect that revenue and net income will grow significantly.


28




For
the six months ended June 30, 2010 and 2009





Wholesale
                    Distribution of
                    Finished Oil and
                    Heavy Oil
                
                
                Production and
                    Sale of Biodiesel
                
                
                Operation of
                    Retail Gas
                    Stations
                
                
                Total2010
      (Unaudited)Sales
                
                $
                140,508,626
                
                
                $
                33,377,284
                
                
                $
                39,954,030
                
                
                $
                213,839,940Cost
      of goods sold
                
                
                126,780,174
                
                
                
                23,113,832
                
                
                
                35,111,692
                
                
                
                185,005,698Segment
      profit
                
                
                13,728,452
                
                
                
                10,263,452
                
                
                
                4,842,338
                
                
                
                28,834,242Selling,
      general and administrative expenses
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,871,718Income
      from operations
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                24,962,524Non-operating
      income (expenses)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (203,580
                )Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                24,758,944Segment
      assets
                
                
                112,720,142
                
                
                
                31,032,740
                
                
                
                44,462,770
                
                
                
                188,215,652Capital
      expenditures
                
                
                10,797
                
                
                
                8,323,361
                
                
                
                2,490,040
                
                
                
                10,824,1982009
      (Unaudited)Sales
                
                $
                82,563,217
                
                
                $
                25,195,466
                
                
                $
                16,144,224
                
                
                $
                123,902,907Cost
      of goods sold
                
                
                74,174,248
                
                
                
                18,656,136
                
                
                
                13,919,652
                
                
                
                106,750,036Segment
      profit
                
                
                8,388,969
                
                
                
                6,539,330
                
                
                
                2,224,572
                
                
                
                17,152,871Selling,
      general and administrative expenses
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,166,575Income
      from operations
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                15,986,296Non-operating
      income (expenses)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                41,690Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                16,027,986Segment
      assets
                
                
                72,134,768
                
                
                
                23,861,023
                
                
                
                10,799,583
                
                
                
                106,795,374Capital
      expenditures
                
                
                91,176
                
                
                
                -
                
                
                
                -
                
                
                
                91,176




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





Six Months ended,
                    June 30, 2010
                
                
                Six Months ended,
                    June 30, 2009$
                
                
                % of Sales
                
                
                $
                
                
                % of SalesNet
      sales
                
                
                213,839,940
                
                
                
                100.0
                %
                
                
                123,902,907
                
                
                
                100.0
                %Cost
      of good sold
                
                
                185,005,698
                
                
                
                86.5
                %
                
                
                106,750,036
                
                
                
                86.2
                %Gross
      profit
                
                
                28,834,242
                
                
                
                13.5
                %
                
                
                17,152,871
                
                
                
                13.8
                %Total
      operating expenses
                
                
                3,871,718
                
                
                
                1.8
                %
                
                
                1,166,575
                
                
                
                0.9
                %Income
      from Operation
                
                
                24,962,523
                
                
                
                11.7
                %
                
                
                15,986,296
                
                
                
                12.9
                %Other
      income (expenses)
                
                
                (203,580
                )
                
                
                -0.1
                %
                
                
                41,690
                
                
                
                -
                %Net
      income
                
                
                24,758,944
                
                
                
                11.6
                %
                
                
                16,027,986
                
                
                
                12.9
                %




Operations
Results for the Six Months Ended June 30, 2009





Net sales.Net sales for the
six months ended June 30, 2010 were approximately $213.8 million compared to
$123.9 million in the same period in 2009, an increase of $89.9 million, or
72.6%. The increase was mainly attributed to the growths in wholesale
distribution and retail gas station sectors. We have continued to expand new
sales channels and territories. We have also increased in-depth penetration to
our existing customers creating more demand for oil products as their businesses
grow and expand. For the six months ended June 30, 2010 and 2009, sales volume
of wholesale distribution were 172,200 tons and 130,200 tons, respectively, with
an increase of 42,000 tons or 32.2% from the same period in 2009. Secondly, in
our retail gas station segment we had increased revenue of $23.8 million or
147.5% compared to the same period in 2009 as the result of addition of 5 new
fully operational gas stations. Sales volume of gas stations for the six months
ended June 30, 2010 and 2009 were 41,700 tons and 21,900 tons, respectively, an
increased by 19,800 tons or 90.4% from the same period in 2009. Sales volume of
biodiesel for the six months ended June 30, 2010 and 2009 were 40,800 tons and
38,200 tons, respectively, an increased by 2,600 tons or 6.8% from the same
period in 2009. Furthermore, for the six months ended of June 30, 2010 the
average selling price of wholesale distribution of finished oil and heavy oil
products, production and sale of biodiesel, and operation of retail gas station
increased 28.8%, 23.8%, and 30.0%, respectively from the same period in
2009.


29





Cost of sales. Cost of sales
for the six months ended June 30, 2010 was approximately $185.0 million compared
to $106.8 million in the same period of 2009, an increase of $78.2 million, or
73.3%. The increase in cost of sales was attributable to an increase in
production and sales activities during the first six months of 2009. Cost of
sales as a percentage of sales was approximately 86.5% for the six months of
2010 and 86.2% for the same period in 2009.





Gross profit. Gross profit
was approximately $28.8 million for the six months ended June 30, 2010 as
compared to approximately $17.2 million for the same period in 2009,
representing gross margins of approximately 13.5% and 13.8%, respectively. For
the six months ended June 30, 2010, the gross profit margin for production and
sales of biodiesel oil was approximately 30.8%, and the gross profit margin for
wholesale distribution of finished oil and heavy oil products, such as
gasoline and diesel oil, was approximately 9.8%, versus 26.0% and 10.2%,
respectively, in the same period of 2009. The decrease in gross margin of oil
distribution was attributed to favorable frequent pricing adjustments by the
NDRC reflecting global crude oil pricing in 2009. The increase in the gross
margin of biodiesel was attributed to the higher selling price compared to the
same period in 2009. The gross profit margin of retail gas stations was
approximately 12.2% for the six months of 2010, as compared to 13.8% in the same
period of 2009. The decrease was attributed to the inefficiency of and the
promotion for the new gas stations we leased and acquired in 2010. We expect our
gross margin to maintain at least at the current level with improvements from
upwards pricing adjustments in the China domestic market and efficiency
improvements from the operation retail gas stations.




Operating expenses. Selling,
general and administrative expenses for the six months ended June 30, 2010 were
approximately $3.9 million compared to $1.2 million for the same period in 2009,
an increase of $2.7 million or 231.8%. This increase was mainly attributed
approximately $1.4 million of employee stock option expense and approximately
$0.9 million of stock options awarded to financial advisors. Total operating
expenses as a percentage of sales was 1.8% and 0.9% for the six months ended
June 30, 2010 and 2009, respectively. We expect our professional fees will at
least maintain at current level for the remainder of 2010, as we continue to
engage an outside consulting firm to work on our Sarbanes Oxley compliance, and
recognize compensation expense to employee stock option awards. We also expect
to have an increase in other general and administrative expenses in future
reporting periods, as our business expands.




Net income. The net income
for the six months ended June 30, 2010 was $24.8 million compared to $16.0
million in the same period in 2009, an increase of $8.8 million or 54.5%. This
increase was attributable to economies of scale combined with rapid growth in
revenue in our distribution and retail business segments. Management believes
that the net income increase is the result of the rapid and continuing revenue
growth, as well as controlling costs and operating expenses.




Liquidity
and Capital Resources




As of
June 30, 2010 and December 31, 2009, we had cash and cash equivalents of
approximately $58.7 million and $62.4 million, respectively. At June 30, 2010,
current assets were approximately $131.7 million and current liabilities were
approximately $6.7 million, as compared to current assets of approximately
$131.4 million and current liabilities of approximately $10.2 million at
December 31, 2009. Working capital equaled approximately $125.0 million at June
30, 2010, compared to $121.1 million at December 31, 2009, a increase of 3.3%.
The current ratio was 19.5-to-1 at June 30, 2010, compared to 12.8-to-1 at the
December 31, 2009. The increase in working capital in the first half year of
2010 was primarily due to a decrease approximately $1.6 million of advance from
customers and a decrease approximately $1.8 million of other payables and
accrued expenses.




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


30




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 completion of a strategic
      acquisition of a biodiesel producer with 50,000-ton production capacity
      and construction of a new facility with 50,000-ton of production capacity
      in 2010; and continue pursuing expansion of biodiesel production capacity
      through both internal build-out and mergers and acquisitions;
      and




·
            Development
      and commercialization of new technology in biodiesel production capacity
      and apply the new technology to the new biodiesel
    facilities.




We
anticipate incurring immaterial research and development expenses during the
next 12 months as a result of us working with research centers of local
universities and colleges.




The
following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended June 30, 2010 and 2009.





Six Months Ended June 30,2010 (Unaudited)
                
                
                2009 (Unaudited)Cash
      provided by (used in):Operating
      Activities
                
                $
                6,790,372
                
                
                $
                18,710,729Investing
      Activities
                
                
                (10,824,198
                )
                
                
                (91,176
                )Financing
      Activities
                
                
                -
                
                
                
                768,738




Net cash
provided operating activities was $6.8 million in the six months ended June 30,
2010, compared to $18.7 million of cash provided by operation in the same period
of 2009. The net cash inflow decreased during the first half year of 2010 was
primarily due to increase in inventory and account receivables. Approximately $9
million of lease payments for leasing 2 new gas stations in January 2010 also
contributed to the decrease of cash provided by operating activities.
Approximately $1.5 million of deposit payments for a non-binding letter of
intent (LOI) to acquire a Sichuan-based biodiesel producer with 50,000 MT of
production capacity also contributed to the decrease of cash provided by
operating activities.




Net cash
used in investing activities was $10.8 million in the six months ended June of
2010. During the six months ended June of 2010, we spent approximately $8.3
million to purchase equipments for constructing a 50,000-ton biodiesel
manufacturing facility, and approximately $2.5 million for of purchase Xianyang
Jinzheng gas station.




There was
no financing activity in the six months ended June 30, 2010. In the six months
ended June, 2009, we received approximately $0.8 million from releases of
restricted cash from prior financing activities.


31




Inflation




We do not
believe that inflation had a significant negative impact on our results of
operations during the six months ended June 30, 2010.  However, there is
concern of inflation for the remainder of 2010.




Off-Balance
Sheet Arrangements




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




Contractual
Obligations and Commitments




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




Quantitative
and Qualitative Disclosures About Market Risks




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




Recently
Issued Accounting Pronouncements




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




ITEM
      3
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Not
required.




ITEM
      4T.
            CONTROLS
      AND PROCEDURES.




We
maintain “disclosure controls and procedures,” as such term is defined under
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation as required by Rule 13a-15(d) under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2010. Based upon their
evaluation and subject to the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that as of June 30, 2010 our disclosure controls and
procedures were effective in ensuring that material information relating to us,
is made known to the Chief Executive Officer and Chief Financial Officer by
others within our company during the period in which this report was being
prepared.




There
were no changes in our internal controls over financial reporting identified in
connection with the evaluation that occurred during the quarter ended June 30,
2010 that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.




32




PART
II
 OTHER
INFORMATION
  ITEM
      1.
              LEGAL
      PROCEEDINGS
  None.


ITEM
      1A.
            RISK
      FACTORS





Risks
Related to our Business




Our
customer sales base in 2010 has become more concentrated.  If we were to
lose any such customers, our business, operating results and financial condition
could be materially and adversely affected.





Historically,
our customer base has been highly concentrated.  In the first quarter of
2010, sales to two provincial subsidiaries of Sinopec, represented 46.9% of our
total sales. In the second quarter of 2010, sales to Shandong Yongxin
Chemical Company, Ltd, represented 23.9% of our total sales and sales to
one provincial subsidiaries of Sinopec, represented 13.2% of our total
sales.  The loss of, or reduction of our sales to, any of such major
customers could have a material adverse effect on our business, operating
results and financial condition.




ITEM
      2
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




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




Since the
consummation of the offering, we have used approximately $15 million of the
net proceeds from the offering to begin construction of a new bio-diesel
facility, and the remaining $16 million to be used to acquire a Sichuan Province
based biodiesel producer with 50,000 tons of production capacity.




ITEM
      3
            DEFAULTS
      UPON SENIOR SECURITIES




None.




ITEM
      4
            OTHER
      INFORMATION




None.




ITEM
      5
            EXHIBITS




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




(a) 
         Exhibits:




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




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




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


33




SIGNATURES




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




Dated:
August 12, 2010





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


34




EXHIBIT
INDEX





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


35