China Integrated Energy 10Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the period ended June 30, 2008

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

For the transition period from _______________________ to _______________________

Commission File Number: 000-25413

China Bio Energy Holding Group Co., Ltd.

(Exact name of registrant as specified in its charter)

Delaware		65-0854589
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

Dongxin Century Square, 7^th Floor Hi-Tech Development District Xi’an Shaanxi Province, People’s Republic of China		710043
(Address of principal executive offices)		(Zip Code)

86 29 8268 9320

(Registrant’s telephone number, including area code)

_______________________________________________________________________________

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

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

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

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

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

o Yes x No

As of August 14, 2008, there were 25,454,545 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.

TABLE OF CONTENTS

		Page
PART I.
FINANCIAL INFORMATION
	Item 1. Consolidated Financial Statements (unaudited)	1
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
	Item 4. Controls and Procedures	24

PART II.
OTHER INFORMATION
	Item 1. Legal Proceedings	25
	Item 1A. Risk Factors	25
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
	Item 3. Defaults Upon Senior Securities	25
	Item 4. Submission of Matters to a Vote of Security Holders	25
	Item 5. Other Information	25
	Item 6. Exhibits	25

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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

CONSOLIDATED BALANCE SHEETS

	As of June 30, 2008		As of December 31, 2007
ASSETS	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	2,247,500	$	1,382,371
Restricted cash		200,000		200,000
Accounts receivable, net		7,417,925		288,589
Other receivables		308,422		1,548,681
Prepaid expenses		6,030,947		2,896,493
Advance to suppliers		18,102,681		16,546,506
Inventories		12,475,820		12,082,962
Due from related party		677,380		593,696
Total current assets		47,460,675		35,539,298

PREPAID EXPENSE - NONCURRENT		6,852,311		—

PROPERTY AND EQUIPMENT, net		10,347,168		8,166,250

TOTAL ASSETS	$	64,660,154	$	43,705,548

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	417,625	$	179,617
Advance from customers		5,091,561		499,908
Tax payable		498,089		125,015
Other payables		3,120,399		3,165,677
Accrued expenses		50,165		67,875
Loan payable		1,457,938		1,370,877
Long term notes payable - current portion		65,743		67,287
Total current liabilities		10,701,520		5,476,256

LONG TERM LIABILITIES		14,642		33,655
Total liabilities		10,716,162		5,509,911

COMMITMENT AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized shares 1,000,000; issued and outstanding 1,000,000 shares		1,000		1,000
Common stock, $.0001 par value; authorized shares 80,000,000; issued and outstanding 25,454,545 shares		2,545		2,545
Paid in capital		19,611,938		19,611,938
Statutory reserve		2,051,030		2,051,030
Accumulated other comprehensive income		5,108,444		2,319,732
Retained earnings		27,169,035		14,209,392
Total stockholders' equity		53,943,992		38,195,637

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	64,660,154	$	43,705,548

See accompanying notes to the unaudited consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(Unaudited)

	For The Six Months Ended June 30,						For The Three Months Ended June 30,
	2008			2007			2008			2007

Sales	$	93,987,652		$	25,276,379		$	58,426,812		$	13,717,654
Cost of goods sold		80,394,701			22,318,179			49,847,038			11,873,889
Gross profit		13,592,951			2,958,200			8,579,774			1,843,765
General and administrative expenses		571,495			514,636			251,689			387,535
Income from operations		13,021,456			2,443,564			8,328,085			1,456,230
Non-operating income (expenses)
Interest income (expenses)		(59,223	)		(62,033	)		(30,952	)		(42,066	)
Other income (expenses)		(2,544	)		—			(2,474	)		—
Financial expenses		(46	)		—			79			4,444
Total non-operating expenses		(61,813	)		(62,033	)		(33,347	)		(37,622	)
Net income		12,959,643			2,381,531			8,294,738			1,418,608
Other comprehensive item
Foreign currency translation gain		2,788,712			360,729			1,548,300			185,542
Comprehensive Income	$	15,748,355		$	2,742,260		$	9,843,038		$	1,604,150

Basic and diluted weighted average shares outstanding
Basic		25,454,545			23,954,545			25,454,545			23,954,545
Diluted		32,891,850			23,954,545			32,685,185			23,954,545

Basic and diluted net earnings per share available to common stockholders
Basic	$	0.51		$	0.10		$	0.33		$	0.06
Diluted	$	0.39		$	0.10		$	0.25		$	0.06

See accompanying notes to the unaudited consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

	For The Six Months Ended June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,959,643		$	2,381,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		457,061			79,406
(Increase) decrease in current assets:
Accounts receivable		(6,910,513	)		(5,111,137	)
Other receivables		266,582			(101,877	)
Prepaid expenses		(8,378,790	)
Advance to suppliers		(491,096	)		718,813
Inventories		363,945			(2,272,693	)
Due from related party		—			(108,206	)
Increase (decrease) in current liabilities:
Accounts payable		220,212			1,582,843
Advance from customers		4,431,338			2,466,295
Taxes payable		354,840			224,088
Other payables and accrued expenses		(1,408,412	)		179,122
Net cash provided by operating activities		1,864,810			38,185
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment		(1,038,203	)		(97,252	)
Construction in progress		—			(320,995	)
Net cash used in investing activities		(1,038,203	)		(418,247	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash		—			(400,814	)
Short-term loans, net		—			(678,238	)
Proceeds from long-term notes payable		—			41,050
Repayment of long-term notes payable		(26,208	)		(20,214	)
Notes payables - trade / related party		—			685,213
Repayment from / (Advance to) shareholder		(44,683	)		26,484
Net cash used in financing activities		(70,891	)		(346,519	)
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS		109,410			360,729
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		865,128			(365,852	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,382,372			631,443
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,247,500		$	265,591
Supplemental Cash flow data:
Income tax paid	$	—		$	—
Interest paid	$	61,680		$	62,033

See accompanying notes to the unaudited consolidated financial statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

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

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

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

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

The Company believes that current PRC corporate rules and regulations do not preclude Redsky Industrial, and thereby the Company, from exercising effective control of Baorun Industrial, the operating entity of the Company. Pursuant to the terms of the Business Cooperation Agreement, as amended (“Cooperation Agreement”) entered into between Redsky Industrial and Baorun Industrial, Baorun Industrial shall granted to Redsky Industrial the right to claim 100% of the net income, or loss, of Baorun Industrial in consideration for the services provided by Redsky Industrial,. In addition, Baorun Industrial granted to Redsky Industrial the right to any residual returns and dividends from Baorun Industrial.

The assets and liabilities of Baorun Industrial are accounted for at their historical rate, similar to the manner in which Baorun Group was treated by the Company in the Share Exchange. Baorun Industrial is not a self-supporting entity and requires the support of Redsky Industrial and their related entities. Redsky Industrial and its related entities were required to finance Baorun Industrial through the issuance of shares of preferred stock by the Company, Redsky Industrial’s ultimate parent. The financing of the Company, concurrent with the Share Exchange Agreement, was entered into to enable Baorun Industrial to pursue bio-energy production projects, and to expand existing conventional oil/energy projects. Bio-energy production and the marketing of their products is an industry with limited operating history, and might require additional financing above what Redsky Industrial, the Company and its related entities have currently advanced to Baorun Industrial.

Under the Cooperation Agreement, Baorun Industrial cannot assign its rights under such agreement to another third party without Redsky Industrial’s consent. Under the agreement, Redsky Industrial must notify Baorun Industrial of its intent to assign the agreement to a third party but does not need the consent of Boarun Industrial for such assignment. Under the Cooperation Agreement Redsky Industrial is to absorb 100% of the net income, or loss, of Baorun Industrial. In addition, Baorun Industrial granted to Redsky Industrial the right to any residual returns and dividends from Baorun Industrial. Accordingly, as Redsky Industrial is a wholly owned subsidiary of Baorun Group, which is ultimately a subsidiary of the Company, 100% of Baorun Industrial will be consolidated into Redsky Industrial and ultimately the Company. The right to absorb these benefits, and expenses, are in place for the entire life of the Cooperation Agreement, or until such time that the Cooperation Agreement is voided or cancelled.

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

The unaudited financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s audited financial statements. The results for the six and three months ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principle of Consolidation

The accompanying consolidated financial statements include our accounts and the accounts of our wholly owned subsidiary, Baorun Group and Redsky Industrial, and its consolidated subsidiary, Baorun Industrial (collectively, the “Company”). All significant inter-company accounts and transactions have been eliminated in consolidation

Use of Estimates

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

Cash and Cash Equivalents

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

As of June 30, 2008 and December 31, 2007, the Company maintained restricted cash of $200,000 in an escrow account for the use of the Company’s investment relations only. It is presented as restricted cash on the accompanying consolidated balance sheets.

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 collection activity, no allowance was deemed necessary at June 30, 2008 and December 31, 2007.

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 production cost 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, 2008 and December 31, 2007 were $5,091,561 and $499,908, respectively.

Property and Equipment

Plants and equipments 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:

	Years
Building		20
Vehicle		5
Office Equipment		5
Production Equipment		5

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Impairment of Long-Lived Assets

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

Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of June 30, 2008 and December 31, 2007, there were no significant impairments of its long-lived assets.

Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

According to the PRC tax regulations, since Baorun Industrial uses the waste gas, water and residue to produce the products, the Company is eligible for the exemption of income taxes for six years from year 2004 to year 2010.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48. As a result of the implementation of Interpretation 48, the Company recognized no material adjustments to liabilities or stockholders equity. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

Revenue Recognition

The Company's revenue recognition policies are in compliance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (“SAB”) 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 before all of the relevant criteria for revenue recognition are recorded as unearned revenue.

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

There were no sales returns and allowances for the six and three months ended June 30, 2008 and 2007. 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.

Shipping Costs

Shipping costs are included in cost of goods sold and totaled approximately $300,000 and $155,000 for the six months ended June 30, 2008 and 2007; respectively and approximately $123,000 and $37,000 for the three months ended June 30, 2008 and 2007, respectively.

Concentration of Credit Risk

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

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

Statement of Cash Flows

In accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

Fair Value of Financial Instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

Foreign Currency Translation and Comprehensive Income (Loss)

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

On July 21, 2005, the central government of China allowed the RMB to fluctuate, ending its decade old valuation peg to the U.S. dollar. Historically, the Chinese government has benchmarked the RMB exchange ratio against the U.S. dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk. The Company does not believe that its foreign currency exchange rate fluctuation risk is significant, especially if the Chinese government continues to benchmark the RMB against the U.S. dollar.

This fluctuation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China.

The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130) “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the six and three months ended June 30, 2008 and 2007 was included net income and foreign currency translation adjustments.

Basic and Diluted Earning per Share (EPS)

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

	For the Six Months Ended June 30 (Unaudited)				For the Three Months Ended June 30 (Unaudited)
	2008		2007		2008		2007
Net income	$	12,959,643	$	2,381,531	$	8,294,738	$	1,418,608

Weighted average shares outstanding - basic		25,454,545		23,954,545		25,454,545		23,954,545
Effect of dilutive securities:
Convertible preferred stock		4,545,455		—		4,545,455		—
Unexercised warrants		2,891,850		—		2,685,185		—
Weighted average shares outstanding - diluted		32,891,850		23,954,545		32,685,185		23,954,545

Earnings per share - basic	$	0.51	$	0.10		0.33		0.06
Earnings per share - diluted	$	0.39	$	0.10		0.25		0.06

Segment Reporting

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

SFAS 131 has no effect on the Company’s financial statements as substantially all of the Company’s operations are conducted in one industry segment, that of processing and distributing finished oil. All of the Company’s assets are located in the PRC. All of the Company's sales are in the PRC and are involved in the processing and distribution of finished oil. For the six months ended June 30, 2008 and 2007, the Company had sales of approximately $21,115,000 and $0 from its biodiesel facility, respectively; and $14,469,000 and $0 for the three months ended June 30, 2008 and 2007 from its biodiesel facility, respectively.

New Accounting Pronouncements

The Hierarchy of Generally Accepted Accounting Principles

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement will not have an impact on the Company’s financial statements.

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133.” This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.

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

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.

Business Combinations

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific items, including:

Acquisition costs will be generally expensed as incurred;

Noncontrolling interests (formerly known as “minority interests” - see SFAS 160 discussion below) will be valued at fair value at the acquisition date;

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

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

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

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

SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. Accordingly, since we are a calendar year-end company we will continue to record and disclose business combinations following existing GAAP until January 1, 2009. The Company expects SFAS 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R

In September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Additionally, SFAS No. 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The new reporting requirements and related new footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending after December 15, 2006. The Company adopted the provisions of SFAS No. 158 for the year end 2006, and the effect of recognizing the funded status in accumulated other comprehensive income was not significant. The new measurement date requirement applies for fiscal years ending after December 15, 2008.

Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities

In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. Management is currently evaluating the effect of this pronouncement on our financial statements.

3. CASH IN BANK ACCOUNTS

Cash includes cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. Total cash in state-owned banks at June 30, 2008 and December 31, 2007 amounted to $2,213,478 and $1,357,256, respectively, of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

4. PREPAID EXPENSES

Prepaid expenses mainly consisted of prepaid rents for the gas stations (see Note 14 - Commitments) and prepayment to Ningxin Yuanshun Petrochemical Co (see Note 11 - Other Payables). At June 30, 2008 and December 31, 2007, the current portion of prepaid expenses was $6,030,947 and $2,896,493, respectively. At June 30, 2008, the noncurrent portion of prepaid expenses amounting $6,852,311 represents the prepaid rents that will be expensed after one year.

5. INVENTORIES

Inventories consisted of the following:

		June 30, 2008 (Unaudited)		December 31, 2007
Petroleum	$	3,225,455	$	2,909,158
Diesel		6,280,386		6,079,751
Heavy Oil		1,552,795		1,620,487
Other		1,417,184		1,473,566
Total	$	12,475,820	$	12,082,962

6. OTHER RECEIVABLES

At June 30, 2008, other receivables represented deposits made for purchase of equipments and short term cash advances to third parties in the amount of $308,422. At December 31, 2007, other receivables represented deposits for diesel oil equipments and three oil mill factories acquisitions in the amount of $1,548,681.

7. PLANT AND EQUIPMENT

Plant and Equipment are summarized as follows:

	June 30, 2008 (Unaudited)		December 31, 2007
Building	$	334,429	$	314,459
Diesel Processing Equipment		8,136,815		7,500,890
Office Equipment		109,306		98,788
Other Equipment		1,995,495		25,086
Motor Vehicles		794,185		746,759
		11,370,230		8,685,982
Less: Accumulated Depreciation		1,023,062		519,732
Total	$	10,347,168	$	8,166,250

Depreciation expense for the six months ended June 30, 2008 and 2007 were approximately $457,000 and $79,000, respectively; and approximately $232,000 and $43,000 for the three months ended June 30, 2008 and 2007, respectively.

8. DUE FROM RELATED PARTY

Due from related party represents the advance to and prepayment for the purchase of oil products from a related company that is 40% owned by one of the shareholder of Baorun Industrial. As of June 30, 2008 and December 31, 2007, due from this related party was $677,380 and $593,696, respectively. Purchase from this related party during six and three months ended June 30, 2008 and 2007 were $0.

9. MAJOR CUSTOMERS AND VENDORS

Major Customers

For the six and three months ended June 30, 2007, one major customer accounted for approximately 13% of the Company’s total sales. For the six and three months ended June 30, 2008, no major customers accounted for over 8% of the Company’s total sales.

Major Vendors

For the six and three months ended June 30, 2007, one vendor provided approximately 73% of the Company’s total purchases. For the six months ended June 30, 2008, two major vendors provided approximately 44% and 12% of the Company’s total purchases, and these same vendors provided approximately 52% and 14% of the Company’s total purchases for the three months ended June 30, 2008, respectively. The accounts payable to these two vendors were $0 at June 30, 2008.

10. TAX PAYABLE

Tax payable consisted of the following at June 30, 2008 and December 31, 2007:

	June 30, 2008 (Unaudited)		December 31, 2007
Value added tax payable	$	465,483	$	125,015
Urban maintenance and construction tax payable		32,583		—
Other tax payable		23		—
	$	498,089	$	125,015

11. OTHER PAYABLES

Other payable mainly consisted of payables for the purchase of equipment and short term advances from third parties, and loan from Ningxia Yuanshun Petrochemical Co. in which Ningxia Yuanshun in the amount of $2,496,965; Ningxia Yuanshun received $3,036,402 as prepaid expenses from Redsky Industrial. At June 30, 2008 and December 31, 2007, the other payables were $3,120,399 and $3,165,677, respectively.

12. LOAN PAYABLE

The Company is obligated under a short term loan from a commercial bank in the PRC for the amount of $1,457,938 (RMB10, 000,000). This loan was entered into on August 31, 2007 with maturity on August 30, 2008. The principal will be repaid at maturity and the interest is payable per quarter with an interest rate of 8.073% per annum. This loan is guaranteed by Xi’an City Economic & Technology Investment Guarantee Co., Ltd. The Company paid them the guarantee fee of 2% of the loan principal, and collateralized the Company’s diesel processing equipments for the guarantee.

13. LONG-TERM LIABILITIES

Long-term liabilities are the loans payable for the automobiles. On September 27, 2006 the Company entered into a three year note payable for approximately $100,000. This note is collateralized by the car with an annualized interest rate of 6.3%. At June 30, 2008 and December 31, 2007, the outstanding loan balance for this car is $56,060 and $70,325, respectively.

In February, 2007, the Company entered into another two notes payable for additional two automobiles. One is a two year note for the loan amount of approximately $25,500 with 7.56% interest rate per annum. The other one is a two year note for the loan amount of $19,800 with 7.56% annual interest rate. At June 30, 2008 and December 31, 2007, the outstanding loan balances for these two automobiles were $24,324 and $30,617, respectively. At June 30, 2008 and December 31, 2007, $65,743 and $67,287, respectively, of the total outstanding loan balance was reclassified to current portion of the liabilities that are payable within one year.

14. COMMITMENTS

Employee Agreements

The Company entered into an employment agreement with Mr. Gao Xincheng to employ him as the Chairman, effective as of October 23, 2007. The agreement expires in October 22, 2010, but is renewable upon agreement by the parties to the agreement, unless earlier terminated by either party. Mr. Gao’s base monthly salary is $800. The Company pays premiums for Mr. Gao for social insurance schemes such as Pension, Unemployment, Medical Insurance, etc. in accordance with relevant PRC laws and regulations. The Company has the right to adjust the salary and welfare of Mr. Gao. In connection with this agreement, Mr. Gao also executed a Confidentiality and Non-competition Agreement with the Company.

The Company entered into an employment agreement with Ms. Li Gaihong to employ her as the Chief Financial Officer, effective as of October 23, 2007. The agreement expires in October 22, 2010, but is renewable upon agreement by the parties to the agreement, unless earlier terminated by either party. Ms. Li’s base monthly salary is $500. The Company pays premiums for Ms. Li for social insurance schemes such as Pension, Unemployment, Medical Insurance, etc. in accordance with relevant PRC laws and regulations. The Company has the right to adjust the salary and welfare of Ms. Li. In connection with this agreement, Ms. Li also executed a Confidentiality and Non-competition Agreement with the Company.

Lease Agreements

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

The Company leases another two oil storage facilities under one year, non-cancelable, and renewable operating lease agreements expiring on December 31, 2007. One lease agreement has been renewed for one year with expiration date on December 31, 2008. The other lease agreement has been terminated as lease term expired. The Company then entered into a new one year, non-cancelable and renewable lease agreement for a new oil storage facility with expiration date on December 31, 2008.

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

During the three months ended June 30, 2008, the Company leased an additional four gas stations for operation under a long term operating lease agreement with an initial term expiring on May 31, 2023. The annual lease payment for each gas station is approximately $437,000 (RMB 3,000,000). The Company is required to make the lease payments for all four gas stations in advance in five-year increments. The first five year aggregate lease payment of $8,747,631 (RMB 60,000,000) is due upon receipt of the operating permits and related documents from the lessor. This lease is classified as operating lease.

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

Years Ending June 30,	Amount

2009	$	207,000
2010		122,000
2011		122,000
2012		122,000
2013		8,952,000
Years thereafter		9,226,000

Total	$	18,751,000

Total rental expense for the six months ended June 30, 2008 and 2007 amounted to approximately $261,000 and $97,000, respectively; and approximately $231,000 and $97,000 for the three months ended June 30, 2008 and 2007, respectively.

15. STATUTORY RESERVES

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

Surplus reserve fund

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

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

Common welfare fund

Common welfare fund is a voluntary fund that the Company can elect to transfer 5% to 10% of its net income to this fund. This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation.

16. STOCKHOLDERS’ EQUITY

Reverse Merger

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

At the same time, Redsky Industrial, a WFOE subsidiary of Baorun China in the PRC, executed a series of exclusive contractual agreements with Baorun Industrial. These contractual agreements allow Redsky Industrial to, among other things, secure significant rights to influence Baorun Industrial’s business operations, policies and management, approve all matters requiring shareholder approval, and the right to include 100% of net income earned by Baorun Industrial as part of our Consolidated Financial Statements.

We have determined a variable interest entity has been created in accordance with FASB Interpretations - FIN 46(R): Consolidation of Variable Interest Entities (as amended) (“FIN 46 (R)”). Under FIN 46 (R), as a result of the contractual arrangements between Redsky Industrial and Baorun Industrial and the Exchange Agreement, Baorun Industrial is presented as our consolidated subsidiary.

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

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

Each share of preferred stock is convertible into a number of fully paid and non-assessable shares of common stock equal to the quotient of the liquidation preference amount per share of preferred stock, or $10.00, divided by the conversion price, which initially is $2.20 per share, subject to certain adjustments, or approximately 4,545,455 shares of common stock if all 1,000,000 shares of preferred stock converted. No dividend is declared during six and three months ended June 30, 2008.

The value of warrants mentioned was determined by allocation of principal using the Black-Scholes pricing model with the following assumptions: discount rate - 1.37%; dividend yield - 0%; expected volatility - 30% and term of 5 years.

Following is a summary of the warrant activity:

Outstanding as of December 31, 2007			5,681,819
Granted			—
Forfeited			—
Exercised			—
Outstanding as of June 30, 2008			5,681,819

17. OPERATING RISK

(a) Country risk

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

(b) Products risk

The Company competes with larger companies, who have greater funds 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.

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

(d) Political risk

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

(e) Key personnel risk

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

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

The following information should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this report.

Forward Looking Statements

This quarterly report on Form 10-Q and other reports filed by Company from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to Company or Company’s management identify forward-looking statements. Such statements reflect the current view of 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 Company’s industry, Company’s operations and results of operations, and any businesses that 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 Company believes that the expectations reflected in the forward-looking statements are reasonable, Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

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

Company Overview

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

Basis of Presentations

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

Critical Accounting Policies

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.

Inventories

Property and Equipment

Plants 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 years
Vehicle		5 years
Office Equipment		5 years
Production Equipment		5 years

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Revenue Recognition

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

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 arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income.” Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.

Income Tax Recognition

We account for income taxes under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” “SFAS 109.” SFAS 109 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. SFAS 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.

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

For the six months ended

June 30,

For the three months ended

June 30,

2008

2007

2008

2007

Net income before income taxes

12,959,643

2,381,531

8,294,738

1,418,608

Tax provision

3,239,911

785,905

2,073,685

468,141

Net income

9,719,732

1,595,626

6,221,053

950,467

Results of Operations

Comparison of Six Months Ended June 30, 2008 and June 30, 2007.

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
	2008				2007
	$		% of Sales		$		% of Sales
Sales	93,987,652		100	%	25,276,379		100	%
Cost of Sales	(80,394,701	)	86	%	(22,318,179	)	88	%
Gross Profit	13,592,951		14	%	2,958,200		12	%
General & Administrative Expenses	(571,495	)	0.6	%	(514,636	)	2	%
Income from Operation	13,021,456		14	%	2,443,564		10	%
Other Income (expenses), net	(61,813	)	0.07	%	(62,033	)	0.25	%
Net Income	12,959,643		14	%	2,381,531		9	%

Net sales. Net sales for six month ended June 30, 2008 were approximately $93.99 million compared to net sales in same period in 2007 of approximately $25.28 million, an increase in revenues of $68.71 million, or 272%. The increase was mainly due to two reasons. First, during the six months ended June 30, 2008, we used military-use railroad routes to sell and deliver our oil products to the customers in the provinces of China that commercial railroads cannot directly connect to. The advantage to delivering oil through military railroad stations and routes, is that we were able to strengthen and extend our sales network to provinces that we were unable to directly connect to before, which increased our sales. Second, there was an increase in our production of bio-diesel which also helped to increase our sales.

Cost of sales. Cost of sales for six month ended June 30, 2008 was approximately $80.39 million compared to cost of sales in same period in 2007 of approximately $22.32 million, an increase of $58.08 million, or 260%. The increase in cost of sales was attributable to the increase of production and sales activities during the six month ended June 30, 2008. Cost of sales as a percentage of sales was approximately 86% for six month ended June 30, 2008 and 88% for the same period in 2007, respectively. The decrease as a percentage of sales was due to the lower production cost through our self-supplied bio-diesel than the purchase price of diesel oil products from the market as we increased our production of bio-diesel during the six months ended June 30, 2008 comparing with same period in 2007.

Gross profit. Gross profit was approximately $13.59 million for six month ended June 30, 2008 as compared to approximately $2.96 million for same period in 2007, representing gross margins of approximately 14% and 12% respectively. During the six month ended June 30, 2008, the gross profit margin for making and selling Bio-diesel oil was approximately 30% and the gross profit margin for buying and reselling gasoline was approximately 11%. The improved gross margin is a result of increased market demand and also the lower cost of self-supplied bio-diesel products.

General and administrative expenses. General and administrative expenses for the six month ended June 30, 2008 were $571,495. The general and administrative expenses for the six month ended June 30, 2007 were $514,636, an increase of $56,859 or 11%. This increase was due to increased sales and productions for the six month ended June 30, 2008 and increase in audit, legal, consulting and filing expenses in connection with the Company of being public in US since October of 2007. The percentage of sales for the six month ended June 30, 2008 and 2007 is about 0.6% and 2%, respectively. The decrease in percentage of sales is due to the well managed operating cost by the company as sales increased in 2008.

Net income. The net income for the six month ended June 30, 2008 was $12.96 million as compared to $2.38 million for the same period in 2007. It was an increase of $10.58 million in net profit or 444%. The management believed that the net income increase is a result of the fast and continuing revenue growth and well control on cost and operating expenses.

Comparison of Three Months Ended June 30, 2008 and June 30, 2007.

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

	Three Months Ended June 30
	2008				2007
	$		% of Sales		$		% of Sales
Sales	58,426,812		100	%	13,717,654		100	%
Cost of Sales	(49,847,038	)	85	%	(11,873,889	)	87	%
Gross Profit	8,579,774		15	%	1,843,765		13	%
General & Administrative Expenses	(251,689	)	0.4	%	(387,535	)	3	%
Income from Operation	8,328,085		14	%	1,456,230		11	%
Other Income (expenses), net	(33,347	)	0.06	%	(37,622	)	0.27	%
Net Income	8,294,738		14	%	1,418,608		10	%

Net sales. Net sales for second quarter of 2008 were approximately $58.43 million compared to net sales in second quarter of 2007 of approximately $13.72 million, an increase in revenues of $44.71 million, or 326%. The increase was mainly due to increase in our new customers, ability to meet the demand for bio-diesel oil as we increased manufacturing of bio-diesel, and increased revenue from new leased gas stations in June.

Cost of sales. Cost of sales for second quarter of 2008 was approximately $49.85 million compared to cost of sales in second quarter of 2007 of approximately $11.87 million, an increase of $37.97 million, or 320%. The increase in cost of sales was attributable to the increase of production and sales activities in second quarter of 2008. Cost of sales as a percentage of sales was approximately 85% for second quarter, 2008 and 87% for second quarter, 2007, respectively. The decrease as a percentage of sales was due to relatively low production cost for bio-diesel oil compared to the purchase price of diesel oil products from the market as we increased our production of bio-diesel during the second quarter of 2008 comparing with same period of 2007.

Gross profit. Gross profit was approximately $8.58 million for second quarter of 2008 as compared to approximately $1.84 million for second quarter of 2007, representing gross margins of approximately 15% and 13% respectively. During the second quarter of 2008, the gross profit margin for making and selling Bio-diesel oil was approximately 31% and the gross profit margin for buying and reselling gasoline was approximately 10%. The improved gross margin is a result of increased market demand and also the lower cost of self-supplied bio-diesel products.

General and administrative expenses. General and administrative expenses for the second quarter of 2008 were $251,689. The general and administrative expenses for the second quarter of 2007 were $387,535, a decrease of $135,846 or 35%. The percentage of sales for the second quarter of 2008 and 2007 are 0.4% and 3%, respectively, which was due to well managed operating cost by the company as sales increases in second quarter of 2008.

Net income. The net income for the second quarter of 2008 was $8.29 million as compared to $1.42 million for the second quarter in 2007. It was an increase of $6.88 million in net profit or 485%. The management believed that the net income increase is a result of the fast and continuing revenue growth and well control of the cost and operating expenses.

Liquidity and Capital Resources

Comparison of Six Months Ended June 30, 2008 and December 31, 2007.

As of June 30, 2008 and December 31, 2007, we had cash and cash equivalents of approximately $2.2 million and $1.4 million, respectively. At June 30, 2008, other current assets were approximately $46.9 million and current liabilities were approximately $10.7 million, as compared to other current assets of approximately $34.2 million and current liabilities of approximately $5.5 million at December 31, 2007. Working capital equaled approximately $38.5 million at June 30, 2008, compared to $30 million at December 31, 2007, an increase of 28%. The ratio of current assets to current liabilities was 4.6-to-1 at June 30, 2008, compared to 6.5-to-1 at the December 31, 2007. The increase in working capital in six months ended June 30, 2008 was primarily due to the increased sales during 2008. The decrease in the current ratio in six months ended June 30, 2008 was primarily related to increase in current liabilities of advance from customers.

We believe we have sufficient cash to continue our current business through June 30, 2009 due to expected increased sales revenue and net income from operations. We intend to expand our current operations through (i) our completed acquisition of three oil extraction plants; (ii) expansion of our 100,000 ton bio-diesel manufacturing facility; and (iii) the acquisition of several additional gas stations over the next three years. We expect to finance such expansion through bank loans, the issuance of debt or equity securities, or a combination thereof. Failure to obtain such financing could have a material adverse effect on our business expansion.

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

the cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights;

competing technological and market developments;

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

the development of commercialization activities and arrangements.

We do not anticipate any additional material research and development expenses during the next 12 months.

We do not believe that inflation had a significant negative impact on our results of operations during the year ended June 30, 2009.

The following is a summary of cash provided by or used in each of the indicated types of activities during six months ended June 30, 2008 and 2007:

		Six Months Ended June 30,
		2008			2007
Net cash provided by (used in):
Operating Activities	$	1,864,812		$	38,185
Investing Activities		(1,038,203	)		(418,247	)
Financing Activities	$	(70,891	)	$	(346,519	)

Net cash provided by operating activities was $1,864,812 in six months ended June 30, 2008, as compared to $38,185 net cash provided by operating activities in same period of 2007. The increase in net cash during the six months ended June 30, 2008 comparing with same period of 2007 was mainly due to rapid increase in net income and advances from customers, but at the same time, our accounts receivables have increased and we’ve prepaid next 5 years rents for four new leased gas stations of approximately $8,500,000, which held back our cash inflows.

Net cash used in investing activities was $1,038,203 during the six months ended June 30, 2008, as compared to net cash used in investing activities of $418,247 in same period of 2007. The increase of net cash used in investing activities in 2008 was mainly due to the amounts paid for purchasing three oil extraction plants and further construction and improvements on these three oil extraction plants.

Net cash used in financing activities was $70,891 in the six months ended June 30, 2008 as compared to net cash used in financing activities of $346,519 for same period of 2007. The decrease of net cash flow used by financing activities in 2008 was mainly due to paying off most of our loans during the six months ended June 30, 2007.

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

Short-term loan

Long-term liabilities

Long-term liabilities are the loans payable for the automobiles. On September 27, 2006 the Company entered into a three year note payable for approximately $100,000. This note is collateralized by the car with an annualized interest rate of 6.3%. At June 30, 2008, the outstanding loan balance for this car is $56,061.

In February, 2007, the Company entered into another two notes payable for additional two automobiles. One is a two year note for the loan amount of approximately $25,500 with 7.56% interest rate per annum. The other one is a two year note for the loan amount of $19,800 with 7.56% annual interest rate. At June 30, 2008, the outstanding loan balances for these two automobiles were $24,324. At June 30, 2008, $65,743 of the total outstanding loan balance has been reclassified to current portion of the liabilities that are payable within one year.

Operating leases

As of June 30, 2008, we have three lease agreements for oil storage facilities. The first lease agreement, expiring on June 30, 2016, is a long-term operating lease agreement. The other two lease agreements expiring on December 31, 2008, are short-term renewable agreements. The aggregate payments remaining under these three lease agreements approximately equal $737,000.

During 2007, we leased one gas station for operation under a long-term operating lease agreement expiring on December 31, 2027. Total rent payments for the gas station due during 2008 will equal an aggregate of $20,000.

During the quarter ended June 30, 2008, we leased four gas stations for operation under a long-term operating lease agreement expiring on May 31, 2023. We’ve prepaid five-year lease payment in advance. The aggregate payments remaining under this lease agreement approximately equal $17,495,000.

Recently Issued Accounting Pronouncements

The Hierarchy of Generally Accepted Accounting Principles

Disclosures about Derivative Instruments and Hedging Activities

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

noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.

Business Combinations

Acquisition costs will be generally expensed as incurred;

Noncontrolling interests (formerly known as “minority interests” - see SFAS 160 discussion below) will be valued at fair value at the acquisition date;

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

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

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

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R

Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4T—CONTROL AND PROCEDURES

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not required.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description

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

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

32		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


	China Bio Energy Holding Group Co., Ltd.

Dated: August 14, 2008	By:	/s/ Gao Xincheng
		Name: Gao Xincheng
		Title: Chief Executive Officer and President

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China Integrated Energy (CBEH) Inactive 10-Q2008 Q2 Quarterly report

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