China Integrated Energy (CBEH) 10-Q 2009 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 quarterly period ended June 30, 2009

Or

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

For the transition period from____________________________to___________________________________________

Commission File Number:  000-25413

China Bio Energy Holding Group Co., Ltd.

(Exact name of registrant as specified in its charter)

Delaware	65-0854589
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Dongxin Century Square, 7th Floor Hi-Tech Development District Xi’an Shaanxi Province, People’s Republic of China	710043
(Address of principal executive offices)	(Zip Code)

86 29 8268 3920

(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.  ý Yes  o No

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

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

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

As of June 30, 2009, there were 27,169,091 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.

Table of Contents

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

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PART I.                FINANCIAL INFORMATION

Item 1                  FINANCIAL STATEMENTS

Item 1. Consolidated Financial Statements

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

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30		December 31,
	2009		2008
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	42,527,363	$	23,119,028
Restricted cash		121,379		919,351
Accounts receivable		6,283,319		8,164,320
Other receivables and deposits		189,368		3,986,984
Prepaid rent		2,263,533		1,884,102
Advance to suppliers		16,915,970		17,945,487
Inventories, net		20,938,731		22,268,903
Total current assets		89,239,663		78,288,175
Prepaid rents		8,048,235		6,408,568
Property and equipment, net		9,507,476		9,997,674
Total noncurrent assets		17,555,711		16,406,242
TOTAL ASSETS	$	106,795,374	$	94,694,417
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Advance from customers	$	2,678,238	$	4,580,462
Taxes payable		782,081		735,461
Other payables		1,000,623		3,232,088
Loans payable		2,219,218		2,247,197
Total current liabilities		6,680,160		10,795,208
TOTAL LIABILITIES		6,680,160		10,795,208
STOCKHOLDERS' EQUITY
Preferred stock,  $.001 par value;  authorized shares 10,000,000; issued and outstanding 3,465,753 and 3,465,753 shares at June 30, 2009 and December 31 2008, respectively		3,465		3,465
Common stock,  $.0001 par value;  authorized shares 79,000,000;  issued and outstanding 27,169,091 and 27,169,091 shares at June 30, 2009 and December 31, 2008, respectively		2,716		2,716
Additional paid in capital		44,565,782		44,434,250
Statutory reserve		4,920,114		4,920,114
Accumulated other comprehensive income		5,393,490		5,337,003
Retained earnings		45,229,647		29,201,661
Total stockholders' equity		100,115,214		83,899,209
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	106,795,374	$	94,694,417

1

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

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND

OTHER COMPREHENSIVE INCOME

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

2

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to such rules and regulation and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2008, included in our Annual Report on Form 10-K for the year ended December 31, 2008.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the six-month and three-month periods have been made. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.  When used in these notes, the terms "Company," "we," "us" or "our" means China Bio Energy Holding Group Co., Ltd. and all entities included in our consolidated financial statement

The unaudited condensed consolidated financial statements include the financial statements of the Company, and its wholly owned or controlled subsidiaries and all other entities that it has a controlling financial interest in or are considered to be the primary beneficiary, pursuant to the rules of FIN - 46R. All significant inter-company transactions and balances between the Company, its subsidiaries and VIEs are eliminated upon consolidation. The Company has included the results of operations of its subsidiaries from the dates of acquisition.

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

Principle of Consolidation

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

Use of Estimates

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

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Cash and Cash Equivalents

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

As of June 30, 2009 and December 31, 2008, the Company maintained restricted cash of $121,379 and $919,351, respectively.  $84,702 was the remaining balance of $200,000 which was also held in the escrow account for the purpose of paying investment relations expense only; and $36,677 was the cash collateral held in the bank for the short term loan of RMB 5 million which was entered on August 31, 2008.

Accounts Receivable

The Company’s policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Based on historical collections, no allowance was deemed necessary at June 30, 2009 and December 31, 2008 as the Company did not experience any uncollectible accounts receivable and bad debt write-off over the past years.

Inventories

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

Advances from Customers

Advances from customers consist of prepayments to the Company for products that have not yet been shipped to the customers. Any amounts received prior to satisfying the Company’s revenue recognition criteria are recorded as deferred revenue or advances from customers. The Company will recognize the prepayments from the customers as revenue at the time the delivery of goods is made. Advances from customers as of June 30, 2009 and December 31, 2008 were $2,678,238 and $4,580,462, respectively.

Plant, Property and Equipment

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

	Years
Building		20
Vehicle		5
Office Equipment		5
Production Equipment		10

5

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

Impairment of Long-Lived Assets

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

 Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of June 30, 2009 and December 31, 2008, there were no impairments of its long-lived assets.

Income Taxes

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

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

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Revenue Recognition

The Company’s revenue recognition policies are in compliance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (“SAB”) 104. For distribution of finished oil and bio-diesel, sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.  For gas station retail sales, revenue is recognized and cash is collected upon completion of fuel sales to customers,

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

There were no sales returns and allowances for the six months ended June 30, 2009 and 2008. The Company does not provide unconditional right of return, price protection or any other concessions to its customers.

Cost of Goods Sold

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

Concentration of Credit Risk

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

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

Statement of Cash Flows

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

Fair Value of Financial Instruments

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

Foreign Currency Translation and Comprehensive Income (Loss)

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

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

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

The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130) “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the six months ended June 30, 2009 and 2008 were included net income and foreign currency translation adjustments.

Fair value of financial instruments

On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.” “SFAS 157 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period oftime between the origination of such instruments and their expected realization and their current market rate of interest.  The three levels are defined as follow:

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

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

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

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

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.”  The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. 

Consolidation of Variable Interest Entities 

VIE’s are entities that lack one or more voting interest entity characteristics. The Company consolidates VIEs in which it is the primary beneficiary of its economic gains or losses. The FASB has issued Interpretation No. 46 (FIN-46R) (Revised December 2004), Consolidation of Variable Interest Entities. FIN-46R clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. It separates entities into two groups: (1) those for which voting interests are used to determine consolidation and (2) those for which variable interests are used to determine consolidation (the subject of FIN-46R). FIN-46R clarifies how to identify a variable interest entity and how to determine when a business enterprise should include the assets, liabilities, noncontrolling interests and results of activities of a variable interest entity in its consolidated financial statements.

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Reclassification

Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation.  These reclassifications had no effect on previously reported results or retained earnings.

New Accounting Pronouncements

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

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

Business Combinations

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

· Acquisition costs will be generally expensed as incurred;

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

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

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

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

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

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

Defining Warrant Indexed To A Company’s Own Stock – EIFT 07-05

In June 2008, the FASB ratified Emerging Issues Task Force (“EITF”) issue No. 07-05, “Determining Whether an instrument (of Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF 07-05”).  EITF 07-05 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock.  Warrants that a company issues that contain a strike process adjustment feature, upon the adoption of EITF 07-05, results in the instruments no longer being considered indexed to the company’s own stock.  Accordingly, adoption of EITF 07-05 will change the current classification (from equity to liability) and the related accounting for such warrants outstanding at the date.  EITF 07-05 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.

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

Interim Disclosures about Fair Value of Financial Instruments

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

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

Subsequent Events

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

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2.  CASH IN BANK ACCOUNTS 

Cash includes cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. Total cash in state-owned banks at June 30, 2009 and December 31, 2008 amounted to $41,772,479 and $21,901,405, respectively, of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. 

3.  PREPAID RENT

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

4.  INVENTORIES

Inventories consisted of the following:

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

5.  OTHER RECEIVABLES AND DEPOSITS

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

6.  PLANT, PROPERTY AND EQUIPMENT

Plant, property and equipment are summarized as follows:

	June 30, 2009 (Unaudited)			December 31, 2008
Building	$	335,815		$	335,624
Diesel Processing Equipment		10,330,916			10,325,005
Office Equipment		125,748			120,588
Other Equipment		33,672			31,888
Motor Vehicles		881,828			797,020
		11,707,979			11,610,125
Less: Accumulated Depreciation		(2,200,503	)		(1,612,451	)
Total	$	9,507,476		$	9,997,674

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

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7.  MAJOR CUSTOMERS AND VENDORS

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

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

8.  TAX PAYABLE

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

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

9.  INCOME TAXES

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

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

Baorun Group is subject to Hong Kong profits tax rate of 16.5%, and has insignificant net operating losses for the six months ended June 30, 2009 and 2008, and has carryover of approximately $769,300 at December 31, 2008.  A 100% valuation allowance has been established due to the uncertainty of its realization.

The parent company, China Bio Energy Holding Group Co., Ltd., is taxed in the U.S. and has a net operating loss approximately of $206,000 and $0 for the six months ended June 30, 2009 and 2008, respectively; . and approximately $84,000 and $0 for the three months ended June 30, 2009 and 2008, respectively.  A 100% valuation allowance has been established due to the uncertainty of its realization.

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

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

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

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

10.  OTHER PAYABLES

Other payable mainly consisted of payables for the purchase of equipment, short term advances from third parties, and other obligations.  Other payables balances at June 30, 2009 and December 31, 2008 were $1,000,623and $3,232,088, respectively.  At December 31, 2008, there was an advance of $3,047,242 from Ningxia Yuanshun Petrochemical Co. to Baorun Industrial; concurrently, Ningxia Yuanshun received $3,047,242 prepayment from Redsky Industrial.

11.  LOANS PAYABLE

The Company is obligated under two short term loans from commercial banks in the PRC. The first loan of $1,463,981 (RMB 10, 000,000) was entered into on September 1, 2008 with maturity to August 31, 2009. The principal will be repaid at maturity and the interest is payable per quarter with an adjustable interest rate of 15% mark up the China national prime rate, currently the Company’s rate is at 8.07%  per annum. This loan is guaranteed by Xi’an City Economic & Technology Investment Guarantee Co., Ltd. The Company paid them the guarantee fee of 2.375% of the loan principal, and collateralized the Company’s diesel processing equipments in the value of approximately $2,966,000 (RMB 20,260,000) and stock of the Company owned by its majority shareholder in the value of approximately $2,152,000 (RMB 14,700,000) for the guarantee.

The second loan of $731,990 (RMB 5,000,000) was entered into on August 31, 2008 with maturity on August 31, 2009. The principal will be repaid at maturity and the interest is payable per month with an interest rate of 8.217% per annum.

At June 30, 2009, automobile loan carried a balance of $23,247.

12.  COMMITMENTS

Lease Agreements

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

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The Company leases another two oil storage facilities under one year, non-cancelable, and renewable operating lease agreements expiring on December 31, 2007. One lease agreement with Shanxi Continental Petroleum Co. Ltd. has been renewed for one year with expiration date on December 31, 2008, and renewed again at the end of 2008 for another one year lease with annual lease payment of $57,000 (RMB 400,000). The other lease agreement has been terminated as lease term expired. The Company then entered into a new one year, non-cancelable and renewable lease agreement with 456 Oil Storage Warehouse for a new oil storage facility with expiration date on December 31, 2008, which was renewed again at the end of 2008 for another one year lease with lease payment charged at RMB 30 per ton for the first month of leasing, and RMB 7 per ton for the months thereafter.  Due to upkeep of the storage tank, occupancy of the 456 Oil Storage Warehouse actually took place in June 2009.  Therefore the lease term has been extended to May 2010.

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

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

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

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

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

Years Ending December 31,	Amount
2010	$	2,058,000
2011		2,058,000
2012		2,059,000
2013		2,045,000
2014		1,905,000
Years thereafter		16,110,000
Total	$	26,235,000

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Total rental expense for the six months ended June 30, 2009 and 2008 amounted to approximately $894,000 and $124,000, respectively; and approximately $451,000 and $94,000 for the three months ended June 30, 2009 and 2008, respectively..

Shipping Agreement

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

13. BASIC AND DILUTED EARNING PER SHARES (EPS)

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

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

14.  STATUTORY RESRVES

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

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Surplus reserve fund

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

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

15.  STOCKHOLDERS’ EQUITY

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

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

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

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

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

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

In February 2009, the Company retained an investor relations consulting firm for the investor relations services.  As a part of investor relations consulting fee, the Company issued the investor relations consulting firm a warrant to purchase 30,000 shares of the Company’s common stock with a strike price at $6.00 per share.  The warrant will be vested on the one year anniversary of the contract signature date and exercisable only for cash; and will expire 18 months from the date of vesting.

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

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

16.  ESCROW AGREEMENT

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

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

17.  SHARED-BASED PAYMENT ARRANGEMENTS

On November 17, 2008, the Company issued non-transferable stock purchase options to two newly appointed independent directors to purchase 20,000 shares of common stock each.  The exercise price is at $4.00 per share.  These options were accounted for using the fair value method.  The option shall be terminated on the earlier of (i) the tenth anniversary of the date of the agreement or (ii) the date as of which the option has been fully exercised.  The option is vested and becomes exercisable after three months from the grant date.  The option is vested in a 25% increment every 3 months, in which each director provides directorship service to the Company.  The Company recognized $101,000 of compensation expense for these options for the six months ended June 30, 2009 and $62,700 for the three months ended March 31, 2009.

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

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

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Following is a summary of non-vested options as of June 30, 2009 and changes during the six months then ended:

	Options		Weighted Average  Fair Value at Grant Date
Non-vested  options as of December 31, 2008		40,000	$	4.00
Exercised		-		-
Cancelled		-		-
Non-vested options as of June 30, 2009		20,000	$	4.00

18. SEGMENT REPORTING

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products, services, and channels.  The management has determined that the Company has three operating segments as defined by SFAS 131: distribution of finished oil, bio-diesel production, and retail gas stations.

For the three months ended June 30, 2009 and 2008

	Distribution of finished oil		Bio-Diesel production		Retail gas stations		Total
2009 (Unaudited)
Net sales	$	45,452,242	$	11,753,849	$	8,038,148	$	65,244,239
Depreciation		38,478		258,705		-		297,183
Interest expense		38,972		-		-		38,972
Net income		4,345,247		3,289,192		1,192,294		8,826,733
Segment assets		72,134,768		23,861,023		10,799,583		106,795,374
Capital expenditure		87,852		-		-		87,852
2008 (Unaudited)
Net sales	$	37,453,191	$	16,459,664	$	4,513,957	$	58,426,812
Depreciation		42,044		189,972		-		232,016
Interest expense		34,022		-		-		34,022
Net income		2,776,141		5,029,911		488,686		8,294,738
Segment assets		35,420,357		19,278,891		9,960,906		64,660,154
Capital expenditure		17,612		72,768		-		90,380

For the six months ended June 30, 2009 and 2008

	Distribution of finished oil		Bio-Diesel production		Retail gas stations		Total
2009 (Unaudited)
Net sales	$	82,563,217	$	25,195,466	$	16,144,224	$	123,902,907
Depreciation		76,034		513,893		-		589,927
Interest expense		77,344		-		-		77,344
Net income		7,538,376		6,417,834		2,071,776		16,027,986
Segment assets		72,134,768		23,861,023		10,799,583		106,795,374
Capital expenditure		91,176		-		-		91,176
2008 (Unaudited)
Net sales	$	65,249,030	$	23,363,056	$	5,375,566	$	93,987,652
Depreciation		86,276		370,785		-		457,061
Interest expense		41,642		20,038		-		61,680
Net income		5,610,048		6,760,184		589,411		12,959,643
Segment assets		35,420,357		19,278,891		9,960,906		64,660,154
Capital expenditure		153,697		884,506		-		1,038,203

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19. SUBSEQUENT EVENT

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

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

20.  OPERATING RISK

(a)            Country risk

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

(b)            Products risk

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

(c)            Exchange risk

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

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(d)            Political risk

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

(e)            Key personnel risk

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

Item 2 

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

Forward Looking Statements

This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the risks contained in the section of this report entitled “Risk Factors”) relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

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

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OVERVIEW

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

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

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

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

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

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

Our Business

 Company Overview

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

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

Recent Developments

For the past 9 years, China's fuel prices have been controlled by the National Development and Reform Commission (NDRC) and not set by market supply and demand. Effective January 1, 2009, the Chinese government implemented a new pricing regime for refined oil products, aimed to link domestic oil prices more closely to changes in the global crude oil prices in a controlled manner.

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

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

On March 25, 2009, the NDRC increased the prices of gasoline and diesel by RMB 290 or $42 per ton or 5.33% and RMB 180 or $26 per ton or 3.74%, respectively, to reflect a rebound of global oil prices.  As a result of this oil price increase, the retail prices of gasoline and diesel have increased accordingly.  In April 2009, the average sales price for our oil products was approximately $745 per ton (equivalent to approxi0mately $2.55 per gallon of gasoline and $2.83 per gallon of petro-diesel)

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

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

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

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

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

We also plan to expand our current bio-diesel production capacity of 100,000 tons to 150,000 tons, either through strategic acquisitions or through a new build-out in 2009. The expansion of bio-diesel production capacity is more focused on strategic acquisition that will quickly provide financial benefits to us.  We anticipate $15 million in capital expenditures in 2009 to accomplish this goal. We have secured enough raw materials to supply 150,000 tons of capacity, but will also continue to work towards securing more long-term sources of raw materials and new technology in the bio-energy field.  

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

Basis of Presentations

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

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Critical Accounting Policies and Estimates

Accounts Receivable

Our policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Based on historical collections, no allowance was deemed necessary at June 30, 2009 and December 31, 2008, as the Company did not experience any uncollectible accounts receivable and bad debt write-off over the past years.

Inventories

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

Plant, Property and Equipment

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

Building	20 years
Vehicle	5 years
Office Equipment	5 years
Production Equipment	10 years

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

Revenue Recognition

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

Foreign Currency Translation

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

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 Income Tax Recognition

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

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

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

Consolidation of Variable Interest Entities 

VIE’s are entities that lack one or more voting interest entity characteristics. The Company consolidates VIEs in which it is the primary beneficiary of its economic gains or losses. The FASB has issued Interpretation No. 46 (FIN-46R) (Revised December 2004), Consolidation of Variable Interest Entities. FIN-46R clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. It separates entities into two groups: (1) those for which voting interests are used to determine consolidation and (2) those for which variable interests are used to determine consolidation (the subject of FIN-46R). FIN-46R clarifies how to identify a variable interest entity and how to determine when a business enterprise should include the assets, liabilities, noncontrolling interests and results of activities of a variable interest entity in its consolidated financial statements.

Contingencies

Management assesses the probability of loss for certain contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate when Management believes that any liability to the Company that may arise as a result of having to pay out additional expenses that may have a material adverse effect on the financial condition of the Company taken as a whole.

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Results of Operations

Operations Results for the Three Months Ended June 30, 2009

	Distribution of finished oil		Bio-Diesel production		Retail gas stations		Total
2009 (Unaudited)
Net sales	$	45,452,242	$	11,753,849	$	8,038,148	$	65,244,239
Depreciation		38,478		258,705		-		297,183
Interest expense		38,972		-		-		38,972
Net income		4,345,247		3,289,192		1,192,294		8,826,733
Segment assets		72,134,768		23,861,023		10,799,583		106,795,374
Capital expenditure		87,852		-		-		87,852
2008 (Unaudited)
Net sales	$	37,453,191	$	16,459,664	$	4,513,957	$	58,426,812
Depreciation		42,044		189,972		-		232,016
Interest expense		34,022		-		-		34,022
Net income		2,776,141		5,029,911		488,686		8,294,738
Segment assets		35,420,357		19,278,891		9,960,906		64,660,154
Capital expenditure		17,612		72,768		-		90,380

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

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

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

Operating expenses. Selling, general and administrative expenses for the three months ended June 30, 2009 were approximately $0.61 million compared to $0.25 million for the same period in 2008, an increase of $0.36 million or 144%. This increase was mainly attributed to approximately $275,000 of legal, consulting fees, stock option expenses for our independent directors and employees, and filing expenses in connection with the Company becoming public in the U.S.  Total operating expenses as a percentage of sales was 0.9% and 0.4% for the three months ended June 30, 2009 and 2008, respectively. We expect our professional fees to continue to increase in 2009, as we have hired an outside consulting firm to work on our Sarbanes Oxley compliance and implement employee incentive programs. We also expect to have an increase in other general and administrative expenses in future reporting periods, as our business expands.

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

Comparison of Six Months Ended June 30, 2009 and 2008

	Distribution of finished oil		Bio-Diesel production		Retail gas stations		Total
2009 (Unaudited)
Net sales	$	82,563,217	$	25,195,466	$	16,144,224	$	123,902,907
Depreciation		76,034		513,893		-		589,927
Interest expense		77,344		-		-		77,344
Net income		7,538,376		6,417,834		2,071,776		16,027,986
Segment assets		72,134,768		23,861,023		10,799,583		106,795,374
Capital expenditure		91,176		-		-		91,176
2008 (Unaudited)
Net sales	$	65,249,030	$	23,363,056	$	5,375,566	$	93,987,652
Depreciation		86,276		370,785		-		457,061
Interest expense		41,642		20,038		-		61,680
Net income		5,610,048		6,760,184		589,411		12,959,643
Segment assets		35,420,357		19,278,891		9,960,906		64,660,154
Capital expenditure		153,697		884,506		-		1,038,203

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

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

Operations Results for the Six Months Ended June 30, 2009

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

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

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

Operating expenses. Selling, general and administrative expenses for the six months ended June 30, 2009 were approximately $1.1 million compared to $0.57 million for the same period in 2008, an increase of $0.53 million or 93%. This increase was mainly attributed to approximately $430,000 of legal, consulting fees, stock option expenses for our independent directors and employees, and filing expenses in connection with the Company becoming public in the U.S.  Payroll and related expenses of sales and administrative staff increased  by approximately $100,000 as a result of business growth and expansion of distribution channels and territories.  Total operating expenses as a percentage of sales was 0.9% and 0.6% for the six months ended June 30, 2009 and 2008, respectively. We expect our professional fees to continue to increase in 2009, as we have hired an outside consulting firm to work on our Sarbanes Oxley compliance and implement employee incentive programs. We also expect to have an increase in other general and administrative expenses in future reporting periods, as our business expands.

Net income. The net income for the six months ended June 30, 2009 was $16 million compared to $13 million in the same period in 2008, an increase of $3 million or 23%.  This increase was attributable to economies of scale combined with rapid growth in revenue in our distribution and retail business segments. Management believes that the net income increase is the result of the rapid and continuing revenue growth, as well as controlling costs and operating expenses. [Net income will continue to increase as we will continue to offer better quality products, improve our manufacturing efficiency and capacity, and control our expenses

Liquidity and Capital Resources

As of June 30, 2009 and December 31, 2008, we had cash and cash equivalents of approximately $42.5 million and $23.1 million, respectively. At June 30, 2009, current assets were approximately $89.2 million and current liabilities were approximately $6.7million, as compared to current assets of approximately $78.2 million and current liabilities of approximately $10.8 million at December 31, 2008. Working capital equaled approximately $82.5 million at June 30, 2009, compared to $67.5 million at December 31, 2008, an increase of 22.2%. The ratio of current assets to current liabilities was 13.3-to-1 at June 30, 2009, compared to 7.3-to-1 at the December 31, 2008. The increase in working capital as of June 30, 2009 was primarily due to the increased sales volume and net income. The increase in the current ratio as of June 30, 2009 was primarily related to an increase in cash, and reduction of advance from customers. At June 30, 2009 and December 31, 2008, our cash and cash equivalent included approximately $14 million of proceeds from a financing agreement in October 2008.  The funding was initially for an acquisition initiative, which was suspended. Without the $14 million financing proceeds, working capital equaled approximately $68.5 million, a 21.9% or 15 million increase from December 31, 2008.  The current ratio still achieved 11.2-to-1.

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We believe we have sufficient working capital to sustain our current business through December 31, 2009 due to expected increased sales volume, revenue and net income from operations. We intend to continue the expansion of our current operations by (i) extending our oil distribution network to other provinces outside of our current territory, (ii) acquiring bio-diesel production plants; (iii) acquiring new technology for bio-diesel production capability, (iv) expanding our 100,000 ton bio-diesel manufacturing facility; and (v) acquiring or leasing several additional gas stations to broaden our retail channels over the next three years. We expect to finance such expansion through bank loans, the issuance of debt or equity securities, or a combination thereof.  Failure to obtain such financing could have an adverse effect on our business expansion.

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

· Successfully raising necessary capital for expansion;

· competing technological and market developments;

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

· development of commercialization activities and arrangements in alternative energy.

We anticipate incurring some research and development expenses during the next 12 months.

The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended June 30, 2009 and 2008.

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

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

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

Net cash provided by financing activities was $768,738 in the six months ended June 30, 2009 compared to net cash used by financing activities of $70,891 in the same period of 2008. The increase of net cash provided by financing activities in 2009 was mainly due to releases of restricted cash from prior financing activities.

Inflation

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

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Off-Balance Sheet Arrangements

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

Recently Issued Accounting Pronouncements

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4T.  CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of June 30, 2009, the end of the period covered by this report, our chief executive officer and the principal financial officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2009,  that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II.              OTHER INFORMATION

Item 1                   LEGAL PROCEEDINGS

None.

Item 1A                RISK FACTORS

The risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 have not materially changed as of June 30, 2009.

Item 2                   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3                   DEFAULTS UPON SENIOR SECURITIES

None.

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Item 4                   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5                   OTHER INFORMATION

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

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

There are no material relationships between the Lessor and the Company or any of their respective affiliates.

Item 6                   EXHIBITS

Exhibit No.	Description
10.1	Lease Agreement by and between the Registrant and Shanxi Fang Wei Lu Gas Station , dated May 28, 2009
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.

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SIGNATURES

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

	China Bio Energy Holding Group Co., Ltd.
Dated:  August 11, 2009	By:	/s/ Gao Xincheng
		Name:	Gao Xincheng
		Title:	Chief Executive Officer and President

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