China Integrated Energy (CBEH) 10-Q/A 2010 Q1 Quarterly report (amended)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q/A

Amendment No. 1

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

For the quarterly period ended March 31, 2010.

or

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

For the transition period from                to                  .

Commission File Number 000-25413

CHINA INTEGRATED ENERGY, INC.

(Exact name of registrant as specified in its charter)

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

Dongxin Century Square, 7th Floor

Hi-Tech Development District

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

(Address of Principal Executive Offices including zip code)

+86 29 8268 3920

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

As of May 13, 2010, 33,569,091 shares of the issuer’s common stock, par value $0.0001, were outstanding.

EXPLANATORY NOTE

This quarterly report on Form 10-Q is being filed as Amendment No. 1 to our Quarterly Report on Form 10-Q which was originally filed on May 13, 2010 (our “Report”) with the Securities and Exchange Commission.  The principal changes to our Report in this amendment are as follows:

●  In Part I, Item 1 (Financial Statements) of our Report we have reclassified approximately $30 million in segment assets in Note 18 from our wholesale and retail distribution of finished oil and heavy oil segment to our retail gas station segment;

●  In Part I, Item 2 (Management’s Discussion and Analysis of Financial Consition and Results of Operations) of our Report we have (i) reclassified approximately $30 million in segment assets in the Results of Operations table for the three months ended March 31, 2010 and 2009 from our wholesale and retail distribution of finished oil and heavy oil segment to our retail gas station segment, and (ii) revised the discussion in Results of Operations for the three months ended March 31, 2010 and 2009 to correct the disclosure relating to the increase in cost of sales as a percentage of sales and the decrease in gross profit sales in 2010 to reflect that such changes were due to a change in our product mix in our wholesale distribution business and price promotions at our new gas stations; and

●  In Part II, Item 1A (Risk Factors) we have added new risk factors to update the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009.

As required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are being filed as exhibits herewith, and as such, we have included Item 5 of Part II, “Exhibits,” as part of this Form 10-Q/A. As further required by Rule 12b-15, this Form 10-Q/A sets forth the complete text of each item as amended.

This Form 10-Q/A does not affect any section of our Report not specifically discussed herein and continues to speak as of the date of our Report. Other than as specifically reflected in this Form 10-Q/A, this Form 10-Q/A does not reflect events occurring after the filing of our Report or modify or update any related disclosures. Accordingly, this Form 10-Q/A should be read in conjunction with our other filings made with the SEC subsequent to the filing of our report.

Table of Contents

		Page
PART I FINANCIAL INFORMATION
ITEM 1	FINANCIAL STATEMENTS	1
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30
ITEM 4T.	CONTROLS AND PROCEDURES.	30
PART II OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	31
ITEM 1A.	RISK FACTORS	31
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	34
ITEM 4	OTHER INFORMATION	34
ITEM 5	EXHIBITS	34

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PART I

FINANCIAL INFORMATION

ITEM 1     FINANCIAL STATEMENTS

CHINA INTEGRATED ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2010			2009
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	40,967,385		$	62,415,443
Accounts receivable		6,878,367			3,099,587
Other receivables and deposits		1,182,927			7,231,586
Prepaid expenses		3,921,161			3,145,502
Advance to suppliers		48,772,007			34,544,100
Inventories, net		21,843,594			20,954,851
Total current assets		123,565,441			131,391,069
Prepaid rents		30,869,398			24,620,685
Property, plant and equipment, at cost		10,466,490			10,017,987
Construction in progress		7,704,856			-
Less accumulated depreciation		(2,714,157	)		(2,456,080	)
Property, plant and equipment , net		15,457,189			7,561,907
Intangible asset, net		10,480,929			-
Total noncurrent assets		56,807,516			32,182,592
TOTAL ASSETS	$	180,372,957		$	163,573,661
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	816,880		$	-
Advance from customers		7,247,886			1,903,124
Taxes payable		882,254			1,242,931
Other payables		1,131,393			2,700,988
Loans payable		4,395,089			4,395,025
Total current liabilities		14,473,502			10,242,068
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; authorized shares
10,000,000; issued and outstanding 2,815,753 and
3,115,753 shares at March 31, 2010 and December 31 2009, respectively		2,815			3,115
Common stock, $.0001 par value; authorized shares
79,000,000; issued and outstanding 33,569,091 and
33,269,091 shares at March 31, 2010 and December 31, 2009, respectively		3,356			3,326
Additional paid in capital		76,986,338			75,858,994
Statutory reserve		4,920,114			4,920,114
Accumulated other comprehensive income		5,554,434			5,473,420
Retained earnings		78,432,398			67,072,624
Total stockholders' equity		165,899,455			153,331,593
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	180,372,957		$	163,573,661

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

1

CHINA INTEGRATED ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(Unaudited)	For The Three Months Ended March 31,
	2010			2009
Sales	$	109,416,050		$	58,658,668
Cost of goods sold		96,120,907			50,981,714
Gross profit		13,295,143			7,676,954
Selling, general and administrative expenses		1,843,456			555,849
Income from operations		11,451,687			7,121,105
Non-operating income (expenses)
Interest expenses		(50,785	)		(33,518	)
Subsidy income		-			116,964
Other expense		(41,128	)		(3,299	)
Total non-operating income (expenses)		(91,913	)		80,147
Net income		11,359,774			7,201,252
Other comprehensive item
Foreign currency translation gain (Loss)		79,883			(50,784	)
Comprehensive Income	$	11,439,657		$	7,150,468
Basic and diluted weighted average shares outstanding
Basic		33,319,091			27,169,091
Diluted		42,807,628			34,622,712
Basic and diluted net earnings per share available to common stockholders
Basic	$	0.34		$	0.27
Diluted	$	0.27		$	0.21

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

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CHINA INTEGRATED ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)	Preferred stock						Common stock
	Shares			Amount			Shares		Amount		Additional paid in capital		Statutory reserves		Other comprehensive income		Retained earnings		Total stockholders' equity
Balance at December 31, 2008		3,465,753		$	3,465			27,169,091	$	2,716	$	44,434,250	$	4,920,114	$	5,337,003	$	29,201,661	$	83,899,209
Preferred B conversion		(350,000	)		(350	)		350,000		35		315								-
Shares issued to employees		-			-			-		-		30,056		-		-		-		30,056
Stock purchase option - directors		-			-			-		-		155,104		-		-		-		155,104
Stock-based compensation												555,710								555,710
Net income for the year		-			-			-		-		-		-		-		37,870,963		37,870,963
Issuance of common stock								5,750,000		575		30,683,559								30,684,134
Foreign currency translation gain (loss)		-			-			-		-		-		-		136,417		-		136,417
Balance at December 31, 2009		3,115,753			3,115			33,269,091		3,326		75,858,994		4,920,114		5,473,420		67,072,624		153,331,593
Preferred B conversion		(300,000	)		(300	)		300,000		30		270								-
Stock purchases option - directors		-			-			-		-		60,702		-		-		-		60,702
Stock-based compensation - consultants												363,824								363,824
Employee stock option compensation												702,548								702,548
Net income for the period		-			-			-		-		-		-				11,359,774		11,359,774
Foreign currency translation gain (loss)		-			-			-		-		-		-		81,014		-		81,014
Balance at March 31, 2010		2,815,753		$	2,815			33,569,091	$	3,356	$	76,986,338	$	4,920,114	$	5,554,434	$	78,432,398	$	165,899,455

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

3

CHINA INTEGRATED ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)	For The Three Months Ended March 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,359,774		$	7,201,252
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization		321,142			292,744
Stock based compensation		1,127,074			82,590
(Increase) decrease in current assets:
Accounts receivable		(3,777,960	)		2,597,481
Other receivables, deposits and prepaid expenses		(924,587	)		3,789,723
Advance to suppliers		(14,224,483	)		2,478,674
Inventories		(888,254	)		1,627,802
Prepaid expenses - Rents		(8,047,836	)		322,565
Increase (decrease) in current liabilities:
Accounts payable		816,713			-
Advance from customers		5,343,638			(3,703,649	)
Taxes payable		(360,621	)		84,725
Other payables and accrued expenses		(1,991,970	)		(3,025,122	)
Net cash provided by (used in) operating activities		(11,247,370	)		11,748,785
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment		(4,716	)		(3,324	)
Business acquisition		(2,490,040	)		-
Construction in progress		(7,703,276	)		-
Net cash used in investing activities		(10,198,032	)		(3,324	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash released		-			522,500
Repayment of loans and notes payable		-			(14,473	)
Net cash provided by financing activities		-			508,027
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS		(2,656	)		14,086
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(21,448,058	)		12,267,574
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		62,415,443			23,119,028
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	40,967,385		$	35,386,602
Supplemental Cash flow data:
Income tax paid	$	-		$	-
Interest paid	$	64,166		$	38,372

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

4

CHINA INTEGRATED ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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

Principle of Consolidation

The accompanying consolidated financial statements include our accounts and the accounts of our wholly owned subsidiary, Baorun China Group Limited (“Baorun China Group”) and Redsky Industrial, (Xi'an) Co. Ltd. (“Redsky Industrial”) and its consolidated subsidiary, Xi'an Baorun Industrial Development Co., Ltd. (“Xi'an Baorun Industrial”). All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

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

5

Accounts Receivable

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

Advance to Suppliers

Advance to suppliers consist of prepayments to the suppliers for products that have not yet been received. Any amount paid to the suppliers prior to the Company’s acceptance of petroleum products are recorded as advance to suppliers. The Company will record the prepayment as inventory at the time of accepting delivery of petroleum products from suppliers. Advance to suppliers as of March 31, 2010 and December 31, 2009 were $48,772,007 and $34,544,100, respectively.

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 March 31, 2010 and December 31, 2009 were $7,247,886 and $1,903,124, respectively.

Property, Plant, and Equipment

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

	Years
Building	20
Vehicle	5
Office Equipment	5
Production Equipment	10

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

Impairment of Long-Lived Assets

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

 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 March 31, 2010 and December 31, 2009, there were no impairments of its long-lived assets.

6

Intangible Assets

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

Income Taxes

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

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

Revenue Recognition

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

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.

7

There were no sales returns and allowances for the three months ended March 31, 2010 and 2009. The Company does not provide unconditional right of return, price protection or any other concessions to its customers.

Cost of Goods Sold

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

Concentration of Credit Risk

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

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

Statement of Cash Flows

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

Foreign Currency Translation and Comprehensive Income (Loss)

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

On July 21, 2005, the central government of China allowed the RMB to fluctuate, ending its decade old valuation peg to the U.S. dollar. Historically, the Chinese government has benchmarked the RMB exchange ratio against the U.S. dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk. The Company does not believe that its foreign currency exchange rate fluctuation risk is significant, especially if the Chinese government continues to benchmark the RMB against the U.S. dollar. This fluctuation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China.

The Company uses Statement of accounting standards codification “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the three months ended March 31, 2010 and 2009 were included net income and foreign currency translation adjustments.

8

Fair value of financial instruments

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

On January 1, 2008, the Company adopted accounting standards codification, “Fair Value Measurements.” The accounting standards codification defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period 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 March 31, 2010, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with the accounting standards codification, “Share-Based Payment.”. The Company measures the cost of employee services received in exchange an award of equity instruments based on the grant-date fair value of the award and other equity-based compensation to employees and non-employees, and recognizes that cost over the requisite service period. For the three months ended March 31, 2010, the Company recorded approximately $1,127,074 of stock compensation expense in accordance with accounting standards codification, “Share-Based Payment”.  Refer to Note 17 for additional information regarding the Company’s stock non-qualified plan (Plan).

Consolidation of Variable Interest Entities 

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

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.

9

New Accounting Pronouncements

Non-controlling Interests in Consolidated Financial Statements

In December 2007, the FASB issued an accounting standards codification, “Non-controlling Interests in Consolidated Financial Statements - An Amendment of the accounting standards codification,” Non-controlling Interest in Consolidated Financial Statements.” The amended accounting standards codification establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement.  The non-controlling Interests in Consolidated Financial Statements clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. The non-controlling Interests in Consolidated Financial Statements also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. The non-controlling Interests in Consolidated Financial Statements is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company expects the non-controlling Interests in Consolidated Financial Statements will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.

Business Combinations

In December 2007, the FASB issued an accounting standards codification (Revised 2007), “Business Combinations”. The revised accounting standards codification of “Business Combinations” will significantly change the accounting for business combinations. Under the revised accounting standards codification of “Business Combinations”, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. The revised accounting standards codification of “Business Combinations will change the accounting treatment for certain specific items, including:

· Acquisition costs will be generally expensed as incurred;

· Non-controlling interests (formerly known as “minority interests” - see accounting standards codification, “non-controlling Interests in Consolidated Financial Statements”, discussion above) will be valued at fair value at the acquisition date;

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

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

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

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

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

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Defining Warrant Indexed To A Company’s Own Stock

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

The full ratchet period of the Company’s warrant A-1 and warrant A-2 series expired on October 22, 2008 one year following the original issue date of October 23, 2007. The Company does not believe that adoption of the accounting standards codification 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 “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. It also amends Accounting Principles Board (“APB”) “Interim Financial Reporting,” to require those disclosures in all interim financial statements. This guidance is effective for interim and annual periods ending after June 15, 2009, with early application permitted.

As of March31, 2010, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

Subsequent Events

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

Accounting Standards Codification and the Hierarchy

In June 2009, the financial accounting standards Board (“FASB”) issued an accounting standards codification, “The FASB  (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles,” which is a significant restructuring of accounting and reporting standards designed to simplify user access to all authoritative U.S. generally accepted accounting principles by providing the authoritative literature in a topically organized structure.  The Company has adopted the ASC, which became effective for interim and annual periods ending after September 15, 2009.

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

In December 2009, the FASB issued guidance for Consolidations – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (Topic 810).   The amendments in this update are a result of incorporating the provisions of accounting standards codification, “Consolidation of Variable Interest Entities”, Amendments to accounting standards codification,“, and accounting standards codification, “Interpretation of Consolidation of Variable Interest Entities, revised December 2004”. The provisions of such Statement are effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2009. Earlier adoption is not permitted. The presentation and disclosure requirements shall be applied prospectively for all periods after the effective date. Management believes this Statement will have immaterial impact on the financial statements of the Company once adopted.

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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 March 31, 2010 and December 31, 2009 amounted to $37,196,137 and $41,905,658, respectively, of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. 

3.  PREPAID RENT

Prepaid expenses mainly consisted of prepaid rents for the gas stations (see Note 13 - Commitments) and other expenses. At March 31, 2010 and December 31, 2009, the current portion of prepaid rental expenses of gas stations was $3,445,872 and $2,732,546, respectively. At March 31, 2010 and December 31, 2009, the noncurrent portion of prepaid expenses amounted $30,869,398 and $24,620,685, respectively, which represents the prepaid rents that will be expensed after one year.

4.  INVENTORIES

Inventories consisted of the following:

	March 31, 2010 (Unaudited)		December 31,2009
Petroleum	$	7,395,213	$	10,449,525
Diesel		8,964,179		5,601,725
Raw material for manufacturing bio-diesel oil		5,484,202		4,903,601
Subtotal		21,843,594		20,954,851

5.  OTHER RECEIVABLES AND DEPOSITS

At March 31, 2010, other receivables represented deposits made for purchase of equipments and short term cash advances to third parties in the amount of $ 1,182,927. At December 31, 2009, other receivables represented deposits made for purchase of equipments and short term cash advances to third parties in the amount of $7,231,586, of which $6,973,439 was a deposit for the purchase of Jinzhen gas station.

6.  PROPERTY, PLANT, AND EQUIPMENT

Plant, property, and equipment are summarized as follows:

	March 31, 2010 (Unaudited)			December 31, 2009
Building	$	600,405		$	336,051
Diesel Processing Equipment		8,360,526			8,360,404
Office Equipment		150,176			145,456
Other Equipment		213,338			34,047
Motor Vehicles		1,142,045			1,142,029
Construction in progress		7,704,856			-
		18,171,346			10,017,987
Less: Accumulated Depreciation		(2,714,157	)		(2,456,080	)
Total	$	15,457,189		$	7,561,907

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Depreciation expense for the three months ended March 31, 2010, and 2009 were $257,988 and $292,744, respectively.

7.  INTANGIBLE ASSETS

In January 2010, the Company completed an acquisition of an agricultural plantation, located in Xianyan Chuanhua, Shaanxi Province, PRC, with 20,000 Mu (approximately 3,295 acres) in size.  The agricultural plantation will used for pilot programs exploring and experimenting with new feedstock for the Company’s biodiesel production.  The purchase price of the plantation was $1,025,521 (RMB 7,000,000) for a 70-year land usage right, where the land is owned by the government.  The payment was made in 2009 and recorded as a deposit.  The amount was reclassified as agricultural plantation land usage right upon completion of transfer of title in January 2010.  See note 14 for gas station operating right and gas station land usage right.

Intangible assets are summarized as follows:

	March 31, 2010 (Unaudited)			December 31, 2009
Gas station operating right	$	7,028,553		$	-
Gas station land usage right		2,490,009			-
Agricultural plantation land usage right		1,025,521			-
		10,554,083			-
Less: Accumulated Amortization		(63,154	)		-
Total		10,480,929			-

Amortization expense for the three months ended March 31, 2010, and 2009 were $63,154 and $-0-, respectively

8.  MAJOR CUSTOMERS AND VENDORS

For the three months ended March 31, 2010, two major customers accounted for approximately 46.9% of the Company’s total sales, and these two customers accounted for approximately 20.6% of the Company’s outstanding accounts receivable. No other major customers accounted for over 10% of the Company’s total sales. For the three months ended March 31, 2009, one major customer accounted for approximately 20.8% of the Company’s total sales, and this customer accounted for approximately 37.2% of the Company’s outstanding accounts receivable.

For the three months ended March 31, 2010, ten vendors accounted for approximately 80.9% of the Company’s total purchase; within them four vendors provided approximately 53.0% of the Company’s total purchases, and each of these four vendors  provided more than 10% of the Company’s total purchase.  For the three months ended March 31, 2009, this biggest vendor accounted for approximately 40.0% of the Company’s total purchases. There were no accounts payables due to this vendor at March 31, 2009.

9.  TAX PAYABLE

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

	March 31, 2010 (Unaudited)		December 31, 2009
Value added tax payable	$	812,075	$	1,150,725
Urban maintenance and construction tax payable		56,845		80,551
Other tax payable		13,334		11,655
	$	882,254	$	1,242,931

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10.  INCOME TAXES

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

Effective January 1, 2008, the PRC government implemented a new corporate income tax law with a new maximum corporate income tax rate of 25%. Despite the income tax exemption of Baorun Industrial, the Company is governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at a statutory rate of 25% (33% prior to 2008) on income reported in the statutory financial statements after appropriate tax adjustments. Redsky had a net operating loss of approximately $10,378 and $14,000 for the three months ended March 31, 2010 and 2009, respectively. A 100% valuation allowance has been established due to the uncertainty of its realization.

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

The parent company, China Integrated Energy, Inc. is incorporated in the United States and has incurred an aggregate net operating loss of $1,127,074 and $122,456 for the three months ended March 31, 2010 and 2009, respectively, subject to the Internal Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. The net operating loss carries forward for the United States income taxes, and may be available to reduce future years’ taxable income. These carryforwards will expire, if not utilized, through 2029. Management believes that the realization of the benefits from these losses appears not more that likely due to the Company’s limited operating history and continuing losses for the United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustment as warranted

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

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

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

	For the Three Months Ended March 31,
	2010			2009
	(pro forma)			(pro forma)
Net income before income taxes	$	11,359,774		$	7,150,468
Tax provision		(3,136,642	)		(1,831,475	)
Net income	$	8,223,132		$	5,318,993
Earnings per share (diluted)	$	0.19		$	0.15

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11.  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 March 31, 2010 and December 31, 2009 were $1,131,393 and $2,700,988, respectively. At December 31, 2009, there was payable of $1,816,610 for remaining unpaid leasing cost of the new gas station

12.  LOANS PAYABLE

The Company was obligated under one short term loan from a commercial banks in the PRC. The loan was entered into on October 26, 2009 with maturity to October 25, 2010. The principal will be repaid at maturity and the interest is payable per quarter, currently the Company’s rate is at 5.841% per annum. This loan is guaranteed by Xi’an City Economic & Technology Investment Guarantee Co., Ltd and Shaanxi Security & Trust Guarantee Co. Xi’an City Economic & Technology Investment Guarantee Co insured $2,930,017 (RMB 20,000,000). Shaanxi Security & Trust Guarantee Co insured $1,465,008 (RMB 10,000,000). The guarantee fee was 2.375% of total loan amount or $110,478 (RMB 754,110). Mr. Gao Xincheng, Chairman and CEO, provided counter guarantee to the guarantee companies to secure the loan. The Company collateralized its diesel processing equipment and inventory in the value of approximately $3,516,000 (RMB 24,000,000) for the guarantee. At March 31, 2010 and December 31, 2009, the loan carried a balance of $4,395,089 and $4,395,025 (RMB 30,000,000).

13.  COMMITMENTS

Lease Agreements

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

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

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

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

Years Ending December 31,	Amount
2010	$	3,900,000
2011		3,783,000
2012		3,783,000
2013		3,749,000
2014		3,681,000
Years thereafter		36,919,000
Total	$	55,815,000

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Total rental expense for the three months ended March 31, 2010 and 2009 amounted to approximately $865,100 and $443,580, respectively.

Shipping Agreement

During 2008, the Company entered a shipping agreement with a transportation company for transporting the raw materials for manufacturing the biodiesel product for a period of July 1, 2008 through August 31, 2009. The contact was renewed for another year. The Company pays RMB 60 per ton for transporting the raw material from the suppliers to its various oil extract plants, and pays a range of RMB 30 / ton – RMB 100 / ton for transporting the raw oil from its various oil extract plants to its bio-diesel production facility. For the three months ended March 31, 2010, the shipping cost paid to this transportation company was approximately $104,809.

Construction Contract

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

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

Equipment Purchase Agreements

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

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

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14.  BUSINESS COMBINATION

In December 2009, the Company entered into a share purchase agreement with Yangbaorong and Wuyang, who held 100% of the equity of Xianyang Jinzheng Petroleum Sales Co., to acquire 100% of the equity of Xianyang Jinzheng gas station, a privately owned service gas station, located in Xiangyang City, Shaanxi Province, PRC.  The acquisition furthers the Company’s growth strategy and expansion in its retail gas station business segment.  The total purchase price of Xianyang Jinzheng gas station was approximately $9,962,202 (RMB 68,000,000) in cash with no assumption of liabilities.  The first installment payment of approximately $6,973,440 (RMB 47,600,000) was made in 2009 and recorded as a deposit.  In January 2010, the Company paid approximately $2.5 million of the unpaid balance.  The total amount was reclassified to fixed assets and intangible assets according to the appraised valuation.  Assets of Xianyang Jinzheng gas station consists of a 40-year land usage right of 7 Mu (approximately 1.15 acres) of land, which is owned by the government; a two-story building with 196 square meters (approximately 2,130 square feet) in size; 12 gas pumps; 5 petroleum storage tanks; and gas station including business office and fueling stations with 988 square meters (approximately 10,620 square feet) in size.

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

The following represents the allocation of the total purchase price.

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

15. BASIC AND DILUTED EARNING PER SHARES (EPS)

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

	March 31
	2010 (Unaudited)		2009 (Unaudited)
Net income available to common stockholders		11,359,774		7,201,252
Weighted average shares outstanding - basic		33,319,09		27,169,091
Effect of dilutive securities:
Convertible preferred stock		6,611,208		7,011,208
Unexercised warrants and stock option		2,877,329		442,413
Weighted average shares outstanding - diluted		42,807,628		34,622,712
Earnings per share - basic	$	0.34	$	0.27
Earnings per share - diluted	$	0.27	$	0.21

16.  STOCKHOLDERS’ EQUITY

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

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

Following is a summary of warrant activity for the three months ended March 31, 2010:

	Number of  Shares		Average  Exercise Price per Share		Weighed  Average Remaining  Contractual Term in Years
Outstanding at December 31, 2009		4,007,273	$	3.82		3.43
Exercisable at December 31, 2009		3,977,273		-		-
Granted		-		-		-
Exercised		-		-		-
Forfeited		-		-		-
Outstanding at March 31, 2010		4,007,273	$	3.82		3.18
Exercisable at March 31, 2010		4,007,273		3.82		3.18

17.  SHARED-BASED PAYMENT ARRANGEMENTS

On September 10, 2009, the Company issued stock purchase options to financial advisory consultant to purchase 310,320 shares of common stock and to investor relations consultant to purchase 206,880 shares of common stock. The exercise prices of both stock purchase options are at $4.50 per share. The stock purchase options are remunerations for the financial advisory and investor relations consulting services provided. The options were accounted for using the fair value method. The options expire in one year from and are immediately vested upon the option issuance date. The Company recognized approximately $340,200 of compensation expense for these options for the three months ended March 31, 2010.

On December 16, 2009, the Company issued stock purchase options to financial advisory consultant to purchase 20,000 shares of common stock. The exercise prices of the stock purchase option are at $7.09 per share. The stock purchase option is a part of remunerations for the financial advisory consulting service to be provided in the next 12 months. The option was accounted for using the fair value method. The option expires in six year from the grant date and is evenly vested each quarter. The Company recognized approximately $23,700 of compensation expense for this option for the three months ended March 31, 2010.

On January 4, 2010, the Company renewed service contracts with the three independent directors and issued non-transferable stock purchase options to two independent directors to purchase 20,000 shares of common stock each. The exercise price is at $7.30 per share. These options were accounted for using the fair value method. The option shall be terminated on the earlier of (i) the tenth anniversary of the date of the agreement or (ii) the date as of which the option has been fully exercised. The option is vested and becomes exercisable after three months from the grant date. The option is vested in a 25% increment every 3 months, in which each director provides directorship service to the Company.  The Company recognized approximately $60,700 of compensation expense for these options for the three months ended March 31, 2010.

Stock Option

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

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

Following is a summary of stock option activity for the year ended March 31, 2010:

	Options		Weighted Average  Exercise Price		Weighed  Average Remaining  Contractual Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2009		577,200	$	4.56		1.41	$	1,546,728
Issued		2,792,000		7.04		5.82
Exercised		259,265		-		-
Cancelled/Forfeited		25,000		-		-
Outstanding at March 31, 2010		3,084,935	$	6.79		5.40	$	11,377,531
Exercisable at March 31, 2010		464,285		3.89		1.99	$	1,901,251

Following is a summary of non-vested options as March 31, 2010 and changes during the three months then ended:

	Options		Weighted Average Fair Value at Grant Date
Non-vested options as of December 31, 2009		20,000	$	7.09
Issued		2,782,000		7.04
Exercised		-		-
Cancelled		25,000		-
Non-vested options as of March 31, 2010		2,552,000	$	7.04

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18. SEGMENT REPORTING

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

For the three months ended March 31, 2010 and 2009

	Wholesale  Distribution of Finished Oil and Heavy Oil		Production and Sale of Biodiesel		Operation of Retail Gas Stations		Total
2010 (Unaudited)
Sales	$	76,577,124	$	14,897,751	$	17,941,175	$	109,416,050
Cost of goods sold		69,994,017		10,199,535		15,927,355		96,120,907
Gross profit		6,583,107		4,698,216		2,013,820		13,295,143
Selling, general and administrative expenses								1,843,456
Income from operations								11,451,687
Non-operating income (expenses)								(91,913	)
Net income								11,359,774
Segment assets		105,649,673		30,012,833		44,710,451		180,372,957
Capital expenditures		2,463		8,728,797		9,962,202		18,693,462
2009 (Unaudited)
Sales	$	39,299,638	$	11,253,616	$	8,105,414	$	58,658,668
Cost of goods sold		35,232,597		8,582,423		7,166,694		50,981,714
Gross profit		4,067,041		2,671,193		938,720		7,676,954
Selling, general and administrative expenses								555,849
Income from operations								7,121,105
Non-operating income (expenses)								80,147
Net income								7,201,252
Segment assets		68,407,475		18,881,905		8,044,875		95,334,255
Capital expenditures		3,324		-		-		3,324

19.  SUBSEQUENT EVENT

On April 14, 2010, the Company renewed the agreement with 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 warrants to purchase 30,000 shares of the Company’s common stock with a strike price at $10.00 per share. The warrants 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.

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.

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(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.

(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.

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

Forward Looking Statements

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

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

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

OVERVIEW

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

• Our Business—a general overview of our three business segments 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.

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

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

Our Business

Company Overview

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

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

Fluctuations in Fuel Prices During 2010

Up to 2008, 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.

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

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

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

Tax Exemptions

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

Growth and Expansion Plans

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

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

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

Basis of Presentations

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

Critical Accounting Policies and Estimates

Accounts Receivable

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

Inventories

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

Property, Plant and Equipment

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

Intangible Assets

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

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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.

Income Tax Recognition

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

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

	For the Three Months  Ended March 31,
	2010				2009
	(pro forma)				(pro forma)
Net income before income taxes		$	11,359,774			$	7,150,468
Tax provision			(3,136,642	)			(1,831,475	)
Net income		$	8,223,132			$	5,318,993
Earnings per share (diluted)		$	0.19			$	0.15

In connection with the Share Exchange Agreement dated October 23, 2007, Redsky Industrial and Xi’an Baorun Industrial, two PRC companies, entered into a series of contracts whereby Redsky Industrial exercises significant control over Xi’an Baorun Industrial, including the right to receive 100% of the net income generated by Xi’an Baorun Industrial. While, as noted above, Xi’an Baorun Industrial is exempt from income tax for the years from 2004 through 2010, Redsky Industrial is not exempt from tax in those periods and is obligated for applicable PRC taxes under PRC tax laws. We account for all income taxes in accordance with “Accounting for Income Taxes” and “Accounting for Uncertainty in Income Taxes,”

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We believe that the series of contracts entered into between Xi’an Baorun Industrial and Redsky Industrial do not constitute taxable income for the purposes of Redsky Industrial. Since commencement of these series of contracts, Xi’an Baorun Industrial has not remitted any income to Redsky Industrial, nor has Redsky Industrial demanded any remittance of income, nor is remittance expected in the future, as Xi’an Baorun Industrial is anticipating to use its undistributed earnings for future bio energy development as was anticipated when it obtained its original tax exemption. We have examined our tax position and have determined that our tax position with regards to both these entities is in compliance with applicable PRC tax laws. Pursuant to the accounting standards codification, we have determined that we will reinvest indefinitely our earnings to the biodiesel production facility and biodiesel production technology, and accordingly no accrual of deferred tax liabilities was required as of December 31, 2009 and 2008. We have also analyzed the status of Redsky Industrial and have determined that based on the aforementioned series of contracts, if Redsky Industrial should be sold, dissolved or otherwise disposed of, the obligations of Xi’an Baorun Industrial would be terminated under the series of contracts, including Redsky Industrial’s right to 100% of Xi’an Baorun Industrial’s net income. In addition, in accordance with “Accounting for Uncertainty in Income Taxes”, we have examined our tax position in the context of “Accounting for Contingencies.”  Accounting for Uncertainty in Income Taxes is an accounting requirement that discusses tax issues that have an element of uncertainty. In accordance with “Accounting for Contingencies”, we have determined that it is probable that our tax position with regards to both Redsky Industrial and Xi’an Baorun Industrial is correct. Accordingly, no deferred tax liability has been provided for.

Consolidation of Variable Interest Entities 

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

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

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 may have a material adverse effect on the financial condition of the Company taken as a whole.

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Results of Operations

For the three months ended March 31, 2010 and 2009

	Wholesale  Distribution of Finished Oil and Heavy Oil		Production and Sale of Biodiesel		Operation of Retail Gas Stations		Total
2010 (Unaudited)
Sales	$	76,577,124	$	14,897,751	$	17,941,175	$	109,416,050
Cost of goods sold		69,994,017		10,199,535		15,927,355		96,120,907
Segment profit		6,583,107		4,698,216		2,013,820		13,295,143
Selling, general and administrative expenses								1,843,456
Income from operations								11,451,687
Non-operating income (expenses)								(91,913	)
Net income								11,359,774
Segment assets		105,649,673		30,012,833		44,710,451		180,372,957
Capital expenditures		2,463		8,728,797		9,962,202		18,693,462
2009 (Unaudited)
Sales	$	39,299,638	$	11,253,616	$	8,105,414	$	58,658,668
Cost of goods sold		35,232,597		8,582,423		7,166,694		50,981,714
Segment profit		4,067,041		2,671,193		938,720		7,676,954
Selling, general and administrative expenses								555,849
Income from operations								7,121,105
Non-operating income (expenses)								80,147
Net income								7,201,252
Segment assets		68,407,475		18,881,905		8,044,875		95,334,255
Capital expenditures		3,324		-		-		3,324

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

	Three Months ended, March 31, 2010						Three Months ended, March 31, 2009
	$			% of Sales			$		% of Sales
Net sales		109,416,050			100.0	%		58,658,668		100.0	%
Cost of good sold		96,120,907			87.8	%		50,981,714		86.9	%
Gross profit		13,295,143			12.2	%		7,676,954		13.1	%
Total operating expenses		1,843,456			1.7	%		555,849		0.9	%
Income from Operation		11,451,687			10.5	%		7,121,105		12.1	%
Other income (expenses)		(91,913	)		-0.1	%		80,147		0.1	%
Net income		11,359,774			10.4	%		7,201,252		12.2	%

 

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Net sales. Net sales for the three months ended March 31, 2010 were approximately $109.4 million compared to the same period in 2009 of approximately $58.7 million, an increase in revenues of $50.8 million, or 86.5%. The increase was mainly due to strong market demand for finished oil products and sales growth generated by the gas stations. Sales from wholesale distribution for the three months ended March 31, 2010 was $76.6 million, compared to $39.3 million in the same period of 2009, an increase of $37.3 million, or 94.6%. For the three months ended March 31, 2010 and 2009, sales volume of wholesale distribution were 91,500 tons and 60,400 tons, respectively, with an increase of 31,100 tons or 51.2% from the same period in 2009, as a result of increase of sales to our existing customers to support their business growth and increase the number of our distributors and end customers. Sales from production and sale of biodiesel segment for the three months ended March 31, 2010 was 14.9 million, compared to $11.3 million in the same period of 2009. Sales volume of biodiesel for the three months ended March 31, 2010 and 2009 were 18,400 tons and 17,300 tons, respectively, with a increased of 1,100 tons or 6.4%, compared to the same period of 2009.  Furthermore, average selling price of biodiesel increased by approximately 24.1% from the same period in 2009.  Sales from our retail gas station for the three months ended March31, 2010 was $17.9 million, compared to $8.1 million in the same period of 2009, an increase of $9.8 million or 121.4%.  Sales volume of gas stations for the three months ended March 31, 2010 and 2009 were 19,500 tons and 11,100 tons, respectively, an increased by 8,400 tons or 75.3% from the same period in 2009. Furthermore, average selling price of retail gas station increased by approximately 22.1% from the same period in 2009.

Cost of sales. Cost of sales for the first quarter of 2010 was approximately $96.1 million compared to the cost of sales in the same period of 2009 of approximately $51.0 million, an increase of $45.1 million, or 88.5%.  The increase in cost of sales was attributable to an increase in production and sales activities during the first quarter of 2010. Cost of sales as a percentage of sales was approximately 87.8% for the quarter of 2010 and 86.9% for the same period of 2009.  The increase as a percentage of sales was due to change of product sales mix in wholesale distribution business and price promotions at five of our new gas stations.

Gross profit. Gross profit was approximately $13.3 million for the first quarter of 2010 as compared to approximately $7.7 million for the same period of 2009, representing gross margins of approximately 12.2% and 13.1%, respectively. During the first quarter of 2010, the gross profit margin for wholesales distribution of finished oil and heavy oil products was approximately 8.6%, the gross profit margin for production and sale of biodiesel was approximately 31.5%, the gross margin for operation of retail gas stations was approximately 11.2%, versus 10.3%, 23.7%, and 11.6%, respectively, compared to the same period of 2009.  The decrease in gross profit was due to change of product sales mix in our wholesale distribution business and price promotions at five of our new gas stations.

Operating expenses. Selling, general and administrative expenses for the first quarter of 2010 were approximately $1.8 million while it was $0.6 million for the same period of 2009 with an increase of $1.2 million or 200%. This increase was mainly attributed approximately $0.7 million of employee, stock option expense and approximately $0.4 million of stock options awarded to financial advisors. Total operating expenses as a percentage of sales was 1.7% and 0.9% for the first quarter of 2010 and 2009, respectively. We expect our professional fees to continue to increase in 2010, as we continue to engage an outside consulting firm to work on our Sarbanes Oxley compliance, and recognize compensation expense to employee stock option awards. We also expect to have an increase in other general and administrative expenses in future reporting periods, as our business expands.

Income from Operations. Income from operations for the three months ended March 31, 2010 was $11.5 million compared to $7.1 million in the same period of 2009.  Income from operations as a percentage of sales for the three months ended March 31, 2010 and 2009 were 10.5% and 12.1%, respectively. The decrease as a percentage of sales was attributable to lower gross margin and additional selling, general and administrative expenses.

Net income. The net income for the first quarter of 2010 was $11.4 million as compared to $7.2 million in the same period of 2009.  It was an increase of $4.2 million in net profit or 57.7%.  This increase was attributable to economies of scale combined with rapid growth in revenue from wholesale distribution of finished oil and heavy oil products and operation of retail gas stations segments especially in wholesale distribution business. Management believes that the net income increase is the result of the fast and continuing revenue growth.  Net income will continue to increase as we will continue to increase sales volume in wholesale distribution and operation of retail gas stations. Upon completion of the new 50,000-ton biodiesel production plant in the third quarter of 2010, we expect that revenue and net income will grow significantly.

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Liquidity and Capital Resources

As of March 31, 2010 and December 31, 2009, we had cash and cash equivalents of approximately $41.0 million and $62.4 million, respectively. At March 31, 2010, current assets were approximately $123.6 million and current liabilities were approximately $14.5 million, as compared to current assets of approximately $131.4 million and current liabilities of approximately $10.2 million at December 31, 2009. Working capital equaled approximately $109.1 million at March 31, 2010, compared to $121.2 million at December 31, 2009, a decrease of 10.0%. The ratio of current assets to current liabilities was 8.5-to-1 at March 31, 2010, compared to 12.8-to-1 at the December 31, 2009. The decrease in working capital in the first quarter of 2010 was primarily due to a significant increase approximately $14.2 million of advance to suppliers for additional petroleum supply to support the growth of wholesale distribution and retail gas station business segments.  In the first quarter of 2010, we leased two new gas stations for approximately $8.9 million. Net cash used in operations was $11.2 million in the first quarter of 2010. We also made approximately $7.7 million of down payments for the new equipments for the new biodiesel production plant.

We believe we have sufficient working capital to sustain our current business due to expected increased sales volume, revenue and net income from operations. We intend to continue the expansion of our current operations by (i) extending oil distribution network to other provinces outside of our current territory, (ii) acquiring biodiesel production plants; (iii) acquiring new technology of biodiesel production capability, (iv) expanding our 100,000 ton bio-diesel manufacturing facility by constructing a new 50,000-ton of biodiesel production plant; and (v) acquiring or leasing several additional gas stations to broaden retail channels over the 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:

· Development of new sales territories, sales offices, and sales force for our wholesale distribution of finished oil and heavy oil products and required working capital to sustain our existing market share and support the growth in this business segment. This development can be achieved by organic growth or through acquisition;

· Expanding of market share for our retail gas stations both in terms of quantity and geographic location and required working capital to support the growth;

· Our ability to maintain our existing oil suppliers and establish collaborative relationships with new suppliers;

· Increase our biodiesel production capacity through strategic acquisitions or construction of a new facility; and

· Development and commercialization of new technology in biodiesel production capacity.

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

The following is a summary of cash provided by or used in each of the indicated types of activities during the years ended March 31, 2010 and 2009.

	Three Months Ended March 31,
	2010 (Unaudited)				2009 (Unaudited)
Cash provided by (used in):
Operating Activities		$	(11,247,371	)		$	11,748,785
Investing Activities			(10,198,032	)			(3,324	)
Financing Activities			-				508,207

 

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Net cash used in operating activities was $11.2 million in the first quarter of 2010, compared to $11.7 million of cash provided by operation in the same period of 2009. The net cash inflow decreased during the first quarter of 2010 was primarily due to advance to suppliers, and lease payments for two new gas stations.

Net cash used in investing activities was $10.2 million in the first quarter of 2010. During the first quarter of 2010, we spent approximately $7.7 million to purchase equipments for constructing a 50,000-ton biodiesel manufacturing facility, and approximately $2.5 million for of purchase Xianyan Jinzheng gas station.

There was no financing activity in the first quarter of 2010. In the first quarter of 2009, we received approximately $0.5 million from 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 March 31, 2010.  However, there is concern of inflation for the remaining of 2010.

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commitments

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

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

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

ITEM 4T.          CONTROLS AND PROCEDURES.

We maintain “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as required by Rule 13a-15(d) under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2010. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2010 our disclosure controls and procedures were effective in ensuring that material information relating to us, is made known to the Chief Executive Officer and Chief Financial Officer by others within our company during the period in which this report was being prepared.

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There were no changes in our internal controls over financial reporting identified in connection with the evaluation that occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II

OTHER INFORMATION

ITEM 1             LEGAL PROCEEDINGS

None.

ITEM 1A.         RISK FACTORS

Risks Related to our Business

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

Historically, our customer base has been highly concentrated.  For the years ended December 31, 2008 and 2009, sales by our five largest customers contributed 23.3% and 39.1% to our total sales, respectively.  In the first quarter of 2010, sales to two provincial subsidiaries of Sinopec, represented 46.9% of our total sales.  The loss of, or reduction of our sales to, any of such major customers could have a material adverse effect on our business, operating results and financial condition.

We face risks associated with future acquisitions.

An important element of our growth strategy is to invest in or acquire businesses or assets that will enable us, among other things, to expand our retail gas station business and expand our bio-diesel manufacturing capacity.  However, we may be unable to identify suitable investment or acquisition candidates or may be unable to make these investments or acquisitions on commercially reasonable terms, if at all.

If we complete an investment or acquisition, we may not immediately realize the anticipated benefits from the transaction. Integrating an acquired business or assets is distracting and time consuming, as well as a potentially expensive process. The successful integration of any acquired businesses or assets requires us to:

• integrate and retain personnel;

• evaluate and assess the acquired technologies to determine if they are suitable;

• integrate and support pre-existing supplier, distribution and customer relationships; and

• consolidate functions and combine back office accounting, order processing and support functions.

Geographic distance between business operations, the compatibility of the technologies and operations being integrated and the disparate corporate cultures being combined also present significant challenges.  Acquired businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, billing, information and other systems. Our focus on integrating operations may also distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts. If we cannot overcome these challenges, we may not realize actual benefits from future acquisitions, which will impair our overall business results.

We may face constraints on our working capital as a result of advancements made to suppliers, and any shortfall in working capital could restrict our ability to obtain our raw material supply.

Industry practice for our wholesale distribution of finished oil segment requires that we prepay our suppliers.  If at any given time we do not have sufficient working capital available to make such payments, we may be unable to obtain additional supplies or, the quantity available to us may be limited.  Although our inventory balances may vary, we generally maintain inventory expected to satisfy our distribution cycle and ultimately customer demand for 14 days.  Any failure or delay in procuring additional supplies could disrupt or inhibit our ability to meet our obligations under customer contracts, which could cause our customers to seek other suppliers and a significant decrease in overall sales revenues.

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We may face increased competition from larger domestic competitors in the finished oil and heavy oil products industry if consolidation continues.

The requirement for payment in advance for petroleum supplies has had a disproportionate negative impact on smaller domestic companies. Many smaller wholesale distributors who do not have access to adequate capital to make these advances have been acquired by larger competitors.  As a result, there has been, and we believe that there will continue to be, consolidation resulting in fewer, larger competitors in the wholesale distribution of finished oil and heavy oil industry.

An increase in competition arising from industry consolidation and an increase in the size and financial resources of our competitors in the wholesale distribution of finished oil and heavy oil products may result in additional advances having to be made to suppliers, price reductions, reduced gross profit margins and loss of our market share, any of which could adversely affect our financial condition and profitability.

Competition in the retail gas station business may become intense as international oil and gas companies begin to enter the retail gas station market in the PRC.

The retail gas station market in the PRC is highly fragmented with many privately owned gas stations.  To date, our operating leases for, and acquisitions of, retail gas stations have primarily been with or from private owners.  As large international players, such as Exxon Mobil and Shell, begin to penetrate this market through partnerships with state-owned entities or others, competition for small privately-owned gas stations may become intense, which could significantly increase lease payments and purchase prices paid to owners.  Companies such as Exxon Mobil and Shell also have greater financial and other resources than we do, and we may be unable to successfully finance such acquisitions at potentially higher prices or otherwise.  Since our growth strategy with respect to our retail gas station business depends on our ability to continue to acquire, through leases and otherwise, gas stations, our inability to compete against larger international companies could significantly hinder revenue  growth for this segment.

Our failure to renew our Dangerous Chemical Operating Permit may have a material adverse impact on our financial condition and results of operations.

PRC law and regulations on dangerous chemical administration require that a Dangerous Chemical Operating Permit must be obtained for any entity engaging in the operation and sale of dangerous chemicals. We obtained a Dangerous Chemical Operating Permit for our wholesale distribution of finished oil and heavy oil business in April 2007, which expired in April 2010.  In March 2010, we submitted an application to renew the permit, which is currently under the review of the relevant authority.  However, we are unable to ascertain how long the review process will take and whether we will be able to receive a renewal or obtain a new permit. On June 3, 2010 we received the following informal written statement confirmed by the local authority of Shan’xi province Who is responsible for issuing the permit: “On March 18, 2010, our Bureau received the Company's renewal application for a Dangerous Chemical Operation Permit (Shaan Sheng You (Jia) [2007] No. 000015). The Company may continue to conduct the relevant business associated with this permit during the renewal review period.”

Operating our business without a Dangerous Chemical Operating Permit may be deemed a violation of PRC law and may subject us to severe penalties, including fines and suspension of operation.  Any failure by us to renew or obtain such permit could require us to suspend operations and would have a material adverse effect on the operation of our business.

Our biodiesel business will suffer if we cannot obtain or maintain necessary permits or approvals.

In the fourth quarter of 2009, to expand our production capacity, we began the construction of a new 50,000-ton biodiesel production plant on leased land adjacent to our existing 100,000-ton biodiesel facility.  We leased the land for both facilities from Northwest Fire Resistant Factory, a former state-owned enterprise. We do not have all the necessary permits relating to the construction and operation of these facilities.  With respect to both biodiesel facilities, we do not have the land planning permit.  For our existing facility we have several outstanding permits, which we are still seeking to obtain, and for our new facility we are in the process of applying for all the required permits.  We have not been informed by any governmental agency that we should cease use of our existing biodiesel facility or that we are prohibited from constructing our new biodiesel facility.  Failure to obtain all necessary approvals/permits may subject us to various penalties, such as fines or being required to vacate our biodiesel facilities or to suspend construction of our new biodiesel plant.

Our legal right to lease certain properties could be challenged by property owners, regulatory authorities or other third parties

We lease the land on which our biodiesel facilities and most of our gas stations are located.  We cannot be certain that Northwest Fire Resistant Factory, the lessor of the land on which our biodiesel facilities are located, or our other lessors have obtained all required consents or approvals for them to lease the relevant property to us.  Any failure to duly obtain the consents and approvals by these lessors could potentially result in the invalidation of our lease or, in serious cases, we may be required to vacate the leased properties or we may have to pay a fine.

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We and/or Baorun China Group may be classified as a “resident enterprise” for PRC enterprise income tax purposes. Such classification could result in PRC tax consequences to us, our non-PRC resident enterprise investors and/or Baorun China Group.

On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as “resident enterprise” and “non-resident enterprises”. An enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a “resident enterprise,” meaning that it can be treated in a manner similar to an enterprise organized under the laws of the PRC for PRC enterprise income tax purposes. The implementing rules of the EIT Law define “de facto management body” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body or Baorun Group’s managing body as being located within the PRC. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case basis.

If the PRC tax authorities determine that we and/or Baorun China Group is a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we and/or Baorun China Group may be subject to the PRC enterprise income tax at a rate of 25% on our and/or Baorun china Group’s respective worldwide taxable incomes, as well as PRC enterprise income tax reporting obligations. Second, under the EIT law and its implementing rules, dividends paid between “qualified resident enterprise” are exempt from enterprise income tax. As a result, dividends paid by Redsky Industrial to Baorun Group may be exempt from the statutory 10% PRC withholding tax normally imposed provided Baorun Group is classified as a resident enterprise and, similarly, dividends paid by Baorun Group to us may be exempt from such 10% withholding tax provided we are also classified as a resident enterprise. If either Baorun Group or we are not classified as a resident enterprise then the statutory 10% PRC withholding tax on dividends paid would normally apply to any dividends paid by the resident enterprise to the non-resident enterprise.

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Finally, if we are classified as a PRC “resident enterprise”, this classification could result in a situation in which an up to 10% PRC tax is imposed on dividends we pay to our enterprise (but not individual) investors that are not tax residents of the PRC (“non-resident investors”) and gains derived by them from transferring our common stock, if such income or gain is considered PRC-sourced income by the relevant PRC tax authorities. In such event, we may be required to withhold an up to 10% PRC tax on any dividends paid to our non-PRC resident investors. Our non-PRC resident investors also may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our common stock in certain circumstances if such income is considered as PRC-sourced income by relevant tax authorities. We would not, however, have an obligation to withhold PRC tax with respect to such gain under the PRC tax laws.

Investors should consult their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available deductions or foreign tax credits.

ITEM 2             UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

Since the consummation of the offering, we have used approximately $15 million of the net proceeds from the offering to begin construction of a new bio-diesel facility, and the remaining $16 million will be used to expand our wholesale distribution and retail gas station businesses through both organic growth and potential acquisitions and for working capital and general corporate purposes.

ITEM 3             DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4             OTHER INFORMATION

None

ITEM 5             EXHIBITS

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

(a)        Exhibits:

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

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

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

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SIGNATURES

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

Dated: June 3, 2010

CHINA INTEGRATED ENERGY, INC.
By:	/s/ Xincheng Gao
	Name: Xincheng Gao
	Title: Chief Executive Officer and President

 

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EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Chief Executive Officers and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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