China Integrated Energy (CBEH) 10-Q 2010 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010.

or

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

For the transition period from to                 .

Commission File Number 000-25413

CHINA INTEGRATED ENERGY, INC.

(Exact name of registrant as specified in its charter)

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

Dongxin Century Square, 7th Floor

Hi-Tech Development District

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

(Address of Principal Executive Offices including zip code)

+86 29 8268 3920

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 Filero Accelerated Filer o Non-Accelerated Filer o (Do not check if a smaller reporting company) Smaller reporting company þ

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

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

TABLE OF CONTENTS

Part I	FINANCIAL INFORMATION
	ITEM 1	CONSOLIDATED 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	32
	ITEM 4T.	CONTROLS AND PROCEDURES.	32
Part II	OTHER INFORMATION
	ITEM 1	LEGAL PROCEEDINGS	32
	ITEM 1A.	RISK FACTORS	33
	ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	33
	ITEM 3	DEFAULTS UPON SENIOR SECURITIES	33
	ITEM 4	OTHER INFORMATION	33
	ITEM 5	EXHIBITS	33

Part I

FINANCIAL INFORMATION

ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS

CHINA INTEGRATED ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

1

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

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

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

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

2

CHINA INTEGRATED ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)	Preferred stock						Common 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		-			-			-		-		-		-		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 A conversion		(11,000	)		(11	)		50,000		5		6		-		-		-		-
Preferred B conversion		(510,000	)		(510	)		510,000		51		459		-		-		-		-
Stock purchase option – directors		-			-			-		-		121,404		-		-		-		121,404
Stock-based compensation – consultants		-			-			-		-		757,648		-		-		-		757,648
Employee stock option compensation		-			-			-		-		1,405,096		-		-		-		1,405,096
Net income for the period		-			-			-		-		-		-				24,758,944		24,758,944
Foreign currency translation gain		-			-			-		-		-		-		1,100,157		-		1,100,157
Balance at June 30, 2010		2,594,753		$	2,594			33,829,091	$	3,382	$	78,143,607	$	4,920,114	$	6,573,577	$	91,831,568	$	181,474,842

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

3

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

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

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

4

CHINA INTEGRATED ENERGY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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

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

Principle of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

5

Accounts Receivable

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

Advance to Suppliers

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

Inventories

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

Advances from Customers

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

Property, Plant, and Equipment

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

	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.

6

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

Intangible Assets

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

Income Taxes

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

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

Revenue Recognition

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

7

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

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

Cost of Goods Sold

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

Concentration of Credit Risk

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

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

Statement of Cash Flows

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

Foreign Currency Translation and Comprehensive Income (Loss)

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

On July 21, 2005, the central government of China allowed the RMB to fluctuate, ending its decade old valuation peg to the U.S. dollar. Historically, the Chinese government has benchmarked the RMB exchange ratio against the U.S. dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk. Since then the RMB has strengthened and risen more than 21% against the USD.  On June 19, 2010, the Chinese central bank announced that it would further the reform of the RMB exchange rate mechanism to improve flexibility. The Company does not believe that its foreign currency exchange rate fluctuation risk is significant. This fluctuation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China.

8

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

Fair value of financial instruments

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

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

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

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

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

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

Stock-Based Compensation

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

Consolidation of Variable Interest Entities

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

9

Reclassification

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

Litigation

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

New Accounting Pronouncements

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

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

Stock based Compensation

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

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

2.  CASH IN BANK ACCOUNTS

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

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3.  PREPAID RENT

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

4.  INVENTORIES

Inventories consisted of the following:

	June 30, 2010 (Unaudited)		December 31,2009 (Audited)
Petroleum	$	12,092,615	$	10,449,525
Diesel		6,614,765		5,601,725
Raw material for manufacturing bio-diesel oil		6,084,614		4,903,601
Total		24,791,994		20,954,851

5.  OTHER RECEIVABLES AND DEPOSITS

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

6.  PROPERTY, PLANT, AND EQUIPMENT

Plant, property, and equipment are summarized as follows:

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

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

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7.  INTANGIBLE ASSETS

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

Intangible assets are summarized as follows:

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

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

8.  MAJOR CUSTOMERS AND VENDORS

For the three months ended June 30, 2010, two major customers accounted for approximately 37.1% of the Company’s total sales, and these two customers accounted for approximately 32.8% of the Company’s outstanding accounts receivable. No other major customers accounted for over 10% of the Company’s total sales. For the three months ended June 30, 2009, one major customer accounted for approximately 23.9% of the Company’s total sales, and this customer accounted for approximately 18.8% of the Company’s outstanding accounts receivable.

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

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

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

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9.  TAX PAYABLE

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

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

10.  INCOME TAXES

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

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

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

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

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

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

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

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

11.  OTHER PAYABLES AND ACCRUALS

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

12.  LOANS PAYABLE

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

13.  COMMITMENTS

Lease Agreements

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

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

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

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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

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

Shipping Agreement

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

Construction Contract

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

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

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

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Equipment Purchase Agreements

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

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

14.  BUSINESS COMBINATION

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

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

The following represents the allocation of the total purchase price.

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

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15. BASIC AND DILUTED EARNING PER SHARES (EPS)

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

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

16.  STOCKHOLDERS’ EQUITY

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

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

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

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

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

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

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17.  SHARED-BASED PAYMENT ARRANGEMENTS

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

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

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

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

Stock Option Grants

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

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

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

	Options		Weighted Average Exercise Price		Weighed Average Remaining Contractual Term in Years		Aggregate Intrinsic 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 June 30, 2010		3,084,935	$	6.79		6.04	$	4,652,373
Exercisable at June 30, 2010		454,285		5.02		3.22	$	1,489,954

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

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

18. SEGMENT REPORTING

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

For the three months ended June 30, 2010 and 2009

	Wholesale  Distribution of Finished Oil and Heavy Oil		Production and Sale of Biodiesel		Operation of Retail Gas Stations		Total
2010 (Unaudited)
Sales	$	63,931,502	$	18,479,533	$	22,012,855	$	104,423,890
Cost of goods sold		56,786,157		12,914,297		19,184,337		88,884,791
Segment profit		7,145,345		5,565,236		2,828,518		15,539,099
Selling, general and administrative expenses								2,028,262
Income from operations								13,510,837
Non-operating income (expenses)								(111,667	)
Net income								13,399,170
Segment assets		112,720,142		31,032,740		44,462,770		188,215,652
Capital expenditures		6,120		623,980		-		630,100
2009 (Unaudited)
Sales	$	45,452,242	$	11,753,849	$	8,038,148	$	65,244,239
Cost of goods sold		40,354,864		8,213,380		7,200,078		55,768,322
Segment profit		5,097,378		3,540,469		838,070		9,475,917
Selling, general and administrative expenses								610,726
Income from operations								8,865,191
Non-operating income (expenses)								(38,458	)
Net income								8,826,733
Segment assets		72,134,768		23,861,023		10,799,583		106,795,374
Capital expenditures		87,852		-		-		87,852

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For the six months ended June 30, 2010 and 2009

	Wholesale  Distribution of Finished Oil and Heavy Oil		Production and Sale of Biodiesel		Operation of Retail Gas Stations		Total
2010 (Unaudited)
Sales	$	140,508,626	$	33,377,284	$	39,954,030	$	213,839,940
Cost of goods sold		126,780,174		23,113,832		35,111,692		185,005,698
Segment profit		13,728,452		10,263,452		4,842,338		28,834,242
Selling, general and administrative expenses								3,871,718
Income from operations								24,962,524
Non-operating income (expenses)								(203,580	)
Net income								24,758,944
Segment assets		112,720,142		31,032,740		44,462,770		188,215,652
Capital expenditures		10,797		8,323,361		2,490,040		10,824,198
2009 (Unaudited)
Sales	$	82,563,217	$	25,195,466	$	16,144,224	$	123,902,907
Cost of goods sold		74,174,248		18,656,136		13,919,652		106,750,036
Segment profit		8,388,969		6,539,330		2,224,572		17,152,871
Selling, general and administrative expenses								1,166,575
Income from operations								15,986,296
Non-operating income (expenses)								41,690
Net income								16,027,986
Segment assets		72,134,768		23,861,023		10,799,583		106,795,374
Capital expenditures		91,176		-		-		91,176

19.  OPERATING RISK

(a) Country risk

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

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

(d) Political risk

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

(e) Key personnel risk

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

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

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking  and consider the various disclosures made throughout the entirety of this quarterly report, as well as in the Company’s other Filings, which include other disclosures of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

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

OVERVIEW

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

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

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

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

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

Fluctuations in Fuel Prices During 2010

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

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

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

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

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

Tax Exemptions

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

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Growth and Expansion Plans

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

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

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

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

Basis of Presentations

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

Critical Accounting Policies and Estimates

Accounts Receivable

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

Inventories

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

Property, Plant and Equipment

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

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

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

Intangible Assets

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

Revenue Recognition

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

Foreign Currency Translation

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

Income Tax Recognition

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

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

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

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

We believe that the series of contracts entered into between Xi’an Baorun Industrial and Redsky Industrial do not constitute taxable income for the purposes of Redsky Industrial. Since commencement of these series of contracts, Xi’an Baorun Industrial has not remitted any income to Redsky Industrial, nor has Redsky Industrial demanded any remittance of income, nor is remittance expected in the future, as Xi’an Baorun Industrial is anticipating to use its undistributed earnings for future bio-energy development as was anticipated when it obtained its original tax exemption. We have examined our tax position and have determined that our tax position with regards to both these entities is in compliance with applicable PRC tax laws. Pursuant to the accounting standards codification, we have determined that we will reinvest indefinitely our earnings to the biodiesel production facility and biodiesel production technology, and accordingly no accrual of deferred tax liabilities was required as of June 30, 2010 and December 31, 2009  We have also analyzed the status of Redsky Industrial and have determined that based on the aforementioned series of contracts, if Redsky Industrial should be sold, dissolved or otherwise disposed of, the obligations of Xi’an Baorun Industrial would be terminated under the series of contracts, including Redsky Industrial’s right to 100% of Xi’an Baorun Industrial’s net income. In addition, in accordance with “Accounting for Uncertainty in Income Taxes”, we have examined our tax position in the context of “Accounting for Contingencies.”  Accounting for Uncertainty in Income Taxes is an accounting requirement that discusses tax issues that have an element of uncertainty. In accordance with “Accounting for Contingencies”, we have determined that it is probable that our tax position with regards to both Redsky Industrial and Xi’an Baorun Industrial is correct. Accordingly, no deferred tax liability has been provided for.

Consolidation of Variable Interest Entities

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

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

 

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Contingencies

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

Litigation

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

Results of Operations

For the three months ended June 30, 2010 and 2009

	Wholesale  Distribution��of Finished Oil and Heavy Oil		Production and Sale of Biodiesel		Operation of Retail Gas Stations		Total
2010 (Unaudited)
Sales	$	63,931,502	$	18,479,533	$	22,012,855	$	104,423,890
Cost of goods sold		56,786,157		12,914,297		19,184,337		88,884,791
Segment profit		7,145,345		5,565,236		2,828,518		15,539,099
Selling, general and administrative expenses								2,028,262
Income from operations								13,510,837
Non-operating income (expenses)								(111,667	)
Net income								13,399,170
Segment assets		112,720,142		31,032,740		44,462,770		188,215,652
Capital expenditures		6,120		623,980		-		630,100
2009 (Unaudited)
Sales	$	45,452,242	$	11,753,849	$	8,038,148	$	65,244,239
Cost of goods sold		40,354,864		8,213,380		7,200,078		55,768,322
Segment profit		5,097,378		3,540,469		838,070		9,475,917
Selling, general and administrative expenses								610,726
Income from operations								8,865,191
Non-operating income (expenses)								(38,458	)
Net income								8,826,733
Segment assets		72,134,768		23,861,023		10,799,583		106,795,374
Capital expenditures		87,852		-		-		87,852

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

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

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

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

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

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

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For the six months ended June 30, 2010 and 2009

	Wholesale  Distribution of Finished Oil and Heavy Oil		Production and Sale of Biodiesel		Operation of Retail Gas Stations		Total
2010 (Unaudited)
Sales	$	140,508,626	$	33,377,284	$	39,954,030	$	213,839,940
Cost of goods sold		126,780,174		23,113,832		35,111,692		185,005,698
Segment profit		13,728,452		10,263,452		4,842,338		28,834,242
Selling, general and administrative expenses								3,871,718
Income from operations								24,962,524
Non-operating income (expenses)								(203,580	)
Net income								24,758,944
Segment assets		112,720,142		31,032,740		44,462,770		188,215,652
Capital expenditures		10,797		8,323,361		2,490,040		10,824,198
2009 (Unaudited)
Sales	$	82,563,217	$	25,195,466	$	16,144,224	$	123,902,907
Cost of goods sold		74,174,248		18,656,136		13,919,652		106,750,036
Segment profit		8,388,969		6,539,330		2,224,572		17,152,871
Selling, general and administrative expenses								1,166,575
Income from operations								15,986,296
Non-operating income (expenses)								41,690
Net income								16,027,986
Segment assets		72,134,768		23,861,023		10,799,583		106,795,374
Capital expenditures		91,176		-		-		91,176

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

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

Operations Results for the Six Months Ended June 30, 2009

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Inflation

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

Off-Balance Sheet Arrangements

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

 Contractual Obligations and Commitments

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

Quantitative and Qualitative Disclosures About Market Risks

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

Recently Issued Accounting Pronouncements

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

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4T. CONTROLS AND PROCEDURES.

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

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

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Risks Related to our Business

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

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

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

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

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 OTHER INFORMATION

None.

ITEM 5 EXHIBITS

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

(a)           Exhibits:

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

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

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

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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: August 12, 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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