UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549


______________




FORM
10-Q




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





For the
quarterly period ended June 30, 2009





 ̈ 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: 001-33470




NEW
ORIENTAL ENERGY & CHEMICAL CORP.


(Exact
name of registrant as specified in its charter)




Delaware
                (State or other jurisdiction
      ofincorporation or organization)
              
              20-1917956
                (I.R.S.  Employer
      Identification No.)





Xicheng
      Industrial Zone ofLuoshan, Xinyang
                  Henan
      Province, The People’sRepublic of China
                  (Address
      of principal executiveoffices)
                
                464200
                  (Zip
      Code)




(86)
27 853 75701


(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 Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.





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 during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).





Yes   ̈                                No  þ





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





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





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





Yes   ̈                                No  þ





Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.





Class
            
            Outstanding
      at August 14, 2009Common
      Stock, $.001 par value per share
            
            12,640,000
      shares







PART
I – FINANCIAL INFORMATION





Item
1.     Financial Statements.





New
Oriental Energy & Chemical Corp. And Subsidiaries


Condensed
Consolidated Financial Statements


For
the Three Months Ended June 30, 2009 And 2008





PageCondensed
      Consolidated Balance Sheets as of June 30, 2009
(Unaudited)and
      March 31, 2009
                                
                                F-2Condensed
      Consolidated Statements of (Loss) Income and Comprehensive
      (Loss)Income
      for the Three Months Ended June 30, 2009 and 2008(Unaudited)
                                
                                F-3Condensed
      Consolidated Statements of Cash Flows for the Three Months
      EndedJune
      30, 2009 and 2008 (Unaudited)
                                
                                F-4Notes
      to Condensed Consolidated Financial Statements for the
    ThreeMonths
      Ended June 30, 2009 and 2008 (Unaudited)
                                
                                F-5-18




See
accompanying notes to the condensed consolidated financial
statements.




F-1


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED
BALANCE SHEETS




June 30, 2009
                                                      
                                                      
                                                      March 31, 2009(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                                      
                                                      $
                                                      234,057
                                                      
                                                      
                                                      $
                                                      410,870Restricted
      cash
                                                      
                                                      
                                                      7,318,608
                                                      
                                                      
                                                      
                                                      4,388,596Notes
      receivable, net of reserve of $146,372 and $146,287 at June 30, 2009 and
      March 31, 2009, respectively
                                                      
                                                      
                                                      807,658
                                                      
                                                      
                                                      
                                                      722,242Inventories,
      net
                                                      
                                                      
                                                      3,503,285
                                                      
                                                      
                                                      
                                                      1,678,626Prepayments
      for goods
                                                      
                                                      
                                                      246,646
                                                      
                                                      
                                                      
                                                      301,450Due
      from employees
                                                      
                                                      
                                                      20,735
                                                      
                                                      
                                                      
                                                      18,424Other
      assets
                                                      
                                                      
                                                      17,531
                                                      
                                                      
                                                      
                                                      19,152Due
      from a related party
                                                      
                                                      
                                                      223,748
                                                      
                                                      
                                                      
                                                      253,959Deferred
      taxes
                                                      
                                                      
                                                      324,764
                                                      
                                                      
                                                      
                                                      307,404Total
      current assets
                                                      
                                                      
                                                      12,697,032
                                                      
                                                      
                                                      
                                                      8,100,723Long-term
      investment
                                                      
                                                      
                                                      469,855
                                                      
                                                      
                                                      
                                                      469,580Plant
      and equipment, net
                                                      
                                                      
                                                      18,065,275
                                                      
                                                      
                                                      
                                                      18,695,469Land
      use rights, net
                                                      
                                                      
                                                      1,629,323
                                                      
                                                      
                                                      
                                                      1,637,352Construction
      in progress
                                                      
                                                      
                                                      26,379,410
                                                      
                                                      
                                                      
                                                      25,703,868Deposits
                                                      
                                                      
                                                      2,193,907
                                                      
                                                      
                                                      
                                                      2,123,963Deferred
      taxes
                                                      
                                                      
                                                      1,423,588
                                                      
                                                      
                                                      
                                                      1,422,756Other
      long-term assets
                                                      
                                                      
                                                      10,361
                                                      
                                                      
                                                      
                                                      11,049Total
      long-term assets
                                                      
                                                      
                                                      50,171,719
                                                      
                                                      
                                                      
                                                      50,064,037TOTAL
      ASSETS
                                                      
                                                      $
                                                      62,868,751
                                                      
                                                      
                                                      $
                                                      58,164,760LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                                      
                                                      $
                                                      8,953,250
                                                      
                                                      
                                                      $
                                                      9,697,419Other
      payables and accrued liabilities
                                                      
                                                      
                                                      950,665
                                                      
                                                      
                                                      
                                                      887,920Short-term
      debt
                                                      
                                                      
                                                      23,495,660
                                                      
                                                      
                                                      
                                                      15,743,355Customer
      deposits
                                                      
                                                      
                                                      3,533,381
                                                      
                                                      
                                                      
                                                      2,907,587Payable
      to contractors
                                                      
                                                      
                                                      1,439,369
                                                      
                                                      
                                                      
                                                      1,477,066Due
      to related parties
                                                      
                                                      
                                                      8,493,026
                                                      
                                                      
                                                      
                                                      8,361,642Deferred
      taxes
                                                      
                                                      
                                                      438,003
                                                      
                                                      
                                                      
                                                      432,232Taxes
      payable
                                                      
                                                      
                                                      570,325
                                                      
                                                      
                                                      
                                                      570,009Total
      current liabilities
                                                      
                                                      
                                                      47,873,679
                                                      
                                                      
                                                      
                                                      40,077,230LONG-TERM
      LIABILITIESLong-term
      bank loan
                                                      
                                                      
                                                      2,927,443
                                                      
                                                      
                                                      
                                                      2,925,730Long-term
      note payable
                                                      
                                                      
                                                      531,331
                                                      
                                                      
                                                      
                                                      531,020Deferred
      taxes
                                                      
                                                      
                                                      519,193
                                                      
                                                      
                                                      
                                                      452,242Due
      to employees
                                                      
                                                      
                                                      160,365
                                                      
                                                      
                                                      
                                                      160,271Total
      long-term liabilities
                                                      
                                                      
                                                      4,138,332
                                                      
                                                      
                                                      
                                                      4,069,263TOTAL
      LIABILITIES
                                                      
                                                      
                                                      52,012,011
                                                      
                                                      
                                                      
                                                      44,146,493SHAREHOLDERS'
      EQUITYCommon
      stock, par value $0.001 per share; 30,000,000 shares authorized,
      12,640,000 shares issued and outstanding as of June 30,2009 and March 31,
      2009, respectively
                                                      
                                                      
                                                      12,640
                                                      
                                                      
                                                      
                                                      12,640Additional
      paid-in capital
                                                      
                                                      
                                                      4,573,205
                                                      
                                                      
                                                      
                                                      4,573,205Retained
      earnings (restricted portion is $950,327 as of June 30,2009 and March 31,
      2009, respectively )
                                                      
                                                      
                                                      3,745,637
                                                      
                                                      
                                                      
                                                      6,897,492Accumulated
      other comprehensive income
                                                      
                                                      
                                                      2,525,258
                                                      
                                                      
                                                      
                                                      2,534,930TOTAL
      SHAREHOLDERS' EQUITY
                                                      
                                                      
                                                      10,856,740
                                                      
                                                      
                                                      
                                                      14,018,267TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                                                      
                                                      $
                                                      62,868,751
                                                      
                                                      
                                                      $
                                                      58,164,760




See
accompanying notes to the condensed consolidated financial
statements.




F-2


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND


COMPREHENSIVE (LOSS)
INCOME


(UNAUDITED)





Three Months Ended
                  June 30,2009
                
                
                2008REVENUES
                
                $
                8,384,866
                
                
                $
                15,965,093COST
      OF GOODS SOLD
                
                
                (9,973,189
                )
                
                
                (13,257,214
                )GROSS
      (LOSS) PROFIT
                
                
                (1,588,323
                )
                
                
                2,707,879General
      and administrative
                
                
                727,934
                
                
                
                949,161Selling
      and distribution
                
                
                287,540
                
                
                
                277,989Research
      and development
                
                
                27,626
                
                
                
                20,433(LOSS)
      INCOME FROM OPERATIONS
                
                
                (2,631,423
                )
                
                
                1,460,296OTHER
      EXPENSESInterest
      expense, net
                
                
                (461,917
                )
                
                
                (186,755
                )Other
      expenses, net
                
                
                (3,507
                )
                
                
                (32,167
                )(LOSS)
      INCOME BEFORE INCOME TAXES
                
                
                (3,096,847
                )
                
                
                1,241,374INCOME
      TAX
                
                
                (55,008
                )
                
                
                (413,355
                )NET
      (LOSS) INCOME
                
                
                (3,151,855
                )
                
                
                828,019OTHER
      COMPREHENSIVE (LOSS) INCOMEForeign
      currency translation (loss) gain
                
                
                (9,672
                )
                
                
                440,034OTHER
      COMPREHENSIVE (LOSS) INCOME
                
                
                (9,672
                )
                
                
                440,034COMPREHENSIVE
      (LOSS) INCOME
                
                $
                (3,161,527
                )
                
                $
                1,268,053WEIGHTED
      AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
                
                
                12,640,000
                
                
                
                12,640,000NET
      (LOSS) INCOME PER SHARE, BASIC AND DILUTED
                
                $
                (0.25
                )
                
                $
                0.07





See
accompanying notes to the condensed consolidated financial
statements.




F-3





NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three Months Ended
                          June 30,2009
                        
                        
                        2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                        
                        $
                        (3,151,855
                        )
                        
                        $
                        828,019Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                        
                        
                        652,255
                        
                        
                        
                        694,446Deferred
      taxes
                        
                        
                        54,530
                        
                        
                        
                        3,092Write-down
      of inventories to net realizable value
                        
                        
                        807,448
                        
                        
                        
                        -Changes
      in operating assets and liabilities:(Increase)
      Decrease In:Inventories
                        
                        
                        (2,632,107
                        )
                        
                        
                        (3,065,508
                        )Prepayments
      for goods
                        
                        
                        54,804
                        
                        
                        
                        818,371Due
      from employees
                        
                        
                        (2,311
                        )
                        
                        
                        (6,056
                        )Other
      assets
                        
                        
                        1,621
                        
                        
                        
                        47,145Due
      from a related party
                        
                        
                        30,211
                        
                        
                        
                        (302,937
                        )Increase
      (Decrease) In:Accounts
      payable
                        
                        
                        (744,169
                        )
                        
                        
                        1,391,408Other
      payables and accrued liabilities
                        
                        
                        62,745
                        
                        
                        
                        102,077Customer
      deposits
                        
                        
                        625,794
                        
                        
                        
                        (91,163
                        )Due
      to a related party
                        
                        
                        27,437
                        
                        
                        
                        -Taxes
      payable
                        
                        
                        -
                        
                        
                        
                        (136,296
                        )Net
      cash (used in) provided by operating activities
                        
                        
                        (4,213,597
                        )
                        
                        
                        282,598CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted
      cash
                        
                        
                        (2,930,012
                        )
                        
                        
                        (1,701,341
                        )Purchases
      of plant and equipment
                        
                        
                        (1,623
                        )
                        
                        
                        (24,714
                        )Purchases
      of construction in progress
                        
                        
                        (599,727
                        )
                        
                        
                        (8,032,005
                        )Deposit
      for land use rights
                        
                        
                        (68,680
                        )
                        
                        
                        (11,544
                        )Notes
      receivable
                        
                        
                        (84,968
                        )
                        
                        
                        64,514Net
      cash used in investing activities
                        
                        
                        (3,685,010
                        )
                        
                        
                        (9,705,090
                        )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from short-term debt
                        
                        
                        15,627,972
                        
                        
                        
                        10,811,200Repayments
      of short-term debt
                        
                        
                        (7,887,151
                        )
                        
                        
                        (8,480,927
                        )Due
      to related parties
                        
                        
                        -
                        
                        
                        
                        1,084,243Net
      cash provided by financing activities
                        
                        
                        7,740,821
                        
                        
                        
                        3,414,516NET
      DECREASE IN CASH AND CASH QUIVALENTS
                        
                        
                        (157,786
                        )
                        
                        
                        (6,007,976
                        )Effect
      of exchange rate changes on cash
                        
                        
                        (19,027
                        )
                        
                        
                        156,402Cash
      and cash equivalents at beginning of period
                        
                        
                        410,870
                        
                        
                        
                        7,487,808CASH AND CASH EQUIVALENTS AT END OF
      PERIOD
                        
                        $
                        234,057
                        
                        
                        $
                        1,636,234SUPPLEMENTARY
      CASH FLOW INFORMATIONIncome
      taxes paid
                        
                        $
                        -
                        
                        
                        $
                        590,855Interest
      paid
                        
                        $
                        324,001
                        
                        
                        $
                        243,949




SUPPLEMENTAL
NON-CASH DISCLOSURES:





During
the three months ended June 30, 2009 and 2008, $0 and $605,234, respectively,
was transferred from construction in progress to plant and
equipment.




See
accompanying notes to the condensed consolidated financial
statements.




F-4


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008


(UNAUDITED)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES





New
Oriental Energy & Chemical Corp. was incorporated under the laws of the
State of Delaware on November 15, 2004. The principal activities of New Oriental
Energy & Chemical Corp. and subsidiaries (“NOEC” or the “Company”) are the
manufacture and distribution of fertilizer and chemical products. The products
are distributed to markets in the People’s Republic of China (the
“PRC”).





On
October 11, 2006, a share exchange agreement was entered into by and among the
Company, Kinfair Holdings Limited (“KHL”) and KHL’s shareholders, whereby the
Company issued 7,500,000 shares, representing 59.34% of its total common stock
in exchange of 100% of KHL’s common stock (the “Share Exchange”). Henan Jinding
Chemical Co., Ltd. (“Jinding”) is a wholly owned subsidiary of KHL and Jinding
is the principal operating subsidiary of KHL.





After the
Share Exchange, KHL and its wholly owned subsidiary, Jinding, became a
wholly-owned subsidiary of the Company and Jinding became the principal
operating subsidiary of the Company and is deemed to be the accounting acquirer.
The exchange transaction has been accounted for as a reverse acquisition in
accordance with Statement of Financial Accounting Standards (“SFAS”) No.141,
Business Combinations and it has been accounted for as a recapitalization of
Jinding.





On
November 13, 2007, Luoshan Jinding Chemical Co., Ltd. (“Luoshan Jinding”) was
incorporated as a wholly owned subsidiary of Jinding under the law of the
PRC.





2.
            BASIS
      OF PRESENTATION





The
unaudited condensed consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the requirements for reporting on Form
10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
However, such information reflects all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary for
the fair presentation of the consolidated financial position and the
consolidated results of operations. Results shown for interim periods are not
necessarily indicative of the results to be obtained for a full year. The
condensed consolidated balance sheet information as of March 31, 2009 was
derived from the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K. These interim financial statements should
be read in conjunction with that report.





3.
              GOING
      CONCERN





The
accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company had a
net loss of $3,151,855 for the three months ended June 30, 2009, and has a
working capital deficit of $35,176,647 at June 30, 2009.





The
Company will need to obtain additional financing to continue operations beyond
2009. Its primary source of capital is cash generated from operations as well as
through loans. If the Company is unable to obtain additional financing, it will
not be able to sustain its operations in their present form and would likely be
required to reduce or cease its operations.





Our major
shareholder has committed to provide financing aid, if necessary.





On August
4, 2009, the Company obtained a short-term bank loan for RMB 10 million
(approximately $1.464 million) with an interest rate of 10.08% per annum from
Xinyang Commercial Bank, which is due on August 4, 2010. The Company’s finished
goods inventory is pledged as collateral for the short-term bank
loan.





4.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING
POLICIES





(a)    Principles
of Consolidation





The
consolidated financial statements include the accounts of NOEC and the following
subsidiaries:




F-5




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


4.  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)





(i)
            Kinfair
      Holding Limited. (“KHL”) (An inactive holding company, 100% subsidiary of
      NOEC).





(ii)
              Henan
      Jinding Chemicals Co., Ltd. (“Jinding”) (100% subsidiary of
      KHL)





(iii)
              Luoshan
      Jinding Chemicals Co., Ltd. (“Luoshan Jinding”) (100% subsidiary of Henan
      Jinding)





Inter-company
accounts and transactions have been eliminated in consolidation.





(b)
            Concentrations





The
Company has major customers who accounted for the following percentage of total
sales and total customer deposits:





Customer
                  
                  Sales
                  
                  
                  Customer DepositsThree Months Ended June 30,
                  
                  
                  As of June 30, 2009
                  
                  
                  As of March 31,
                    20092009
                  
                  
                  2008Company
      A
                  
                  
                  16.14
                  %
                  
                  
                  11.07
                  %
                  
                  
                  13.77
                  %
                  
                  
                  14.45
                  %Company
      B
                  
                  
                  13.52
                  %
                  
                  
                  20.43
                  %
                  
                  
                  1.13
                  %
                  
                  
                  3.56
                  %Company
      C
                  
                  
                  10.24
                  %
                  
                  
                  -
                  
                  
                  
                  1.40
                  %
                  
                  
                  1.52
                  %Company
      D
                  
                  
                  7.54
                  %
                  
                  
                  -
                  
                  
                  
                  79.07
                  %
                  
                  
                  49.94
                  %





The
Company has major suppliers who accounted for the following percentage of total
purchases and total accounts payable/deposits:





Supplier
                  
                  Purchases
                  
                  
                  Accounts Payable
                    /DepositsThree Months Ended June 30,
                  
                  
                  As of June 30,
                    2009
                  
                  
                  As of March 31,
                    20092009
                  
                  
                  2008Company
      E
                  
                  
                  23.58
                  %
                  
                  
                  -
                  
                  
                  
                  9.66
                  %
                  
                  
                  12.27
                  %Company
      F
                  
                  
                  19.05
                  %
                  
                  
                  31.43
                  %
                  
                  
                  10.27
                  %
                  
                  
                  1.39
                  %Company
      G
                  
                  
                  15.48
                  %
                  
                  
                  -
                  
                  
                  
                  1.38
                  %
                  
                  
                  -Company
      H
                  
                  
                  13.35
                  %
                  
                  
                  37.60
                  %
                  
                  
                  10.88
                  %
                  
                  
                  9.52
                  %Company
      I
                  
                  
                  6.74
                  %
                  
                  
                  -
                  
                  
                  
                  1.55
                  %
                  
                  
                  0.87
                  %





The sole
market of the Company is in the PRC for the three months ended June 30, 2009 and
2008.





(c)  Economic
and Political Risks





The
Company's operations are conducted 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 and by the general
stateof the PRC
economy. The Company's operations in the PRC are subject to special
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environment and foreign currency
exchange. The Company's results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of taxation,
among other things.





(d)  Use
of Estimates





The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods.




F-6


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


4.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Management
makes these estimates using the best information available at the time the
estimates are made. Actual results could differ materially from those
estimates.





(e)  Fair
Value of Financial Instruments





Statements
of Financial Accounting Standards (“SFAS”) No. 157 establishes a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value. The
hierarchy prioritizes the inputs into three levels based on the extent to which
inputs used in measuring fair value are observable in the market.




These
tiers include:





•Level
1—defined as observable inputs such as quoted prices in active
markets;


•Level
2—defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and


•Level
3—defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions.





The
assets measured at fair value on a recurring basis subject to the disclosure
requirements of SFAS 157 as of June 30, 2009 are as follows:





Fair Value Measurements at Reporting Date UsingCarrying valueas of June30,2009
                  
                  
                  Quoted Prices inActive Markets forIdentical Assets
                  
                  
                  SignificantOtherObservableInputs
                  
                  
                  SignificantUnobservableInputs(Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)Cash
      and cash equivalents
                  
                  $
                  234,057
                  
                  
                  $
                  234,057
                  
                  
                  $
                  -
                  
                  
                  $
                  -Restricted
      cash
                  
                  $
                  7,318,608
                  
                  
                  $
                  7,318,608
                  
                  
                  $
                  -
                  
                  
                  $
                  -Long-term
      investment
                  
                  $
                  469,855
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  469,855





Cash and
cash equivalents consist primarily of high rated money market funds at a variety
of well-known institutions with original maturities of three months or less.
Restricted cash represents time deposits on account to secure short-term debt.
The original cost of these assets approximates fair value due to their short
term maturity.





Long-term
investment is valued at cost, which approximates fair value.





Long-term
investment has no quoted market prices and it is not practicable to estimate its
fair value. The Company reviews the investment for impairment whenever events or
changes in circumstances indicate that the carrying amount may no longer be
recoverable.





(f)  Cash
and Cash Equivalents





For
financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturity of three months or less to be cash
equivalents.





Restricted
cash represents time deposits on account to secure short-term debt. See Note 11.
These balances are subject to withdrawal restrictions and totaled $7,318,608 and
$4,388,596 as of June 30, 2009 and March 31, 2009, respectively.





(g)  Inventories





Inventories
are stated at the lower of cost or net realizable value (market). The cost of
raw materials is determined on a weighted average basis. Finished goods costs
are determined on a weighted average basis and comprise direct materials, direct
labor and an appropriate proportion of overhead.




F-7




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


4.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Net
realizable value is based on estimated selling prices less any further costs
expected to be incurred for completion and disposal.





(h)
            Capitalized
      Interest





The
interest cost associated with debt relating to construction projects is
capitalized and included in the cost of the project. When no debt is incurred
specifically for a project, interest is capitalized on amounts expended on the
project using weighted-average cost of the Company’s outstanding borrowings.
Capitalization of interest ceases when the project is substantially complete or
development activity is suspended for more than a brief period. Capitalized
interest for the three months ended June 30, 2009 and 2008 was $99,153 and
$94,040, respectively.





(i)
            Revenue
      Recognition





Revenue
represents the invoiced value of goods sold recognized upon the delivery of
goods to customers. Revenue is recognized when all of the following criteria are
met:





-Persuasive
evidence of an arrangement exists,


-Delivery
has occurred or services have been rendered,


-The
seller’s price to the buyer is fixed or determinable, and


-Collectability
is reasonably assured.





(j)
            Foreign
      Currency Translation





The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company is the Renminbi (RMB). The
consolidated financial statements are translated into United States dollars from
RMB at year-end exchange rates as to assets and liabilities and average exchange
rates as to revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred.





June 30, 2009
                  
                  
                  March 31, 2009
                  
                  
                  June 30, 2008Year
      end RMB: $ exchange rate
                  
                  
                  6.8319
                  
                  
                  
                  6.8359
                  
                  
                  
                  6.8591Average
      yearly RMB: $ exchange rate
                  
                  
                  6.8339
                  
                  
                  
                  6.9275
                  
                  
                  
                  6.9391





(k)  Earnings
(Loss) Per Share





Basic
earnings (loss) per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings (loss) per share is computed similar to basic
earnings (loss) 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. There were no potentially dilutive securities for the three months
ended June 30, 2009 and 2008.





(l)  Segments





Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in assessing
performance.





The
Company has determined that there are two reportable segments:





The
fertilizer segment is made up of four business units, which involve the
manufacture and sale of Urea, Carbonate Hydrogen Ammonia, Liquefied Ammonia and
Ammonia Water.





The fuel
segment involves the manufacture and sale of Methanol, Dimethyl Ether. The
Company believes it is not feasible to separately identify the assets and
operating expenses of each segment because of the similarities shared by each in
the manufacturing process. Both segments share the same coal-to-gas primary
system, and also share the same manufacturing sub-systems and cycles. Therefore,
the following represents the revenue, cost of goods sold and gross profit by
each product within each segment:




F-8




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


4.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(l)  Segments
(Continued)





Fuel
Segment:





For
      The Three Months Ended June 30, 2009DME
                    
                    
                    Methanol
                    
                    
                    Segment TotalRevenues
                    
                    
                    -
                    
                    
                    $
                    1,665,163
                    
                    
                    $
                    1,665,163COGS
                    
                    
                    -
                    
                    
                    
                    2,735,103
                    
                    
                    
                    2,735,103Gross
      loss
                    
                    
                    -
                    
                    
                    $
                    (1,069,940
                    )
                    
                    $
                    (1,069,940
                    )





For
      The Three Months Ended June 30, 2008DME
                        
                        
                        Methanol
                        
                        
                        Segment TotalRevenues
                        
                        $
                        4,915,616
                        
                        
                        $
                        349,408
                        
                        
                        $
                        5,265,024COGS
                        
                        
                        4,028,452
                        
                        
                        
                        240,020
                        
                        
                        
                        4,268,472Gross
      profit
                        
                        $
                        887,164
                        
                        
                        $
                        109,388
                        
                        
                        $
                        996,552





Fertilizer
Segment:





For
      The Three Months Ended June 30, 2009Urea
                
                
                AmmoniumBicarbonate
                
                
                Liquefied
                  Ammonia
                
                
                Ammonia
                  Water
                
                
                Segment TotalRevenues
                
                $
                5,724,165
                
                
                $
                671,142
                
                
                $
                218,243
                
                
                $
                106,153
                
                
                $
                6,719,703COGS
                
                
                6,135,880
                
                
                
                707,467
                
                
                
                279,688
                
                
                
                115,051
                
                
                
                7,238,086Gross
      (loss) profit
                
                $
                (411,715
                )
                
                $
                (36,325
                )
                
                $
                (61,445
                )
                
                $
                (8,898
                )
                
                $
                (518,383
                )





For
      The Three Months Ended June 30, 2008Urea
                
                
                Ammonium
                  Bicarbonate
                
                
                LiquefiedAmmonia
                
                
                Ammonia
                  Water
                
                
                Segment TotalRevenues
                
                $
                9,917,995
                
                
                $
                661,044
                
                
                $
                34,318
                
                
                $
                86,712
                
                
                $
                10,700,069COGS
                
                
                8,080,680
                
                
                
                783,190
                
                
                
                28,411
                
                
                
                96,461
                
                
                
                8,988,742Gross
      profit (loss)
                
                $
                1,837,315
                
                
                $
                (122,146
                )
                
                $
                5,907
                
                
                $
                (9,749
                )
                
                $
                1,711,327





Combined
Segments:





For
      The Three Months Ended June 30, 2009Fuel Segment
                      
                      
                      Fertilizer Segment
                      
                      
                      Consolidated TotalRevenues
                      
                      $
                      1,665,163
                      
                      
                      $
                      6,719,703
                      
                      
                      $
                      8,384,866COGS
                      
                      
                      2,735,103
                      
                      
                      
                      7,238,086
                      
                      
                      
                      9,973,189Gross
      loss
                      
                      $
                      (1,069,940
                      )
                      
                      $
                      (518,383
                      )
                      
                      $
                      (1,588,323
                      )





For
      The Three Months Ended June 30, 2008Fuel Segment
                          
                          
                          Fertilizer Segment
                          
                          
                          Consolidated TotalRevenues
                          
                          $
                          5,265,024
                          
                          
                          $
                          10,700,069
                          
                          
                          $
                          15,965,093COGS
                          
                          
                          4,268,472
                          
                          
                          
                          8,988,742
                          
                          
                          
                          13,257,214Gross
      profit
                          
                          $
                          996,552
                          
                          
                          $
                          1,711,327
                          
                          
                          $
                          2,707,879




F-9




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


4.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





(m)
            New
      Accounting Pronouncement





On April
1, 2009, the FASB approved FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies,
which amends Statement 141(R) and eliminates the distinction between contractual
and non-contractual contingencies. Under FSP FAS 141(R)-1, an acquirer is
required to recognize at fair value an asset acquired or liability assumed in a
business combination that arises from a contingency if the acquisition-date fair
value of that asset or liability can be determined during the measurement
period. If the acquisition-date fair value cannot be determined, the acquirer
applies the recognition criteria in SFAS No. 5, Accounting for Contingencies and
Interpretation 14, “Reasonable Estimation of the Amount of a Loss – and
interpretation of FASB Statement No. 5,” to determine whether the contingency
should be recognized as of the acquisition date or after it. The Company is
currently evaluating the impact of the adoption of FAS 141(R)-1.





FSP FAS
115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in U.S.
GAAP for debt securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. It did not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. We are required to adopt this FSP for our interim and
annual reporting periods ending after June 15, 2009. This FSP does not require
disclosures for periods presented for comparative purposes at initial adoption.
This FSP requires comparative disclosures only for periods ending after initial
adoption. The Company is currently evaluating the impact of the adoption of FSP
FAS115-2 and FAS 124-2.





On April
9, 2009, the FASB also approved FSP FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments to require disclosures about fair
value of financial instruments in interim period financial statements of
publicly traded companies and in summarized financial information required by
APB Opinion No. 28, Interim Financial Reporting. We are required to adopt this
FSP for our interim and annual reporting periods ending after June 15, 2009.
This FSP does not require disclosures for periods presented for comparative
purposes at initial adoption. This FSP requires comparative disclosures only for
periods ending after initial adoption. The Company is currently evaluating the
impact of the adoption of FSP FAS 107-1 and APB 28-1.





In June
2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R)
(“FAS 167”). FAS 167 amends FASB 46(R) to require an enterprise to perform an
analysis and ongoing reassessments to determine whether the enterprises variable
interest or interests give it a controlling financial interest in a variable
interest entity and amends certain guidance for determining whether an entity is
a variable interest entity. It also requires enhanced disclosures that will
provide users of financial statements with more transparent information about an
enterprises involvement in a variable interest entity. FAS 167 is effective as
of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009 and for all interim reporting periods after that.
The Company is currently evaluating the impact of the adoption of FAS
167.





5.
            INVENTORIES





Inventories
consist of the following:




June 30, 2009
                  
                  
                  March 31, 2009(Unaudited)Finished
      goods
                  
                  $
                  1,641,284
                  
                  
                  $
                  182,559Raw
      materials
                  
                  
                  1,290,304
                  
                  
                  
                  1,006,135Packing
      materials
                  
                  
                  571,697
                  
                  
                  
                  489,932Total
      inventories, net
                  
                  $
                  3,503,285
                  
                  
                  $
                  1,678,626





The net
book value of $1,641,284 and $182,559 of finished goods inventory is pledged as
collateral for short-term debt at June 30, 2009 and March 31, 2009,
respectively. See Note 11.





As of
June 30, 2009 and 2008, the Company recorded a write-down of inventories to net
realizable value for $807,448 and $0, respectively.





F-10




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


6.     RELATED
PARTY TRANSACTIONS





(I)
            Due
      from Related Parties





June 30, 2009
                    
                    
                    March 31, 2009(Unaudited)Current:Huaiyang
      Desheng Chemical Co., Ltd
                    
                    $
                    223,748
                    
                    
                    $
                    253,959





Huaiyang
Desheng Chemical Co., Ltd (“Huaiyang Desheng”) is a company controlled by a
director of the Company. For the three months ended June 30, 2009 and 2008,
Huaiyang Desheng purchased $0 and $30,239 of raw materials from Henan Jinding,
and sold $0 and $18,886 of finished goods to Henan Jinding. The remaining
balance represented advance for purchase of raw materials from Huaiyang Desheng.
The amount is unsecured, interest free, and has no fixed repayment
terms.





(II)
            Due
      to Related Parties




June 30, 2009
                      
                      
                      March 31, 2009(Unaudited)Principal:Xinyang
      Hong Chang Pipeline Gas Co., Ltd.
                      
                      (a)
                      
                      $
                      4,976,654
                      
                      
                      $
                      4,973,742Long
      Triumph Investments Limited
                      
                      (b)
                      
                      
                      1,344,328
                      
                      
                      
                      1,344,328Chen
      Siqiang
                      
                      (c)
                      
                      
                      1,024,605
                      
                      
                      
                      1,024,006Wang
      Guiquan
                      
                      (d)
                      
                      
                      131,735
                      
                      
                      
                      131,658Zhou
      Dianchang
                      
                      (e)
                      
                      
                      73,186
                      
                      
                      
                      73,143Mai
      Xiaofu
                      
                      (f)
                      
                      
                      146,372
                      
                      
                      
                      146,287Yu
      Zhiyang
                      
                      (g)
                      
                      
                      43,912
                      
                      
                      
                      43,886Yang
      Hongtao
                      
                      (h)
                      
                      
                      43,912
                      
                      
                      
                      43,886Due
      to employees
                      
                      (i)
                      
                      
                      12,104
                      
                      
                      
                      11,419Subtotal
                      
                      
                      
                      $
                      7,796,808
                      
                      
                      $
                      7,792,355Interest:Xinyang
      Hong Chang Pipeline Gas Co., Ltd.
                      
                      (a)
                      
                      
                      514,184
                      
                      
                      
                      422,472Chen
      Siqiang
                      
                      (c)
                      
                      
                      130,330
                      
                      
                      
                      105,677Wang
      Guiquan
                      
                      (d)
                      
                      
                      15,211
                      
                      
                      
                      12,042Zhou
      Dianchang
                      
                      (e)
                      
                      
                      8,451
                      
                      
                      
                      6,690Mai
      Xiaofu
                      
                      (f)
                      
                      
                      17,526
                      
                      
                      
                      14,004Yu
      Zhiyang
                      
                      (g)
                      
                      
                      5,258
                      
                      
                      
                      4,201Yang
      Hongtao
                      
                      (h)
                      
                      
                      5,258
                      
                      
                      
                      4,201Subtotal
                      
                      
                      
                      $
                      696,218
                      
                      
                      $
                      569,287Total
                      
                      
                      
                      $
                      8,493,026
                      
                      
                      $
                      8,361,642





(a)
              Xinyang
      Hong Chang Pipeline Gas Co., Ltd. is a company controlled by Chen Siqiang,
      the Chairman of the Board of Directors and Chief Executive Officer of the
      Company. The amount represents advances from Xinyang Hong Chang Pipeline
      Gas Co., Ltd. and the amount is unsecured. Included in the $4,976,654 is
      $2,927,443, which has an interest rate of 8.748% per annum and is due on
      June 30, 2010. Included in the $4,976,654 is $731,861, which has an
      interest rate of 15% per annum and is due on September 25, 2009. The
      interest expense for the three months ended June 30, 2009 and 2008 is
      $91,460 and $63,770, respectively. Of the $91,460 of interest expense,
      $64,023 was capitalized interest in construction in progress, since the
      amount was used for construction. Also see Note 10. The remaining balance
      of $1,317,350 is unsecured, interest free, and has no fixed repayment
      terms.





(b)
              Long
      Triumph Investments Limited is a former shareholder of the Company. The
      amount represents advances from Long Triumph Investments Limited. The
      amount is unsecured, interest free, and has no fixed repayment
      terms.





(c)
              The
      amount is unsecured, has an interest rate of 9.6% per annum and is due on
      February 3, 2010. The interest expense for the three months ended June 30,
      2009 and 2008 of $24,591 and $20,761, was capitalized in construction in
      progress, since the amount was used for construction. Also see Note
      10.




F-11




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


6.
            RELATED
      PARTY TRANSACTIONS (CONTINUED)





(d)
              Wang
      Guiquan is the President and Director of the Company. The amount is
      unsecured, has an interest rate of 9.6% per annum and is due on October
      18, 2009. The interest expense for the three months ended June 30, 2009
      and 2008 of $3,162 and $2,554, was capitalized interest in construction in
      progress, since the amount was used for construction. Also see Note
      10.





(e)
              Zhou
      Dianchang is a Director of the Company. The amount is unsecured, has an
      interest rate of 9.6% per annum and is due October 18, 2009. The interest
      expense for the three months ended June 30, 2009 and 2008 of $1,756 and
      $1,419, was capitalized in construction in progress, since the amount was
      used for construction. Also see Note
10.





(f)
              Mai
      Xiaofu is a Director of the Company. The amount is unsecured, has an
      interest rate of 9.6% per annum and is due on October 2, 2009. The
      interest expense for the three months ended June 30, 2009 and 2008 of
      $3,513 and $3,460, was capitalized in construction in progress, since the
      amount was used for construction. Also see Note
  10.




(g)
              Yu
      Zhiyang is a significant shareholder of the Company. The amount is
      unsecured, has an interest rate of 9.6% per annum and is due on October 2,
      2009. The interest expense for the three months ended June 30, 2009 and
      2008 of $1,054 and $1,038, was capitalized in construction in progress,
      since the amount was used for construction. Also see Note
    10.





(h)
              YangHongtao is a
      significant shareholder of the Company. The amount is unsecured, has an
      interest rate of 9.6% per annum and is due on October 2, 2009. The
      interest expense for the three months June 30, 2009 and 2008 of $1,054 and
      $1,038, was capitalized in construction in progress, since the amount was
      used for construction. Also see Note
10.





(III)
            Due
      from Employees





June 30, 2009
                    
                    
                    March 31, 2009(Unaudited)Current
                    
                    $
                    20,735
                    
                    
                    $
                    18,424Total
      amount due from employees
                    
                    $
                    20,735
                    
                    
                    $
                    18,424




Amounts
due from employees is interest-free, unsecured and has no fixed repayment terms.
The amounts primarily represent advances to employees for business related
expenses.




(IV)
              Due
      to Employees





June 30, 2009
                  
                  
                  March 31, 2009(Unaudited)Long-term
                  
                  $
                  160,365
                  
                  
                  $
                  160,271Total
      amount due to employees
                  
                  $
                  160,365
                  
                  
                  $
                  160,271





Amounts
due to employees are interest-free, unsecured and have no fixed repayment terms.
The amounts represent training deposits due to employees.





7.
            LONG-TERM
      INVESTMENT





June 30, 2009
                  
                  
                  March 31, 2009(Unaudited)Luoshan
      Rural Credit Cooperatives
                  
                  $
                  469,855
                  
                  
                  $
                  469,580





The
amounts reprensent 3.07% interest of Luoshan Rural Credit Cooperatives acquired
for cash and the Company accounted for its investment in Luoshan Rural Credit
Cooperative using the cost method.





F-12




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


8.
            PLANT
      AND EQUIPMENT





Plant and
equipment consist of the following:




June 30, 2009
                      
                      
                      March 31, 2009(Unaudited)At
      cost:Buildings
                      
                      $
                      2,434,275
                      
                      
                      $
                      2,432,852Machinery
                      
                      
                      25,118,142
                      
                      
                      
                      25,102,781Motor
      vehicles
                      
                      
                      329,070
                      
                      
                      
                      328,878Office
      equipment
                      
                      
                      270,862
                      
                      
                      
                      269,74328,152,349
                      
                      
                      
                      28,134,254Less:  Accumulated
      depreciationBuildings
                      
                      
                      438,820
                      
                      
                      
                      413,860Machinery
                      
                      
                      9,297,355
                      
                      
                      
                      8,699,555Motor
      vehicles
                      
                      
                      210,038
                      
                      
                      
                      196,885Office
      equipment
                      
                      
                      140,861
                      
                      
                      
                      128,48510,087,074
                      
                      
                      
                      9,438,785Plant
      and equipment, net
                      
                      $
                      18,065,275
                      
                      
                      $
                      18,695,469





Depreciation
expense for the three months ended June 30, 2009 and 2008 is $642,575 and
$685,410, respectively.





The net
book value of machinery of $7,326,316 and $7,322,029 are pledged as collateral
for the long-term bank loans at June 30, 2009 and March 31, 2009, respectively.
See Note 13.





9.
            LAND
      USE RIGHTS





June 30, 2009
                    
                    
                    March 31, 2009(Unaudited)Cost
                    
                    $
                    1,797,594
                    
                    
                    $
                    1,796,542Less:
      Accumulated amortization
                    
                    
                    168,271
                    
                    
                    
                    159,190Land
      use rights, net
                    
                    $
                    1,629,323
                    
                    
                    $
                    1,637,352





Amortization
expense for the three months ended June 30, 2009 and 2008 is $8,985 and $8,849,
respectively.





The net
book value of $1,629,323 and $0 of the land use rights are pledged as collateral
for the short-term bank loans at June 30, 2009 and March 31, 2009, respectively.
See Note 11.





Amortization
expense for the next five years and thereafter is as follows:




Nine
      months ending March 31, 2010
                    
                    $
                    26,9672011
                    
                    
                    35,9522012
                    
                    
                    35,9522013
                    
                    
                    35,9522014
                    
                    
                    35,952Thereafter
                    
                    
                    1,458,548Total
                    
                    $
                    1,629,323




F-13




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


10.
            CONSTRUCTION
      IN PROGRESS





Construction
in progress at June 30, 2009 and March 31, 2009 consist of the
following:




June 30, 2009
                      
                      
                      March 31, 2009(Unaudited)Plant
                      
                      $
                      24,330,658
                      
                      
                      $
                      23,461,536Machinery
                      
                      
                      1,849,228
                      
                      
                      
                      2,086,359Other
                      
                      
                      199,524
                      
                      
                      
                      155,973$
                      26,379,410
                      
                      
                      $
                      25,703,868




Capitalized
interest for the three months ended June 30, 2009 and 2008 is $99,153 and
$94,040, respectively.





The net
book value of $3,137,195 and $3,108,009 of plant construction in progress is
pledged as collateral for the short-term bank loans at June 30, 2009 and March
31, 2009, respectively. See Note 11.





11.
            SHORT-TERM
      DEBT





Short-term
debt consists of the following:




June 30, 2009
                        
                        
                        March 31, 2009(Unaudited)Bank
      Loans:Xinyang
      Commercial Bank, due April 28, 2010, interest rate at 10.08% per annum,
      collateralized by finished goods inventory.
                        
                        $
                        1,463,722
                        
                        
                        $
                        -Guangdong
      Development Bank, due May 13, 2010, interest rate at 5.31% per annum,
      collateralized by land use rights and guaranteed by Xinyang Hong Chang
      Pipeline Gas Co., Ltd.
                        
                        
                        4,391,165
                        
                        
                        
                        -Rural
      Credit Cooperatives, due June 16, 2010, interest rate at 9.56% per annum,
      collateralized by construction in progress.
                        
                        
                        556,214
                        
                        
                        
                        -Xinyang
      Commercial Bank, due April 25, 2009, interest rate at 11.56% per annum,
      collateralized by finished goods inventory. (Subsequently repaid on its
      due date)
                        
                        
                        -
                        
                        
                        
                        1,462,865Rural
      Credit Cooperatives, due June 12, 2009, interest rate at 14.19% per annum,
      collateralized by construction in progress. (Subsequently repaid on its
      due date)
                        
                        
                        -
                        
                        
                        
                        570,517Rural
      Credit Cooperatives, due October 16, 2009, interest rate at 14.19% per
      annum, collateralized by construction in progress.
                        
                        
                        570,851
                        
                        
                        
                        570,517Xinyang
      Commercial Bank, due August 3, 2009, interest rate at 11.34% per annum,
      collateralized by finished goods inventory. (Subsequently repaid on its
      due date)
                        
                        
                        1,463,722
                        
                        
                        
                        1,462,865Xinyang
      Commercial Bank, due December 29, 2009, interest rate at 11.56% per annum,
      collateralized by finished goods inventory.
                        
                        
                        2,341,955
                        
                        
                        
                        2,340,584Notes Payable to Unrelated
      Companies:Due
      July 15, 2009 (subsequently repaid on its due date)
                        
                        
                        731,861
                        
                        
                        
                        731,433
  F-14
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)
 June 30, 2009
                                            
                                            
                                            
                                            March 31, 2009(Unaudited)Due
      July 16, 2009 (subsequently repaid on its due date)
                                            
                                            
                                            731,861
                                            
                                            
                                            
                                            731,433Due
      July 23, 2009 (subsequently repaid on its due date)
                                            
                                            
                                            878,233
                                            
                                            
                                            
                                            877,719Due
      August 10, 2009 (subsequently repaid on its due date)
                                            
                                            
                                            585,489
                                            
                                            
                                            
                                            585,146Due
      October 29, 2009
                                            
                                            
                                            2,195,582
                                            
                                            
                                            
                                            -Due
      November 26, 2009
                                            
                                            
                                            2,195,582
                                            
                                            
                                            
                                            -Due
      November 27, 2009
                                            
                                            
                                            1,463,722
                                            
                                            
                                            
                                            -Due
      December 26, 2009
                                            
                                            
                                            2,927,443
                                            
                                            
                                            
                                            -Due
      April 28, 2009 (subsequently repaid on its due date)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            731,433Due
      April 30, 2009 (subsequently repaid on its due date)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,462,866Due
      May 24, 2009 (subsequently repaid on its due date)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            877,719Due
      May 25, 2009 (subsequently repaid on its due date)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            877,719Due
      May 26, 2009 (subsequently repaid on its due date)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,024,006Due
      May 27, 2009 (subsequently repaid on its due date)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            877,719Notes Payable to Unrelated
      Individuals:Due
      December 3, 2009
                                            
                                            
                                            559,142
                                            
                                            
                                            
                                            558,814Due
      October 13, 2009
                                            
                                            
                                            439,116
                                            
                                            
                                            
                                            -$
                                            23,495,660
                                            
                                            
                                            $
                                            15,743,355




Interest
expense for the three months ended June 30, 2009 and 2008 was $430,365 and
$244,789, respectively.




Notes
payable to unrelated companies are interest-free and were paid on their due
dates. All the notes payable are subject to bank charges of 0.05% of the
principal as a commission on each loan transaction. Bank charges for notes
payable were $4,390 and $4,129 for the three months ended June 30, 2009 and
2008, respectively.





Notes
payable to unrelated individuals is unsecured. The amount of $559,142, has an
interest rate of 15% per annum and is due on December 3, 2009. The amount of
$439,116, has an interest rate of 7.2% per annum and is due on October 13,
2009.





Restricted
cash of $7,318,608 and $4,388,596 is collateralized for the notes payable at
June 30, 2009 and March 31, 2009 respectively.





Inventory
of $1,641,284 and $182,559 is collateralized for the notes payable at June 30,
2009 and March 31, 2009 respectively.




The net
book value of $1,641,284 and $182,559 of finished goods inventory is pledged as
collateral for short-term bank loans at June 30, 2009 and March 31, 2009
respectively. See Note 5.




12.
            LONG-TERM
      NOTES PAYABLE





In
September 2003, the Company purchased a plant and machinery, a building and a
land use right from Luoshan Fertilizer Plant, a bankrupt company, for
$4,633,601. The remaining balance at June 30, 2009 and March 31, 2009 is
$531,331 and $531,020, respectively. The note is unsecured, interest free and
due December 31, 2010.





13.
            LONG-TERM
      BANK LOAN





June 30, 2009
                  
                  
                  March 31, 2009(Unaudited)Luoshan
      Rural Credit Cooperatives
                  
                  $
                  2,927,443
                  
                  
                  $
                  2,925,730





The
long-term bank loan is collateralized by the Company’s machinery, has an
interest rate of 9.558% per annum and is due March 19, 2012. See Note
8.




F-15




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


14.       INCOME
TAXES





Corporation
Income Tax (“CIT”)





On March
16, 2007, the National People’s Congress of China approved the Corporate Income
Tax Law of the PRC (the “new CIT Law”), which is effective from January 1, 2008.
The new CIT rate applicable to the Company starting January 1, 2008 is 25%,
replacing the previous tax rate of 33%.





Income
tax expense for the three months ended June 30, 2009 and 2008 is summarized as
follows:




Three
      Months Ended June 30,2009
                        
                        
                        2008(Unaudited)
                        
                        
                        (Unaudited)Current:CIT
                        
                        $
                        -
                        
                        
                        $
                        (423,984
                        )Deferred:CIT
                        
                        
                        (55,008
                        )
                        
                        
                        10,629Income
      tax expense
                        
                        $
                        (55,008
                        )
                        
                        $
                        (413,355
                        )





The
Company’s income tax expense differs from the “expected” tax expense (computed
by applying the CIT rate of 25% percent to income before income taxes) as
follows:





Three
      Months Ended June 30,2009
                          
                          
                          2008(Unaudited)
                          
                          
                          (Unaudited)Computed
      “expected” benefit (expense)
                          
                          $
                          774,212
                          
                          
                          $
                          (310,344
                          )Permanent
      differences
                          
                          
                          -
                          
                          
                          
                          (103,011
                          )Valuation
      allowance
                          
                          
                          (829,220
                          )
                          
                          
                          -Income
      tax expense
                          
                          $
                          (55,008
                          )
                          
                          $
                          (413,355
                          )


F-16




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


14.
             INCOME
TAXES (CONTINUED)




The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities as of June 30, 2009 and March 31, 2009 are as
follows:





June
      30, 2009
                                
                                
                                March
      31, 2009(Unaudited)Deferred
      tax assets:Current
      portion:Cost
      of sales
                                
                                $
                                212,757
                                
                                
                                $
                                169,956Financial
      expense
                                
                                
                                15,780
                                
                                
                                
                                13,876Welfare
                                
                                
                                10,292
                                
                                
                                
                                21,263Provision
      for notes receivable
                                
                                
                                36,593
                                
                                
                                
                                36,571Other
      expense
                                
                                
                                49,342
                                
                                
                                
                                65,738Total
      current deferred tax assets
                                
                                
                                324,764
                                
                                
                                
                                307,404Non-current
      portion:Net
      operating loss carry forward
                                
                                
                                1,423,588
                                
                                
                                
                                1,422,756Total
      non-current deferred tax assets
                                
                                
                                1,423,588
                                
                                
                                
                                1,422,756Total
      deferred tax assets
                                
                                
                                1,748,352
                                
                                
                                
                                1,730,160Deferred
      tax liabilities:Current
      portion:Cost
      of sales
                                
                                
                                355,180
                                
                                
                                
                                348,565Government
      grant
                                
                                
                                44,278
                                
                                
                                
                                49,006Investment
      income
                                
                                
                                17,244
                                
                                
                                
                                17,233Other
      expenses
                                
                                
                                21,301
                                
                                
                                
                                17,428Total
      current deferred tax liabilities
                                
                                
                                438,003
                                
                                
                                
                                432,232Non-current
      portion:Amortization
                                
                                
                                27,968
                                
                                
                                
                                26,586Depreciation
                                
                                
                                491,225
                                
                                
                                
                                425,656Total
      non-current deferred tax liabilities
                                
                                
                                519,193
                                
                                
                                
                                452,242Total
      deferred tax liabilities
                                
                                
                                957,196
                                
                                
                                
                                884,474Net
      deferred tax assets
                                
                                $
                                791,156
                                
                                
                                $
                                845,686




In June
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109, which seeks to reduce the diversity in
practice associated with the accounting and reporting for uncertainty in income
tax positions. This interpretation prescribes a comprehensive model for the
financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in an income tax return.
FIN 48 presents a two-step process for evaluating a tax position. The first step
is to determine whether it is more likely than not that a tax position will be
sustained upon examination, based on the technical merits of the position. The
second step is to measure the benefit to be recorded from tax positions that
meet the more likely than not recognition threshold, by determining the largest
amount of tax benefit that is greater than 50 percent likely of being realized
upon ultimate settlement, and recognizing that amount in the financial
statements. At the date of adoption, and as of June 30, 2009, the Company does
not have a liability for unrecognized tax benefits. There was no effect on
financial condition or results of operations as a result of implementing
FIN48.




The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. Federal or State income tax examinations
by tax authorities for years after 2006. During the periods open to examination,
the Company has net operating loss (“NOL”) and tax credit carry forwards for
U.S. federal and state tax purposes that have attributes from closed periods.
Since these NOLs and tax credit carry forwards may be utilized in future
periods, they remain subject to examination. The Company also files certain tax
returns in the PRC. As of June 30, 2009 the Company was not aware of any pending
income tax examinations by tax authorities in the PRC.




The
Company’s policy is to record interest and penalties on uncertain tax positions
as income tax expense. As of June 30, 2009, the Company has no accrued interest
or penalties related to uncertain tax positions.




F-17




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)


15.  CONTINGENCIES





On
December 29, 2004, the Company entered into an agreement (the “Luoshan
Agreement”) to purchase Luoshan Fertilizer Plant, a bankrupt company and to
assume $1.3 million in debt owed by Xixian Fertilizer Plant (the principal
shareholder of Luoshan Fertilizer Plant). Under the Luoshan Agreement, the
Company was to receive reimbursements of $650,000 from both the Luoshan county
government and the Xi county government, which were to be received before
December 29, 2007. Luoshan county government paid its note of $650,000 to the
Company on its due date.





In
November 2007, the Company initiated a lawsuit in the Intermediate Court of
Xinyang City against the Xi county government and Henan Shiji Jinyuan Chemicals
Co., Ltd. (the “Shiji Jinyuan”, formerly Xixian Fertilizer Plant) for
non-payment of the Xi county government note receivable of $650,000 on its due
date as set forth under the Luoshan Agreement, and sought the enforcement of the
terms of the note receivable and the Luoshan Agreement for payment of the
$650,000 by both the Xi county government and Shiji Jinyuan. On June 12, 2009,
the court entered final judgment against Xi county government and Shiji Jinyuan
in amount of $650,000 to be paid before June 22, 2009. In addition, the judgment
ordered the Xi county government and Shiji Jinyuan to pay the Company interest
and late fee based on market rates. As of August 14, 2009, Xi county government
and Shiji Jinyuan did not pay the amount to the Company, as they plan to appeal
the decision. At June 30, 2009, the Company has a reserve against the $650,000
note of $146,372 due to the uncertainty of collection.




16. CAPITAL
COMMITMENT





Through
June 30, 2009, the Company entered into several agreements and made several
payments totaling $20,926,239 toward the purchase of production equipment to be
used in the Methanol project. The Company is required to pay the remainder of
the purchase price of approximately $9 million prior to delivery of the
equipment in connection with contracts the Company has executed with certain
suppliers, which is estimated to occur in 2010. The amount paid is recorded in
construction in progress. Through June 30, 2009, the Company has used its
working capital and borrowed money from its shareholders to fund the project.
The Company originally planned on completing the project by December 2009,
however, financing needs have delayed the completion of the project until March
2010.


F-18


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





The following Management’s Discussion
and Analysis of Financial Condition and Results of Operations (“MD&A”)
should be read together with the condensed consolidated financial statements and
the accompanying notes of New Oriental Energy & Chemical Corp. (the
“Company”, “we” or “our”) for the quarter ended June 30, 2009. The condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles of the United States
(“GAAP”).





Forward
Looking Statements




We are including the following
discussion to inform our existing and potential security holders of some of the
risks and uncertainties that can affect us and to take advantage of the “safe
harbor” protection for forward-looking statements that applicable federal
securities laws afford. From time to time, our management or persons acting on
our behalf make forward-looking statements to inform existing and potential
security holders about our Company. These forward-looking statements include
information about possible or assumed future results of our operations. All
statements, other than statements of historical facts, included or
incorporated by reference in this report that address activities, events or
developments that we expect or anticipate may occur in the future, including
such things as future capital expenditures, business strategy, competitive
strengths, goals, growth of our business and operations, plans and
references to future successes, may be considered forward-looking statements.
Also, when we use words such as “anticipate,” “believe,” “estimate,” “intend,”
“plan,” “project,” “forecast,” “may,” “should,” “budget,” “goal,” “expect,”
“probably” or similar expressions, we are making forward-looking statements.
Many risks and uncertainties may impact the matters addressed in these
forward-looking statements. Our forward-looking statements speak only as of the
date made and we will not update such forward-looking statements unless the
securities laws require us to do so.




Some of
the key factors which could cause our future financial results and performance
to vary from those expected include:




·
            The
      loss of primary customers;




·
            Our
      ability to implement productivity improvements, cost reduction initiatives
      or facilities expansions;




·
            Market
      developments affecting, and other changes in, the demand for our products
      and the introduction of new competing
products;




·
            Availability
      or increases in the price of our primary raw materials or active
      ingredients;




·
            The
      timing of planned capital
expenditures;




·
            Our
      ability to identify, develop or acquire, and market additional product
      lines and businesses necessary to implement our business strategy and our
      ability to finance such acquisitions and
  development;




·
            The
      condition of the capital markets generally, which will be affected by
      interest rates, foreign currency fluctuations and general economic
      conditions;




·
            The
      ability to obtain registration and re-registration of our products under
      applicable law;




19




·
            The
      political and economic climate in the foreign or domestic jurisdictions in
      which we conduct business; and




·
            Other
      People’s Republic of China (the “PRC”) or foreign regulatory or
      legislative developments which affect the demand for our products
      generally or increase the environmental compliance cost for our products
      or impose liabilities on the manufacturers and distributors of such
      products.




The information contained in this
report identifies additional factors that could cause our results or performance
to differ materially from those we express in our forward-looking statements.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of these assumptions and, therefore, the
forward-looking statements based on these assumptions, could themselves prove to
be inaccurate. In light of the significant uncertainties inherent in the
forward-looking statements which are included in this report and the exhibits
and other documents incorporated herein by reference, our inclusion of this
information is not a representation by us or any other person that our
objectives and plans will be achieved.




Critical
Accounting Policies and Estimates





Use
of estimates





The preparation of financial statements
in conformity with GAAP requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.





Accounts
receivable





The Company 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 turnover and adequacy of accounts receivable
and adjust its collection strategies.





Inventories





Inventories are valued at the lower of
cost (determined on a weighted average basis) or market. The Company compares
the cost of inventories with the market value and allowance is made for writing
down the inventories to their market value, if lower.





Property
and equipment





Property and equipment are stated at
cost. Expenditures for maintenance and repairs are charged to earnings as
incurred; additions, renewals and betterments are capitalized. When property and
equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is
included in operations. Depreciation of property and equipment is provided using
the straight-line method for substantially all assets with estimated lives of:
30 years for building, 10 years for machinery, 5 years for office equipment and
8 years for vehicles.





Revenue
recognition





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 by the
Company exist and collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue.


20


Income
taxes





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





Foreign
currency transactions and comprehensive income (loss)





Accounting principles generally require
that recognized revenue, expenses, gains and losses be included in net income.
Certain statements, however, require entities to report specific changes in
assets and liabilities, such as gain or loss on foreign currency translation, as
a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income. Transactions
occur in Chinese Renminbi (“RMB”). The unit of RMB is in Yuan.





Recent
Accounting Pronouncements





On April
1, 2009, the FASB approved FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies,
which amends Statement 141(R) and eliminates the distinction between contractual
and non-contractual contingencies. Under FSP FAS 141(R), an acquirer is required
to recognize at fair value an asset acquired or liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period. If the
acquisition-date fair value cannot be determined, the acquirer applies the
recognition criteria in SFAS No. 5, Accounting for Contingencies and
Interpretation 14, “Reasonable Estimation of the Amount of a Loss – and
interpretation of FASB Statement No. 5,” to determine whether the contingency
should be recognized as of the acquisition date or after it. The Company is
currently evaluating the impact of the adoption of FAS 141(R)-1.





FSP
FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in
U.S. GAAP for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on
debt and equity securities in the financial statements. It did not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. We are required to adopt this FSP for our
interim and annual reporting periods ending after June 15, 2009. This FSP does
not require disclosures for periods presented for comparative purposes at
initial adoption. This FSP requires comparative disclosures only for periods
ending after initial adoption. The Company is currently evaluating the impact of
the adoption of FSP FAS115-2 and FAS 124-2.





On April
9, 2009, the FASB also approved FSP FAS 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments to require disclosures about fair
value of financial instruments in interim period financial statements of
publicly traded companies and in summarized financial information required by
APB Opinion No. 28, Interim Financial Reporting. We are required to adopt this
FSP for our interim and annual reporting periods ending after June 15, 2009.
This FSP does not require disclosures for periods presented for comparative
purposes at initial adoption. This FSP requires comparative disclosures only for
periods ending after initial adoption. The Company is currently evaluating the
impact of the adoption of FSP FAS 107-1 and APB 28-1.


21


In June
2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R)
(“FAS 167”). FAS 167 amends FASB 46(R) to require an enterprise to perform an
analysis and ongoing reassessments to determine whether the enterprises variable
interest or interests give it a controlling financial interest in a variable
interest entity and amends certain guidance for determining whether an entity is
a variable interest entity. It also requires enhanced disclosures that will
provide users of financial statements with more transparent information about an
enterprises involvement in a variable interest entity. FAS 167 is effective as
of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009 and for all interim reporting periods after
that. The Company is currently evaluating the impact of the adoption of FAS
167.





Overview





The Company was incorporated in the
State of Delaware on November 15, 2004, and its operating subsidiary, Henan
Jinding Chemical Industry Co. Ltd. (“Jinding”), is headquartered in Henan
Province, the PRC. The Company is a leading manufacturer and marketer of various
products, including Urea, liquefied ammonia, ammonia water, methanol, ammonium
bicarbonate and dimethyl ether (“DME”).





We aim to continue to improve our
products in order to maintain our market leadership and to support our
performance. We are focused on applying innovation and technology to make our
processes more productive and profitable and provide improved products to our
customers. Our capabilities in alternative fuel and traditional chemical
products are generating a rich product pipeline that is expected to drive
long-term growth.


22


RESULTS
OF OPERATIONS





Three
Months Ended June 30, 2009 as compared to


Three
Months Ended June 30, 2008





Three
      Months Ended
                                        
                                        
                                        Three Months Ended
                                        
                                        
                                        ComparisonsJune 30, 2009
                                        
                                        
                                        June 30, 2008Percentage of
                                        
                                        
                                        
                                        
                                        
                                        Percentage
                                        
                                        
                                        Change in
                                        
                                        
                                        IncreaseAmount
                                        
                                        
                                        Revenues
                                        
                                        
                                        Amount
                                        
                                        
                                        of Revenues
                                        
                                        
                                        Amount
                                        
                                        
                                        (Decrease) inPercentageItem
                                        
                                        US
      $
                                        
                                        
                                        (%)
                                        
                                        
                                        US
      $
                                        
                                        
                                        (%)
                                        
                                        
                                        US
      $
                                        
                                        
                                        (%)Revenues
                                        
                                        
                                        8,384,866
                                        
                                        
                                        
                                        100.00
                                        %
                                        
                                        
                                        15,965,093
                                        
                                        
                                        
                                        100.00
                                        %
                                        
                                        
                                        (7,580,227
                                        )
                                        
                                        
                                        (47.48
                                        )%Cost
      of Goods Sold
                                        
                                        
                                        (9,973,189
                                        )
                                        
                                        
                                        (118.94
                                        )%
                                        
                                        
                                        (13,257,214
                                        )
                                        
                                        
                                        (83.04
                                        )%
                                        
                                        
                                        3,284,025
                                        
                                        
                                        
                                        (24.77
                                        )%Gross
      (loss) profit
                                        
                                        
                                        (1,588,323
                                        )
                                        
                                        
                                        (18.94
                                        )%
                                        
                                        
                                        2,707,879
                                        
                                        
                                        
                                        16.96
                                        %
                                        
                                        
                                        (4,296,202
                                        )
                                        
                                        
                                        (158.66
                                        )%General
      & administrative
                                        
                                        
                                        727,934
                                        
                                        
                                        
                                        8.68
                                        %
                                        
                                        
                                        949,161
                                        
                                        
                                        
                                        5.95
                                        %
                                        
                                        
                                        (221,227
                                        )
                                        
                                        
                                        (23.31
                                        )%Selling
      and distribution
                                        
                                        
                                        287,540
                                        
                                        
                                        
                                        3.43
                                        %
                                        
                                        
                                        277,989
                                        
                                        
                                        
                                        1.74
                                        %
                                        
                                        
                                        9,551
                                        
                                        
                                        
                                        3.44
                                        %Research
      and development
                                        
                                        
                                        27,626
                                        
                                        
                                        
                                        0.33
                                        %
                                        
                                        
                                        20,433
                                        
                                        
                                        
                                        0.13
                                        %
                                        
                                        
                                        7,193
                                        
                                        
                                        
                                        35.20
                                        %(Loss)
      income from operations
                                        
                                        
                                        (2,631,423
                                        )
                                        
                                        
                                        (31.38
                                        )%
                                        
                                        
                                        1,460,296
                                        
                                        
                                        
                                        9.15
                                        %
                                        
                                        
                                        (4,091,719
                                        )
                                        
                                        
                                        (280.20
                                        )%Interest
      expense, net
                                        
                                        
                                        (461,917
                                        )
                                        
                                        
                                        (5.51
                                        )%
                                        
                                        
                                        (186,755
                                        )
                                        
                                        
                                        (1.17
                                        )%
                                        
                                        
                                        (275,162
                                        )
                                        
                                        
                                        147.34
                                        %Other
      expenses, net
                                        
                                        
                                        (3,507
                                        )
                                        
                                        
                                        (0.04
                                        )%
                                        
                                        
                                        (32,167
                                        )
                                        
                                        
                                        (0.20
                                        )%
                                        
                                        
                                        28,660
                                        
                                        
                                        
                                        (89.10
                                        )%(Loss)
      income before income taxes
                                        
                                        
                                        (3,096,847
                                        )
                                        
                                        
                                        (36.93
                                        )%
                                        
                                        
                                        1,241,374
                                        
                                        
                                        
                                        7.78
                                        %
                                        
                                        
                                        (4,338,221
                                        )
                                        
                                        
                                        (349.47
                                        )%Income
      tax
                                        
                                        
                                        (55,008
                                        )
                                        
                                        
                                        (0.66
                                        )%
                                        
                                        
                                        (413,355
                                        )
                                        
                                        
                                        (2.59
                                        )%
                                        
                                        
                                        358,347
                                        
                                        
                                        
                                        (86.69
                                        )%Net
      (loss) income
                                        
                                        
                                        (3,151,855
                                        )
                                        
                                        
                                        (37.59
                                        )%
                                        
                                        
                                        828,019
                                        
                                        
                                        
                                        5.19
                                        %
                                        
                                        
                                        (3,979,874
                                        )
                                        
                                        
                                        (480.65
                                        )%Foreign
      currency translation (loss) gain
                                        
                                        
                                        (9,672
                                        )
                                        
                                        
                                        (0.12
                                        )%
                                        
                                        
                                        440,034
                                        
                                        
                                        
                                        2.76
                                        %
                                        
                                        
                                        (449,706
                                        )
                                        
                                        
                                        (102.20
                                        )%Other
      comprehensive (loss) income
                                        
                                        
                                        (9,672
                                        )
                                        
                                        
                                        (0.12
                                        )%
                                        
                                        
                                        440,034
                                        
                                        
                                        
                                        2.76
                                        %
                                        
                                        
                                        (449,706
                                        )
                                        
                                        
                                        (102.20
                                        )%Comprehensive
      (loss) income
                                        
                                        
                                        (3,161,527
                                        )
                                        
                                        
                                        (37.71
                                        )%
                                        
                                        
                                        1,268,053
                                        
                                        
                                        
                                        7.94
                                        %
                                        
                                        
                                        (4,429,580
                                        )
                                        
                                        
                                        (349.32
                                        )%Weighted
      average shares outstanding basic and diluted
                                        
                                        
                                        12,640,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        12,640,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0.00
                                        %Net
      (loss) income per share, basic and diluted
                                        
                                        
                                        (0.25
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        0.07
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (0.32
                                        )
                                        
                                        
                                        -





Revenues,
Cost of Goods Sold and Gross Profit





Revenues for the three months ended
June 30, 2009 were $8,384,866, which represented a decrease of 47.48% from the
same period in the prior year. The decrease was mainly due to the decrease in
sales volume and the selling price of DME and Urea.


23
 Three Months Ended
                                      
                                      
                                      Three Months Ended
                                      
                                      
                                      ComparisonsJune 30, 2009
                                      
                                      
                                      June 30, 2008IncreasePercentage of
                                      
                                      
                                      
                                      
                                      
                                      Percentage of
                                      
                                      
                                      Change in
                                      
                                      
                                      (Decrease) inProducts
                                      
                                      Amount
                                      
                                      
                                      Revenues
                                      
                                      
                                      Amount
                                      
                                      
                                      Revenues
                                      
                                      
                                      Amount
                                      
                                      
                                      PercentageUS $
                                      
                                      
                                      (%)
                                      
                                      
                                      US $
                                      
                                      
                                      (%)
                                      
                                      
                                      US $
                                      
                                      
                                      (%)Urea
                                      
                                      
                                      5,724,165
                                      
                                      
                                      
                                      68.27
                                      %
                                      
                                      
                                      9,917,995
                                      
                                      
                                      
                                      62.12
                                      %
                                      
                                      
                                      (4,193,830
                                      )
                                      
                                      
                                      (42.29
                                      )%Ammonium
      bicarbonate
                                      
                                      
                                      671,142
                                      
                                      
                                      
                                      8.00
                                      %
                                      
                                      
                                      661,044
                                      
                                      
                                      
                                      4.14
                                      %
                                      
                                      
                                      10,098
                                      
                                      
                                      
                                      1.53
                                      %Methanol
                                      
                                      
                                      1,665,163
                                      
                                      
                                      
                                      19.86
                                      %
                                      
                                      
                                      349,408
                                      
                                      
                                      
                                      2.19
                                      %
                                      
                                      
                                      1,315,755
                                      
                                      
                                      
                                      376.57
                                      %Liquefied
      Ammonia
                                      
                                      
                                      218,243
                                      
                                      
                                      
                                      2.60
                                      %
                                      
                                      
                                      34,318
                                      
                                      
                                      
                                      0.21
                                      %
                                      
                                      
                                      183,925
                                      
                                      
                                      
                                      535.94
                                      %DME
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      4,915,616
                                      
                                      
                                      
                                      30.79
                                      %
                                      
                                      
                                      (4,915,616
                                      )
                                      
                                      
                                      (100.00
                                      )%Ammonia
      Water
                                      
                                      
                                      106,153
                                      
                                      
                                      
                                      1.27
                                      %
                                      
                                      
                                      86,712
                                      
                                      
                                      
                                      0.54
                                      %
                                      
                                      
                                      19,441
                                      
                                      
                                      
                                      22.42
                                      %Total
                                      
                                      
                                      8,384,866
                                      
                                      
                                      
                                      100.00
                                      %
                                      
                                      
                                      15,965,093
                                      
                                      
                                      
                                      100.00
                                      %
                                      
                                      
                                      (7,580,227
                                      )
                                      
                                      
                                      (47.48
                                      )%




Three
      Months Ended
                                          
                                          
                                          Three
      Months Ended
                                          
                                          
                                          ComparisonsJune
      30, 2009
                                          
                                          
                                          June
      30, 2008IncreaseProvinces
                                          
                                          
                                          
                                          
                                          Percentage
                                          
                                          
                                          
                                          
                                          
                                          Percentage
                                          
                                          
                                          Change
      in
                                          
                                          
                                          (Decrease)
      inAmount
                                          
                                          
                                          of
      Revenues
                                          
                                          
                                          Amount
                                          
                                          
                                          of
      Revenues
                                          
                                          
                                          Amount
                                          
                                          
                                          PercentageUS
      $
                                          
                                          
                                          (%)
                                          
                                          
                                          US
      $
                                          
                                          
                                          (%)
                                          
                                          
                                          US
      $
                                          
                                          
                                          (%)Henan
      Province
                                          
                                          
                                          2,868,226
                                          
                                          
                                          
                                          34.21
                                          %
                                          
                                          
                                          7,050,802
                                          
                                          
                                          
                                          44.16
                                          %
                                          
                                          
                                          (4,182,576
                                          )
                                          
                                          
                                          (59.32
                                          )%Guangdong
      Province
                                          
                                          
                                          3,125,464
                                          
                                          
                                          
                                          37.26
                                          %
                                          
                                          
                                          5,136,770
                                          
                                          
                                          
                                          32.18
                                          %
                                          
                                          
                                          (2,011,306
                                          )
                                          
                                          
                                          (39.16
                                          )%Hubei
      Province
                                          
                                          
                                          176,689
                                          
                                          
                                          
                                          2.11
                                          %
                                          
                                          
                                          1,914,738
                                          
                                          
                                          
                                          11.99
                                          %
                                          
                                          
                                          (1,738,049
                                          )
                                          
                                          
                                          (90.77
                                          )%Anhui
      Province
                                          
                                          
                                          2,113,675
                                          
                                          
                                          
                                          25.21
                                          %
                                          
                                          
                                          658,839
                                          
                                          
                                          
                                          4.13
                                          %
                                          
                                          
                                          1,454,836
                                          
                                          
                                          
                                          220.82
                                          %Hunan
      Province
                                          
                                          
                                          63,344
                                          
                                          
                                          
                                          0.76
                                          %
                                          
                                          
                                          68,998
                                          
                                          
                                          
                                          0.43
                                          %
                                          
                                          
                                          (5,654
                                          )
                                          
                                          
                                          (8.19
                                          )%Hebei
      Province
                                          
                                          
                                          6,670
                                          
                                          
                                          
                                          0.08
                                          %
                                          
                                          
                                          465,063
                                          
                                          
                                          
                                          2.91
                                          %
                                          
                                          
                                          (458,393
                                          )
                                          
                                          
                                          (98.57
                                          )%Jiangxi
      Province
                                          
                                          
                                          30,798
                                          
                                          
                                          
                                          0.37
                                          %
                                          
                                          
                                          254,955
                                          
                                          
                                          
                                          1.60
                                          %
                                          
                                          
                                          (224,157
                                          )
                                          
                                          
                                          (87.92
                                          )%Shandong
      Province
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          414,928
                                          
                                          
                                          
                                          2.60
                                          %
                                          
                                          
                                          (414,928
                                          )
                                          
                                          
                                          (100.00
                                          )%Total
                                          
                                          
                                          8,384,866
                                          
                                          
                                          
                                          100.00
                                          %
                                          
                                          
                                          15,965,093
                                          
                                          
                                          
                                          100.00
                                          %
                                          
                                          
                                          (7,580,227
                                          )
                                          
                                          
                                          (47.48
                                          )%





The sales for the three months ended
June 30, 2009 in the Anhui Province increased by 220.82%. This increase was
mainly attributable to the fact that the Company’s reinforcement of its
marketing strategy and expansion of the market share. As a result, the sales of
Methanol in Anhui Province increased as compared to the same period last
year.





The sales
for the three months ended June 30, 2009 in other provinces decreased as
compared to the same period last year. The decrease was mainly attributable to
the fact that the Company made adjustments to its product structure, and the
sales volume of Urea and DME decreased in these provinces.





Cost of Goods Sold (“COGS”) for the
three months ended June 30, 2009 was $9,973,189, which is 118.94% of total
revenues and represents a 24.77% decrease as compared to $13,257,214 and 83.04%
of total revenues for the three months ended June 30, 2008. This was in line
with the lower sales volume offset by increased raw materials prices, such as
coal, which accounts for a majority of the Company’s raw
materials.


24


COGS as a percentage of revenue may
fluctuate in the future. This fluctuation may primarily be due to changes in the
price of raw materials, which can have a significant impact on the
COGS.





Gross profit is calculated by deducting
from revenues the cost of raw materials used to produce the finished products as
well as charges for depreciation, employee welfare, repairs to machinery and
equipment, all inventory costs and all other costs incident to or necessary for
the production of our products. The Company’s COGS line item does not include
any of inbound freight charges, purchasing and receiving costs, inspection
costs, warehousing costs, internal transfer costs, and the other costs of our
distribution network.  The Company’s gross profit may not be
comparable to those of other entities, since some entities include all of the
costs related to their distribution network in COGS and others exclude a portion
of them from gross profit.





Gross profit decreased by
$4,296,202, or 158.66%, to $1,588,323 for the three months ended June 30,
2009 as compared to $2,707,879 for the three months ended June 30,
2008. This decrease was mainly due to the decrease in the selling price of
Urea and DME product, and the increase of the price of raw materials, which
resulted in higher production costs. As a result, the Company adjusted its
product structure, and the sales volume of Urea and DME decreased substantially
as compared to the same period last year.





Ammonium
                                              
                                              
                                              Liquefied
                                              
                                              
                                              AmmoniaDME
                                              
                                              
                                              Methanol
                                              
                                              
                                              Urea
                                              
                                              
                                              Bicarbonate
                                              
                                              
                                              Ammonia
                                              
                                              
                                              Water2010Q1
                                              Revenues
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,665,163
                                              
                                              
                                              
                                              5,724,165
                                              
                                              
                                              
                                              671,142
                                              
                                              
                                              
                                              218,243
                                              
                                              
                                              
                                              106,153COGS
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,735,103
                                              
                                              
                                              
                                              6,135,880
                                              
                                              
                                              
                                              707,467
                                              
                                              
                                              
                                              279,688
                                              
                                              
                                              
                                              115,051Gross
      (Loss) Profit
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,069,940
                                              )
                                              
                                              
                                              (411,715
                                              )
                                              
                                              
                                              (36,325
                                              )
                                              
                                              
                                              (61,445
                                              )
                                              
                                              
                                              (8,898
                                              )Gross
      Margin
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (64.25
                                              )%
                                              
                                              
                                              (7.19
                                              )%
                                              
                                              
                                              (5.41
                                              )%
                                              
                                              
                                              (28.15
                                              )%
                                              
                                              
                                              (8.38
                                              )%2009Q1
                                              Revenues
                                              
                                              
                                              4,915,616
                                              
                                              
                                              
                                              349,408
                                              
                                              
                                              
                                              9,917,995
                                              
                                              
                                              
                                              661,044
                                              
                                              
                                              
                                              34,318
                                              
                                              
                                              
                                              86,712COGS
                                              
                                              
                                              4,028,452
                                              
                                              
                                              
                                              240,020
                                              
                                              
                                              
                                              8,080,680
                                              
                                              
                                              
                                              783,190
                                              
                                              
                                              
                                              28,411
                                              
                                              
                                              
                                              96,461Gross
      Profit (Loss)
                                              
                                              
                                              887,164
                                              
                                              
                                              
                                              109,388
                                              
                                              
                                              
                                              1,837,315
                                              
                                              
                                              
                                              (122,146
                                              )
                                              
                                              
                                              5,907
                                              
                                              
                                              
                                              (9,749
                                              )Gross
      Margin
                                              
                                              
                                              18.05
                                              %
                                              
                                              
                                              31.31
                                              %
                                              
                                              
                                              18.53
                                              %
                                              
                                              
                                              (18.48
                                              )%
                                              
                                              
                                              17.21
                                              %
                                              
                                              
                                              (11.24
                                              )%Changes
                                              Revenues
                                              
                                              
                                              (4,915,616
                                              )
                                              
                                              
                                              1,315,755
                                              
                                              
                                              
                                              (4,193,830
                                              )
                                              
                                              
                                              10,098
                                              
                                              
                                              
                                              183,925
                                              
                                              
                                              
                                              19,441Revenue
      Growth
                                              
                                              
                                              (100
                                              )%
                                              
                                              
                                              376.57
                                              %
                                              
                                              
                                              (42.29
                                              )%
                                              
                                              
                                              1.53
                                              %
                                              
                                              
                                              535.94
                                              %
                                              
                                              
                                              22.42
                                              %





Sales of Urea decreased $4,193,830, or
42.29%, to $5,724,165 for the three months ended June 30, 2009, as compared to
$9,917,995 for the three months ended June 30, 2008. This decrease was mainly
due to the decrease in sales volume and the selling price as compared to the
same period of last year.





The gross margin of Urea decreased to
(7.19)% for the three months ended June 30, 2009, as compared to 18.53% for the
three months ended June 30, 2008. This was mainly due to the decrease in the
selling price and the increase in the cost of production as compared to the same
period of last year.





Sales of ammonium bicarbonate for the
three months ended June 30, 2009 were $671,142, which represented an increase of
1.53% from the same period in the prior year. This was mainly due to the
appreciation of RMB to USD.





The gross margins of ammonium
bicarbonate increased to (5.41)% for the three months ended June 30, 2009
as compared to (18.48)% for the same period of the prior year. This was mainly
due to the growth rate of selling price is higher than the growth rate of the
product cost per unit.


25


Sales of methanol for the three months
ended June 30, 2009 increased 376.57% to $1,665,163, from $349,408 for the three
months ended June 30, 2008. This increase was mainly due to the increase in
sales volume of Methanol as compared to the same period of last year. Methanol
incurred a negative gross margin of 64.25% for the three months ended June 30,
2009, which was mainly due to the increased cost of raw material.





Sales of liquefied
ammonia increased $183,925, or 535.94%, to $218,243 for the three months
ended June 30, 2009, as compared to $34,318 for the three months ended June 30,
2008. This was mainly due to the increase in sales volume of liquefied ammonia
as compared to the same period last year.





The gross margin of liquefied ammonia
decreased to (28.15%) for the three months ended June 30, 2009, as compared to
17.21% for the three months ended June 30, 2008. This was mainly due to the fact
that the growth rate of the product selling price was lower than the growth rate
of the product cost per unit.





Sales of DME decreased  to $0
for the three months ended June 30, 2009. This decrease was mainly due to the
decrease in the selling price and the increase in higher production costs. As a
result, the Company reduced the production volume of DME.





Sales of
ammonia water increased $19,441, or 22.42%, to $106,153 for the three months
ended June 30, 2009 as compared to $86,712 for the three months ended June 30,
2008. This was mainly due to the increase in both sales volume and selling price
of ammonia water as compared to the same period last year.





The gross margin of ammonia water
increased to (8.38%) for the three months ended June 30, 2009 as compared to
(11.24%) for the same period prior year. This was mainly due to the increase in
the selling price and sales volume of liquefied ammonia as compared to the same
period last year.





Operating
Expenses





The Company incurred selling and
distribution expenses of $287,540 for the three months ended June 30, 2009, an
increase of $9,551, or 3.44%, as compared to $277,989 for the three months ended
June 30, 2008.





The Company incurred general and
administrative expenses of $727,934 for the three months ended June 30, 2009,
representing a decrease of $221,227, or 23.31%, as compared to $949,161 for
the three months ended June 30, 2008. This was mainly due to the decrease in
consulting fees and evaluation feesas
compared to the same period last year.





The Company incurred R&D expenses
of $27,626 for the three months ended June 30, 2009, representing an increase of
$7,193, or 35.2%, compared to $20,433 for the three months ended June 30,
2008.





Income
Tax





The Company incurred income tax expense
of $55,008 for the three months ended June 30, 2009, a decrease of $358,347, or
86.69%, as compared to $413,355 for the three months ended June 30, 2008. This
decrease is mainly attributable to the decrease in the Company’s operation
income.


26


Net  (Loss) Income





The Company’s net loss of $3,151,855
for the three months ended June 30, 2009 represented a decrease of $3,979,874,
or 480.65%, as compared to a net income of $828,019 for the three months ended
June 30, 2008. This decrease was mainly due to the following factors: (i) the
increase in the price of raw materials resulting in higher production costs, in
response to which the Company adjusted its product structure, and (ii) the
decrease in the selling price and the sales volume of Urea and DME product,
which resulted in a substantial decrease in the sales revenue of Urea and
DME.





LIQUIDITY
AND CAPITAL RESOURCES





Cash
Flows





Three months ended June 30,2009
                      
                      
                      2008Net
      cash provided by (used in)Operating
      activities
                      
                      $
                      (4,213,597
                      )
                      
                      $
                      282,598Investing
      activities
                      
                      
                      (3,685,010
                      )
                      
                      
                      (9,705,090
                      )Financing
      activities
                      
                      
                      7,740,821
                      
                      
                      
                      3,414,516Net
      change in cash and cash equivalents
                      
                      
                      (157,786
                      )
                      
                      
                      (6,007,976
                      )Effect
      of exchange rate changes on cash and cash equivalents
                      
                      
                      (19,027
                      )
                      
                      
                      156,402Cash
      and cash equivalents at beginning of period
                      
                      
                      410,870
                      
                      
                      
                      7,487,808Cash
      and cash equivalents at end of period
                      
                      $
                      234,057
                      
                      
                      $
                      1,636,234





Cash flows used in operating activities
during the three months ended June 30, 2009 amounted to $4,213,597, representing
a decrease of $4,496,195, or 1591.02% as compared with cash
flows  provided in operating activities of $282,598 during the three
months ended June 30, 2008. The decrease in cash flow from operating activities
was primarily due to the decrease of our net income from operations from a net
income of $828,019 to a net loss of $3,151,855 and the decrease in accounts
payable by $2,135,577.





As of June 30, 2009, the cash used in
investing activities was $3,685,010, which represented the expenditure on
construction of the third phase of the 600,000 ton DME facility
project.





As of June 30, 2009, the cash provided
by financing activities was $7,740,821, which represented theproceeds from short-term
debt in the reporting period.





Liquidity





The Company has a working capital
deficit of $35,176,647 as of June 30, 2009, and the Company incurred a net loss
of $3,151,855 for the three months ended June 30, 2009. The condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. These matters raise substantial
doubt about the Company’s ability to continue as a going concern. Management
recognizes that the Company’s continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to allow the Company to continue
the development of its business plans and satisfy its current and long-term
obligations on a timely basis. The Company believes that it will be able to
complete the necessary steps in order to meet its cash requirements for the next
twelve months.





Our major
shareholder has committed to provide financing aid to the Company, if necessary.
The Company believes revenue and gross profits will increase in the near
term.


27


On August
4, 2009, the Company obtained a short-term bank loan for RMB 10 million
(approximately $1.464 million) with an interest rate of 10.08% per annum from
Xinyang Commercial Bank, which is due on August 4, 2010. The Company’s finished
goods inventory is pledged as collateral for the short-term bank
loan.





Capital
Resources





As of June 30, 2009, our total assets
were $62,868,751 and our total liabilities were $52,012,011. Our debt to asset
ratio, calculated as total liabilities (including short-term debt and payables)
over total assets, was 83%.





As of June 30, 2009, our total assets
were $62,868,751 and our operating revenue for the three months ended June 30,
2009 was $8,384,866, reflecting a total asset turnover of 0.13.





As of June 30, 2009, we had working
capital deficit of $35,176,647. This was mainly due
to a change from net income to net loss as compared to the same period last
year.





CONTINGENT
LIABILITIES





None.





OFF
BALANCE SHEET ARRANGEMENTS





None.





Item 3.                    Quantitative
and Qualitative Disclosures About Market Risk.





Not Applicable.





Item
4.                    Controls
and Procedures.





A.
Evaluation of Disclosure Controls and Procedures:





The Company maintains disclosure
controls and procedures and internal controls designed to ensure that
information required to be disclosed in the Company's filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. The Company's management, with the participation of its
principal executive and financial officers, has evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q. The Company's principal executive
and financial officers have concluded, based on such evaluation, that such
disclosure controls and procedures were effective for the purpose for which they
were designed as of the end of such period.





B.
Changes in Internal Control over Financial Reporting:





There was no change in the Company's
internal control over financial reporting that was identified in connection with
such evaluation that occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial
reporting.


28


PART
II – OTHER INFORMATION





Item
1.                    Legal
Proceedings.





On
December 29, 2004, the Company entered into an agreement (the “Luoshan
Agreement”) to purchase Luoshan Fertilizer Plant, a bankrupt company and to
assume $1.3 million in debt owed by Xixian Fertilizer Plant (the principal
shareholder of Luoshan Fertilizer Plant). Under the Luoshan Agreement, the
Company was to receive reimbursements of $650,000 from both the Luoshan county
government and the Xi county government, which were to be received before
December 29, 2007. Luoshan county government paid its note of $650,000 to the
Company on its due date.





In
November 2007, the Company initiated a lawsuit in the Intermediate Court of
Xinyang City against the Xi county government and Henan Shiji Jinyuan Chemicals
Co., Ltd. (the “Shiji Jinyuan”, formerly Xixian Fertilizer Plant) for
non-payment of the Xi county government note receivable of $650,000 on its due
date as set forth under the Luoshan Agreement, and sought the enforcement of the
terms of the note receivable and the Luoshan Agreement for payment of the
$650,000 by both the Xi county government and Shiji Jinyuan. On June 12, 2009,
the court entered final judgment against Xi county government and Shiji Jinyuan
in amount of $650,000 to be paid before June 22, 2009. In addition, the judgment
ordered the Xi county government and Shiji Jinyuan to pay the Company interest
and late fee based on market rates. As of August 14, 2009, Xi county government
and Shiji Jinyuan did not pay the amount to the Company, as they plan to appeal
the decision. At June 30, 2009, the Company has a reserve against the $650,000
note of $146,372 due to the uncertainty of collection.





Item
1A.                 Risk
Factors.





Not
required.





Item
2.                    Unregistered
Sales of Equity Securities and Use of Proceeds.





None.





Item
3.                    Defaults
Upon Senior Securities.





None.





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





None.





Item
5.                    Other
Information.





(a)           There
is no information required to be disclosed on Form 8-K during the period covered
by this Form 10-Q that was not so reported.





(b)           There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant's board of directors during the quarter
ended June 30, 2009.


29


Item
6.                                Exhibits.





The
following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:





Exhibit
                Number
              
              Exhibit Description2.1
              
              Share
      Exchange Agreement dated as of October 11, 2006, between Sports Source,
      Kinfair Holdings Limited and Auto Chance International Limited.
      (2)2.2
              
              Share
      Transfer Agreement, dated February 29, 2006, between Kinfair Holdings
      Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu,
      Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)2.3
              
              Stock
      Purchase Agreement, dated February 19, 2006, by and between Henan Jinding
      Chemical Industry Co., Ltd. and Kinfair Holdings Limited.
    (2)3.1
              
              Certificate
      of Incorporation of the Company, as amended by the current report on Form
      8-K filed with the SEC on February 7, 2007 (1)3.2
              
              Bylaws
      of the Company, as amended by the current report on Form 8-K/A filed with
      the SEC on February 23, 2007 (1)4.1
              
              Specimen
      of Common Stock Certificate (3)10.1
              
              Form
      of Labor Contract for Henan Jinding Chemical Industry Co., Ltd.
      (2)10.2
              
              Land
      Use Certificates issued to Luoshan Jinding Chemical Industry Co., Ltd. by
      the People’s Government of Luoshan County. (2)31.1
              
              Certification
      of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)31.2
              
              Certification
      of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)32.1
              
              Certification
      of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)32.2
              
              Certification
      of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)99.1
              
              Loan
      Agreement, dated August 8, 2008, by and between New Oriental Energy &
      Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd.
      (5)







(1)
              Incorporation
      by reference to the Company's Registration Statement on Form SB-2, as
      amended (Registration No.
333-125131).


(2)
              Incorporated
      by reference to the Company's Current Report on Form 8-K dated October 13,
      2006.


(3)
              Incorporated
      by reference to the Company's Quarterly Report on Form 10-Q for the period
      ended December 31, 2008.


(4)
              Filed
      herewith.


(5)
              Incorporated
      by reference to the Company’s Form 10-Q for the period ended June 30,
      2008.


30


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.





NEW
      ORIENTAL ENERGY & CHEMICAL CORP.By:
                /s/ Chen Si QiangChen
      Si QiangChief
      Executive Officer and Chairman of the BoardBy:
                /s/ Donglai LiDonglai
      LiChief
      Financial Officer





DATED:  August
14, 2009







INDEX
TO EXHIBITS
 
 Exhibit
                      Number
                    
                    Exhibit
      Description2.1
                    
                    Share
      Exchange Agreement dated as of October 11, 2006, between Sports Source,
      Kinfair Holdings Limited and Auto Chance International Limited.
      (2)2.2
                    
                    Share
      Transfer Agreement, dated February 29, 2006, between Kinfair Holdings
      Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu,
      Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)2.3
                    
                    Stock
      Purchase Agreement, dated February 19, 2006, by and between Henan Jinding
      Chemical Industry Co., Ltd. and Kinfair Holdings Limited.
    (2)3.1
                    
                    Certificate
      of Incorporation of the Company, as amended by the current report on Form
      8-K filed with the SEC on February 7, 2007 (1)3.2
                    
                    Bylaws
      of the Company, as amended by the current report on Form 8-K/A filed with
      the SEC on February 23, 2007 (1)4.1
                    
                    Specimen
      of Common Stock Certificate (3)10.1
                    
                    Form
      of Labor Contract for Henan Jinding Chemical Industry Co., Ltd.
      (2)10.2
                    
                    Land
      Use Certificates issued to Luoshan Jinding Chemical Industry Co., Ltd. by
      the People’s Government of Luoshan County. (2)31.1
                    
                    Certification
      of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)31.2
                    
                    Certification
      of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)32.1
                    
                    Certification
      of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)32.2
                    
                    Certification
      of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)99.1
                    
                    Loan
      Agreement, dated August 8, 2008, by and between New Oriental Energy &
      Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd.
      (5)
 
 (1)
                Incorporation
      by reference to the Company's Registration Statement on Form SB-2, as
      amended (Registration No.
333-125131).
 (2)
                Incorporated
      by reference to the Company's Current Report on Form 8-K dated October 13,
      2006.
 (3)
                Incorporated
      by reference to the Company's Quarterly Report on Form 10-Q for the period
      ended December 31, 2008.
 (4)
                Filed
      herewith.
 (5)
                Incorporated
      by reference to the Company’s Form 10-Q for the period ended June 30,
      2008.