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, 2010





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




Xicheng
      Industrial Zone of
                Luoshan,
      Xinyang
                Henan
      Province, The People’s
                Republic
      of China
                (Address
      of principal executive
                offices)
              
              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   ̈





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 23, 2010Common
      Stock, $.001 par value per share
              
              14,100,000
      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, 2010 And 2009





PageCondensed
      Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and March 31,
      2010
                  
                  F-2Condensed
      Consolidated Statements of Operations and Comprehensive Loss for the Three
      Months Ended June 30, 2010 and 2009 (Unaudited)
                  
                  F-3Condensed
      Consolidated Statements of Changes in Shareholders’ Equity
      (Deficit)  for the Three Months Ended June 30, 2010
      (Unaudited)
                  
                  F-4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended June 30,
      2010 and 2009 (Unaudited)
                  
                  F-5Notes
      to Condensed Consolidated Financial Statements for the Three Months
      Ended  June 30, 2010 and 2009 (Unaudited)
                  
                  F-6-21






F-1


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED
BALANCE SHEETS





June 30,
                              2010
                            
                            
                            March 31,
                              2010(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            1,117,917
                            
                            
                            $
                            319,816Restricted
      cash
                            
                            
                            23,192,802
                            
                            
                            
                            3,662,306Notes
      receivable, net of reserve of $736,279 and $732,461 at June 30, 2010and
      March 31, 2010, respectively
                            
                            
                            -
                            
                            
                            
                            42,483Inventories,
      net
                            
                            
                            2,765,992
                            
                            
                            
                            7,607,683Prepayments
      for goods
                            
                            
                            323,773
                            
                            
                            
                            275,735Due
      from employees
                            
                            
                            -
                            
                            
                            
                            225,519Other
      assets
                            
                            
                            224,266
                            
                            
                            
                            35,762Due
      from a related party
                            
                            
                            233,080
                            
                            
                            
                            231,872Deferred
      taxes
                            
                            
                            492,396
                            
                            
                            
                            622,452Total
      current assets
                            
                            
                            28,350,226
                            
                            
                            
                            13,023,628Plant
      and equipment, net
                            
                            
                            15,700,625
                            
                            
                            
                            16,246,562Land
      use rights, net
                            
                            
                            1,602,991
                            
                            
                            
                            1,603,674Construction
      in progress
                            
                            
                            30,077,799
                            
                            
                            
                            29,540,856Deposits
                            
                            
                            1,214,907
                            
                            
                            
                            1,208,607Deferred
      taxes
                            
                            
                            761,785
                            
                            
                            
                            551,037Other
      long-term assets
                            
                            
                            9,766
                            
                            
                            
                            8,282Total
      long-term assets
                            
                            
                            49,367,873
                            
                            
                            
                            49,159,018TOTAL
      ASSETS
                            
                            $
                            77,718,099
                            
                            
                            $
                            62,182,646LIABILITIES
      AND SHAREHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable
                            
                            $
                            8,749,292
                            
                            
                            $
                            8,672,865Other
      payables and accrued liabilities
                            
                            
                            1,431,060
                            
                            
                            
                            1,169,859Short-term
      debt
                            
                            
                            41,249,319
                            
                            
                            
                            18,900,429Customer
      deposits
                            
                            
                            4,341,424
                            
                            
                            
                            10,814,494Due
      to employees
                            
                            
                            88,159
                            
                            
                            
                            16,810Payable
      to contractors
                            
                            
                            1,174,841
                            
                            
                            
                            1,175,726Due
      to related parties
                            
                            
                            15,240,212
                            
                            
                            
                            14,871,559Deferred
      taxes
                            
                            
                            459,427
                            
                            
                            
                            450,853Taxes
      payable
                            
                            
                            573,587
                            
                            
                            
                            570,768Derivative
      liabilities
                            
                            
                            479,645
                            
                            
                            
                            -Current
      portion of long-term notes payable
                            
                            
                            534,539
                            
                            
                            
                            531,767Total
      current liabilities
                            
                            
                            74,321,505
                            
                            
                            
                            57,175,130LONG-TERM
      LIABILITIESLong-term
      bank loan
                            
                            
                            2,945,118
                            
                            
                            
                            2,929,845Deferred
      taxes
                            
                            
                            794,754
                            
                            
                            
                            722,636Due
      to employees
                            
                            
                            127,506
                            
                            
                            
                            129,555Total
      long-term liabilities
                            
                            
                            3,867,378
                            
                            
                            
                            3,782,036TOTAL
      LIABILITIES
                            
                            $
                            78,188,883
                            
                            
                            $
                            60,957,166SHAREHOLDERS'
      EQUITY (DEFICIT)Common
      stock, par value $0.001 per share; 30,000,000 shares authorized,
      14,100,000 and12,640,000
      shares issued and outstanding at June 30, 2010 and March 31, 2010,
      respectively
                            
                            
                            14,100
                            
                            
                            
                            12,640Additional
      paid-in capital
                            
                            
                            5,466,977
                            
                            
                            
                            4,573,205Retained
      deficit (restricted portion was $0 and $950,327 at June 30, 2010 andMarch
      31, 2010, respectively)
                            
                            
                            (8,500,966
                            )
                            
                            
                            (5,903,362
                            )Accumulated
      other comprehensive income
                            
                            
                            2,549,105
                            
                            
                            
                            2,542,997TOTAL
      SHAREHOLDERS' EQUITY (DEFICIT)
                            
                            
                            (470,784
                            )
                            
                            
                            1,225,480TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
                            
                            $
                            77,718,099
                            
                            
                            $
                            62,182,646





See
accompanying notes to the condensed consolidated financial
statements.


F-2


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND


COMPREHENSIVE
LOSS


(UNAUDITED)




Three
      Months Ended
                        June
      30,2010
                      
                      
                      2009REVENUES
                      
                      $
                      13,730,314
                      
                      
                      $
                      8,384,866COST
      OF GOODS SOLD
                      
                      
                      (14,667,701
                      )
                      
                      
                      (9,973,189
                      )GROSS
      LOSS
                      
                      
                      (937,387
                      )
                      
                      
                      (1,588,323
                      )General
      and administrative
                      
                      
                      767,811
                      
                      
                      
                      727,934Selling
      and distribution
                      
                      
                      241,029
                      
                      
                      
                      287,540Research
      and development
                      
                      
                      18,251
                      
                      
                      
                      27,626LOSS
      FROM OPERATIONS
                      
                      
                      (1,964,478
                      )
                      
                      
                      (2,631,423
                      )OTHER
      INCOME (EXPENSES)Interest
      expense, net
                      
                      
                      (875,441
                      )
                      
                      
                      (461,917
                      )Other
      income (expenses), net
                      
                      
                      9,384
                      
                      
                      
                      (3,507
                      )Change
      in fair value of derivatives liabilities
                      
                      
                      232,931
                      
                      
                      
                      -LOSS
      BEFORE INCOME TAXES
                      
                      
                      (2,597,604
                      )
                      
                      
                      (3,096,847
                      )INCOME
      TAX EXPENSE
                      
                      
                      -
                      
                      
                      
                      (55,008
                      )NET
      LOSS
                      
                      
                      (2,597,604
                      )
                      
                      
                      (3,151,855
                      )OTHER COMPREHENSIVE INCOME
      (LOSS)Foreign
      currency translation gain (loss)
                      
                      
                      6,108
                      
                      
                      
                      (9,672
                      )OTHER
      COMPREHENSIVE INCOME (LOSS)
                      
                      
                      6,108
                      
                      
                      
                      (9,672
                      )COMPREHENSIVE LOSS
                      
                      $
                      (2,591,496
                      )
                      
                      $
                      (3,161,527
                      )WEIGHTED
      AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
                      
                      
                      13,538,000
                      
                      
                      
                      12,640,000NET
      LOSS PER SHARE, BASIC AND DILUTED
                      
                      $
                      (0.19
                      )
                      
                      $
                      (0.25
                      )





See
accompanying notes to the condensed consolidated financial
statements.


F-3





NEW
ORIENTAL ENERGY & CHEMICAL CORP.AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(DEFICIT)





Common stock
                                
                                
                                Additional
                                  Paid-in
                                
                                
                                Retained
                                
                                
                                Accumulated
                                  Other
                                  ComprehensiveShares
                                
                                
                                Par
      value
                                
                                
                                Capital
                                
                                
                                Deficit
                                
                                
                                Income
                                
                                
                                TotalBALANCE
      AT MARCH 31, 2010
                                
                                
                                12,640,000
                                
                                
                                $
                                12,640
                                
                                
                                $
                                4,573,205
                                
                                
                                $
                                (5,903,362
                                )
                                
                                $
                                2,542,997
                                
                                
                                $
                                1,225,480Sale
      of 1,460,000 shares of common stock for cash, net of expenses and
      derivative liabilities
                                
                                
                                1,460,000
                                
                                
                                
                                1,460
                                
                                
                                
                                893,772
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                895,232Foreign
      currency translation gain
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                6,108
                                
                                
                                
                                6,108Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (2,597,604
                                )
                                
                                
                                -
                                
                                
                                
                                (2,597,604
                                )BALANCE
      AT JUNE 30, 2010
                                
                                
                                14,100,000
                                
                                
                                $
                                14,100
                                
                                
                                $
                                5,466,977
                                
                                
                                $
                                (8,500,966
                                )
                                
                                $
                                2,549,105
                                
                                
                                $
                                (470,784
                                )





See
accompanying notes to the condensed consolidated financial
statements.


F-4





NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three Months Ended
                            June 30,2010
                          
                          
                          2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                          
                          $
                          (2,597,604
                          )
                          
                          $
                          (3,151,855
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                          
                          
                          649,999
                          
                          
                          
                          652,255Gain
      on disposal of plant and equipment
                          
                          
                          (8,629
                          )
                          
                          
                          -Deferred
      taxes
                          
                          
                          -
                          
                          
                          
                          54,530Write-down
      of inventories to net realizable value
                          
                          
                          271,991
                          
                          
                          
                          807,448Change
      in fair value of derivatives
                          
                          
                          (232,931
                          )
                          
                          
                          -Changes
      in operating assets and liabilities:(Increase)
      Decrease In:Inventories
                          
                          
                          4,569,700
                          
                          
                          
                          (2,632,107
                          )Prepayments
      for goods
                          
                          
                          (48,038
                          )
                          
                          
                          54,804Other
      assets
                          
                          
                          (188,504
                          )
                          
                          
                          1,621Due
      from a related party
                          
                          
                          -
                          
                          
                          
                          30,211Increase
      (Decrease) In:Accounts
      payable
                          
                          
                          76,427
                          
                          
                          
                          (744,169
                          )Other
      payables and accrued liabilities
                          
                          
                          261,201
                          
                          
                          
                          62,745Customer
      deposits
                          
                          
                          (6,473,070
                          )
                          
                          
                          625,794Due
      to employees
                          
                          
                          71,349
                          
                          
                          
                          -Due
      to a related party
                          
                          
                          39,444
                          
                          
                          
                          27,437Net
      cash used in operating activities
                          
                          
                          (3,608,665
                          )
                          
                          
                          (4,211,286
                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of plant and equipment
                          
                          
                          (11,294
                          )
                          
                          
                          (1,623
                          )Purchases
      of construction in progress
                          
                          
                          (131,033
                          )
                          
                          
                          (599,727
                          )Deposits
                          
                          
                          -
                          
                          
                          
                          (68,680
                          )Purchases
      of other long-term assets
                          
                          
                          (2,136
                          )
                          
                          
                          -Proceeds
      from disposal of plant and equipment
                          
                          
                          8,629Due
      from employees
                          
                          
                          225,519
                          
                          
                          
                          (2,311
                          )Notes
      receivable
                          
                          
                          42,593
                          
                          
                          
                          (84,968
                          )Net
      cash provided by (used in) investing activities
                          
                          
                          132,278
                          
                          
                          
                          (757,309
                          )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from short-term debt, net of restricted cash
                          
                          
                          13,148,763
                          
                          
                          
                          12,697,960Repayments
      of short-term debt
                          
                          
                          (10,486,738
                          )
                          
                          
                          (7,887,151
                          )Proceeds
      from issuance of common stock, net
                          
                          
                          1,607,808
                          
                          
                          
                          -Net
      cash provided by financing activities
                          
                          
                          4,269,833
                          
                          
                          
                          4,810,809NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                          
                          
                          793,446
                          
                          
                          
                          (157,786
                          )Effect
      of exchange rate changes on cash
                          
                          
                          4,655
                          
                          
                          
                          (19,027
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          319,816
                          
                          
                          
                          410,870CASH AND CASH EQUIVALENTS AT END OF
      PERIOD
                          
                          $
                          1,117,917
                          
                          
                          $
                          234,057SUPPLEMENTARY
      CASH FLOW INFORMATIONInterest
      paid
                          
                          $
                          350,476
                          
                          
                          $
                          324,001





See
accompanying notes to the condensed consolidated financial
statements.


F-5





NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(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”).





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, 2010 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 $2,597,604 and has
negative cash flow from operations of $3,608,665 for the three months
ended June 30, 2010, and has a working capital deficit of $45,971,279 and a shareholders’
deficit of $470,784 at June 30, 2010.





The
Company will need to obtain additional financing to continue operations beyond
2011. 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 and would likely be required to cease its
operations.





The major
shareholder has committed to provide financial assistance of RMB 50 to 80
million (approximately $7.3 to $11.7 million) over the next few years, if
necessary.





A former
shareholder of the Company forgave $1,344,328 of debt after June 30,
2010.  See Note 19.





4.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





(a)
            Principles
      of Consolidation





The
consolidated financial statements include the accounts of New Oriental Energy
& Chemical Corp. and the following subsidiaries:





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





(ii)
              Henan
      Jinding Chemicals Co., Ltd. (“Henan 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:


F-6


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





4.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)





Customer
                  
                  Sales
                  
                  
                  Customer
      DepositsThree Months Ended June 30,
                  
                  
                  As of June 30,
                  
                  
                  As of March 31,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2010Company
      A
                  
                  
                  37.56
                  %
                  
                  
                  7.53
                  %
                  
                  
                  89.45
                  %
                  
                  
                  83.32
                  %Company
      B
                  
                  
                  12.69
                  %
                  
                  
                  16.13
                  %
                  
                  
                  2.52
                  %
                  
                  
                  5.16
                  %Company
      C
                  
                  
                  5.45
                  %
                  
                  
                  -
                  
                  
                  
                  0.07
                  %
                  
                  
                  0.52
                  %Company
      D
                  
                  
                  5.22
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0.47
                  %




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,
                      2010
                    
                    
                    As of March 31,
                      20102010
                    
                    
                    2009Company
      E
                    
                    
                    45.69
                    %
                    
                    
                    15.48
                    %
                    
                    
                    25.03
                    %
                    
                    
                    0.24
                    %Company
      F
                    
                    
                    20.82
                    %
                    
                    
                    13.35
                    %
                    
                    
                    13.75
                    %
                    
                    
                    12.51
                    %Company
      G
                    
                    
                    9.15
                    %
                    
                    
                    23.58
                    %
                    
                    
                    5.47
                    %
                    
                    
                    6.38
                    %Company
      H
                    
                    
                    7.94
                    %
                    
                    
                    19.05
                    %
                    
                    
                    7.92
                    %
                    
                    
                    8.94
                    %





The sole
market of the Company is the PRC for the three months ended June 30, 2010 and
2009.





(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.





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





ASC
820-10 (formerly SFAS No. 157, Fair Value Measurements) 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.




F-7


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)




4.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)





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 and liabilities measured at fair value on a recurring basis subject to
the disclosure requirements of ASC 820-10 as of June 30, 2010 are as
follows:





Fair Value Measurements at Reporting Date UsingCarrying value
                    as of June 30,
                    2010
                  
                  
                  Quoted Prices
                    in Active
                    Markets for
                    Identical
                    Assets
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                  
                  
                  Significant
                    Unobservable
                    Inputs(Level
      1)
                  
                  
                  (Level
      2)
                  
                  
                  (Level
      3)Fair
      value of warrants
                  
                  $
                  479,645
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  479,645





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 represent time deposits on account to secure short-term debt.
The original cost of these assets approximates fair value due to their short
term maturity. See Note 10.





The
carrying amounts of other financial assets and liabilities, such as notes
receivable, due from employees, due from a related party, accounts payable,
other payables and accrued liabilities, short-term debt, customer deposits, due
to employees, payable to contractors, due to related parties, taxes payable and
long-term bank loan, approximate their fair values because of the short-term
maturity of these instruments.





(f)
            Derivative
      Financial Instruments





The
Company evaluates all of its financial instruments to determine if such
instruments are derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is initially recorded at
its fair value and is then re-valued at each reporting date, with changes in the
fair value reported in the condensed consolidated statements of operations. For
stock-based derivative financial instruments, the Company uses the Black-Scholes
option pricing models to value the derivative instruments at inception and on
subsequent valuation dates. The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as
equity, is evaluated at the end of each reporting period. Notes 15 and
16.





(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.





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


F-8


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





4.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)





(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, 2010 and 2009 was $258,590 and
$99,153, 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, 2010
                    
                    
                    March 31, 2010
                    
                    
                    June 30, 2009Period
      end RMB: $ exchange rate
                    
                    
                    6.7909
                    
                    
                    
                    6.8263
                    
                    
                    
                    -Average
      period RMB: $ exchange rate
                    
                    
                    6.8086
                    
                    
                    
                    -
                    
                    
                    
                    6.8339





(k)
            Loss
      Per Share





Basic
loss per share is computed by dividing loss available to common shareholders by
the weighted average number of common shares outstanding during the period. The
diluted loss per share calculation gives effect to all potentially dilutive
common shares outstanding during the period using the treasury stock method.
Common equivalent shares consist of shares issuable upon the exercise of stock
warrants.  As of June 30, 2010, common stock equivalents were composed
of warrants convertible into 876,000 shares of the Company's common
stock.  For three months ended June 30, 2010, common equivalent shares
have been excluded from the calculation of loss per share as their effect is
anti-dilutive.





(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.


F-9





NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





4.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)





(l)
            Segments
      (Continued)








Fuel
Segment:




For
      The Three Months Ended June 30, 2010DME
                          
                          
                          Methanol
                          
                          
                          Segment TotalRevenues
                          
                          
                          -
                          
                          
                          $
                          2,051,729
                          
                          
                          $
                          2,051,729COGS
                          
                          
                          -
                          
                          
                          
                          2,510,587
                          
                          
                          
                          2,510,587Gross
      loss
                          
                          
                          -
                          
                          
                          $
                          (458,858
                          )
                          
                          $
                          (458,858
                          )





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
                  )




Fertilizer
Segment:


For
      The Three Months Ended June 30, 2010Urea
                  
                  
                  Ammonium
      Bicarbonate
                  
                  
                  Liquefied
                    Ammonia
                  
                  
                  Ammonia
                    Water
                  
                  
                  Segment TotalRevenues
                  
                  $
                  10,719,109
                  
                  
                  $
                  756,170
                  
                  
                  $
                  100,340
                  
                  
                  $
                  102,966
                  
                  
                  $
                  11,678,585COGS
                  
                  
                  11,133,333
                  
                  
                  
                  806,459
                  
                  
                  
                  115,598
                  
                  
                  
                  101,724
                  
                  
                  
                  12,157,114Gross
      (loss) profit
                  
                  $
                  (414,224
                  )
                  
                  $
                  (50,289
                  )
                  
                  $
                  (15,258
                  )
                  
                  $
                  1,242
                  
                  
                  $
                  (478,529
                  )




For
      The Three Months Ended June 30, 2009Urea
                  
                  
                  Ammonium
                    Bicarbonate
                  
                  
                  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
                  
                  $
                  (411,715
                  )
                  
                  $
                  (36,325
                  )
                  
                  $
                  (61,445
                  )
                  
                  $
                  (8,898
                  )
                  
                  $
                  (518,383
                  )




(m)
            New
      Accounting Pronouncements





Effective
January 1, 2009, the Company adopted ASC 815-10 (formerly SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities), which amends
SFAS No. 133 and expands disclosures to include information about the fair value
of derivatives, related credit risks and a company's strategies and objectives
for using derivatives. The adoption of ASC 815-10 did not have a material effect
on the Company’s condensed consolidated financial statements as of June 30,
2010.


F-10


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





4.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)





Effective
January 1, 2009, the Company adopted ASC 815-40 (formerly Emerging Issues Task
Force (“EITF”) Issue No. 07-05, Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). ASC 815-40
addresses the determination of whether an instrument (or an embedded feature) is
indexed to an entity's own stock, which is the first part of the scope exception
in paragraph 11(a) of FASB SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (“SFAS 133”). If an instrument (or an embedded feature)
that has the characteristics of a derivative instrument under paragraphs 6-9





On April
9, 2009, the FASB also approved ASC 825-10 (formerly 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 ASC 825-10 for our interim and
annual reporting periods ending after June 15, 2009. ASC 825-10 does not require
disclosures for periods presented for comparative purposes at initial adoption.
ASC 825-10 requires comparative disclosures only for periods ending after
initial adoption. The adoption of ASC 825-10 did not have a material effect on
the Company’s condensed consolidated financial statements as of June 30,
2010.





In April
2009, the FASB updated guidance related to fair-value measurements to clarify
the guidance related to measuring fair-value in inactive markets, to modify the
recognition and measurement of other-than-temporary impairments of debt
securities, and to require public companies to disclose the fair values of
financial instruments in interim periods. This updated guidance became effective
for the Company beginning June 1, 2009. The adoption of this guidance did not
have a material effect on the Company’s condensed consolidated financial
statements as of June 30, 2010.





In June
2009, the FASB issued ASC 810-10 (formerly SFAS No. 167) Amendments to FASB
Interpretation No. 46(R), which 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. ASC 810-10 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
adoption of ASC 810-10 did not have a material effect on the Company’s condensed
consolidated financial statements as of June 30, 2010.





In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and liabilities
measured under Level 3 of the fair value measurement hierarchy. This guidance is
effective for the Company beginning March 1, 2010. The adoption of this guidance
did not have a material effect on the Company’s condensed consolidated financial
statements as of June 30, 2010.




F-11


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





5.
            INVENTORIES





Inventories
consist of the following:




June 30,
                    2010
                  
                  
                  March 31,
                    2010(Unaudited)Finished
      goods
                  
                  $
                  1,708,984
                  
                  
                  $
                  6,108,597Raw
      materials
                  
                  
                  558,520
                  
                  
                  
                  989,483Packing
      materials
                  
                  
                  498,488
                  
                  
                  
                  509,603Total
      inventories, net
                  
                  $
                  2,765,992
                  
                  
                  $
                  7,607,683





The net
book value of $1,472,559 and $3,868,274 of finished goods inventory is pledged
as collateral for short-term debt at June 30, 2010 and March 31, 2010,
respectively. See Note 10.





As of
June 30, 2010 and 2009, the Company recorded a write-down of inventories to net
realizable value of $271,991 and $807,448, respectively.





6.
            RELATED
      PARTY TRANSACTIONS





(I)
            Due
      from a Related Party





June 30,
                    2010
                  
                  
                  March 31,
                    2010(Unaudited)Current:Huaiyang
      Desheng Chemical Co., Ltd
                  
                  $
                  233,080
                  
                  
                  $
                  231,872





Huaiyang
Desheng Chemical Co., Ltd (“Huaiyang Desheng”) is a company controlled by a
director of the Company. The remaining balance represents an advance for the
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,
                        2010
                      
                      
                      March 31,
                        2010(Unaudited)Principal:Xinyang
      Hong Chang Pipeline Gas Co., Ltd.
                      
                      (a)
                      
                      $
                      10,896,935
                      
                      
                      $
                      10,840,426Long
      Triumph Investments Limited
                      
                      (b)
                      
                      
                      1,344,328
                      
                      
                      
                      1,344,328Chen
      Siqiang
                      
                      (c)
                      
                      
                      1,030,791
                      
                      
                      
                      1,025,446Wang
      Guiquan
                      
                      (d)
                      
                      
                      132,530
                      
                      
                      
                      131,843Zhou
      Dianchang
                      
                      (e)
                      
                      
                      73,628
                      
                      
                      
                      73,246Mai
      Xiaofu
                      
                      (f)
                      
                      
                      147,256
                      
                      
                      
                      146,492Yu
      Zhiyang
                      
                      (g)
                      
                      
                      44,177
                      
                      
                      
                      43,948Yang
      Hongtao
                      
                      (h)
                      
                      
                      44,177
                      
                      
                      
                      43,948Subtotal
                      
                      
                      
                      $
                      13,713,822
                      
                      
                      $
                      13,649,677Interest:Xinyang
      Hong Chang Pipeline Gas Co., Ltd.
                      
                      (a)
                      
                      
                      1,201,893
                      
                      
                      
                      934,227Chen
      Siqiang
                      
                      (c)
                      
                      
                      230,073
                      
                      
                      
                      204,269Wang
      Guiquan
                      
                      (d)
                      
                      
                      28,026
                      
                      
                      
                      24,716Zhou
      Dianchang
                      
                      (e)
                      
                      
                      15,570
                      
                      
                      
                      13,731Mai
      Xiaofu
                      
                      (f)
                      
                      
                      31,768
                      
                      
                      
                      28,087Yu
      Zhiyang
                      
                      (g)
                      
                      
                      9,530
                      
                      
                      
                      8,426Yang
      Hongtao
                      
                      (h)
                      
                      
                      9,530
                      
                      
                      
                      8,426Subtotal
                      
                      
                      
                      $
                      1,526,390
                      
                      
                      $
                      1,221,882Total
                      
                      
                      
                      $
                      15,240,212
                      
                      
                      $
                      14,871,559




F-12


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





6.
              RELATED
      PARTY TRANSACTIONS
(CONTINUED)





(II)
              Due
      to Related Parties
(continued)





(a)
            Xinyang
      Hong Chang Pipeline Gas Co., Ltd. is a company controlled by the Chairman
      of the board and chiefexecutive
      officer of the Company. The amount represents advances from Xinyang Hong
      Chang Pipeline Gas Co., Ltd, and the amount consists of the following at
      June 30, 2010:





Due
      December 30, 2010, interest rate at 8.748% per annum,
      unsecured
                  
                  $
                  2,945,117Due
      January 13, 2011, interest rate at 10.62% per annum,
    unsecured
                  
                  
                  441,768Due
      January 20, 2011, interest rate at 10.62% per annum,
    unsecured
                  
                  
                  1,030,791Due
      September 1, 2010, interest rate at 10.62% per annum,
      unsecured
                  
                  
                  736,279Due
      September 25, 2010, interest rate at 15% per annum,
    unsecured
                  
                  
                  736,279Due
      October 9, 2010, interest rate at 10.62% per annum,
    unsecured
                  
                  
                  589,024Due
      October 14, 2010, interest rate at 10.62% per annum,
    unsecured
                  
                  
                  883,535Due
      December 10, 2010, interest rate at 10.62% per annum,
      unsecured
                  
                  
                  736,279Due
      December 28, 2010, interest rate at 10.62% per annum,
      unsecured
                  
                  
                  441,768Due
      December 31, 2010, interest rate at 10.62% per annum,
      unsecured
                  
                  
                  294,512Due
      January 25, 2011, interest rate at 10.62% per annum,
    unsecured
                  
                  
                  294,512Due
      February 9, 2011, interest rate at 10.62% per annum,
    unsecured
                  
                  
                  441,768No
      fixed repayment term, interest free, unsecured
                  
                  
                  1,325,303Total
                  
                  $
                  10,896,935





Interest
expense for the three months ended June 30, 2010 and 2009 is $296,869 and
$91,765, respectively. Of the $296,869 of interest expense, $223,249 was
capitalized interest in construction in progress, since the amount was used for
construction. Also see Note 9.





(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)
            Chen
      Siqiang is the chairman of the board and chief executive officer of the
      Company. The amount is unsecured, has an interest rate of 9.6% per annum
      and is due on September 3, 2010. The interest expense for the three months
      ended June 30, 2010 and 2009 of $24,739 and $24,591 was capitalized in
      construction in progress, since the amount was used for construction. Also
      see Note 9.





(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 January
      18, 2011. The interest expense for the three months ended June 30, 2010
      and 2009 of $3,181 and $3,162 was capitalized interest in construction in
      progress, since the amount was used for construction. Also see Note
      9.





(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 January 18, 2011. The interest
      expense for the three months ended June 30, 2010 and 2009 of $1,767 and
      $1,756 was capitalized in construction in progress, since the amount was
      used for construction. Also see Note
9.





(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 January 2, 2011. The
      interest expense for the three months ended June 30, 2010 and 2009 of
      $3,534 and $3,513 was capitalized in construction in progress, since the
      amount was used for construction. Also see Note
  9.




(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 January 2,
      2011. The interest expense for the three months ended June 30, 2010 and
      2009 of $1,060 and $1,054 was capitalized in construction in progress,
      since the amount was used for construction. Also see Note
    9.


F-13




NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





6.
            RELATED
      PARTY TRANSACTIONS (CONTINUED)





(II)
            Due
      to Related Parties (continued)





(h)
            Yang
      Hongtao is a significant shareholder of the Company. The amount is
      unsecured, has an interest rate of 9.6% per annum and is due on January 2,
      2011. The interest expense for the three months ended June 30, 2010 and
      2009 of $1,060 and $1,054 was capitalized in construction in progress,
      since the amount was used for construction. Also see Note
    9.





(III)
            Due
      from employees





June 30,
                    2010
                  
                  
                  March 31,
                    2010(Unaudited)Current
                  
                  $
                  -
                  
                  
                  $
                  225,519Total
      amount due from employees
                  
                  $
                  -
                  
                  
                  $
                  225,519





Amounts
due from employees was interest-free, unsecured and had no fixed repayment
terms. The amounts primarily represented payments made by the Company on behalf
of employees for their purchase of apartments.





7.
            PLANT
      AND EQUIPMENT





Plant and
equipment consist of the following:




June 30,
                    2010
                  
                  
                  March 31,
                    2010(Unaudited)At
      cost:Buildings
                  
                  $
                  2,460,035
                  
                  
                  $
                  2,447,278Machinery
                  
                  
                  25,330,456
                  
                  
                  
                  25,196,080Motor
      vehicles
                  
                  
                  324,285
                  
                  
                  
                  344,841Office
      equipment
                  
                  
                  282,552
                  
                  
                  
                  272,83928,397,328
                  
                  
                  
                  28,261,038Less: 
      Accumulated depreciationBuildings
                  
                  
                  540,886
                  
                  
                  
                  513,328Machinery
                  
                  
                  11,726,924
                  
                  
                  
                  11,076,634Motor
      vehicles
                  
                  
                  238,506
                  
                  
                  
                  247,040Office
      equipment
                  
                  
                  190,387
                  
                  
                  
                  177,47412,696,703
                  
                  
                  
                  12,014,476Plant
      and equipment, net
                  
                  $
                  15,700,625
                  
                  
                  $
                  16,246,562





Depreciation
expense for the three months ended June 30, 2010 and 2009 is $640,282 and
$642,575, respectively.





The net
book value of machinery of $7,370,549 and $7,332,326 is pledged as collateral
for a long-term bank loan at June 30, 2010 and March 31, 2010, respectively. See
Note 12.





8.
            LAND
      USE RIGHTS





June 30,
                    2010
                  
                  
                  March 31,
                    2010(Unaudited)Cost
                  
                  $
                  1,808,447
                  
                  
                  $
                  1,799,069Less:
      Accumulated amortization
                  
                  
                  205,456
                  
                  
                  
                  195,395Land
      use rights, net
                  
                  $
                  1,602,991
                  
                  
                  $
                  1,603,674


F-14


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





8.
            LAND
      USE RIGHTS (CONTINUED)





Amortization
expense for the three months ended June 30, 2010 and 2009 is $9,019 and $8,985,
respectively.





The net
book value of $1,602,991 and $1,603,674 of land use rights are pledged as
collateral for short-term bank loans at June 30, 2010 and March 31, 2010,
respectively. See Note 10.





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





Nine
      months ended March 31, 2011
                  
                  $
                  27,1272012
                  
                  
                  36,1692013
                  
                  
                  36,1692014
                  
                  
                  36,1692015
                  
                  
                  36,169Thereafter
                  
                  
                  1,431,188Total
                  
                  $
                  1,602,991





9.
            CONSTRUCTION
      IN PROGRESS





Construction
in progress consists of the following:




June 30,
                      2010
                    
                    
                    March 31,
                      2010(Unaudited)Plant
                    
                    $
                    27,758,985
                    
                    
                    $
                    27,176,737Machinery
                    
                    
                    2,111,450
                    
                    
                    
                    2,183,122Other
                    
                    
                    207,364
                    
                    
                    
                    180,997$
                    30,077,799
                    
                    
                    $
                    29,540,856




Capitalized
interest for the three months ended June 30, 2010 and 2009 is $257,918 and
$99,153, respectively.





Plant
construction in progress of $3,156,135 and $3,139,768 is pledged as collateral
for short-term bank loans at June 30, 2010 and March 31, 2010, respectively. See
Note 10.





10.
            SHORT-TERM
      DEBT





Short-term
debt consists of the following:




June 30,
                    2010
                  
                  
                  March 31,
                    2010(Unaudited)Bank
      Loans:Xinyang
      Commercial Bank, due April 28, 2010, interest rate at 10.08% per annum,
      collateralized by finished goods inventory. (Repaid on its due
      date)
                  
                  $
                  -
                  
                  
                  $
                  1,464,922Guangdong
      Development Bank, due May 12, 2010, interest rate at 5.31% per annum,
      collateralized by land use rights and guaranteed by Xinyang Hong Chang
      Pipeline Gas Co., Ltd. (Repaid on its due date)
                  
                  
                  -
                  
                  
                  
                  4,394,767Rural
      Credit Cooperatives, due August 16, 2010, interest rate at 9.56% per
      annum, collateralized by construction in progress. (Repaid on its due
      date)
                  
                  
                  559,572
                  
                  
                  
                  556,671Xinyang
      Commercial Bank, due August 4, 2010, interest rate at 10.08% per annum,
      collateralized by finished goods inventory. (Repaid on its due
      date)
                  
                  
                  1,472,559
                  
                  
                  
                  1,464,922


F-15


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





June 30,
                          2010
                        
                        
                        March 31,
                          2010(Unaudited)Rural
      Credit Cooperatives, due October 23, 2010, interest rate at 10.62% per
      annum, collateralized by construction in progress.
                        
                        
                        574,298
                        
                        
                        
                        571,320Xinyang
      Commercial Bank, due January 4, 2011, interest rate at 10.08% per annum,
      guaranteed by Xinyang Hong Chang Pipeline Gas Co., Ltd.
                        
                        
                        2,356,094
                        
                        
                        
                        2,343,875Xinyang
      Commercial Bank, due November 30, 2010, interest rate at 10.08% per annum,
      guaranteed by Xinyang Hong Chang Pipeline Gas Co., Ltd.
                        
                        
                        1,472,559
                        
                        
                        
                        -Guangdong
      Development Bank, due April 15, 2011, interest rate at 5.31% per annum,
      collateralized by land use rights and guaranteed by Xinyang Hong Chang
      Pipeline Gas Co., Ltd.
                        
                        
                        4,417,678
                        
                        
                        
                        -Notes Payable to Unrelated
      Companies:Due
      May 2, 2010 (Repaid on its due date)
                        
                        
                        -
                        
                        
                        
                        2,197,384Due
      May 26, 2010 (Repaid on its due date)
                        
                        
                        -
                        
                        
                        
                        2,197,384Due
      August 2, 2010 (Repaid on its due date)
                        
                        
                        1,619,815
                        
                        
                        
                        1,611,415Due
      August 3, 2010 (Repaid on its due date)
                        
                        
                        736,279
                        
                        
                        
                        732,461Due
      September 16, 2010
                        
                        
                        589,024
                        
                        
                        
                        585,969Due
      October 6, 2010
                        
                        
                        2,208,838
                        
                        
                        
                        -Due
      October 8, 2010
                        
                        
                        4,049,537
                        
                        
                        
                        -Due
      October 12, 2010
                        
                        
                        3,681,397
                        
                        
                        
                        -Due
      October 14, 2010
                        
                        
                        4,417,677
                        
                        
                        
                        -Due
      October 29, 2010
                        
                        
                        2,208,838
                        
                        
                        
                        -Due
      November 5, 2010
                        
                        
                        2,208,838
                        
                        
                        
                        -Due
      November 10, 2010
                        
                        
                        5,153,956
                        
                        
                        
                        -Due
      December 1, 2010
                        
                        
                        2,208,838
                        
                        
                        
                        -Notes Payable to Unrelated
      Individuals:Due
      December 3, 2010, interest rate at 15% per annum,
unsecured
                        
                        
                        135,475
                        
                        
                        
                        339,862Due
      October 13, 2010, interest rate at 7.2% per annum,
    unsecured
                        
                        
                        441,768
                        
                        
                        
                        439,477Due
      July 15, 2010, interest rate at 6% per annum, unsecured
                        
                        
                        736,279
                        
                        
                        
                        -$
                        41,249,319
                        
                        
                        $
                        18,900,429





Interest
      expense for the three months ended June 30, 2010 and 2009 was $852,860 and
      $430,365, respectively.




Notes
      payable to unrelated companies are interest-free. 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 $13,035 and
      $4,390 for the three months ended June 30, 2010 and 2009,
      respectively.




Restricted
      cash of $23,192,802 and $3,662,306 is collateralized for the notes payable
      at June 30, 2010 and March 31, 2010,
  respectively.




Finished
goods inventory and construction in progress are pledged as collateral for
short-term bank loans at June 30, 2010 and March 31, 2010. See Notes 5 and
9.


F-16


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





11.
            CURRENT
      PORTION OF LONG-TERM NOTES PAYABLE





June 30,
                    2010
                  
                  
                  March 31,
                    2010(Unaudited)Due
      December 31, 2010, interest free, unsecured
                  
                  $
                  534,539
                  
                  
                  $
                  531,767





In
September 2003, the Company purchased plant and machinery, a building and a land
use right from Luoshan Fertilizer Plant, a bankrupt company, for $4,633,601
through long-term notes payable. The remaining balance at June 30, 2010 is
$534,539.





12.
            LONG-TERM
      BANK LOAN





June 30,
                    2010
                  
                  
                  March 31,
                    2010(Unaudited)Luoshan
      Rural Credit Cooperatives
                  
                  $
                  2,945,118
                  
                  
                  $
                  2,929,845





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
7.





13.
            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, 2010 and 2009 is summarized as
follows:




Three Months Ended June 30,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Current:CIT
                  
                  $
                  -
                  
                  
                  $
                  -Deferred:CIT
                  
                  
                  -
                  
                  
                  
                  (55,008
                  )Income
      tax expense
                  
                  $
                  -
                  
                  
                  $
                  (55,008
                  )





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 30,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Computed
      “expected” benefit
                  
                  $
                  649,401
                  
                  
                  $
                  774,212Permanent
      differences
                  
                  
                  (46,560
                  )
                  
                  
                  -Valuation
      allowance
                  
                  
                  (602,841
                  )
                  
                  
                  (829,220
                  )Income
      tax expense
                  
                  $
                  -
                  
                  
                  $
                  (55,008
                  )




The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities as of June 30, 2010 and March 31, 2010 are as
follows:


F-17





NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





13.
            INCOME
      TAXES (CONTINUED)





June 30,
                    2010
                  
                  
                  March 31,
                    2010(Unaudited)Deferred
      tax assets:Current
      portion:Cost
      of sales
                  
                  $
                  226,418
                  
                  
                  $
                  362,250Financial
      expense
                  
                  
                  12,238
                  
                  
                  
                  12,175Welfare
                  
                  
                  10,354
                  
                  
                  
                  10,300Provision
      for notes receivable
                  
                  
                  184,070
                  
                  
                  
                  183,115Other
      expense
                  
                  
                  59,316
                  
                  
                  
                  54,612Total
      current deferred tax assets
                  
                  
                  492,396
                  
                  
                  
                  622,452Non-current
      portion:Net
      operating loss carry forward
                  
                  
                  5,015,933
                  
                  
                  
                  4,202,344Valuation
      allowance
                  
                  
                  (4,254,148
                  )
                  
                  
                  (3,651,307
                  )Total
      non-current deferred tax assets
                  
                  
                  761,785
                  
                  
                  
                  551,037Total
      deferred tax assets
                  
                  
                  1,254,181
                  
                  
                  
                  1,173,489Deferred
      tax liabilities:Current
      portion:Cost
      of sales
                  
                  
                  383,123
                  
                  
                  
                  374,721Government
      grant
                  
                  
                  25,402
                  
                  
                  
                  30,031Investment
      income
                  
                  
                  17,348
                  
                  
                  
                  17,258Other
      expenses
                  
                  
                  33,554
                  
                  
                  
                  28,843Total
      current deferred tax liabilities
                  
                  
                  459,427
                  
                  
                  
                  450,853Non-current
      portion:Amortization
                  
                  
                  33,636
                  
                  
                  
                  32,094Depreciation
                  
                  
                  761,118
                  
                  
                  
                  690,542Total
      non-current deferred tax liabilities
                  
                  
                  794,754
                  
                  
                  
                  722,636Total
      deferred tax liabilities
                  
                  
                  1,254,181
                  
                  
                  
                  1,173,489Net
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -





In June
2006, the FASB issued ASC 740-10 (formerly 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. ASC 740-10 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, 2010, 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 ASC 740-10.




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, 2010 the Company was not aware of any pending income tax
      examinations by tax authorities in the
PRC.


F-18





NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)




13.
            INCOME
      TAXES (CONTINUED)




The
Company’s policy is to record interest and penalties on uncertain tax positions
as income tax expense. As of June 30, 2010, the Company has no accrued interest
or penalties related to uncertain tax positions.




14.
            SHAREHOLDERS’
      EQUITY





In May
2010, the Company sold 1,460,000 shares of common stock and warrants to purchase
730,000 shares of common stock to certain individuals at $1.25 per unit, for net
proceeds of $1,607,807. The Company incurred total expenses of $217,177, which
were directly related to the sale of the common stock, and the amount was
deducted from the total proceeds and recorded to additional paid-in capital for
the three months ended June 30, 2010.





The fair
value of the warrants acquired by the investors was $552,800, which was
determined using the Black-Scholes valuation method, using the following
assumptions: no expected dividend yield; a risk-free interest rate of 1.56% and
1.21%, respectively; an expected life of 3 years; and an estimated volatility of
88.23% and 106.83%, respectively, based on recent history of its stock
price.





The fair
value of the warrants acquired by Internet Securities Inc., the placement agent
in connection with the sale of common stock, was $159,776, which was determined
using the Black-Scholes valuation method, using the following assumptions: no
expected dividend yield; a risk-free interest rate of 2.47%; an expected life of
5 years; and an estimated volatility of 88.23% based on recent history of its
stock price.





At the
grant date, the fair value of warrants in connection with the sale of common
stock is $712,576 and was recorded as derivative liabilities. Also see Notes 15
and 16.





15.
            WARRANTS





Common
      Stock Warrants (also see Note 16)





On May 3,
2010 and May 25, 2010, the Company issued two series of warrants to certain
investors to purchase 680,000 and 50,000 shares of common stock at $2 per share
with a term of three years (730,000 warrants in the aggregate). The fair value
of the warrants were recorded as derivative liabilities. The fair value of the
warrants was $515,961 and $36,839, respectively, at the grant date, which was
determined using the Black-Scholes valuation method, using the following
assumptions: no expected dividend yield; a risk-free interest rate of 1.56% and
1.21%, respectively; an expected life of 3 years; and an estimated volatility of
88.23% and 106.83%, respectively, based on recent history of its stock
price.





On May 3,
2010, the Company issued warrants to Internet Securities Inc., the placement
agent in connection with the sale of common stock, for the purchase of 146,000
shares of common stock at $1.25 per share with a term of five years. We recorded
the fair value of the warrants as derivative liabilities. The fair value of the
warrant was $159,776 at the grant date, which was determined using the
Black-Scholes valuation method, using the following assumptions: no expected
dividend yield; a risk-free interest rate of 2.47%; an expected life of 5 years;
and an estimated volatility of 88.23% based on recent history of its stock
price.





At June
30, 2010, warrants outstanding were as follows:





Numbers
                    of Shares
                    Underlying
                    Warrants
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceWarrants
      outstanding at March 31, 2010
                  
                  
                  -
                  
                  
                  $
                  -Warrants
      granted
                  
                  
                  876,000
                  
                  
                  
                  1.88Warrants
      expired
                  
                  
                  -
                  
                  
                  
                  -Warrants
      outstanding at June 30, 2010
                  
                  
                  876,000
                  
                  
                  
                  1.88


F-19


NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





15.
            WARRANTS
      (CONTINUED)





The
following table summarizes information about warrants outstanding at June 30,
2010:




Warrants outstanding and exercisableNumbers of Shares under Warrants
                  
                  Exercise Price
                  
                  Expiration Date
                  
                  Weighted
                    Average
                    Exercise Price680,000
                  
                  $
                  2.00
                  
                  May
      2, 2013
                  
                  $
                  2.0050,000
                  
                  $
                  2.00
                  
                  May
      24, 2013
                  
                  $
                  2.00146,000
                  
                  $
                  1.25
                  
                  May
      2, 2015
                  
                  $
                  1.25876,000
                  
                  $
                  1.25-2.00
                  
                  
                  
                  $
                  1.88





The
aggregate intrinsic value of the 876,000 warrants outstanding and exercisable as
of June 30, 2010 was zero.





16.
            DERIVATIVE
      LIABILITIES





In June
2008, the FASB issued authoritative guidance on determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock. Under the
authoritative guidance, effective January 1, 2009, instruments which do not have
fixed settlement provisions are deemed to be derivative instruments.  The
strike price of warrants issued by the Company is denominated in US dollars, a
currency other than the Company’s functional currency, RMB. As a result, the
warrants are not considered indexed to the Company’s own stock. The fair value
of certain of the Company’s warrants has been characterized as derivative
liabilities.  The FASB’s guidance requires the fair value of these
liabilities be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.





At June
30, 2010, the Company had 876,000 warrants outstanding with a strike price
denominated in US dollars, a currency other than the Company’s functional
currency, RMB.





The
derivative liabilities were valued using the Black-Scholes valuation model with
the following assumptions:





June 30, 2010
                  
                  
                  At the date of issuanceRisk-free
      interest rate
                  
                  
                  1.00
                  %
                  
                  1.21%
      to 2.47
                  %Expected
      volatility
                  
                  
                  104.88
                  %
                  
                  88.23%
      to 106.83
                  %Expected
      life (in years)
                  
                  2.8
      to 4.8 years
                  
                  
                  3
      to 5 yearsExpected
      dividend yield
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %Fair
      Value
                  
                  $
                  479,645
                  
                  
                  $
                  712,576





The
risk-free interest rate is based on the yield available on U.S. Treasury
securities. The Company estimates volatility based on the historical volatility
of its common stock. The expected life of the warrants is based on the
expiration date of the warrants. The expected dividend yield was based on the
fact that the Company has not paid dividends to common shareholders in the past
and does not expect to pay dividends to common shareholders in the
future.





The
Company measured the fair value of the warrants as of June 30, 2010 as $479,645.
For the three months ended June 30, 2010, the Company recorded a gain on the
change in the fair value of derivatives of $232,931.





17.
            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 RMB 5 million (approximately $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 RMB 5 million (approximately $650,000) to the Company on its due
date.


F-20





NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED
JUNE 30, 2010 AND 2009


(UNAUDITED)





17.
            CONTINGENCIES
      (CONTINUED)





In
November 2007, the Company initiated a lawsuit in the Intermediate Court of
Xinyang City (the “Intermediate Court”) 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
RMB 5 million (approximately $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 RMB 5 million
(approximately $650,000) by both the Xi county government and Shiji Jinyuan. On
June 12, 2009, the court entered judgment against Xi county government and Shiji
Jinyuan in amount of RMB 5 million (approximately $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. On
December 16, 2009, Xi county government and Shiji Jinyuan appealed to the Higher
Court of Henan Province (“Higher Court”). On April 13, 2010, the Higher Court
entered final judgment to reject the appeal and sustain the original judgment.
On June 17, 2010, the intermediate Court issued an enforcement notice to Xi
County Government and Shiji Jinyuan. The Xi County Government and Shiji Jinyuan
did not pay the amount to the Company before June 21, 2010. On June 30, 2010,
the Company has a reserve against the RMB 5 million ($736,279) note of $736,279
due to the uncertainty of collection.





18.
            CAPITAL
      COMMITMENT





As of
June 30, 2010, the Company entered into an agreement and made a down payment of
$25.1 million 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 $7.82 million prior to delivery of the equipment, which
is estimated to occur in 2010. The amount paid is recorded in construction in
progress. Through June 30, 2010, the Company 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 estimated completion date of the project until September
2010.





19.
            SUBSEQUENT
      EVENT





On August
10, 2010, the Company obtained a short-term bank loan for RMB 10 million
(approximately $1.47 million) with an interest rate of 10.08% per annum from
Xinyang Commercial Bank, which is due on August 10, 2011.





F-21





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, 2010. 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:




Ÿ
            The
      loss of primary customers;




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




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




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




Ÿ
            The
      timing of planned capital
expenditures;




Ÿ
            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;




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




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




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




Ÿ
            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.


2




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.





Income
taxes





The Company utilizes ASC 740 (formerly
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.


3





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





The
following recently issued but not yet enacted accounting standards have not yet
been codified by the FASB, as described in Note 2, “Basis of
Presentation.”





Effective
January 1, 2009, the Company adopted ASC 815-10 (formerly SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities), which amends
SFAS No. 133 and expands disclosures to include information about the fair value
of derivatives, related credit risks and a company's strategies and objectives
for using derivatives. The adoption of ASC 815-10 did not have a material effect
on the Company’s condensed consolidated financial statements as of June 30,
2010.





Effective
January 1, 2009, the Company adopted ASC 815-40 (formerly Emerging Issues Task
Force (“EITF”) Issue No. 07-05, Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). ASC 815-40
addresses the determination of whether an instrument (or an embedded feature) is
indexed to an entity's own stock, which is the first part of the scope exception
in paragraph 11(a) of FASB SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (“SFAS 133”). If an instrument (or an embedded feature)
that has the characteristics of a derivative instrument under paragraphs 6–9 of
SFAS 133 is indexed to an entity's own stock, it is still necessary to evaluate
whether it is classified in stockholders' equity (or would be classified in
stockholders' equity if it were a freestanding instrument). Other applicable
authoritative accounting literature, including Issues EITF 00-19, Accounting for
Derivative Financial  Instruments Indexed to, and Potentially Settled in, a
Company Own Stock, and EITF 05-2,  The Meaning of “Conventional Debt
Instrument” in Issue No. 00-19, provides guidance for determining whether an
instrument (or an embedded feature) is classified in stockholders' equity
(or would be classified in stockholders' equity if it were a freestanding
instrument). ASC 815-40 does not address that second part of the scope exception
in paragraph 11(a) of SFAS 133. The Company adopted ASC 815-40 and determined
that the outstanding warrants were derivative liabilities rather than
equity.





On April
9, 2009, the FASB also approved ASC 825-10 (formerly 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 ASC 825-10 for our interim and
annual reporting periods ending after June 15, 2009. ASC 825-10 does not require
disclosures for periods presented for comparative purposes at initial adoption.
ASC 825-10 requires comparative disclosures only for periods ending after
initial adoption. The adoption of ASC 825-10 did not have a material effect
on the Company’s condensed consolidated financial statements as of June 30,
2010.





In April
2009, the FASB updated guidance related to fair-value measurements to clarify
the guidance related to measuring fair-value in inactive markets, to modify the
recognition and measurement of other-than-temporary impairments of debt
securities, and to require public companies to disclose the fair values of
financial instruments in interim periods. This updated guidance
became effective for the Company beginning June 1, 2009. The adoption of
this guidance did not have a material effect on the Company’s condensed
consolidated financial statements as of June 30, 2010.


4





In June
2009, the FASB issued ASC 810-10 (formerly SFAS No. 167) Amendments to FASB
Interpretation No. 46(R), which 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. ASC 810-10 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
adoption of ASC 810-10 did not have a material effect on the Company’s condensed
consolidated financial statements as of June 30, 2010.





In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and
liabilities measured under Level 3 of the fair value measurement hierarchy. This
guidance is effective for the Company beginning March 1, 2010. The adoption of
this guidance did not have a material effect on the Company’s condensed
consolidated financial statements as of June 30, 2010.





Overview





The Company was incorporated in the
State of Delaware on November 15, 2004, and its operating subsidiary, Henan
Jinding Chemical Industry Co. Ltd. (“Henan 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”).





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 total common stock in exchange of 100% of KHL common
stock (the “Share Exchange”). Henan Jinding is a wholly owned subsidiary of KHL.
Jinding is the principal operating subsidiary of KHL.





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





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





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.


5


RESULTS
OF OPERATIONS





Three
Months Ended June 30, 2010 as Compared to


Three
Months Ended June 30, 2009




Three
      Months Ended
                June
      30, 2010
              
              
              Three
      Months Ended
                June
      30, 2009
              
              
              ComparisonsIncreasePercentage
      of
              
              
              
              
              
              Percentage
      of
              
              
              Change in
              
              
              (Decrease)
      inAmount
              
              
              Revenues
              
              
              Amount
              
              
              Revenues
              
              
              Amount
              
              
              PercentageItem
              
              US $
              
              
              (%)
              
              
              US $
              
              
              (%)
              
              
              US $
              
              
              (%)Revenues
              
              
              13,730,314
              
              
              
              100.00
              %
              
              
              8,384,866
              
              
              
              100.00
              %
              
              
              5,345,448
              
              
              
              63.75
              %Cost
      of Goods Sold
              
              
              (14,667,701
              )
              
              
              (106.83
              )%
              
              
              (9,973,189
              )
              
              
              (118.94
              )%
              
              
              (4,694,512
              )
              
              
              47.07
              %Gross
      loss
              
              
              (937,387
              )
              
              
              (6.83
              )%
              
              
              (1,588,323
              )
              
              
              (18.94
              )%
              
              
              650,936
              
              
              
              (40.98
              )%General
      & administrative
              
              
              767,811
              
              
              
              5.59
              %
              
              
              727,934
              
              
              
              8.68
              %
              
              
              39,877
              
              
              
              5.48
              %Selling
      and distribution
              
              
              241,029
              
              
              
              1.76
              %
              
              
              287,540
              
              
              
              3.43
              %
              
              
              (46,511
              )
              
              
              (16.18
              )%Research
      and development
              
              
              18,251
              
              
              
              0.13
              %
              
              
              27,626
              
              
              
              0.33
              %
              
              
              (9,375
              )
              
              
              (33.94
              )%Loss
      from operations
              
              
              (1,964,478
              )
              
              
              (14.31
              )%
              
              
              (2,631,423
              )
              
              
              (31.38
              )%
              
              
              666,945
              
              
              
              (25.35
              )%Interest
      expense, net
              
              
              (875,441
              )
              
              
              (6.38
              )%
              
              
              (461,917
              )
              
              
              (5.51
              )%
              
              
              (413,524
              )
              
              
              89.52
              %Other
      income (expenses), net
              
              
              9,384
              
              
              
              0.07
              %
              
              
              (3,507
              )
              
              
              (0.04
              )%
              
              
              12,891
              
              
              
              (367.58
              )%Change
      in fair value of derivatives liabilities
              
              
              232,931
              
              
              
              1.70
              %
              
              
              -
              
              
              
              -
              
              
              
              232,931
              
              
              
              100.00
              %Loss
      before income taxes
              
              
              (2,597,604
              )
              
              
              (18.92
              )%
              
              
              (3,096,847
              )
              
              
              (36.93
              )%
              
              
              499,243
              
              
              
              (16.12
              )%Income
      tax expense
              
              
              -
              
              
              
              -
              
              
              
              (55,008
              )
              
              
              (0.66
              )%
              
              
              55,008
              
              
              
              (100.00
              )%Net
      loss
              
              
              (2,597,604
              )
              
              
              (18.92
              )%
              
              
              (3,151,855
              )
              
              
              (37.59
              )%
              
              
              554,251
              
              
              
              (17.58
              )%Foreign
      currency translation gain (loss)
              
              
              6,108
              
              
              
              0.04
              %
              
              
              (9,672
              )
              
              
              (0.12
              )%
              
              
              15,780
              
              
              
              (163.15
              )%Weighted
      average shares outstanding basic and diluted
              
              
              13,538,000
              
              
              
              
              
              
              
              12,640,000
              
              
              
              
              
              
              
              898,000
              
              
              
              7.10
              %Net
      loss per share, basic and diluted
              
              
              (0.19
              )
              
              
              
              
              
              
              (0.25
              )
              
              
              
              
              
              
              0.06
              
              
              
              (24
              )%
 Revenues,
Cost of Goods Sold and Gross Profit (Loss)





Revenues for the three months ended
June 30, 2010 were $13,730,314, which represented an increase of 63.75% from the
same period in the prior year. The increase was mainly due to the following
factors:  (i) the increase in sales volume of Urea and Ammonium Bicarbonate
as compared to the same period last year and (ii) the increase in the selling
price of Methanol as compared to the same period last year.





Cost of Goods Sold (“COGS”) for the
three months ended June 30, 2010 was $14,667,701, which was 106.83% of total
revenues and represents a 47.07% increase, as compared to $9,973,189, and
118.94% of total revenues for the three months ended June 30, 2009. This was
mainly due to the increase in sales volume of products as compared to the same
period last year.


6





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 loss 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 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 loss increased by $650,936,
or 40.98%, to $(937,387)for the three months ended
June 30, 2010 as compared to $(1,588,323) for the three months ended June 30,
2009. This increase was mainly due to the decrease in the production cost
as compared to the same period last year.





DME
                                        
                                        Methanol
                                        
                                        
                                        Urea
                                        
                                        
                                        Ammonium
                                          Bicarbonate
                                        
                                        
                                        Liquefied
                                          Ammonia
                                        
                                        
                                        Ammonia
                                          Water2011Q1
                                        
                                        Revenues
                                        
                                        
                                        -
                                        
                                        $
                                        2,051,729
                                        
                                        
                                        $
                                        10,719,109
                                        
                                        
                                        $
                                        756,170
                                        
                                        
                                        $
                                        100,340
                                        
                                        
                                        $
                                        102,966COGS
                                        
                                        
                                        -
                                        
                                        
                                        2,510,587
                                        
                                        
                                        
                                        11,133,333
                                        
                                        
                                        
                                        806,459
                                        
                                        
                                        
                                        115,598
                                        
                                        
                                        
                                        101,724Gross
      (Loss) Profit
                                        
                                        
                                        -
                                        
                                        
                                        (458,858
                                        )
                                        
                                        
                                        (414,224
                                        )
                                        
                                        
                                        (50,289
                                        )
                                        
                                        
                                        (15,258
                                        )
                                        
                                        
                                        1,242Gross
      Margin
                                        
                                        
                                        -
                                        
                                        
                                        (22.36
                                        )%
                                        
                                        
                                        (3.86
                                        )%
                                        
                                        
                                        (6.65
                                        )%
                                        
                                        
                                        (15.21
                                        )%
                                        
                                        
                                        1.21
                                        %2010Q1
                                        
                                        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
      Profit (Loss)
                                        
                                        
                                        -
                                        
                                        
                                        (1,069,940
                                        )
                                        
                                        
                                        (411,715
                                        )
                                        
                                        
                                        (36,325
                                        )
                                        
                                        
                                        (61,445
                                        )
                                        
                                        
                                        (8,898
                                        )Gross
      Margin
                                        
                                        
                                        -
                                        
                                        
                                        (64.25
                                        )%
                                        
                                        
                                        (7.19
                                        )%
                                        
                                        
                                        (5.41
                                        )%
                                        
                                        
                                        (28.15
                                        )%
                                        
                                        
                                        (8.38
                                        )%Changes
                                        
                                        Revenues
                                        
                                        
                                        -
                                        
                                        
                                        386,566
                                        
                                        
                                        
                                        4,994,944
                                        
                                        
                                        
                                        85,028
                                        
                                        
                                        
                                        (117,903
                                        )
                                        
                                        
                                        (3,187
                                        )Percentage
                                        
                                        
                                        -
                                        
                                        
                                        23.21
                                        %
                                        
                                        
                                        87.26
                                        %
                                        
                                        
                                        12.67
                                        %
                                        
                                        
                                        (54.02
                                        )%
                                        
                                        
                                        (3.00
                                        )%





Sales of Urea increased $4,994,944, or 87.26%, to $10,719,109 for the three months
ended June 30, 2010, as compared to $5,724,165 for the three months
ended June 30, 2009. This increase was mainly due to the increase in sales
volume as compared to the same period of last year.





The gross margin of Urea increased to
(3.86)% for the three
months ended June 30, 2010, as compared to (7.19)% for the three months
ended June 30, 2009. This was mainly due to the decrease in the production cost
as compared to the same period last year.





Sales of ammonium bicarbonate for the
three months ended June 30, 2010 were $756,170, which represented an
increase of 12.67% from
the same period in the prior year. This was mainly due to the increase in sales
volume as compared to the same period of last year.





The gross margin of ammonium
bicarbonate decreased to (6.65)% for the three
months ended June 30, 2010 as compared to (5.41)% for the same period of
the prior year. This was mainly due to the decrease in sales
volume.





Sales of methanol for the three months
ended June 30, 2010 increased 23.21% to $2,051,729, from $1,665,163 for the three months
ended June 30, 2009. This increase was mainly due to the increase in sales
volume and the selling price of Methanol as compared to the same period of last
year. Methanol incurred a negative gross margin of 22.36% for the three months
ended June 30, 2010, which was mainly due to the decrease in the production cost
as compared to the same period last year.





Sales of liquefied
ammonia decreased $117,903, or 54.02%, to $100,340 for the three months
ended June 30, 2010, as compared to $218,243 for the three months
ended June 30, 2009. This was mainly due to the decrease in sales volume as
compared to the same period last year.


7


The gross margin of liquefied ammonia
increased to (15.21)% for the three months ended June 30, 2010, as compared to
(28.15)% for the three months ended June 30, 2009. This was mainly due to the
increase in the selling price and the decrease in the production cost of
liquefied ammonia as compared to the same period of last year.





Sales of DME decreased to $0 for the
three months ended June 30, 2010. This was due to the decrease in the selling
price which would have resulted in a negative gross profit of DME
sales.  Management ceased the production of DME temporarily. Based on
the management's estimation, when the market price of DME increases to over RMB
3,150 per ton in China, the Company's DME will have positive gross profit. The
Company plans to resume the production of DME in the near future, and recover to
the normal level within one year.





The gross margin of ammonia water
increased 9.59% for the three months ended
June 30, 2010 as compared to (8.38)% for the same period
prior year. This was mainly due to the fact that the decrease in the production
cost of ammonia water as compared to the same period of last year.





Three Months Ended
                            June 30, 2010
                          
                          
                          Three Months Ended
                            June 30, 2009
                          
                          
                          ComparisonsProvinces
                          
                          Amount
                            US $
                          
                          
                          Percentage
                            of Revenues
                            (%)
                          
                          
                          Amount
                            US $
                          
                          
                          Percentage
                            of Revenues
                            (%)
                          
                          
                          Change in
      Amount
                            US $
                          
                          
                          Increase
      (Decrease) in Percentage
                            (%)Henan
      Province
                          
                          
                          4,118,627
                          
                          
                          
                          30.00
                          %
                          
                          
                          2,868,226
                          
                          
                          
                          34.21
                          %
                          
                          
                          1,250,401
                          
                          
                          
                          43.59
                          %Guangdong
      Province
                          
                          
                          6,415,753
                          
                          
                          
                          46.73
                          %
                          
                          
                          3,125,464
                          
                          
                          
                          37.26
                          %
                          
                          
                          3,290,289
                          
                          
                          
                          105.27
                          %Hubei
      Province
                          
                          
                          1,189,708
                          
                          
                          
                          8.66
                          %
                          
                          
                          176,689
                          
                          
                          
                          2.11
                          %
                          
                          
                          1,013,019
                          
                          
                          
                          573.33
                          %Anhui
      Province
                          
                          
                          1,986,549
                          
                          
                          
                          14.47
                          %
                          
                          
                          2,113,675
                          
                          
                          
                          25.21
                          %
                          
                          
                          (127,126
                          )
                          
                          
                          (6.01
                          )%Hunan
      Province
                          
                          
                          2,661
                          
                          
                          
                          0.02
                          %
                          
                          
                          63,344
                          
                          
                          
                          0.76
                          %
                          
                          
                          (60,683
                          )
                          
                          
                          (95.80
                          )%Hebei
      Province
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          6,670
                          
                          
                          
                          0.08
                          %
                          
                          
                          (6,670
                          )
                          
                          
                          (100.00
                          )%Jiangxi
      Province
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          30,798
                          
                          
                          
                          0.37
                          %
                          
                          
                          (30,798
                          )
                          
                          
                          (100.00
                          )%Guangxi
      Province
                          
                          
                          17,016
                          
                          
                          
                          0.12
                          %
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          17,016
                          
                          
                          
                          100.00
                          %Total
                          
                          
                          13,730,314
                          
                          
                          
                          100.00
                          %
                          
                          
                          8,384,866
                          
                          
                          
                          100.00
                          %
                          
                          
                          5,345,448
                          
                          
                          
                          63.75
                          %





The sales
for the three months ended June 30, 2010 in Henan Province, Guangdong Province
and Hubei Province increased by 43.59%, 105.27%and 573.33%respectively as compared
to the same period last year. This increase was mainly attributable to the
Company’s reinforcement of its marketing strategy and expansion of the market
share.





The sales
for the three months ended June 30, 2010 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 Methanol decreased in these provinces.





Operating
Expenses





The Company incurred general and
administrative expenses of $767,811 for the three months ended June 30, 2010,
representing an increase of $39,877, or 5.48%, as compared to $727,934 for the
three months ended June 30, 2009.





The Company incurred selling and
distribution expenses of $241,029 for the three months ended June 30, 2010, a
decrease of $46,511, or 16.18%, as compared to $287,540 for the three months
ended June 30, 2009.





The Company incurred R&D expenses
of $18,251 for the three months ended June 30, 2010, representing a decrease of
$9,375, or 33.94%, compared to $27,626 for the three months ended June 30,
2009.


8





Income
Tax Expense





The Company incurred income tax expense
of $0 for the three months ended June 30, 2010, a decrease of $55,008, or 100%,
as compared to $55,008 for the three months ended June 30, 2009. This decrease
is mainly attributable to the decrease in the reserve against the net operating
loss carry forward deferred tax asset.





Net
Loss





The Company’s net loss of $2,597,604
for the three months ended June 30, 2010 represented a decrease of $554,251, or
17.58%, as compared to a net loss of $3,151,855 for the three months ended June
30, 2009. This decrease was mainly dueto the decrease in the
production cost as compared to the same period last year offset by the
increase in the change in fair value of derivatives liabilities of $232,931
in the reporting period.





LIQUIDITY
AND CAPITAL RESOURCES





Cash
Flows





Three Months Ended June 30,2010
                        
                        
                        2009Net
      cash provided by (used in)Operating
      activities
                        
                        $
                        (3,608,665
                        )
                        
                        $
                        (4,211,286
                        )Investing
      activities
                        
                        
                        132,278
                        
                        
                        
                        (757,309
                        )Financing
      activities
                        
                        
                        4,269,833
                        
                        
                        
                        4,810,809Net
      change in cash and cash equivalents
                        
                        
                        793,446
                        
                        
                        
                        (157,786
                        )Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        4,655
                        
                        
                        
                        (19,027
                        )Cash
      and cash equivalents at beginning of period
                        
                        
                        319,816
                        
                        
                        
                        410,870Cash
      and cash equivalents at end of period
                        
                        $
                        1,117,917
                        
                        
                        $
                        234,057





Cash flows used in operating activities
during the three months ended June 30, 2010 amounted to $3,608,665, which was
mainly due to the Company’s net loss of $2,597,604 in the reporting periodand the decrease
in  customer deposits by $6,473,070.





As of June 30, 2010, the cash provided
by investing activities was $132,278, which was mainly due to the decrease
in due from employees.





As of June 30, 2010, the cash provided
by financing activities was $4,269,833, which represented the net increase
short-term debt and the increase in proceeds from issuance of common stock in
the reporting period.





Liquidity





The Company has a working capital
deficit of $45,971,279 and a shareholders’ deficit of $470,784 as of June 30,
2010, and the Company incurred a net loss of $2,597,604 and negative cash flow
from operations of $3,608,665 for the three months ended June 30, 2010. 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
throughout the fiscal year ending March 31, 2011.


9





The major
shareholder has committed to provide financial assistance of RMB 30 to 50
million (approximately $4.4 to $7.3 million) over the next few years, if
necessary.





On August
10, 2010, the Company obtained a short-term bank loan for RMB 10 million
(approximately $1.47 million) with an interest rate of 10.08% per annum from
Xinyang Commercial Bank, which is due on August 10, 2011.





Capital
Resources





As of June 30, 2010, our total assets
were $77,718,099 and our total liabilities were $78,188,883. Our debt to asset
ratio, calculated as total liabilities (including short-term debt and payables)
over total assets, was 100.61%.





As of June 30, 2010, our total assets
were $77,718,099 and our operating revenue for the three months ended June 30,
2010 was $13,730,314, reflecting a total asset turnover of 0.18.





As of June 30, 2010, we had working
capital deficit of $45,971,279. This was mainly due
tothe increase in
the Company’s net loss.




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.





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 RMB 5 million (approximately $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 RMB 5 million (approximately $650,000) to the Company on its due
date.


10





In
November 2007, the Company initiated a lawsuit in the Intermediate Court of
Xinyang City (the “Intermediate Court”) 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
RMB 5 million (approximately $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 RMB 5 million
(approximately $650,000) by both the Xi county government and Shiji Jinyuan. On
June 12, 2009, the court entered judgment against Xi county government and Shiji
Jinyuan in amount of RMB 5 million (approximately $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. On
December 16, 2009, Xi county government and Shiji Jinyuan appealed to the Higher
Court of Henan Province.(“Higher Court”). On April 13, 2010, the Higher Court
entered final judgment to reject the appeal and sustain the original judgment.
On June 17, 2010, the intermediate Court issued enforcement notice to Xi county
government and Shiji Jinyuan. The Xi County Government and Shiji Jinyuan did not
pay the amount to the Company before June 21, 2010. At June 30, 2010, the
Company has a reserve against the RMB 5 million ($736,279) note of $736,279 due
to the uncertainty of collection.





Item
1A.        Risk Factors.





Not
required.





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





As
disclosed in the Company’s Annual Report Form 10-K filed with the SEC on June
29, 2010, during the fiscal quarter covered by this Current Quarterly Report
Form 10-Q, the following sale of unregistered securities occurred:





On May 3, 2010, the Company entered
into a Securities Purchase and Registration Rights Agreement (the “First
Purchase Agreement”) and a Warrant Agreement, with certain accredited investors
(collectively, the “First Investors”), pursuant to which the Company issued
1,360,000 units (the “Units”) to the Investors, consisting of (i) one (1) share
of our common stock, par value $0.001, and (ii) a Warrant to purchase one half
(1⁄2) of one (1) share of common stock with an exercise price of Two Dollars
($2.00) per share (the “First Offering”). The purchase price for each Unit is
$1.25 and the aggregate purchase price for the Units sold in the Offering was
$1,700,000.





On May 25, 2010, the Company entered
into a separate Securities Purchase and Registration Rights Agreement (the
“Additional Purchase Agreement,” and together with the First Purchase Agreement,
the “Purchase Agreements”) and a Warrant Agreement with Joseph Zilfi, an
accredited investor (the “Second Investor,” and together with the First
Investors, the “Investors”), pursuant to which the Company issued 100,000 Units
to the Second Investor, consisting of (i) one (1) share of our common stock, par
value $0.001, and (ii) a Warrant to purchase one half (1⁄2) of one (1) share of
common stock with an exercise price of Two Dollars ($2.00) per share (the
“Second Offering,” and together with the First Offering, the
“Offerings”).  The purchase price for each Unit is $1.25 and the
aggregate purchase price for the Units sold in the Second Offering was
$125,000.




The Warrants have a 21⁄2 year term and
will not be exercisable until 6 months following the issuance of the
Warrants.




Pursuant to the terms of the Purchase
Agreements, the Company shall, on or prior to sixty (60) calendar days following
the closing of each of the Offerings, use all reasonable efforts to prepare and
file with the SEC a registration statement covering the shares of the Common
Stock and the shares underlying the Warrants issued in connection with the
applicable Offering.


11




The Company engaged Internet
Securities, Inc. as placement agent (the “Placement Agent”) in connection with
the Offerings.  The Company will pay the Placement Agent an amount
equal 10% of the aggregate gross proceeds raised in the Offerings in cash and a
5 year warrant to purchase 10% of the Securities sold in the Offerings (the
“Placement Agent Warrant”). The Placement Agent Warrant shall have the same
terms as the Warrant, except that the exercise price of the Placement Agent
Warrant shall be $1.25.




The Company sold the Units in the
Offerings in reliance upon the exemption from securities registration afforded
by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D as promulgated by the SEC under the Securities Act
1933.  When appropriate, we determined that the purchaser of
securities described above was a sophisticated investor with the financial
ability to assume the risk of its investment in our securities and acquired such
securities for its own account and not with a view to any distribution thereof
to the public. Where required by applicable law, the certificates evidencing the
securities bear legends stating that the securities are not to be offered, sold
or transferred other than pursuant to an effective registration statement under
the Securities Act or an exemption from such registration
requirements.





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, 2010.


12


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)10.3
                        
                        Securities
      Purchase and Registration Rights Agreement, dated May 3, 2010, by and
      between the Company and the Investors listed on the Schedule of Buyers
      attached thereto. (6)10.4
                        
                        Securities
      Purchase and Registration Rights Agreement, dated May 25, 2010, by and
      between the Company and the Investors listed on the Schedule of Buyers
      attached thereto. (4)10.5
                        
                        Form
      of Warrant. (6)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.


(6)
            Incorporated by reference to the
      Company’s Current Report on Form 8-K dated May 4,
    2010.


13


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
23, 2010


14


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)10.3
                      
                      Securities
      Purchase and Registration Rights Agreement, dated May 3, 2010, by and
      between the Company and the Investors listed on the Schedule of Buyers
      attached thereto. (6)10.4
                      
                      Securities
      Purchase and Registration Rights Agreement, dated May 25, 2010, by and
      between the Company and the Investors listed on the Schedule of Buyers
      attached thereto. (4)Form
      of Warrant. (6)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)
            Incorporated
      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.


(6)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K dated May 4,
      2010.


15