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 September 30, 2009
 
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ______ to ______.
 
 Commission
file number: 001-33470
 
 NEW
ORIENTAL ENERGY & CHEMICAL CORP.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
                
                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
                  
                  464200(Address of principal executive
                    offices)
                  
                  (Zip Code)
 
 (86)
27 853 75701
 (Registrant’s
telephone number, including area code)
 
 Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
 
 Yes  þ                                No   ̈
 
 Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).
 
 Yes   ̈                                No  þ
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer   ̈
                  
                  Accelerated
      filer  ̈Non-accelerated
      filer     ̈
                  (Do
      not check if a smaller reporting company)
                  Smaller
      reporting company þ
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
 
 Yes   ̈                                No  þ
 
 Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.
 
 Class
                
                Outstanding
      at November 16, 2009Common
      Stock, $.001 par value per share
                
                12,640,000
      shares
  
  PART
I – FINANCIAL INFORMATION
 
 Item
      1.
              Financial
      Statements.
 
 New
Oriental Energy & Chemical Corp. And Subsidiaries
 Condensed
Consolidated Financial Statements
 For
the Three and Six Months Ended September 30, 2009 And 2008
 
 PageCondensed
      Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and March
      31, 2009
                      
                      F-2Condensed
      Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
      for the Three and Six Months Ended September 30, 2009 and 2008
      (Unaudited)
                      
                      F-3Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended September
      30, 2009 and 2008 (Unaudited)
                      
                      F-4Notes
      to Condensed Consolidated Financial Statements for the Three and Six
      Months Ended September 30, 2009 and 2008 (Unaudited)
                      
                      F-5-19
  F-1
 NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED
BALANCE SHEETS
 September 30, 2009
                          
                          
                          March 31, 2009(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                          
                          $
                          122,734
                          
                          
                          $
                          410,870Restricted
      cash
                          
                          
                          7,321,716
                          
                          
                          
                          4,388,596Notes
      receivable, net of reserve of $146,434 and $146,287 at September 30, 2009
      and March 31, 2009, respectively
                          
                          
                          585,737
                          
                          
                          
                          722,242Inventories,
      net
                          
                          
                          2,188,521
                          
                          
                          
                          1,678,626Prepayments
      for goods
                          
                          
                          637,070
                          
                          
                          
                          301,450Due
      from employees
                          
                          
                          433,239
                          
                          
                          
                          18,424Due
      from a related party
                          
                          
                          223,843
                          
                          
                          
                          253,959Deferred
      taxes
                          
                          
                          368,941
                          
                          
                          
                          307,404Other
      assets
                          
                          
                          7,983
                          
                          
                          
                          19,152Total
      current assets
                          
                          
                          11,889,784
                          
                          
                          
                          8,100,723Long-term
      investment
                          
                          
                          470,054
                          
                          
                          
                          469,580Plant
      and equipment, net
                          
                          
                          17,480,064
                          
                          
                          
                          18,695,469Land
      use rights, net
                          
                          
                          1,621,023
                          
                          
                          
                          1,637,352Construction
      in progress
                          
                          
                          27,215,947
                          
                          
                          
                          25,703,868Deposits
                          
                          
                          1,176,095
                          
                          
                          
                          2,123,963Deferred
      taxes
                          
                          
                          1,424,193
                          
                          
                          
                          1,422,756Other
      long-term assets
                          
                          
                          9,670
                          
                          
                          
                          11,049Total
      long-term assets
                          
                          
                          49,397,046
                          
                          
                          
                          50,064,037TOTAL
      ASSETS
                          
                          $
                          61,286,830
                          
                          
                          $
                          58,164,760LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                          
                          $
                          8,160,067
                          
                          
                          $
                          9,697,419Other
      payables and accrued liabilities
                          
                          
                          1,008,114
                          
                          
                          
                          887,920Short-term
      debt
                          
                          
                          23,505,638
                          
                          
                          
                          15,743,355Customer
      deposits
                          
                          
                          3,435,443
                          
                          
                          
                          2,907,587Due
      to employees
                          
                          
                          12,225
                          
                          
                          
                          11,419Payable
      to contractors
                          
                          
                          1,435,170
                          
                          
                          
                          1,477,066Due
      to related parties
                          
                          
                          10,832,793
                          
                          
                          
                          8,350,223Deferred
      taxes
                          
                          
                          445,850
                          
                          
                          
                          432,232Taxes
      payable
                          
                          
                          570,554
                          
                          
                          
                          570,009Total
      current liabilities
                          
                          
                          49,405,854
                          
                          
                          
                          40,077,230LONG-TERM
      LIABILITIESLong-term
      bank loan
                          
                          
                          2,928,686
                          
                          
                          
                          2,925,730Long-term
      note payable
                          
                          
                          531,557
                          
                          
                          
                          531,020Deferred
      taxes
                          
                          
                          586,561
                          
                          
                          
                          452,242Due
      to employees
                          
                          
                          133,091
                          
                          
                          
                          160,271Total
      long-term liabilities
                          
                          
                          4,179,895
                          
                          
                          
                          4,069,263TOTAL
      LIABILITIES
                          
                          $
                          53,585,749
                          
                          
                          $
                          44,146,493SHAREHOLDERS'
      EQUITYCommon
      stock, par value $0.001 per share; 30,000,000 shares authorized,
      12,640,000 shares issued and outstanding as of September 30,2009 and March
      31, 2009, respectively
                          
                          
                          12,640
                          
                          
                          
                          12,640Additional
      paid-in capital
                          
                          
                          4,573,205
                          
                          
                          
                          4,573,205Retained
      earnings (restricted portion was $572,563 and $950,327 as of September
      30,2009 and March 31, 2009, respectively )
                          
                          
                          572,563
                          
                          
                          
                          6,897,492Accumulated
      other comprehensive income
                          
                          
                          2,542,673
                          
                          
                          
                          2,534,930TOTAL
      SHAREHOLDERS' EQUITY
                          
                          
                          7,701,081
                          
                          
                          
                          14,018,267TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                          
                          $
                          61,286,830
                          
                          
                          $
                          58,164,760
  See
accompanying notes to the condensed consolidated financial
statements.
  F-2
 NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND
 COMPREHENSIVE (LOSS)
INCOME
 (UNAUDITED)
 Three Months Ended
                            September 30,
                          
                          
                          Six Months Ended
                            September 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008REVENUES
                          
                          $
                          7,553,115
                          
                          
                          $
                          14,260,705
                          
                          
                          $
                          15,937,433
                          
                          
                          $
                          30,107,977COST
      OF GOODS SOLD
                          
                          
                          (9,522,165
                          )
                          
                          
                          (15,212,114
                          )
                          
                          
                          (19,494,540
                          )
                          
                          
                          (28,332,521
                          )GROSS
      (LOSS) PROFIT
                          
                          
                          (1,969,050
                          )
                          
                          
                          (951,409
                          )
                          
                          
                          (3,557,107
                          )
                          
                          
                          1,775,456General
      and administrative
                          
                          
                          478,077
                          
                          
                          
                          510,894
                          
                          
                          
                          1,206,715
                          
                          
                          
                          1,457,664Selling
      and distribution
                          
                          
                          260,196
                          
                          
                          
                          291,657
                          
                          
                          
                          547,716
                          
                          
                          
                          567,093Research
      and development
                          
                          
                          15,045
                          
                          
                          
                          89,982
                          
                          
                          
                          42,673
                          
                          
                          
                          109,435LOSS
      FROM OPERATIONS
                          
                          
                          (2,722,368
                          )
                          
                          
                          (1,843,942
                          )
                          
                          
                          (5,354,211
                          )
                          
                          
                          (358,736
                          )OTHER
      INCOME (EXPENSES)Interest
      expense, net
                          
                          
                          (426,547
                          )
                          
                          
                          (232,826
                          )
                          
                          
                          (887,699
                          )
                          
                          
                          (417,440
                          )Government
      grants
                          
                          
                          -
                          
                          
                          
                          1,008,964
                          
                          
                          
                          -
                          
                          
                          
                          997,297Other
      income (expenses), net
                          
                          
                          6,263
                          
                          
                          
                          (1,209
                          )
                          
                          
                          2,754
                          
                          
                          
                          (33,457
                          )(LOSS)
      INCOME BEFORE INCOME TAXES
                          
                          
                          (3,142,652
                          )
                          
                          
                          (1,069,013
                          )
                          
                          
                          (6,239,156
                          )
                          
                          
                          187,664INCOME
      TAX (EXPENSE) BENEFIT
                          
                          
                          (30,763
                          )
                          
                          
                          478,567
                          
                          
                          
                          (85,773
                          )
                          
                          
                          58,459NET
      (LOSS) INCOME
                          
                          
                          (3,173,415
                          )
                          
                          
                          (590,446
                          )
                          
                          
                          (6,324,929
                          )
                          
                          
                          246,123OTHER COMPREHENSIVE (LOSS)
      INCOMEForeign
      currency translation gain
                          
                          
                          17,756
                          
                          
                          
                          117,832
                          
                          
                          
                          7,743
                          
                          
                          
                          549,315OTHER
      COMPREHENSIVE INCOME
                          
                          
                          17,756
                          
                          
                          
                          117,832
                          
                          
                          
                          7,743
                          
                          
                          
                          549,315COMPREHENSIVE (LOSS) INCOME
                          
                          $
                          (3,155,659
                          )
                          
                          $
                          (472,614
                          )
                          
                          $
                          (6,317,186
                          )
                          
                          $
                          795,438WEIGHTED
      AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
                          
                          
                          12,640,000
                          
                          
                          
                          12,640,000
                          
                          
                          
                          12,640,000
                          
                          
                          
                          12,640,000NET
      (LOSS) INCOME PER SHARE, BASIC AND DILUTED
                          
                          $
                          (0.25
                          )
                          
                          $
                          (0.05
                          )
                          
                          $
                          (0.50
                          )
                          
                          $
                          0.02
  See
accompanying notes to the condensed consolidated financial
statements.
  F-3
 NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six Months Ended
                      September 30,2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                    
                    $
                    (6,324,929
                    )
                    
                    $
                    246,123Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    1,303,432
                    
                    
                    
                    1,388,804Gain
      on disposal of plant and equipment
                    
                    
                    -
                    
                    
                    
                    (2,847
                    )Deferred
      taxes
                    
                    
                    84,963
                    
                    
                    
                    (23,006
                    )Write-down
      of inventories to net realizable value
                    
                    
                    987,124
                    
                    
                    
                    110,245Changes
      in operating assets and liabilities:(Increase)
      Decrease In:Inventories
                    
                    
                    (1,497,019
                    )
                    
                    
                    (506,897
                    )Prepayments
      for goods
                    
                    
                    (335,620
                    )
                    
                    
                    665,996Other
      assets
                    
                    
                    11,169
                    
                    
                    
                    61,775Due
      from a related party
                    
                    
                    30,116
                    
                    
                    
                    (172,799
                    )Increase
      (Decrease) In:Accounts
      payable
                    
                    
                    (1,537,352
                    )
                    
                    
                    4,352,829Other
      payables and accrued liabilities
                    
                    
                    120,194
                    
                    
                    
                    24,055Customer
      deposits
                    
                    
                    527,856
                    
                    
                    
                    (291,862
                    )Due
      to employees
                    
                    
                    806
                    
                    
                    
                    10,878Due
      to a related party
                    
                    
                    54,885
                    
                    
                    
                    -Taxes
      payable
                    
                    
                    -
                    
                    
                    
                    (579,093
                    )Net
      cash (used in) provided by operating activities
                    
                    
                    (6,574,375
                    )
                    
                    
                    5,284,201CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted
      cash
                    
                    
                    (2,933,120
                    )
                    
                    
                    (1,278,408
                    )Payment
      for long-term investment
                    
                    
                    -
                    
                    
                    
                    (433,607
                    )Purchases
      of plant and equipment
                    
                    
                    (24,755
                    )
                    
                    
                    (133,587
                    )Purchases
      of construction in progress
                    
                    
                    (1,330,415
                    )
                    
                    
                    (10,983,763
                    )Deposits
                    
                    
                    949,527
                    
                    
                    
                    (13,500
                    )Purchases
      of other long-term assets
                    
                    
                    -
                    
                    
                    
                    (9,973
                    )Proceeds
      on disposal of plant and equipment
                    
                    
                    -
                    
                    
                    
                    96,310Notes
      receivable
                    
                    
                    137,164
                    
                    
                    
                    71,931Net
      cash used in investing activities
                    
                    
                    (3,201,599
                    )
                    
                    
                    (12,684,597
                    )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from short-term debt
                    
                    
                    20,021,954
                    
                    
                    
                    13,733,794Repayments
      of short-term debt
                    
                    
                    (12,279,546
                    )
                    
                    
                    (14,457,196
                    )Due
      from employees
                    
                    
                    (414,815
                    )
                    
                    
                    (4,745
                    )Due
      to related parties
                    
                    
                    2,195,390
                    
                    
                    
                    2,386,146Net
      cash provided by financing activities
                    
                    
                    9,522,983
                    
                    
                    
                    1,657,999NET
      DECREASE IN CASH AND CASH QUIVALENTS
                    
                    
                    (252,991
                    )
                    
                    
                    (5,742,397
                    )Effect
      of exchange rate changes on cash
                    
                    
                    (35,145
                    )
                    
                    
                    115,520Cash
      and cash equivalents at beginning of period
                    
                    
                    410,870
                    
                    
                    
                    7,487,808CASH AND CASH EQUIVALENTS AT END OF
      PERIOD
                    
                    $
                    122,734
                    
                    
                    $
                    1,860,931SUPPLEMENTARY
      CASH FLOW INFORMATIONIncome
      taxes paid
                    
                    $
                    -
                    
                    
                    $
                    592,597Interest
      paid
                    
                    $
                    590,428
                    
                    
                    $
                    366,820
 
 SUPPLEMENTAL
NON-CASH DISCLOSURES:
 
 During
the six months ended September 30, 2009 and 2008, $25,651 and $651,420,
respectively, was transferred from construction in progress to plant and
equipment.
  See
accompanying notes to the condensed consolidated financial
statements.
  F-4
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 1.
              ORGANIZATION
      AND PRINCIPAL ACTIVITIES
 
 New
Oriental Energy & Chemical Corp. was incorporated under the laws of the
State of Delaware on November 15, 2004. The principal activities of New Oriental
Energy & Chemical Corp. and subsidiaries (“NOEC” or the “Company”) are the
manufacture and distribution of fertilizer and chemical products. The products
are distributed to markets in the People’s Republic of China (the
“PRC”).
 
 2.
                BASIS
      OF PRESENTATION
 
 The
unaudited condensed consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the requirements for reporting on Form
10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
However, such information reflects all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary for
the fair presentation of the consolidated financial position and the
consolidated results of operations. Results shown for interim periods are not
necessarily indicative of the results to be obtained for a full year. The
condensed consolidated balance sheet information as of March 31, 2009 was
derived from the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K. These interim financial statements should
be read in conjunction with that report.
 
 On July
1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 105-10 (formerly Statement of
Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards
Codification and Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162). ASC 105-10 establishes the FASB ASC as
the source of authoritative accounting principles recognized by the FASB to be
applied in preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America. The adoption of
this standard had no impact on the Company’s condensed consolidated financial
statements.
 
 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 $6,324,929 for the six months ended September 30, 2009, and has a
working capital deficit of $37,516,070 at September 30, 2009.
 
 The
Company will need to obtain additional financing to continue operations beyond
2009. Its primary source of capital is cash generated from operations as well as
through loans. If the Company is unable to obtain additional financing, it will
not be able to sustain its operations 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.
 
 On
October 23, 2009, the Company obtained a short-term bank loan for RMB 3.9
million (approximately $0.57 million) with an interest rate of 10.62% per annum
from Rural Credit Cooperatives, which is due on October 15, 2010. The Company’s
construction in progress is pledged as collateral for the short-term bank
loan.
 
 4.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a)
              Principles
      of Consolidation
 
 The
consolidated financial statements include the accounts of 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.
  F-5
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 4.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
 
 (b)
              Concentrations
 
 The
Company has major customers who accounted for the following percentage of total
sales and total customer deposits:
 
 Sales
                        
                        
                        Customer
      DepositsSix
      Months Ended September 30,
                        
                        
                        As
      of September 30,
                        
                        
                        As
      of March 31,Customer
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2009Company
      A
                        
                        
                        18.99
                        %
                        
                        
                        -
                        
                        
                        
                        40.24
                        %
                        
                        
                        49.94
                        %Company
      B
                        
                        
                        15.69
                        %
                        
                        
                        10.27
                        %
                        
                        
                        19.13
                        %
                        
                        
                        14.45
                        %Company
      C
                        
                        
                        9.75
                        %
                        
                        
                        -
                        
                        
                        
                        3.96
                        %
                        
                        
                        3.56
                        %Company
      D
                        
                        
                        6.44
                        %
                        
                        
                        -
                        
                        
                        
                        0.89
                        %
                        
                        
                        1.52
                        %
 
 The
Company has major suppliers who accounted for the following percentage of total
purchases and total accounts payable/deposits:
 
 Purchases
                      
                      
                      Accounts Payable
                        /DepositsSix Months Ended September 30,
                      
                      
                      As of September
                      
                      
                      As of March 31,Supplier
                      
                      2009
                      
                      
                      2008
                      
                      
                      
                      30, 2009
                      
                      
                      2009Company
      E
                      
                      
                      19.87
                      %
                      
                      
                      -
                      
                      
                      
                      49.03
                      %
                      
                      
                      -Company
      F
                      
                      
                      18.37
                      %
                      
                      
                      19.17
                      %
                      
                      
                      12.47
                      %
                      
                      
                      9.52
                      %Company
      G
                      
                      
                      17.57
                      %
                      
                      
                      19.36
                      %
                      
                      
                      6.13
                      %
                      
                      
                      6.89
                      %Company
      H
                      
                      
                      15.97
                      %
                      
                      
                      -
                      
                      
                      
                      9.87
                      %
                      
                      
                      12.27
                      %Company
      I
                      
                      
                      12.63
                      %
                      
                      
                      24.36
                      %
                      
                      
                      9.76
                      %
                      
                      
                      1.39
                      %
 
 The sole
market of the Company is the PRC for the six months ended September 30, 2009 and
2008.
 
 (c)
              Economic
      and Political Risks
 
 The
Company's operations are conducted in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general
stateof the PRC
economy. The Company's operations in the PRC are subject to special
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environment and foreign currency
exchange. The Company's results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of taxation,
among other things.
 
 (d)
              Use
      of Estimates
 
 The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods.
 
 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-6
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (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 measured at fair value on a recurring basis subject to the disclosure
requirements of SFAS 157 as of September 30, 2009 are as follows:
 
 Fair Value Measurements at Reporting Date UsingCarrying Value
                      as of September
                      30,2009
                    
                    
                    Quoted Prices
                      in Active
                      Markets for
                      Identical
                      Assets
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                    
                    
                    Significant
                      Unobservable
                      Inputs(Level 1)
                    
                    
                    (Level 2)
                    
                    
                    (Level 3)Cash
      and cash equivalents
                    
                    $
                    122,734
                    
                    
                    $
                    122,734
                    
                    
                    $
                    -
                    
                    
                    $
                    -Restricted
      cash
                    
                    $
                    7,321,716
                    
                    
                    $
                    7,321,716
                    
                    
                    $
                    -
                    
                    
                    $
                    -Long-term
      investment
                    
                    $
                    470,054
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    470,054
 
 Cash and
cash equivalents consist primarily of high rated money market funds at a variety
of well-known institutions with original maturities of three months or less.
Restricted cash represents time deposits on account to secure short-term debt.
The original cost of these assets approximates fair value due to their short
term maturity.
 
 Long-term
investment is valued at cost, which approximates fair value.
 
 Long-term
investment has no quoted market prices and it is not practicable to estimate its
fair value. The Company reviews the investment for impairment whenever events or
changes in circumstances indicate that the carrying amount may no longer be
recoverable.
 
 (f)
              Cash
      and Cash Equivalents
 
 For
financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturity of three months or less to be cash
equivalents.
 
 Restricted
cash represents time deposits on account to secure short-term debt. See Note 12.
These balances are subject to withdrawal restrictions and totaled $7,321,716 and
$4,388,596 as of September 30, 2009 and March 31, 2009,
respectively.
 
 (g)
              Inventories
 
 Inventories
are stated at the lower of cost or net realizable value (market). The cost of
raw materials is determined on a weighted average basis. Finished goods costs
are determined on a weighted average basis and comprise direct materials, direct
labor and an appropriate proportion of overhead.
 
 Net
realizable value is based on estimated selling prices less any further costs
expected to be incurred for completion and disposal.
 
 (h)
                Capitalized
      Interest
 
 The
interest cost associated with debt relating to construction projects is
capitalized and included in the cost of the project. When no debt is incurred
specifically for a project, interest is capitalized on amounts expended on the
project using weighted-average cost of the Company’s outstanding borrowings.
Capitalization of interest ceases when the project is substantially complete or
development activity is suspended for more than a brief period.
  F-7
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 4.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
 
 Capitalized
interest for the six months ended September 30, 2009 and 2008 was $224,064 and
$193,953, 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.
 
 September 30, 2009
                    
                    
                    March 31, 2009
                    
                    
                    September 30, 2008Period
      end RMB: $ exchange rate
                    
                    
                    6.8290
                    
                    
                    
                    6.8359
                    
                    
                    
                    6.8183Average
      period RMB: $ exchange rate
                    
                    
                    6.8325
                    
                    
                    
                    6.9275
                    
                    
                    
                    6.9187
 
 (k)
              Earnings
      (Loss) Per Share
 
 Basic
earnings (loss) per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings (loss) per share is computed similar to basic
earnings (loss) per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive. There were no potentially dilutive securities for the six months ended
September 30, 2009 and 2008.
 
 (l)
              Segments
 
 Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in assessing
performance.
 
 The
Company has determined that there are two reportable segments:
 
 The
fertilizer segment is made up of four business units, which involve the
manufacture and sale of Urea, Carbonate Hydrogen Ammonia, Liquefied Ammonia and
Ammonia Water.
 
 The fuel
segment involves the manufacture and sale of Methanol, Dimethyl Ether. The
Company believes it is not feasible to separately identify the assets and
operating expenses of each segment because of the similarities shared by each in
the manufacturing process. Both segments share the same coal-to-gas primary
system, and also share the same manufacturing sub-systems and cycles. Therefore,
the following represents the revenue, cost of goods sold and gross profit by
each product within each segment:
  F-8
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 4.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
 
 (l)
              Segments
      (Continued)
 
 Fuel
Segment:
 
 For The Three Months Ended September 30, 2009DME
                    
                    
                    Methanol
                    
                    
                    Segment TotalRevenues
                    
                    
                    -
                    
                    
                    $
                    712,459
                    
                    
                    $
                    712,459COGS
                    
                    
                    -
                    
                    
                    
                    1,120,855
                    
                    
                    
                    1,120,855Gross
      loss
                    
                    
                    -
                    
                    
                    $
                    (408,396
                    )
                    
                    $
                    (408,396
                    )
 
 For The Three Months Ended September 30, 2008DME
                          
                          
                          Methanol
                          
                          
                          Segment TotalRevenues
                          
                          $
                          3,992,642
                          
                          
                          $
                          366,753
                          
                          
                          $
                          4,359,395COGS
                          
                          
                          4,529,406
                          
                          
                          
                          445,628
                          
                          
                          
                          4,975,034Gross
      loss
                          
                          $
                          (536,764
                          )
                          
                          $
                          (78,875
                          )
                          
                          $
                          (615,639
                          )
 
 For The Six Months Ended September 30, 2009DME
                        
                        
                        Methanol
                        
                        
                        Segment TotalRevenues
                        
                        
                        -
                        
                        
                        $
                        2,377,765
                        
                        
                        $
                        2,377,765COGS
                        
                        
                        -
                        
                        
                        
                        3,902,399
                        
                        
                        
                        3,902,399Gross
      loss
                        
                        
                        -
                        
                        
                        $
                        (1,524,634
                        )
                        
                        $
                        (1,524,634
                        )
 
 For The Six Months Ended September 30, 2008DME
                          
                          
                          Methanol
                          
                          
                          Segment TotalRevenues
                          
                          $
                          8,876,798
                          
                          
                          $
                          712,843
                          
                          
                          $
                          9,589,641COGS
                          
                          
                          8,518,796
                          
                          
                          
                          678,402
                          
                          
                          
                          9,197,198Gross
      profit
                          
                          $
                          358,002
                          
                          
                          $
                          34,441
                          
                          
                          $
                          392,443
 
 Fertilizer
Segment:
  For The Three Months Ended September 30, 2009Urea
                  
                  
                  Ammonium
                    Bicarbonate
                  
                  
                  Liquefied
                    Ammonia
                  
                  
                  Ammonia
                    Water
                  
                  
                  Segment TotalRevenues
                  
                  $
                  6,105,901
                  
                  
                  $
                  575,771
                  
                  
                  $
                  83,278
                  
                  
                  $
                  75,706
                  
                  
                  $
                  6,840,656COGS
                  
                  
                  7,436,132
                  
                  
                  
                  755,343
                  
                  
                  
                  123,020
                  
                  
                  
                  86,815
                  
                  
                  
                  8,401,310Gross
      loss
                  
                  $
                  (1,330,231
                  )
                  
                  $
                  (179,572
                  )
                  
                  $
                  (39,742
                  )
                  
                  $
                  (11,109
                  )
                  
                  $
                  (1,560,654
                  )
 
 For The Three Months Ended September 30, 2008Urea
                  
                  
                  Ammonium
                    Bicarbonate
                  
                  
                  Liquefied
                    Ammonia
                  
                  
                  Ammonia
                    Water
                  
                  
                  Segment TotalRevenues
                  
                  $
                  8,601,623
                  
                  
                  $
                  1,083,837
                  
                  
                  $
                  131,205
                  
                  
                  $
                  84,645
                  
                  
                  $
                  9,901,310COGS
                  
                  
                  8,733,875
                  
                  
                  
                  1,234,487
                  
                  
                  
                  150,900
                  
                  
                  
                  117,818
                  
                  
                  
                  10,237,080Gross
      loss
                  
                  $
                  (132,252
                  )
                  
                  $
                  (150,650
                  )
                  
                  $
                  (19,695
                  )
                  
                  $
                  (33,173
                  )
                  
                  $
                  (335,770
                  )
  F-9
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 4.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
 
 (l)
              Segments
      (continued)
 
 For The Six Months Ended September 30, 2009Urea
                  
                  
                  Ammonium
                    Bicarbonate
                  
                  
                  Liquefied
                    Ammonia
                  
                  
                  Ammonia
                    Water
                  
                  
                  Segment TotalRevenues
                  
                  $
                  11,829,408
                  
                  
                  $
                  1,246,878
                  
                  
                  $
                  301,557
                  
                  
                  $
                  181,825
                  
                  
                  $
                  13,559,668COGS
                  
                  
                  13,521,389
                  
                  
                  
                  1,460,477
                  
                  
                  
                  407,537
                  
                  
                  
                  202,738
                  
                  
                  
                  15,592,141Gross
      loss
                  
                  $
                  (1,691,981
                  )
                  
                  $
                  (213,599
                  )
                  
                  $
                  (105,980
                  )
                  
                  $
                  (20,913
                  )
                  
                  $
                  (2,032,473
                  )
 
 For The Six Months Ended September 30, 2008Urea
                  
                  
                  Ammonium
                    Bicarbonate
                  
                  
                  Liquefied
                    Ammonia
                  
                  
                  Ammonia
                    Water
                  
                  
                  Segment TotalRevenues
                  
                  $
                  18,449,402
                  
                  
                  $
                  1,734,298
                  
                  
                  $
                  164,018
                  
                  
                  $
                  170,618
                  
                  
                  $
                  20,518,336COGS
                  
                  
                  16,745,697
                  
                  
                  
                  2,000,664
                  
                  
                  
                  175,866
                  
                  
                  
                  213,096
                  
                  
                  
                  19,135,323Gross
      profit (loss)
                  
                  $
                  1,703,705
                  
                  
                  $
                  (266,366
                  )
                  
                  $
                  (11,848
                  )
                  
                  $
                  (42,478
                  )
                  
                  $
                  1,383,013
  (m)
              New
      Accounting Pronouncement
 
 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.”
 
 On April
1, 2009, the FASB approved ASC 205-10 (formerly FSP FAS 141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, which amends Statement ASC 805 and eliminates the
distinction between contractual and non-contractual contingencies. Under ASC
205-10, an acquirer is required to recognize at fair value an asset acquired or
liability assumed in a business combination that arises from a contingency if
the acquisition-date fair value of that asset or liability can be determined
during the measurement period. If the acquisition-date fair value cannot be
determined, the acquirer applies the recognition criteria in SFAS No. 5,
Accounting for Contingencies and Interpretation 14, “Reasonable Estimation of
the Amount of a Loss – and Interpretation of FASB Statement No. 5,” to determine
whether the contingency should be recognized as of the acquisition date or after
it. The Company is currently evaluating the impact of the adoption of ASC
205-10,.
 
 ASC
320-10 (formerly FSP FAS 115-2 and FAS 124-2, amends the other-than-temporary
impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. It did not amend existing recognition and measurement guidance
related to other-than-temporary impairments of equity securities. We are
required to adopt this FSP for our interim and annual reporting periods ending
after June 15, 2009. This FSP does not require disclosures for periods presented
for comparative purposes at initial adoption. This FSP requires comparative
disclosures only for periods ending after initial adoption. The adoption of ASC
320-10 did not have a material impact on the Company’s condensed consolidated
financial statements.
 
 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 this FSP for our interim and annual reporting periods ending
after June 15, 2009. This FSP does not require disclosures for periods presented
for comparative purposes at initial adoption. This FSP requires comparative
disclosures only for periods ending after initial adoption. The adoption of ASC
825-10 did not have a material impact on the Company’s condensed consolidated
financial statements.
 
 In June
2009, the FASB issued 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. SFAS No. 167 is effective as of the beginning of
each reporting entity’s first annual reporting period that begins after November
15, 2009 and for all interim reporting periods after that. The Company is
currently evaluating the impact of the adoption of SFAS No. 167. This recently
issued but not yet enacted accounting standard has not yet been codified by the
FASB. Also see Note 2.
  F-10
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 5.
              INVENTORIES
 
 Inventories
consist of the following:
  September 30, 2009
                      
                      
                      March 31, 2009(Unaudited)Finished
      goods
                      
                      $
                      803,262
                      
                      
                      $
                      182,559Raw
      materials
                      
                      
                      885,351
                      
                      
                      
                      1,006,135Packing
      materials
                      
                      
                      499,908
                      
                      
                      
                      489,932Total
      inventories, net
                      
                      $
                      2,188,521
                      
                      
                      $
                      1,678,626
 
 The net
book value of $803,262 and $182,559 of finished goods inventory is pledged as
collateral for short-term debt at September 30, 2009 and March 31, 2009,
respectively. See Note 12.
 
 As of
September 30, 2009 and 2008, the Company recorded a write-down of inventories to
net realizable value of $987,124 and $110,245, respectively.
  6.
              DUE
      FROM EMPLOYEES
 
 September 30, 2009
                      
                      
                      March 31, 2009(Unaudited)Current
                      
                      $
                      433,239
                      
                      
                      $
                      18,424Total
      amount due from employees
                      
                      $
                      433,239
                      
                      
                      $
                      18,424
  Amounts
due from employees is interest-free, unsecured and have no fixed repayment
terms. The amounts primarily represent payments made by the Company on behalf of
employees for their purchase of apartments.
  7.
              RELATED
      PARTY TRANSACTIONS
 
 (I)
              Due
      from Related Parties
 
 September 30, 2009
                    
                    
                    March 31, 2009(Unaudited)Current:Huaiyang
      Desheng Chemical Co., Ltd
                    
                    $
                    223,843
                    
                    
                    $
                    253,959
 
 Huaiyang
Desheng Chemical Co., Ltd (“Huaiyang Desheng”) is a company controlled by a
director of the Company. For the six months ended September 30, 2009 and 2008,
Huaiyang Desheng purchased $0 and $30,420 of raw materials from Henan Jinding,
and sold $0 and $145,975 of finished goods to Henan Jinding. 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.
  F-11
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 7.
              RELATED
      PARTY TRANSACTIONS (CONTINUED)
 
 (II)
                Due
      to Related Parties
 
 September 30, 2009
                        
                        
                        March 31, 2009(Unaudited)Principal:Xinyang
      Hong Chang Pipeline Gas Co., Ltd.
                        
                        (a)
                        
                        $
                        7,175,282
                        
                        
                        $
                        4,973,742Long
      Triumph Investments Limited
                        
                        (b)
                        
                        
                        1,344,328
                        
                        
                        
                        1,344,328Chen
      Siqiang
                        
                        (c)
                        
                        
                        1,025,040
                        
                        
                        
                        1,024,006Wang
      Guiquan
                        
                        (d)
                        
                        
                        131,791
                        
                        
                        
                        131,658Zhou
      Dianchang
                        
                        (e)
                        
                        
                        73,217
                        
                        
                        
                        73,143Mai
      Xiaofu
                        
                        (f)
                        
                        
                        146,434
                        
                        
                        
                        146,287Yu
      Zhiyang
                        
                        (g)
                        
                        
                        43,930
                        
                        
                        
                        43,886Yang
      Hongtao
                        
                        (h)
                        
                        
                        43,930
                        
                        
                        
                        43,886Subtotal
                        
                        
                        
                        $
                        9,983,952
                        
                        
                        $
                        7,780,936Interest:Xinyang
      Hong Chang Pipeline Gas Co., Ltd.
                        
                        (a)
                        
                        
                        631,589
                        
                        
                        
                        422,472Chen
      Siqiang
                        
                        (c)
                        
                        
                        154,986
                        
                        
                        
                        105,677Wang
      Guiquan
                        
                        (d)
                        
                        
                        18,380
                        
                        
                        
                        12,042Zhou
      Dianchang
                        
                        (e)
                        
                        
                        10,211
                        
                        
                        
                        6,690Mai
      Xiaofu
                        
                        (f)
                        
                        
                        21,047
                        
                        
                        
                        14,004Yu
      Zhiyang
                        
                        (g)
                        
                        
                        6,314
                        
                        
                        
                        4,201Yang
      Hongtao
                        
                        (h)
                        
                        
                        6,314
                        
                        
                        
                        4,201Subtotal
                        
                        
                        
                        $
                        848,841
                        
                        
                        $
                        569,287Total
                        
                        
                        
                        $
                        10,832,793
                        
                        
                        $
                        8,350,223
 (a)
                Xinyang
      Hong Chang Pipeline Gas Co., Ltd. is a company controlled by the Chairman
      of the board and chief executive officer of the Company. The amount
      represents advances from Xinyang Hong Chang Pipeline Gas Co., Ltd, and the
      amount is unsecured. Included in the $7,175,282 is $2,928,686, which has
      an interest rate of 8.748% per annum and is due on June 30, 2010. Also
      included in the $7,175,282 is $732,172, which has an interest rate of 15%
      per annum and is due on September 25, 2010, $439,303, which has an
      interest rate of 10.62% per annum and is due on August 13, 2010,
      $1,025,040, which has an interest rate of 10.62% per annum and is due on
      August 20, 2010, and $732,172, which has an interest rate of 10.62% per
      annum and is due on September 1, 2010. Interest expense for the six months
      ended September 30, 2009 and 2008 is $208,660 and $130,109, respectively.
      Of the $208,660 of interest expense, $153,775 was capitalized interest in
      construction in progress, since the amount was used for construction. Also
      see Note 11. The remaining balance of $1,317,909 is unsecured, interest
      free, and has no fixed repayment
terms.
 
 (b)
                Long
      Triumph Investments Limited is a former shareholder of the Company. The
      amount represents advances from Long Triumph Investments Limited. The
      amount is unsecured, interest free, and has no fixed repayment
      terms.
 
 (c)
                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 February 3, 2010. The interest expense for the six months
      ended September 30, 2009 and 2008 of $49,202 and $45,525 was capitalized
      in construction in progress, since the amount was used for construction.
      Also see Note 11.
 
 (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 April 18,
      2010. The interest expense for the six months ended September 30, 2009 and
      2008 of $6,326 and $5,911 was capitalized interest in construction in
      progress, since the amount was used for construction. Also see Note
      11.
 
 (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 April 18, 2010. The interest
      expense for the six months ended September 30, 2009 and 2008 of $3,514 and
      $3,187 was capitalized in construction in progress, since the amount was
      used for construction. Also see Note
11.
  F-12
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 7.
                RELATED
      PARTY TRANSACTIONS
(CONTINUED)
 
 (II)
              Due
      to Related Parties (continued)
 
 (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 April 2, 2010. The interest
      expense for the six months ended June 30, 2009 and 2008 of $7,029 and
      $7,001 was capitalized in construction in progress, since the amount was
      used for construction. Also see Note
11.
  (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 April 2,
      2010. The interest expense for the six months ended September 30, 2009 and
      2008 of $2,109 and $2,100 was capitalized in construction in progress,
      since the amount was used for construction. Also see Note
    11.
 
 (h)
                YangHongtao is a
      significant shareholder of the Company. The amount is unsecured, has an
      interest rate of 9.6% per annum and is due on April 2, 2010. The interest
      expense for the six months September 30, 2009 and 2008 of $2,109 and
      $2,100 was capitalized in construction in progress, since the amount was
      used for construction. Also see Note
11.
 
 8.
              LONG-TERM
      INVESTMENT
 
 September 30, 2009
                      
                      
                      March 31, 2009(Unaudited)Luoshan
      Rural Credit Cooperatives
                      
                      $
                      470,054
                      
                      
                      $
                      469,580
 
 The
amounts represent a 3.07% interest in Luoshan Rural Credit Cooperatives and the
Company accounted for its investment in Luoshan Rural Credit Cooperative using
the cost method.
 
 9.
              PLANT
      AND EQUIPMENT
 
 Plant and
equipment consist of the following:
  September 30, 2009
                      
                      
                      March 31, 2009(Unaudited)At
      cost:Buildings
                      
                      $
                      2,435,310
                      
                      
                      $
                      2,432,852Machinery
                      
                      
                      25,175,861
                      
                      
                      
                      25,102,781Motor
      vehicles
                      
                      
                      329,210
                      
                      
                      
                      328,878Office
      equipment
                      
                      
                      272,731
                      
                      
                      
                      269,74328,213,112
                      
                      
                      
                      28,134,254Less:  Accumulated
      depreciationBuildings
                      
                      
                      463,735
                      
                      
                      
                      413,860Machinery
                      
                      
                      9,893,003
                      
                      
                      
                      8,699,555Motor
      vehicles
                      
                      
                      223,136
                      
                      
                      
                      196,885Office
      equipment
                      
                      
                      153,174
                      
                      
                      
                      128,48510,733,048
                      
                      
                      
                      9,438,785Plant
      and equipment, net
                      
                      $
                      17,480,064
                      
                      
                      $
                      18,695,469
 
 Depreciation
expense for the six months ended September 30, 2009 and 2008 is $1,284,068 and
$1,370,678, respectively.
 
 The net
book value of machinery of $7,329,427 and $7,322,029 are pledged as collateral
for the long-term bank loans at September 30, 2009 and March 31, 2009,
respectively. See Note 14.
  F-13
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 10.
              LAND
      USE RIGHTS
 
 September 30, 2009
                      
                      
                      March 31, 2009(Unaudited)Cost
                      
                      $
                      1,798,358
                      
                      
                      $
                      1,796,542Less:
      Accumulated amortization
                      
                      
                      177,335
                      
                      
                      
                      159,190Land
      use rights, net
                      
                      $
                      1,621,023
                      
                      
                      $
                      1,637,352
 
 Amortization
expense for the six months ended September 30, 2009 and 2008 is $17,974 and
$17,750, respectively.
 
 The net
book value of $1,621,023 and $0 of the land use rights are pledged as collateral
for the short-term bank loans for the six months ending March 31, 2010 and March
31, 2009, respectively. See Note 12.
 
 Amortization
expense for the next five years and thereafter is as follows:
  Six
      months ending March 31, 2010
                          
                          $
                          17,9932011
                          
                          
                          35,9672012
                          
                          
                          35,9672013
                          
                          
                          35,9672014
                          
                          
                          35,967Thereafter
                          
                          
                          1,459,162Total
                          
                          $
                          1,621,023
  11.
              CONSTRUCTION
      IN PROGRESS
 
 Construction
in progress at September 30, 2009 and March 31, 2009 consist of the
following:
  September 30, 2009
                      
                      
                      March 31, 2009(Unaudited)Plant
                      
                      $
                      25,124,328
                      
                      
                      $
                      23,461,536Machinery
                      
                      
                      1,853,177
                      
                      
                      
                      2,086,359Other
                      
                      
                      238,442
                      
                      
                      
                      155,973$
                      27,215,947
                      
                      
                      $
                      25,703,868
  Capitalized
interest for the six months ended September 30, 2009 and 2008 is $224,064 and
$193,953, respectively.
 
 The net
book value of $3,138,527 and $3,108,009 of plant construction in progress is
pledged as collateral for the short-term bank loans at September 30, 2009 and
March 31, 2009, respectively. See Note 12.
  F-14
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 12.
              SHORT-TERM
      DEBT
 
 Short-term
debt consists of the following:
  September 30,
                          2009
                        
                        
                        March 31,
                          2009(Unaudited)Bank
      Loans:Xinyang
      Commercial Bank, due April 28, 2010, interest rate at 10.08% per annum,
      collateralized by finished goods inventory.
                        
                        $
                        1,464,343
                        
                        
                        $
                        -Guangdong
      Development Bank, due May 13, 2010, interest rate at 5.31% per annum,
      collateralized by land use rights and guaranteed by Xinyang Hong Chang
      Pipeline Gas Co., Ltd.
                        
                        
                        4,393,031
                        
                        
                        
                        -Rural
      Credit Cooperatives, due June 16, 2010, interest rate at 9.56% per annum,
      collateralized by construction in progress.
                        
                        
                        556,450
                        
                        
                        
                        -Xinyang
      Commercial Bank, due April 25, 2009, interest rate at 11.56% per annum,
      collateralized by finished goods inventory. (Subsequently repaid on its
      due date)
                        
                        
                        -
                        
                        
                        
                        1,462,865Rural
      Credit Cooperatives, due June 12, 2009, interest rate at 14.19% per annum,
      collateralized by construction in progress. (Subsequently repaid on its
      due date)
                        
                        
                        -
                        
                        
                        
                        570,517Rural
      Credit Cooperatives, due October 16, 2009, interest rate at 14.19% per
      annum, collateralized by construction in progress. (Subsequently repaid on
      its due date)
                        
                        
                        571,094
                        
                        
                        
                        570,517Xinyang
      Commercial Bank, due August 3, 2009, interest rate at 11.34% per annum,
      collateralized by finished goods inventory. (Subsequently repaid on its
      due date)
                        
                        
                        -
                        
                        
                        
                        1,462,865Xinyang
      Commercial Bank, due December 29, 2009, interest rate at 11.56% per annum,
      collateralized by finished goods inventory.
                        
                        
                        2,342,949
                        
                        
                        
                        2,340,584Xinyang
      Commercial Bank, due August 4, 2010, interest rate at 10.08% per annum,
      collateralized by finished goods inventory.
                        
                        
                        1,464,343
                        
                        
                        
                        -Notes Payable to Unrelated
      Companies:Due
      July 15, 2009 (subsequently repaid on its due date)
                        
                        
                        -
                        
                        
                        
                        731,433Due
      July 16, 2009 (subsequently repaid on its due date)
                        
                        
                        -
                        
                        
                        
                        731,433Due
      July 23, 2009 (subsequently repaid on its due date)
                        
                        
                        -
                        
                        
                        
                        877,719Due
      August 10, 2009 (subsequently repaid on its due date)
                        
                        
                        -
                        
                        
                        
                        585,146Due
      October 29, 2009 (Subsequently repaid on its due date)
                        
                        
                        2,196,515
                        
                        
                        
                        -Due
      November 26, 2009
                        
                        
                        2,196,515
                        
                        
                        
                        -Due
      November 27, 2009
                        
                        
                        1,464,343
                        
                        
                        
                        -
  F-15
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 September 30,
                            2009
                          
                          
                          March 31,
                            2009(Unaudited)Due
      December 26, 2009
                          
                          
                          2,928,686
                          
                          
                          
                          -Due
      January 22, 2010
                          
                          
                          732,172
                          
                          
                          
                          -Due
      January 23, 2010
                          
                          
                          1,610,778
                          
                          
                          
                          -Due
      February 25, 2010
                          
                          
                          585,737
                          
                          
                          
                          -Due
      April 28, 2009 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          731,433Due
      April 30, 2009 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          1,462,866Due
      May 24, 2009 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          877,719Due
      May 25, 2009 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          877,719Due
      May 26, 2009 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          1,024,006Due
      May 27, 2009 (subsequently repaid on its due date)
                          
                          
                          -
                          
                          
                          
                          877,719Notes
      Payable to Unrelated Individuals:Due
      December 3, 2009
                          
                          
                          559,379
                          
                          
                          
                          558,814Due
      April 13, 2010
                          
                          
                          439,303
                          
                          
                          
                          -$
                          23,505,638
                          
                          
                          $
                          15,743,355
 
 Interest
expense for the six months ended September 30, 2009 and 2008 was $886,486 and
$510,459, respectively.
  Notes
payable to unrelated companies are interest-free and were paid on their due
dates. All the notes payable are subject to bank charges of 0.05% of the
principal as a commission on each loan transaction. Bank charges for notes
payable were $5,854 and $5,669 for the six months ended September 30, 2009 and
2008, respectively.
 
 Notes
payable to unrelated individuals are unsecured. The amount of $559,379 has an
interest rate of 15% per annum and is due on December 3, 2009. The amount of
$439,303 has an interest rate of 7.2% per annum and is due on Arpil 13,
2010.
 
 Restricted
cash of $7,321,716 and $4,388,596 is collateralized for the notes payable at
September 30, 2009 and March 31, 2009, respectively.
 
 Inventory
of $803,262 and $182,559 is collateralized for the notes payable at September
30, 2009 and March 31, 2009, respectively.
  The net
book value of $803,262 and $182,559 of finished goods inventory is pledged as
collateral for short-term bank loans at September 30, 2009 and March 31, 2009,
respectively. See Note 5.
  13.
              LONG-TERM
      NOTES PAYABLE
 
 In
September 2003, the Company purchased a plant and machinery, a building and a
land use right from Luoshan Fertilizer Plant, a bankrupt company, for
$4,633,601. The remaining balance at September 30, 2009 and March 31, 2009 is
$531,557 and $531,020, respectively. The note is unsecured, interest free and
due on December 31, 2010.
 
 14.
              LONG-TERM
      BANK LOAN
 
 September 30, 2009
                      
                      
                      March 31, 2009(Unaudited)Luoshan
      Rural Credit Cooperatives
                      
                      $
                      2,928,686
                      
                      
                      $
                      2,925,730
 
 The
long-term bank loan is collateralized by the Company’s machinery, has an
interest rate of 9.558% per annum and is due March 19, 2012. See Note
9.
  F-16
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
  15.
              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) benefit for the six months ended September 30, 2009 and 2008 is
summarized as follows:
  Six Months Ended September 30,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Unaudited)Current:CIT
                      
                      $
                      -
                      
                      
                      $
                      81,465Deferred:CIT
                      
                      
                      (85,773
                      )
                      
                      
                      (23,006
                      )Income
      tax (expense) benefit
                      
                      $
                      (85,773
                      )
                      
                      $
                      58,459
 
 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:
 
 Six Months Ended September 30,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Unaudited)Computed
      “expected” benefit (expense)
                      
                      $
                      1,559,789
                      
                      
                      $
                      (46,916
                      )Permanent
      differences
                      
                      
                      -
                      
                      
                      
                      105,375Valuation
      allowance
                      
                      
                      (1,645,562
                      )
                      
                      
                      -Income
      tax
                      
                      $
                      (85,773
                      )
                      
                      $
                      58,459
  F-17
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 15.
              INCOME
      TAXES (CONTINUED)
  The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities as of September 30, 2009 and March 31, 2009 are as
follows:
  September 30, 2009
                      
                      
                      March 31, 2009Deferred tax assets:
                      
                      (Unaudited)Current
      portion:Cost
      of sales
                      
                      $
                      257,748
                      
                      
                      $
                      169,956Financial
      expense
                      
                      
                      13,890
                      
                      
                      
                      13,876Welfare
                      
                      
                      10,296
                      
                      
                      
                      21,263Provision
      for notes receivable
                      
                      
                      36,609
                      
                      
                      
                      36,571Other
      expense
                      
                      
                      50,398
                      
                      
                      
                      65,738Total
      current deferred tax assets
                      
                      
                      368,941
                      
                      
                      
                      307,404Non-current
      portion:Net
      operating loss carry forward
                      
                      
                      1,424,193
                      
                      
                      
                      1,422,756Total
      non-current deferred tax assets
                      
                      
                      1,424,193
                      
                      
                      
                      1,422,756Total
      deferred tax assets
                      
                      
                      1,793,134
                      
                      
                      
                      1,730,160Deferred
      tax liabilities:Current
      portion:Cost
      of sales
                      
                      
                      363,585
                      
                      
                      
                      348,565Government
      grant
                      
                      
                      39,537
                      
                      
                      
                      49,006Investment
      income
                      
                      
                      17,252
                      
                      
                      
                      17,233Other
      expenses
                      
                      
                      25,476
                      
                      
                      
                      17,428Total
      current deferred tax liabilities
                      
                      
                      445,850
                      
                      
                      
                      432,232Non-current
      portion:Amortization
                      
                      
                      29,347
                      
                      
                      
                      26,586Depreciation
                      
                      
                      557,214
                      
                      
                      
                      425,656Total
      non-current deferred tax liabilities
                      
                      
                      586,561
                      
                      
                      
                      452,242Total
      deferred tax liabilities
                      
                      
                      1,032,411
                      
                      
                      
                      884,474Net
      deferred tax assets
                      
                      $
                      760,723
                      
                      
                      $
                      845,686
  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
September 30, 2009, the Company does not have a liability for unrecognized tax
benefits. There was no effect on financial condition or results of operations as
a result of implementing 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 September 30, 2009 the Company was not aware of any
pending income tax examinations by tax authorities in the PRC.
  The
Company’s policy is to record interest and penalties on uncertain tax positions
as income tax expense. As of September 30, 2009, the Company has no accrued
interest or penalties related to uncertain tax positions.
  F-18
  NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 16.
              CONTINGENCIES
 
 On
December 29, 2004, the Company entered into an agreement (the “Luoshan
Agreement”) to purchase Luoshan Fertilizer Plant, a bankrupt company and to
assume $1.3 million in debt owed by Xixian Fertilizer Plant (the principal
shareholder of Luoshan Fertilizer Plant). Under the Luoshan Agreement, the
Company was to receive reimbursements of $650,000 from both the Luoshan county
government and the Xi county government, which were to be received before
December 29, 2007. Luoshan county government paid its note of $650,000 to the
Company on its due date.
 
 In
November 2007, the Company initiated a lawsuit in the Intermediate Court of
Xinyang City against the Xi county government and Henan Shiji Jinyuan Chemicals
Co., Ltd. (the “Shiji Jinyuan”, formerly Xixian Fertilizer Plant) for
non-payment of the Xi county government note receivable of $650,000 on its due
date as set forth under the Luoshan Agreement, and sought the enforcement of the
terms of the note receivable and the Luoshan Agreement for payment of the
$650,000 by both the Xi county government and Shiji Jinyuan. On June 12, 2009,
the court entered final judgment against Xi county government and Shiji Jinyuan
in amount of $650,000 to be paid before June 22, 2009. In addition, the judgment
ordered the Xi county government and Shiji Jinyuan to pay the Company interest
and late fee based on market rates. As of November 16, 2009, Xi county
government and Shiji Jinyuan did not pay the amount to the Company, as they plan
to appeal the decision. At September 30, 2009, the Company has a reserve against
the $650,000 note of $146,434 due to the uncertainty of collection.
 
 17.
              CAPITAL
      COMMITMENT
 
 As of
September 30, 2009, the Company entered into an agreement and made a down
payment of $23,911,407  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 $8.6 million prior to delivery of the
equipment, which is estimated to occur in 2010.The amount paid is
recorded in construction in progress. Through September 30, 2009, 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 March 2010.
 
 18.
              SUBSEQUENT
      EVENT
 
 In
preparing the unaudited condensed consolidated financial statements, the Company
has evaluated all subsequent events and transactions for potential recognition
or disclosure through November 16, 2009, the date the unaudited condensed
financial statements were issued.
  F-19
 
 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 September 30, 2009. The
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles of the United States
(“GAAP”).
 
 Forward
Looking Statements
  We are including the following
discussion to inform our existing and potential security holders of some of the
risks and uncertainties that can affect us and to take advantage of the “safe
harbor” protection for forward-looking statements that applicable federal
securities laws afford. From time to time, our management or persons acting on
our behalf make forward-looking statements to inform existing and potential
security holders about our Company. These forward-looking statements include
information about possible or assumed future results of our operations. All
statements, other than statements of historical facts, included or incorporated
by reference in this report that address activities, events or developments that
we expect or anticipate may occur in the future, including such things as future
capital expenditures, business strategy, competitive strengths, goals, growth of
our business and operations, plans and references to future successes, may be
considered forward-looking statements. Also, when we use words such as
“anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” “forecast,”
“may,” “should,” “budget,” “goal,” “expect,” “probably” or similar expressions,
we are making forward-looking statements. Many risks and uncertainties may
impact the matters addressed in these forward-looking statements. Our
forward-looking statements speak only as of the date made and we will not update
such forward-looking statements unless the securities laws require us to do
so.
  Some of
the key factors which could cause our future financial results and performance
to vary from those expected include:
  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.
  20
  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.
  21
 
 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.”
 
 On April
1, 2009, the FASB approved ASC 205-10 (formerly FSP FAS 141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, which amends Statement ASC 805 and eliminates the
distinction between contractual and non-contractual contingencies. Under ASC
205-10, an acquirer is required to recognize at fair value an asset acquired or
liability assumed in a business combination that arises from a contingency if
the acquisition-date fair value of that asset or liability can be determined
during the measurement period. If the acquisition-date fair value cannot be
determined, the acquirer applies the recognition criteria in SFAS No. 5,
Accounting for Contingencies and Interpretation 14, “Reasonable Estimation of
the Amount of a Loss – and Interpretation of FASB Statement No. 5,” to determine
whether the contingency should be recognized as of the acquisition date or after
it. The Company is currently evaluating the impact of the adoption of ASC
205-10,.
 
 ASC
320-10 (formerly FSP FAS 115-2 and FAS 124-2, amends the other-than-temporary
impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. It did not amend existing recognition and measurement guidance
related to other-than-temporary impairments of equity securities. We are
required to adopt this FSP for our interim and annual reporting periods ending
after June 15, 2009. This FSP does not require disclosures for periods presented
for comparative purposes at initial adoption. This FSP requires comparative
disclosures only for periods ending after initial adoption. The adoption of ASC
320-10 did not have a material impact on the Company’s condensed consolidated
financial statements.
 
 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 this FSP for our interim and annual reporting periods ending
after June 15, 2009. This FSP does not require disclosures for periods presented
for comparative purposes at initial adoption. This FSP requires comparative
disclosures only for periods ending after initial adoption. The adoption of ASC
825-10 did not have a material impact on the Company’s condensed consolidated
financial statements.
 
 In June
2009, the FASB issued 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. SFAS No. 167 is effective as of the beginning of
each reporting entity’s first annual reporting period that begins after November
15, 2009 and for all interim reporting periods after that. The Company is
currently evaluating the impact of the adoption of SFAS No. 167. This recently
issued but not yet enacted accounting standard has not yet been codified by the
FASB.
  22
 
 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.
  23
  RESULTS
OF OPERATIONS
 
 Three
Months Ended September 30, 2009 as compared to
 Three
Months Ended September 30, 2008
 
 Three Months Ended
                        September 30, 2009
                      
                      
                      Three Months Ended
                        September 30, 2008
                      
                      
                      ComparisonsAmount
                      
                      
                      Percentage of
                        Revenues
                      
                      
                      Amount
                      
                      
                      Percentage
                        of Revenues
                      
                      
                      Change in
                        Amount
                      
                      
                      Increase
                        (Decrease) in
                        PercentageItem
                      
                      US $
                      
                      
                      (%)
                      
                      
                      US $
                      
                      
                      (%)
                      
                      
                      US $
                      
                      
                      (%)Revenues
                      
                      
                      7,553,115
                      
                      
                      
                      100.00
                      %
                      
                      
                      14,260,705
                      
                      
                      
                      100.00
                      %
                      
                      
                      (6,707,590
                      )
                      
                      
                      (47.04
                      )%Cost
      of Goods Sold
                      
                      
                      (9,522,165
                      )
                      
                      
                      (126.07
                      )%
                      
                      
                      (15,212,114
                      )
                      
                      
                      (106.67
                      )%
                      
                      
                      5,689,949
                      
                      
                      
                      (37.40
                      )%Gross
      (loss) profit
                      
                      
                      (1,969,050
                      )
                      
                      
                      (26.07
                      )%
                      
                      
                      (951,409
                      )
                      
                      
                      (6.67
                      )%
                      
                      
                      (1,017,641
                      )
                      
                      
                      106.96
                      %General
      & administrative
                      
                      
                      478,077
                      
                      
                      
                      6.33
                      %
                      
                      
                      510,894
                      
                      
                      
                      3.58
                      %
                      
                      
                      (32,817
                      )
                      
                      
                      (6.42
                      )%Selling
      and distribution
                      
                      
                      260,196
                      
                      
                      
                      3.44
                      %
                      
                      
                      291,657
                      
                      
                      
                      2.05
                      %
                      
                      
                      (31,461
                      )
                      
                      
                      (10.79
                      )%Research
      and development
                      
                      
                      15,045
                      
                      
                      
                      0.20
                      %
                      
                      
                      89,982
                      
                      
                      
                      0.63
                      %
                      
                      
                      (74,937
                      )
                      
                      
                      (83.28
                      )%(Loss)
      income from operations
                      
                      
                      (2,722,368
                      )
                      
                      
                      (36.04
                      )%
                      
                      
                      (1,843,942
                      )
                      
                      
                      (12.93
                      )%
                      
                      
                      (878,426
                      )
                      
                      
                      47.64
                      %Interest
      expense, net
                      
                      
                      (426,547
                      )
                      
                      
                      (5.65
                      )%
                      
                      
                      (232,826
                      )
                      
                      
                      (1.63
                      )%
                      
                      
                      (193,721
                      )
                      
                      
                      83.20
                      %Government
      grants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,008,964
                      
                      
                      
                      7.08
                      %
                      
                      
                      (1,008,964
                      )
                      
                      
                      (100
                      )%Other
      income (expenses), net
                      
                      
                      6,263
                      
                      
                      
                      0.08
                      %
                      
                      
                      (1,209
                      )
                      
                      
                      (0.01
                      )%
                      
                      
                      7,472
                      
                      
                      
                      (618.03
                      )%(Loss)
      income before income taxes
                      
                      
                      (3,142,652
                      )
                      
                      
                      (41.61
                      )%
                      
                      
                      (1,069,013
                      )
                      
                      
                      (7.50
                      )%
                      
                      
                      (2,073,639
                      )
                      
                      
                      193.98
                      %Income
      tax (expense) benefit
                      
                      
                      (30,763
                      )
                      
                      
                      (0.41
                      )%
                      
                      
                      478,567
                      
                      
                      
                      3.36
                      %
                      
                      
                      (509,330
                      )
                      
                      
                      (106.43
                      )%Net
      (loss) income
                      
                      
                      (3,173,415
                      )
                      
                      
                      (42.01
                      )%
                      
                      
                      (590,446
                      )
                      
                      
                      (4.14
                      )%
                      
                      
                      (2,582,969
                      )
                      
                      
                      437.46
                      %Foreign
      currency translation gain
                      
                      
                      17,756
                      
                      
                      
                      0.24
                      %
                      
                      
                      117,832
                      
                      
                      
                      0.83
                      %
                      
                      
                      (100,076
                      )
                      
                      
                      (84.93
                      )%Weighted
      average shares outstanding basic and diluted
                      
                      
                      12,640,000
                      
                      
                      
                      
                      
                      
                      
                      12,640,000
                      
                      
                      
                      
                      
                      
                      
                      0
                      
                      
                      
                      0.00
                      %Net
      (loss) income per share, basic and diluted
                      
                      
                      (0.25
                      )
                      
                      
                      
                      
                      
                      (0.05
                      )
                      
                      
                      
                      
                      
                      (0.20
                      )
                      
                      
                      -
 
 Revenues,
Cost of Goods Sold and Gross Profit
 
 Revenues for the three months ended
September 30, 2009 were $7,553,115, which represented a decrease of 47.04% from
the same period in the prior year. The decrease was mainly due to the following
factors: (i) the decrease in the selling price resulted in a negative gross
profit of DME. Therefore, the management ceased the production of DME
temporarily. Based on the management's estimation, when the market price of DME
increases to over RMB 3150 per ton in China, the Company's DME will have
positive gross profit. The Company plans to resume the production of DME in near
future, and recover to the normal level within one year, and (ii) the decrease
in the selling price of Urea as compared to the same period last
year.
  24
 
 Three Months Ended
                                                September 30, 2009
                                              
                                              
                                              Three Months Ended
                                                September 30, 2008
                                              
                                              
                                              ComparisonsProducts
                                              
                                              Amount
                                                US $
                                              
                                              
                                              Percentage
                                                of Revenues
                                                (%)
                                              
                                              
                                              Amount
                                                US $
                                              
                                              
                                              Percentage
                                                of Revenues
                                                (%)
                                              
                                              
                                              Change in
                                                Amount
                                                US $
                                              
                                              
                                              Increase
                                                (Decrease) in
                                                Percentage
                                                (%)Urea
                                              
                                              
                                              6,105,901
                                              
                                              
                                              
                                              80.85
                                              %
                                              
                                              
                                              8,601,623
                                              
                                              
                                              
                                              60.32
                                              %
                                              
                                              
                                              (2,495,722
                                              )
                                              
                                              
                                              (29.01
                                              )%Ammonium
      bicarbonate
                                              
                                              
                                              575,771
                                              
                                              
                                              
                                              7.62
                                              %
                                              
                                              
                                              1,083,837
                                              
                                              
                                              
                                              7.60
                                              %
                                              
                                              
                                              (508,066
                                              )
                                              
                                              
                                              (46.88
                                              )%Methanol
                                              
                                              
                                              712,459
                                              
                                              
                                              
                                              9.43
                                              %
                                              
                                              
                                              366,753
                                              
                                              
                                              
                                              2.57
                                              %
                                              
                                              
                                              345,706
                                              
                                              
                                              
                                              94.26
                                              %Liquefied
      Ammonia
                                              
                                              
                                              83,278
                                              
                                              
                                              
                                              1.10
                                              %
                                              
                                              
                                              131,205
                                              
                                              
                                              
                                              0.92
                                              %
                                              
                                              
                                              (47,927
                                              )
                                              
                                              
                                              (36.53
                                              )%DME
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,992,642
                                              
                                              
                                              
                                              28.00
                                              %
                                              
                                              
                                              (3,992,642
                                              )
                                              
                                              
                                              (100.00
                                              )%Ammonia
      Water
                                              
                                              
                                              75,706
                                              
                                              
                                              
                                              1.00
                                              %
                                              
                                              
                                              84,645
                                              
                                              
                                              
                                              0.59
                                              %
                                              
                                              
                                              (8,939
                                              )
                                              
                                              
                                              (10.56
                                              )%Total
                                              
                                              
                                              7,553,115
                                              
                                              
                                              
                                              100.00
                                              %
                                              
                                              
                                              14,260,705
                                              
                                              
                                              
                                              100.00
                                              %
                                              
                                              
                                              (6,707,590
                                              )
                                              
                                              
                                              (47.04
                                              )%
 
 Three Months Ended
                          September 30, 2009
                        
                        
                        Three Months Ended
                          September 30, 2008
                        
                        
                        ComparisonsProvinces
                        
                        Amount
                          US $
                        
                        
                        Percentage
                          of Revenues
                          (%)
                        
                        
                        Amount
                          US $
                        
                        
                        Percentage
                          of Revenues
                          (%)
                        
                        
                        Change in
                          Amount
                          US $
                        
                        
                        Increase
                          (Decrease) in
                          Percentage
                          (%)Henan
      Province
                        
                        
                        2,616,881
                        
                        
                        
                        34.64
                        %
                        
                        
                        3,947,312
                        
                        
                        
                        27.68
                        %
                        
                        
                        (1,330,431
                        )
                        
                        
                        (33.70
                        )%Guangdong
      Province
                        
                        
                        3,869,100
                        
                        
                        
                        51.23
                        %
                        
                        
                        7,397,425
                        
                        
                        
                        51.87
                        %
                        
                        
                        (3,528,325
                        )
                        
                        
                        (47.70
                        )%Hubei
      Province
                        
                        
                        170,655
                        
                        
                        
                        2.26
                        %
                        
                        
                        1,074,404
                        
                        
                        
                        7.53
                        %
                        
                        
                        (903,749
                        )
                        
                        
                        (84.12
                        )%Anhui
      Province
                        
                        
                        839,772
                        
                        
                        
                        11.12
                        %
                        
                        
                        525,106
                        
                        
                        
                        3.68
                        %
                        
                        
                        314,666
                        
                        
                        
                        59.92
                        %Hunan
      Province
                        
                        
                        31,523
                        
                        
                        
                        0.42
                        %
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        31,523
                        
                        
                        
                        100.00
                        %Hebei
      Province
                        
                        
                        25,184
                        
                        
                        
                        0.33
                        %
                        
                        
                        7,482
                        
                        
                        
                        0.05
                        %
                        
                        
                        17,702
                        
                        
                        
                        236.59
                        %Jiangxi
      Province
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        33,745
                        
                        
                        
                        0.24
                        %
                        
                        
                        (33,745
                        )
                        
                        
                        (100.00
                        )%Shandong
      Province
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,275,231
                        
                        
                        
                        8.95
                        %
                        
                        
                        (1,275,231
                        )
                        
                        
                        (100.00
                        )%Total
                        
                        
                        7,553,115
                        
                        
                        
                        100.00
                        %
                        
                        
                        14,260,705
                        
                        
                        
                        100.00
                        %
                        
                        
                        (6,707,590
                        )
                        
                        
                        (47.04
                        )%
 
 The sales for the three months ended
September 30, 2009 in Anhui Province, Hunan Province and Hebei Province
increased by 59.92%, 100% and 236.59% respectively as compared to the same
period last year. This increase was mainly attributable to the fact that the
Company’s reinforcement of its marketing strategy and expansion of the market
share.
 
 The sales
for the three months ended September 30, 2009 in other provinces decreased as
compared to the same period last year. The decrease wasmainly due to the decrease
in the selling price of DME and Urea. As a result, the decrease in the selling
price resulted in a negative gross profit of DME. Therefore, the management
ceased the production of DME temporarily, and the sales of Urea and DME
decreased in these provinces. Based on the management's estimation, when the
market price of DME increases to over RMB 3150 per ton in China, the
Company's DME will have positive gross profit. The Company plans to resume the
production of DME in near future, and recover to the normal level within one
year.
 
 Cost of Goods Sold (“COGS”) for the
three months ended September 30, 2009 was $9,522,165, which was 126.07% of total
revenues and represents a 37.40% decrease, as compared to $15,212,114, and
106.67% of total revenues for the three months ended September 30, 2008. This
was mainly due to the decrease in sales volume of DME and Ammonium bicarbonate
as compared to the same period last year.
  25
 
 COGS as a percentage of revenue may
fluctuate in the future. This fluctuation may primarily be due to changes in the
price of raw materials, which can have a significant impact on the
COGS.
 
 Gross profit is calculated by deducting
from revenues the cost of raw materials used to produce the finished products as
well as charges for depreciation, employee welfare, repairs to machinery and
equipment, all inventory costs and all other costs incident to or necessary for
the production of our products. The Company’s COGS line item does not include
any inbound freight charges, purchasing and receiving costs, inspection costs,
warehousing costs, internal transfer costs, and the other costs of our
distribution network.  The Company’s gross profit may not be
comparable to those of other entities, since some entities include all of the
costs related to their distribution network in COGS and others exclude a portion
of them from gross profit.
 
 Gross profit decreased by
$1,017,641, or 106.96%, to $(1,969,050) for the three
months ended September 30, 2009 as compared to $(951,409) for the three
months ended September 30, 2008. This decrease was mainly due to the fact
that the decrease in the selling price was greater than the decrease in the
corresponding cost per unit.
 
 DME
                                        
                                        
                                        Methanol
                                        
                                        
                                        Urea
                                        
                                        
                                        Ammonium
                                          Bicarbonate
                                        
                                        
                                        Liquefied
                                          Ammonia
                                        
                                        
                                        Ammonia
                                          Water2010Q2
                                        
                                        Revenues
                                        
                                        
                                        -
                                        
                                        
                                        
                                        712,459
                                        
                                        
                                        
                                        6,105,901
                                        
                                        
                                        
                                        575,771
                                        
                                        
                                        
                                        83,278
                                        
                                        
                                        
                                        75,706COGS
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,120,855
                                        
                                        
                                        
                                        7,436,132
                                        
                                        
                                        
                                        755,343
                                        
                                        
                                        
                                        123,020
                                        
                                        
                                        
                                        86,815Gross
      (Loss) Profit
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (408,396
                                        )
                                        
                                        
                                        (1,330,231
                                        )
                                        
                                        
                                        (179,572
                                        )
                                        
                                        
                                        (39,742
                                        )
                                        
                                        
                                        (11,109
                                        )Gross
      Margin
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (57.32
                                        )%
                                        
                                        
                                        (21.79
                                        )%
                                        
                                        
                                        (31.19
                                        )%
                                        
                                        
                                        (47.72
                                        )%
                                        
                                        
                                        (14.67
                                        )%2009Q2
                                        
                                        Revenues
                                        
                                        
                                        3,992,642
                                        
                                        
                                        
                                        366,753
                                        
                                        
                                        
                                        8,601,623
                                        
                                        
                                        
                                        1,083,837
                                        
                                        
                                        
                                        131,205
                                        
                                        
                                        
                                        84,645COGS
                                        
                                        
                                        4,529,406
                                        
                                        
                                        
                                        445,628
                                        
                                        
                                        
                                        8,733,875
                                        
                                        
                                        
                                        1,234,487
                                        
                                        
                                        
                                        150,900
                                        
                                        
                                        
                                        117,818Gross
      Profit (Loss)
                                        
                                        
                                        (536,764
                                        )
                                        
                                        
                                        (78,875
                                        )
                                        
                                        
                                        (132,252
                                        )
                                        
                                        
                                        (150,650
                                        )
                                        
                                        
                                        (19,695
                                        )
                                        
                                        
                                        (33,173
                                        )Gross
      Margin
                                        
                                        
                                        (13.44
                                        )%
                                        
                                        
                                        (21.51
                                        )%
                                        
                                        
                                        (1.54
                                        )%
                                        
                                        
                                        (13.90
                                        )%
                                        
                                        
                                        (15.01
                                        )%
                                        
                                        
                                        (39.19
                                        )%Changes
                                        
                                        Revenues
                                        
                                        
                                        (3,992,642
                                        )
                                        
                                        
                                        345,706
                                        
                                        
                                        
                                        (2,495,722
                                        )
                                        
                                        
                                        (508,066
                                        )
                                        
                                        
                                        (47,927
                                        )
                                        
                                        
                                        (8,939
                                        )Revenue
      Growth
                                        
                                        
                                        (100
                                        )%
                                        
                                        
                                        94.26
                                        %
                                        
                                        
                                        (29.01
                                        )%
                                        
                                        
                                        (46.88
                                        )%
                                        
                                        
                                        (36.53
                                        )%
                                        
                                        
                                        (10.56
                                        )%
 
 Sales of Urea decreased $2,495,722, or
29.01%, to $6,105,901 for the three months ended September 30, 2009, as compared
to $8,601,623 for the three months ended September 30, 2008. This decrease was
mainly due to the decrease in the selling price as compared to the same period
of last year.
 
 The gross margin of Urea decreased to
(21.79)% for the three months ended September 30, 2009, as compared to (1.54)%
for the three months ended September 30, 2008. This was mainly due to the
decrease in the selling price as compared to the same period of last
year.
 
 Sales of ammonium bicarbonate for the
three months ended September 30, 2009 were $575,771, which represented a
decrease of 46.88% from the same period in the prior year. This was mainly due
to the decrease in sales volume and the selling price of ammonium bicarbonate as
compared to the same period of last year.
 
 The gross margins of ammonium
bicarbonate decreased to (31.19)% for the three months ended September 30,
2009 as compared to (13.90)% for the same period of the prior year. This was
mainly due to the decrease in the selling price as compared to the same period
of last year.
 
 Sales of methanol for the three months
ended September 30, 2009 increased 94.26% to $712,459, from $366,753 for the
three months ended September 30, 2008. This increase was mainly due to the
increase in sales volume of Methanol as compared to the same period of last
year. Methanol incurred a negative gross margin of 57.32% for the three months
ended September 30, 2009, which was mainly due to the decrease in the selling
price as compared to the same period of last year.
  26
 
 Sales of liquefied
ammonia decreased $47,927, or 36.53%, to $83,278 for the three months ended
September 30, 2009, as compared to $131,205 for the three months ended September
30, 2008. This was mainly due to the decrease in sales volume and the selling
price of liquefied ammonia as compared to the same period last
year.
 
 The gross margin of liquefied ammonia
decreased to (47.72)% for the three months ended September 30, 2009, as compared
to (15.01)% for the three months ended September 30, 2008. This was mainly due
to the decrease in the selling priceas compared to the same
period of last year.
 
 Sales of DME decreased to $0 for the
three months ended September 30, 2009. This decrease was mainly due to the
decrease in the selling price resulted in a negative gross profit of DME.
Therefore, the management ceased the production of DME temporarily. Based on the
management's estimation, when the market price of DME increases to over RMB
3150 per ton in China, the Company's DME will have positive gross profit. The
Company plans to resume the production of DME in near future, and recover to the
normal level within one year.
 
 Sales of
ammonia water decreased $8,939, or 10.56%, to $75,706 for the three months ended
September 30, 2009 as compared to $84,645 for the three months ended September
30, 2008. This was mainly due to the decrease in both sales volume and selling
price of ammonia water as compared to the same period last year.
 
 The gross margin of ammonia water
increased to (14.67) % for the three months ended September 30, 2009 as compared
to (39.19) % for the same period prior year. This was mainly due to the fact
that the decrease in the selling price was lower than the decrease in
the corresponding cost per unit.
 
 Operating
Expenses
 
 The Company incurred selling and
distribution expenses of $260,196 for the three months ended September 30, 2009,
a decrease of $31,461, or 10.79%, as compared to $291,657 for the three months
ended September 30, 2008.
 
 The Company incurred general and
administrative expenses of $478,077 for the three months ended September 30,
2009, representing a decrease of $32,817, or 6.42%, as compared to $510,894 for
the three months ended September 30, 2008. This was mainly due to the decrease
in consulting fees and evaluation feesas
compared to the same period last year.
 
 The Company incurred R&D expenses
of $15,045 for the three months ended September 30, 2009, representing a
decrease of $74,937, or 83.28%, compared to $89,982 for the three months ended
September 30, 2008. This was mainly due to the decrease in consulting fees and
evaluation fees of R&D project as compared to the same period last
year.
 
 Income
Tax
 
 The Company incurred income tax expense
of $30,763 for the three months ended September 30, 2009, an increase of
$509,330, or 106.43%, as compared to income tax benefit of $478,567 for the
three months ended September 30, 2008. This increase is mainly attributable
to the increase in the Company’s deferred income
taxes expenses.
 
 Net
(Loss) Income
 
 The Company’s net loss of $3,173,415
for the three months ended September 30, 2009 represented a decrease of
$2,582,969, or 437.46%, as compared to a net loss of $590,446 for the three
months ended September 30, 2008. This decrease was mainly dueto the following factors:
(i) the decrease in the selling price resulted in a negative gross profit of
DME. Therefore, the management ceased the production of DME temporarily. Based
on the management's estimation, when the market price of DME increases
to over RMB 3150 per ton in China, the Company's DME will have positive
gross profit. The Company plans to resume the production of DME in near future,
and recover to the normal level within one year, and (ii) the decrease in the
selling price of Urea as compared to the same period last year, which resulted
in the decrease in the sales revenue of Urea.
  27
 
 Six
Months Ended September 30, 2009 as compared to
 Six
Months Ended September 30, 2008
 
 Six Months Ended
                                September 30, 2009
                              
                              
                              Six Months Ended
                                September 30, 2008
                              
                              
                              ComparisonsAmount
                              
                              
                              Percentage of
                                Revenues
                              
                              
                              Amount
                              
                              
                              Percentage
                                of Revenues
                              
                              
                              Change in
                                Amount
                              
                              
                              Increase
                                (Decrease) in
                                PercentageItem
                              
                              US $
                              
                              
                              (%)
                              
                              
                              US $
                              
                              
                              (%)
                              
                              
                              US $
                              
                              
                              (%)Revenues
                              
                              
                              15,937,433
                              
                              
                              
                              100.00
                              %
                              
                              
                              30,107,977
                              
                              
                              
                              100.00
                              %
                              
                              
                              (14,170,544
                              )
                              
                              
                              (47.07
                              )%Cost
      of Goods Sold
                              
                              
                              (19,494,540
                              )
                              
                              
                              (122.32
                              )%
                              
                              
                              (28,332,521
                              )
                              
                              
                              (94.10
                              )%
                              
                              
                              8,837,981
                              
                              
                              
                              (31.19
                              )%Gross
      (loss) profit
                              
                              
                              (3,557,107
                              )
                              
                              
                              (22.32
                              )%
                              
                              
                              1,775,456
                              
                              
                              
                              5.90
                              %
                              
                              
                              (5,332,563
                              )
                              
                              
                              (300.35
                              )%General
      & administrative
                              
                              
                              1,206,715
                              
                              
                              
                              7.57
                              %
                              
                              
                              1,457,664
                              
                              
                              
                              4.84
                              %
                              
                              
                              (250,949
                              )
                              
                              
                              (17.22
                              )%Selling
      and distribution
                              
                              
                              547,716
                              
                              
                              
                              3.44
                              %
                              
                              
                              567,093
                              
                              
                              
                              1.88
                              %
                              
                              
                              (19,377
                              )
                              
                              
                              (3.42
                              )%Research
      and development
                              
                              
                              42,673
                              
                              
                              
                              0.27
                              %
                              
                              
                              109,435
                              
                              
                              
                              0.36
                              %
                              
                              
                              (66,762
                              )
                              
                              
                              (61.01
                              )%Loss
      from operations
                              
                              
                              (5,354,211
                              )
                              
                              
                              (33.60
                              )%
                              
                              
                              (358,736
                              )
                              
                              
                              (1.19
                              )%
                              
                              
                              (4,995,475
                              )
                              
                              
                              1392.52
                              %Interest
      expense, net
                              
                              
                              (887,699
                              )
                              
                              
                              (5.57
                              )%
                              
                              
                              (417,440
                              )
                              
                              
                              (1.39
                              )%
                              
                              
                              (470,259
                              )
                              
                              
                              112.65
                              %Government
      grants
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              997,297
                              
                              
                              
                              3.31
                              %
                              
                              
                              (997,297
                              )
                              
                              
                              (100
                              )%Other
      income (expenses), net
                              
                              
                              2,754
                              
                              
                              
                              0.02
                              %
                              
                              
                              (33,457
                              )
                              
                              
                              (0.11
                              )%
                              
                              
                              36,211
                              
                              
                              
                              (108.23
                              )%(Loss)
      income before income taxes
                              
                              
                              (6,239,156
                              )
                              
                              
                              (39.15
                              )%
                              
                              
                              187,664
                              
                              
                              
                              0.62
                              %
                              
                              
                              (6,426,820
                              )
                              
                              
                              (3424.64
                              )%Income
      tax (expense) benefit
                              
                              
                              (85,773
                              )
                              
                              
                              (0.54
                              )%
                              
                              
                              58,459
                              
                              
                              
                              0.19
                              %
                              
                              
                              (144,232
                              )
                              
                              
                              (246.72
                              )%Net
      (loss) income
                              
                              
                              (6,324,929
                              )
                              
                              
                              (39.69
                              )%
                              
                              
                              246,123
                              
                              
                              
                              0.82
                              %
                              
                              
                              (6,571,052
                              )
                              
                              
                              (2669.82
                              )%Foreign
      currency translation gain
                              
                              
                              7,743
                              
                              
                              
                              0.05
                              %
                              
                              
                              549,315
                              
                              
                              
                              1.82
                              %
                              
                              
                              (541,572
                              )
                              
                              
                              (98.59
                              )%Weighted
      average shares outstanding basic and diluted
                              
                              
                              12,640,000
                              
                              
                              
                              
                              
                              
                              
                              12,640,000
                              
                              
                              
                              
                              
                              
                              
                              0
                              
                              
                              
                              0.00
                              %Net
      (loss) income per share, basic and diluted
                              
                              
                              (0.50
                              )
                              
                              
                              
                              
                              
                              0.02
                              
                              
                              
                              
                              
                              
                              (0.52
                              )
                              
                              
                              -
 
 Revenues
 
 Revenues for the six months ended
September 30, 2009 were $15,937,433, which represented a decrease of 47.07% from
the same period in the prior year.The decrease was mainly
due to the following factors:  (i) the decrease in the selling price
resulted in a negative gross profit of DME. Therefore, the management ceased the
production of DME temporarily. Based on the management's estimation, when the
market price of DME increases to over RMB 3150 per ton in China, the
Company's DME will have positive gross profit. The Company plans to resume the
production of DME in near future, and recover to the normal level within one
year, and (ii) the decrease in the selling price and the sales volume of Urea as
compared to the same period last year.
  28
  
 Six Months Ended
                                                  September 30, 2009
                                                
                                                
                                                Six Months Ended
                                                  September 30, 2008
                                                
                                                
                                                ComparisonsProducts
                                                
                                                Amount
                                                  US $
                                                
                                                
                                                Percentage
                                                  of Revenues
                                                  (%)
                                                
                                                
                                                Amount
                                                  US $
                                                
                                                
                                                Percentage
                                                  of Revenues
                                                  (%)
                                                
                                                
                                                Change in
                                                  Amount
                                                  US $
                                                
                                                
                                                Increase
                                                  (Decrease) in
                                                  Percentage
                                                  (%)Urea
                                                
                                                
                                                11,829,408
                                                
                                                
                                                
                                                74.23
                                                %
                                                
                                                
                                                18,449,402
                                                
                                                
                                                
                                                61.28
                                                %
                                                
                                                
                                                (6,619,994
                                                )
                                                
                                                
                                                (35.88
                                                )%Ammonium
      bicarbonate
                                                
                                                
                                                1,246,878
                                                
                                                
                                                
                                                7.82
                                                %
                                                
                                                
                                                1,734,298
                                                
                                                
                                                
                                                5.76
                                                %
                                                
                                                
                                                (487,420
                                                )
                                                
                                                
                                                (28.10
                                                )%Methanol
                                                
                                                
                                                2,377,765
                                                
                                                
                                                
                                                14.92
                                                %
                                                
                                                
                                                712,843
                                                
                                                
                                                
                                                2.37
                                                %
                                                
                                                
                                                1,664,922
                                                
                                                
                                                
                                                233.56
                                                %Liquefied
      Ammonia
                                                
                                                
                                                301,557
                                                
                                                
                                                
                                                1.89
                                                %
                                                
                                                
                                                164,018
                                                
                                                
                                                
                                                0.54
                                                %
                                                
                                                
                                                137,539
                                                
                                                
                                                
                                                83.86
                                                %DME
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                8,876,798
                                                
                                                
                                                
                                                29.48
                                                %
                                                
                                                
                                                (8,876,798
                                                )
                                                
                                                
                                                (100.00
                                                )%Ammonia
      Water
                                                
                                                
                                                181,825
                                                
                                                
                                                
                                                1.14
                                                %
                                                
                                                
                                                170,618
                                                
                                                
                                                
                                                0.57
                                                %
                                                
                                                
                                                11,207
                                                
                                                
                                                
                                                6.57
                                                %Total
                                                
                                                
                                                15,937,433
                                                
                                                
                                                
                                                100.00
                                                %
                                                
                                                
                                                30,107,977
                                                
                                                
                                                
                                                100.00
                                                %
                                                
                                                
                                                (14,170,544
                                                )
                                                
                                                
                                                (47.07
                                                )%
 
 Sales of
Urea decreased $6,619,994, or 35.88%, to $11,829,408 for the six months ended
September 30, 2009 as compared to $18,449,402 for the six months ended September
30, 2008. This was mainly due to the decrease in sales volume and the selling
price of Urea as compared to the same period of last year.
 
 Sales of
DME decreased to $0 for the six months ended September 30, 2009. This decrease
was mainly due to the decrease in the selling price resulted in a negative gross
profit of DME. Therefore, the management ceased the production of DME
temporarily. Based on the management's estimation, when the market price of DME
increases to over RMB 3150 per ton in China, the Company's DME will have
positive gross profit. The Company plans to resume the production of DME in near
future, and recover to the normal level within one year.
 
 Divided
by Regions
  Six Months Ended
                          September 30, 2009
                        
                        
                        Six Months Ended
                          September 30, 2008
                        
                        
                        ComparisonsProvinces
                        
                        Amount
                          US $
                        
                        
                        Percentage
                          of Revenues
                          (%)
                        
                        
                        Amount
                          US $
                        
                        
                        Percentage
                          of Revenues
                          (%)
                        
                        
                        Change in
                          Amount
                          US $
                        
                        
                        Increase
                          (Decrease) in
                          Percentage
                          (%)Henan
      Province
                        
                        
                        5,485,364
                        
                        
                        
                        34.43
                        %
                        
                        
                        10,990,900
                        
                        
                        
                        36.50
                        %
                        
                        
                        (5,505,536
                        )
                        
                        
                        (50.09
                        )%Guangdong
      Province
                        
                        
                        7,008,470
                        
                        
                        
                        43.97
                        %
                        
                        
                        12,442,728
                        
                        
                        
                        41.33
                        %
                        
                        
                        (5,434,258
                        )
                        
                        
                        (43.67
                        )%Hubei
      Province
                        
                        
                        347,487
                        
                        
                        
                        2.18
                        %
                        
                        
                        2,987,137
                        
                        
                        
                        9.92
                        %
                        
                        
                        (2,639,650
                        )
                        
                        
                        (88.37
                        )%Anhui
      Province
                        
                        
                        2,939,057
                        
                        
                        
                        18.44
                        %
                        
                        
                        1,180,292
                        
                        
                        
                        3.92
                        %
                        
                        
                        1,758,765
                        
                        
                        
                        149.01
                        %Hunan
      Province
                        
                        
                        94,521
                        
                        
                        
                        0.59
                        %
                        
                        
                        69,664
                        
                        
                        
                        0.23
                        %
                        
                        
                        24,857
                        
                        
                        
                        35.68
                        %Hebei
      Province
                        
                        
                        32,110
                        
                        
                        
                        0.20
                        %
                        
                        
                        476,890
                        
                        
                        
                        1.58
                        %
                        
                        
                        (444,780
                        )
                        
                        
                        (93.27
                        )%Jiangxi
      Province
                        
                        
                        30,424
                        
                        
                        
                        0.19
                        %
                        
                        
                        290,517
                        
                        
                        
                        0.96
                        %
                        
                        
                        (260,093
                        )
                        
                        
                        (89.53
                        )%Shandong
      Province
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,669,849
                        
                        
                        
                        5.55
                        %
                        
                        
                        (1,669,849
                        )
                        
                        
                        (100.00
                        )%Total
                        
                        
                        15,937,433
                        
                        
                        
                        100.00
                        %
                        
                        
                        30,107,977
                        
                        
                        
                        100.00
                        %
                        
                        
                        (14,170,544
                        )
                        
                        
                        (47.07
                        )%
  29
 
 The sales for the six months ended
September 30, 2009 in the Anhui Province and Hunan Province increased by 149.01%
and 35.68% respectively as compared to the same period last year. This increase
was mainly attributable to the fact that the Company’s reinforcement of its
marketing strategy and expansion of the market share.
 
 The sales
for the six months ended September 30, 2009 in other provinces decreased as
compared to the same period last year. The decrease was mainly due to the
decrease in the selling price of DME and Urea. As a result, the decrease in the
selling price resulted in a negative gross profit of DME. Therefore, the
management ceased the production of DME temporarily, and the sales of Urea and
DME decreased in these provinces. Based on the management's estimation, when the
market price of DME increases to over RMB 3150 per ton in China, the Company's
DME will have positive gross profit. The Company plans to resume the production
of DME in near future, and recover to the normal level within one
year.
 
 Cost
of Goods Sold
 
 Cost of Goods Sold (“COGS”) for the six
months ended September 30, 2009 was $19,494,540, which is 122.32% of total
revenues and represents a 31.19% decrease as compared to $28,332,521 and 94.1%
of total revenues for the six months ended September 30, 2008. This was mainly
due to the decrease in sales volume of products as compared to the same period
last year.
 
 Gross
Profit
 
 Gross profit decreased $5,332,563, or
300.35%, to $(3,557,107) for the six months ended September 30, 2009 as compared
to $1,775,456 for the six months ended September 30, 2008. This decrease was
mainly due to the decrease in sales volume and the selling price of product as
compared to the same period last year.
 
 Operating
Expenses
 
 The Company incurred selling and
distribution expenses of $547,716 for the six months ended September 30, 2009, a
decrease of $19,377, or 3.42%, as compared to $567,093 for the six months ended
September 30, 2008.
 
 The Company incurred general and
administrative expenses of $1,206,715 for the six months ended September 30,
2009, representing a decrease of $250,949 or 17.22%, as compared to
$1,457,664 for the six months ended September 30, 2008. This was mainly due to
the decrease in consulting fees as compared to the same period last
year.
 
 The Company incurred R&D expenses
of $42,673 for the six months ended September 30, 2009, representing a decrease
of $66,762, or 61.01%, compared to $109,435 for the six months ended September
30, 2008. This was mainly due to the decrease in consulting fees and evaluation
fees of R&D project as compared to the same period last year.
 
 Income
from Operations
 
 Consolidated operating income for the
six months ended September 30, 2009 decreased 1392.52% to a loss from operations
of $5,354,211 from loss from operations of $358,736 for the six months ended
September 30, 2008. This decrease was mainly due to the following
factors:  (i) the decrease in the selling price resulted in a negative
gross profit of DME. Therefore, the management ceased the production of DME
temporarily. Based on the management's estimation, when the market price of DME
increases to over RMB 3150 per ton in China, the Company's DME will have
positive gross profit. The Company plans to resume the production of DME in
near future, and recover to the normal level within one year, and (ii) the
decrease in the selling price and sales volume of Urea as compared to the same
period last year, which resulted in the decrease in the sales revenue of
Urea.
  30
 
 Income
Tax
 
 The Company incurred income tax expense
of $85,773 for the six months ended September 30, 2009, a decrease of $144,232,
or 246.72%, as compared to income tax benefit of $58,459 for the six months
ended September 30, 2008. This increase is mainly attributable to the increase
in the Company’s deferred income taxes expenses.
 
 Net
Income (Loss)
 
 The Company’s net loss of $6,324,929
for the six months ended September 30, 2009 represented a decrease of
$6,571,052, or 2669.82%, as compared to a net income of $246,123 for the six
months ended September 30, 2008. This decrease was mainly due to the following
factors:  (i) the decrease in the selling price resulted in a negative
gross profit of DME. Therefore, the management ceased the production of DME
temporarily. Based on the management's estimation, when the market price of DME
increases to over RMB 3150 per ton in China, the Company's DME will have
positive gross profit. The Company plans to resume the production of DME
in near future, and recover to the normal level within one year, and (ii)
the decrease in the selling price and sales volume of Urea as compared to the
same period last year, which resulted in the decrease in the sales revenue of
Urea.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Cash
Flows
  Six months ended September 30,2009
                    
                    
                    2008Net
      cash provided by (used in)Operating
      activities
                    
                    $
                    (6,574,375
                    )
                    
                    $
                    5,284,201Investing
      activities
                    
                    
                    (3,201,599
                    )
                    
                    
                    (12,684,597
                    )Financing
      activities
                    
                    
                    9,522,983
                    
                    
                    
                    1,657,999Net
      change in cash and cash equivalents
                    
                    
                    (252,991
                    )
                    
                    
                    (5,742,397
                    )Effect
      of exchange rate changes on cash and cash equivalents
                    
                    
                    (35,145
                    )
                    
                    
                    115,520Cash
      and cash equivalents at beginning of period
                    
                    
                    410,870
                    
                    
                    
                    7,487,808Cash
      and cash equivalents at end of period
                    
                    $
                    122,734
                    
                    
                    $
                    1,860,931
 
 Cash flows used in operating activities
during the six months ended September 30, 2009 amounted to $6,574,375, which was
mainly due to the Company’s net loss of $6,324,929 in the reporting
period and the decrease in accounts payable by $1,537,352.
 
 As of September 30, 2009, the cash used
in investing activities was $3,201,599, which represented the expenditure on
construction of the third phase of the 600,000 ton DME facility
project.
 
 As of September 30, 2009, the cash
provided by financing activities was $9,522,983, which represented theproceeds from short-term
debt in the reporting period.
 
 Liquidity
 
 The Company has a working capital
deficit of $37,516,070 as of September 30, 2009, and the Company incurred a net
loss of $6,324,929 for the six months ended September 30, 2009. These matters
raise substantial doubt about the Company’s ability to continue as a going
concern. Management recognizes that the Company’s continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to allow
the Company to continue the development of its business plans and satisfy its
current and long-term obligations on a timely basis. The Company believes that
it will be able to complete the necessary steps in order to meet its cash
requirements for the next twelve months. The condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
  31
 
 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.
 
 On
October 23, 2009, the Company obtained a short-term bank loan for RMB 3.9
million (approximately $0.57 million) with an interest rate of 10.62% per annum
from Rural Credit Cooperatives, which is due on October 15, 2010. The Company’s
construction in progress is pledged as collateral for the short-term bank
loan.
 
 Capital
Resources
 
 As of September 30, 2009, our total
assets were $61,286,830 and our total liabilities were $53,585,749. Our debt to
asset ratio, calculated as total liabilities (including short-term debt and
payables) over total assets, was 87%.
 
 As of September 30, 2009, our total
assets were $61,286,830 and our operating revenue for the six months ended
September 30, 2009 was $15,937,433, reflecting a total asset turnover of
0.26.
 
 As of September 30, 2009, we had
working capital deficit of $37,516,070. This was mainly due to a change from net
income to net loss as compared to the same period last year.
 
 CONTINGENT
LIABILITIES
 
 None.
 
 OFF
BALANCE SHEET ARRANGEMENTS
 
 None.
 
 Item
      3.
              Quantitative
      and Qualitative Disclosures About Market
Risk.
 
 Not Applicable.
 
 Item
      4.
              Controls
      and Procedures.
 
 A.
Evaluation of Disclosure Controls and Procedures:
 
 The Company maintains disclosure
controls and procedures and internal controls designed to ensure that
information required to be disclosed in the Company's filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. The Company's management, with the participation of its
principal executive and financial officers, has evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q. The Company's principal executive
and financial officers have concluded, based on such evaluation, that such
disclosure controls and procedures were effective for the purpose for which they
were designed as of the end of such period.
 
 B.
Changes in Internal Control over Financial Reporting:
 
 There was no change in the Company's
internal control over financial reporting that was identified in connection with
such evaluation that occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial
reporting.
  32
 
 PART
II – OTHER INFORMATION
 
 Item
      1.
              Legal
      Proceedings.
 
 On
December 29, 2004, the Company entered into an agreement (the “Luoshan
Agreement”) to purchase Luoshan Fertilizer Plant, a bankrupt company and to
assume $1.3 million in debt owed by Xixian Fertilizer Plant (the principal
shareholder of Luoshan Fertilizer Plant). Under the Luoshan Agreement, the
Company was to receive reimbursements of $650,000 from both the Luoshan county
government and the Xi county government, which were to be received before
December 29, 2007. Luoshan county government paid its note of $650,000 to the
Company on its due date.
 
 In
November 2007, the Company initiated a lawsuit in the Intermediate Court of
Xinyang City against the Xi county government and Henan Shiji Jinyuan Chemicals
Co., Ltd. (“Shiji Jinyuan”, formerly Xixian Fertilizer Plant) for non-payment of
the Xi county government note receivable of $650,000 on its due date as set
forth under the Luoshan Agreement, and sought the enforcement of the terms of
the note receivable and the Luoshan Agreement for payment of the $650,000 by
both the Xi county government and Shiji Jinyuan. On June 12, 2009, the court
entered final judgment against Xi county government and Shiji Jinyuan in amount
of $650,000 to be paid before June 22, 2009. In addition, the judgment ordered
the Xi county government and Shiji Jinyuan to pay the Company interest and late
fee based on market rates. As of November 16, 2009, Xi county government and
Shiji Jinyuan did not pay the amount to the Company, as they plan to appeal the
decision. At September 30, 2009, the Company has a reserve against the $650,000
note of $146,434 due to the uncertainty of collection.
 
 Item
      1A.
              Risk
      Factors.
 
 Not
required.
 
 Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds.
 
 None.
 
 Item
      3.
              Defaults
      Upon Senior Securities.
 
 None.
 
 Item
      4.
                    Submission
      of Matters to a Vote of Security
Holders.
 
 None.
 
 Item
      5.
              Other
      Information.
 
 (a)           There
is no information required to be disclosed on Form 8-K during the period covered
by this Form 10-Q that was not so reported.
 
 (b)           There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant's board of directors during the quarter
ended September 30, 2009.
  33
  Item
      6.
              Exhibits.
 
 The
following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:
 
 Exhibit
                      Number
                    
                    Exhibit
      Description2.1
                    
                    Share
      Exchange Agreement dated as of October 11, 2006, between Sports Source,
      Kinfair Holdings Limited and Auto Chance International Limited.
      (2)2.2
                    
                    Share
      Transfer Agreement, dated February 29, 2006, between Kinfair Holdings
      Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu,
      Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)2.3
                    
                    Stock
      Purchase Agreement, dated February 19, 2006, by and between Henan Jinding
      Chemical Industry Co., Ltd. and Kinfair Holdings Limited.
    (2)3.1
                    
                    Certificate
      of Incorporation of the Company, as amended by the current report on Form
      8-K filed with the SEC on February 7, 2007 (1)3.2
                    
                    Bylaws
      of the Company, as amended by the current report on Form 8-K/A filed with
      the SEC on February 23, 2007 (1)4.1
                    
                    Specimen
      of Common Stock Certificate (3)10.1
                    
                    Form
      of Labor Contract for Henan Jinding Chemical Industry Co., Ltd.
      (2)10.2
                    
                    Land
      Use Certificates issued to Luoshan Jinding Chemical Industry Co., Ltd. by
      the People’s Government of Luoshan County. (2)31.1
                    
                    Certification
      of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)31.2
                    
                    Certification
      of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)32.1
                    
                    Certification
      of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)32.2
                    
                    Certification
      of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)99.1
                    
                    Loan
      Agreement, dated August 8, 2008, by and between New Oriental Energy &
      Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd.
      (5)
 
 (1)
                Incorporation
      by reference to the Company's Registration Statement on Form SB-2, as
      amended (Registration No.
333-125131).
 (2)
                Incorporated
      by reference to the Company's Current Report on Form 8-K dated October 13,
      2006.
 (3)
                Incorporated
      by reference to the Company's Quarterly Report on Form 10-Q for the period
      ended December 31, 2008.
 (4)
                Filed
      herewith.
 (5)
                Incorporated
      by reference to the Company’s Form 10-Q for the period ended June 30,
      2008.
  34
  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:  November
16, 2009
  35
  INDEX
TO EXHIBITS
 
 Exhibit
                      Number
                    
                    Exhibit
      Description2.1
                    
                    Share
      Exchange Agreement dated as of October 11, 2006, between Sports Source,
      Kinfair Holdings Limited and Auto Chance International Limited.
      (2)2.2
                    
                    Share
      Transfer Agreement, dated February 29, 2006, between Kinfair Holdings
      Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu,
      Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)2.3
                    
                    Stock
      Purchase Agreement, dated February 19, 2006, by and between Henan Jinding
      Chemical Industry Co., Ltd. and Kinfair Holdings Limited.
    (2)3.1
                    
                    Certificate
      of Incorporation of the Company, as amended by the current report on Form
      8-K filed with the SEC on February 7, 2007 (1)3.2
                    
                    Bylaws
      of the Company, as amended by the current report on Form 8-K/A filed with
      the SEC on February 23, 2007 (1)4.1
                    
                    Specimen
      of Common Stock Certificate (3)10.1
                    
                    Form
      of Labor Contract for Henan Jinding Chemical Industry Co., Ltd.
      (2)10.2
                    
                    Land
      Use Certificates issued to Luoshan Jinding Chemical Industry Co., Ltd. by
      the People’s Government of Luoshan County. (2)31.1
                    
                    Certification
      of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)31.2
                    
                    Certification
      of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act
      of 2002 (4)32.1
                    
                    Certification
      of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)32.2
                    
                    Certification
      of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 (4)99.1
                    
                    Loan
      Agreement, dated August 8, 2008, by and between New Oriental Energy &
      Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd.
      (5)
 
 (1)
                Incorporation
      by reference to the Company's Registration Statement on Form SB-2, as
      amended (Registration No.
333-125131).
 (2)
                Incorporated
      by reference to the Company's Current Report on Form 8-K dated October 13,
      2006.
 (3)
                Incorporated
      by reference to the Company's Quarterly Report on Form 10-Q for the period
      ended December 31, 2008.
 (4)
                Filed
      herewith.
 (5)
                Incorporated
      by reference to the Company’s Form 10-Q for the period ended June 30,
      2008.
  36