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, 2010
¨
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ______ to ______.
Commission
file number: 001-33470
NEW
ORIENTAL ENERGY & CHEMICAL CORP.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or
organization)
|
|
20-1917956
(I.R.S. Employer
Identification No.)
|
Xicheng
Industrial Zone of Luoshan, Xinyang
Henan
Province, The People’s Republic of China
(Address
of principal executive offices)
|
|
464200
(Zip
Code)
|
(86)
27 853 75701
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
þ
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
¨
No
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 22, 2010
|
Common Stock, $.001 par value per share
|
|
17,012,458 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, 2010 And 2009
|
Page
|
Condensed
Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and March
31, 2010
|
F-2
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive
Loss for the Three and Six Months Ended September 30, 2010 and
2009 (Unaudited)
|
F-3
|
|
|
Condensed
Consolidated Statements of Changes in Shareholders’ Equity for
the Six Months Ended September 30, 2010 (Unaudited)
|
F-4
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended September
30, 2010 and 2009 (Unaudited)
|
F-5
|
|
|
Notes
to Condensed Consolidated Financial Statements for the Three and Six
Months Ended September 30, 2010 and 2009 (Unaudited)
|
F-6-21
|
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
44,093
|
|
|
$
|
319,816
|
|
Restricted
cash
|
|
|
23,205,145
|
|
|
|
3,662,306
|
|
Notes
receivable, net of reserve of $746,146 and $732,461 at September 30, 2010
and March 31, 2010, respectively
|
|
|
-
|
|
|
|
42,483
|
|
Inventories,
net
|
|
|
1,748,335
|
|
|
|
7,607,683
|
|
Prepayments
for goods
|
|
|
250,063
|
|
|
|
275,735
|
|
Due
from employees
|
|
|
221,934
|
|
|
|
225,519
|
|
Other
assets
|
|
|
117,200
|
|
|
|
35,762
|
|
Due
from a related party
|
|
|
236,204
|
|
|
|
231,872
|
|
Deferred
taxes
|
|
|
289,755
|
|
|
|
622,452
|
|
Total
current assets
|
|
|
26,112,729
|
|
|
|
13,023,628
|
|
|
|
|
|
|
|
|
|
|
Plant
and equipment, net
|
|
|
15,271,235
|
|
|
|
16,246,562
|
|
Land
use rights, net
|
|
|
1,615,309
|
|
|
|
1,603,674
|
|
Construction
in progress
|
|
|
30,790,517
|
|
|
|
29,540,856
|
|
Deposits
|
|
|
1,231,188
|
|
|
|
1,208,607
|
|
Deferred
taxes
|
|
|
1,058,435
|
|
|
|
551,037
|
|
Other
long-term assets
|
|
|
9,003
|
|
|
|
8,282
|
|
Total
long-term assets
|
|
|
49,975,687
|
|
|
|
49,159,018
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
76,088,416
|
|
|
$
|
62,182,646
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,390,727
|
|
|
$
|
8,672,865
|
|
Other
payables and accrued liabilities
|
|
|
1,614,739
|
|
|
|
1,169,859
|
|
Short-term
debt
|
|
|
42,042,351
|
|
|
|
18,900,429
|
|
Customer
deposits
|
|
|
1,172,262
|
|
|
|
10,814,494
|
|
Due
to employees
|
|
|
66,407
|
|
|
|
16,810
|
|
Payable
to contractors
|
|
|
1,190,585
|
|
|
|
1,175,726
|
|
Due
to related parties
|
|
|
13,850,554
|
|
|
|
14,871,559
|
|
Deferred
taxes
|
|
|
471,655
|
|
|
|
450,853
|
|
Taxes
payable
|
|
|
580,872
|
|
|
|
570,768
|
|
Derivative
liabilities
|
|
|
410,531
|
|
|
|
-
|
|
Current
portion of long-term notes payable
|
|
|
541,702
|
|
|
|
531,767
|
|
Total
current liabilities
|
|
|
70,332,385
|
|
|
|
57,175,130
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
Long-term
bank loan
|
|
|
2,984,585
|
|
|
|
2,929,845
|
|
Deferred
taxes
|
|
|
876,535
|
|
|
|
722,636
|
|
Due
to employees
|
|
|
129,214
|
|
|
|
129,555
|
|
Total
long-term liabilities
|
|
|
3,990,334
|
|
|
|
3,782,036
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
74,322,719
|
|
|
|
60,957,166
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001 per share; 30,000,000 shares authorized,
17,012,458 and 12,640,000 shares issued and outstanding at September 30,
2010 and March 31, 2010, respectively
|
|
|
17,012
|
|
|
|
12,640
|
|
Additional
paid-in capital
|
|
|
8,376,523
|
|
|
|
4,573,205
|
|
Retained
deficit (restricted portion was $0 and $950,327 at September 30, 2010 and
March 31, 2010, respectively )
|
|
|
(9,220,233
|
)
|
|
|
(5,903,362
|
)
|
Accumulated
other comprehensive income
|
|
|
2,592,395
|
|
|
|
2,542,997
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
1,765,697
|
|
|
|
1,225,480
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
76,088,416
|
|
|
$
|
62,182,646
|
|
See accompanying notes to the condensed consolidated financial
statements.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(UNAUDITED)
|
|
Three Months Ended
September 30,
|
|
|
Six Months Ended
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
3,187,574
|
|
|
$
|
7,553,115
|
|
|
$
|
17,000,693
|
|
|
$
|
15,937,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
(1,688,721
|
)
|
|
|
(9,522,165
|
)
|
|
|
(16,567,459
|
)
|
|
|
(19,494,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT (LOSS)
|
|
|
1,498,853
|
|
|
|
(1,969,050
|
)
|
|
|
433,234
|
|
|
|
(3,557,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,821,007
|
|
|
|
478,077
|
|
|
|
2,469,372
|
|
|
|
1,206,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and distribution
|
|
|
10,988
|
|
|
|
260,196
|
|
|
|
253,588
|
|
|
|
547,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
9,112
|
|
|
|
15,045
|
|
|
|
27,460
|
|
|
|
42,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(342,254
|
)
|
|
|
(2,722,368
|
)
|
|
|
(2,317,186
|
)
|
|
|
(5,354,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(430,593
|
)
|
|
|
(426,547
|
)
|
|
|
(1,310,718
|
)
|
|
|
(887,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses), net
|
|
|
(459
|
)
|
|
|
6,263
|
|
|
|
8,988
|
|
|
|
2,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of derivatives
|
|
|
69,115
|
|
|
|
-
|
|
|
|
302,045
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(704,191
|
)
|
|
|
(3,142,652
|
)
|
|
|
(3,316,871
|
)
|
|
|
(6,239,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
-
|
|
|
|
(30,763
|
)
|
|
|
-
|
|
|
|
(85,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(704,191
|
)
|
|
|
(3,173,415
|
)
|
|
|
(3,316,871
|
)
|
|
|
(6,324,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
43,290
|
|
|
|
17,756
|
|
|
|
49,398
|
|
|
|
7,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
43,290
|
|
|
|
17,756
|
|
|
|
49,398
|
|
|
|
7,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
|
|
$
|
(660,901
|
)
|
|
$
|
(3,155,659
|
)
|
|
$
|
(3,267,473
|
)
|
|
$
|
(6,317,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
14,664,149
|
|
|
|
12,640,000
|
|
|
|
14,108,315
|
|
|
|
12,640,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE, BASIC AND DILUTED
|
|
$
|
(0.05
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.50
|
)
|
See accompanying notes to the condensed
consolidated financial statements.
NEW
ORIENTAL ENERGY & CHEMICAL CORP.AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2010
(UNAUDITED)
|
|
Common stock
|
|
|
Additional
Paid-in
|
|
|
Retained
|
|
|
Accumulated Other
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT MARCH 31, 2010
|
|
|
12,640,000
|
|
|
$
|
12,640
|
|
|
$
|
4,573,205
|
|
|
$
|
(5,903,362
|
)
|
|
$
|
2,542,997
|
|
|
$
|
1,225,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of 1,460,000 shares of common stock for cash, net of expenses and
derivative liabilities
|
|
|
1,460,000
|
|
|
|
1,460
|
|
|
|
893,772
|
|
|
|
-
|
|
|
|
-
|
|
|
|
895,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debt to common stock
|
|
|
2,912,458
|
|
|
|
2,912
|
|
|
|
2,909,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,912,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,398
|
|
|
|
49,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,316,871
|
)
|
|
|
-
|
|
|
|
(3,316,871
|
)
|
BALANCE AT SEPTEMBER 30,
2010
|
|
|
17,012,458
|
|
|
$
|
17,012
|
|
|
$
|
8,376,523
|
|
|
$
|
(9,220,233
|
)
|
|
$
|
2,592,395
|
|
|
$
|
1,765,697
|
|
See
accompanying notes to the condensed consolidated financial statements.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six Months Ended
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,316,871
|
)
|
|
$
|
(6,324,929
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,301,053
|
|
|
|
1,303,432
|
|
Gain
on disposal of plant and equipment
|
|
|
(8,629
|
)
|
|
|
-
|
|
Deferred
taxes
|
|
|
-
|
|
|
|
84,963
|
|
Write-down
of inventories to net realizable value
|
|
|
-
|
|
|
|
987,124
|
|
Change
in fair value of derivatives
|
|
|
(302,045
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
Decrease In:
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
5,945,940
|
|
|
|
(1,497,019
|
)
|
Prepayments
for goods
|
|
|
25,672
|
|
|
|
(335,620
|
)
|
Other
assets
|
|
|
(81,438
|
)
|
|
|
11,169
|
|
Due
from a related party
|
|
|
-
|
|
|
|
30,116
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) In:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(282,138
|
)
|
|
|
(1,537,352
|
)
|
Other
payables and accrued liabilities
|
|
|
540,451
|
|
|
|
120,194
|
|
Customer
deposits
|
|
|
(9,642,232
|
)
|
|
|
527,856
|
|
Due
to employees
|
|
|
49,597
|
|
|
|
806
|
|
Due
to a related party
|
|
|
65,678
|
|
|
|
54,885
|
|
Net
cash used in operating activities
|
|
|
(5,704,962
|
)
|
|
|
(6,574,375
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
-
|
|
|
|
(2,933,120
|
)
|
Purchases
of plant and equipment
|
|
|
(14,459
|
)
|
|
|
(24,755
|
)
|
Purchases
of construction in progress
|
|
|
(176,596
|
)
|
|
|
(1,330,415
|
)
|
Deposits
|
|
|
-
|
|
|
|
949,527
|
|
Purchases
of other long-term assets
|
|
|
(1,966
|
)
|
|
|
-
|
|
Proceeds
from disposal of plant and equipment
|
|
|
8,629
|
|
|
|
-
|
|
Due
from employees
|
|
|
3,585
|
|
|
|
(414,815
|
)
|
Notes
receivable
|
|
|
42,876
|
|
|
|
137,164
|
|
Net
cash used in investing activities
|
|
|
(137,931
|
)
|
|
|
(3,616,414
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from short-term debt
|
|
|
18,588,657
|
|
|
|
20,021,954
|
|
Repayments
of short-term debt
|
|
|
(15,553,617
|
)
|
|
|
(12,279,546
|
)
|
Due
to related parties
|
|
|
961,012
|
|
|
|
2,195,390
|
|
Proceeds
from issuance of common stock, net
|
|
|
1,607,808
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
5,603,860
|
|
|
|
9,937,798
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(239,033
|
)
|
|
|
(252,991
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(36,690
|
)
|
|
|
(35,145
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
319,816
|
|
|
|
410,870
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF
PERIOD
|
|
$
|
44,093
|
|
|
$
|
122,734
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
568,008
|
|
|
$
|
590,428
|
|
SUPPLEMENTAL
NON-CASH DISCLOSURES:
During
the six months ended September 30, 2010 and 2009, $0 and $25,651, respectively,
was transferred from construction in progress to plant and
equipment.
During
the six months ended September 30, 2010, $2,912,458 of due to related parties
was converted into common stock.
See
accompanying notes to the condensed consolidated financial statements.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
New
Oriental Energy & Chemical Corp. was incorporated under the laws of the
State of Delaware on November 15, 2004. The principal activities of New Oriental
Energy & Chemical Corp. and subsidiaries (“NOEC” or the “Company”) are the
manufacture and distribution of fertilizer and chemical products. The products
are distributed to markets in the People’s Republic of China (the
“PRC”).
The
unaudited condensed consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the requirements for reporting on Form
10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
However, such information reflects all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary for
the fair presentation of the consolidated financial position and the
consolidated results of operations. Results shown for interim periods are not
necessarily indicative of the results to be obtained for a full year. The
condensed consolidated balance sheet information as of March 31, 2010 was
derived from the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K. These interim financial statements should
be read in conjunction with that report.
The
accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company had a
net loss of $3,316,871 and has negative cash flow from operations of $5,704,962
for the six months ended September 30, 2010, and has a working capital deficit
of $44,219,656 at September 30, 2010.
The
Company will need to obtain additional financing to continue operations beyond
2011. Its primary source of capital is cash generated from operations as well as
through loans. If the Company is unable to obtain additional financing, it will
not be able to sustain its operations and would likely be required to cease its
operations. The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On
November 5 and November 10, 2010, notes to an unrelated third party in the
principal amount of $2,238,438 and $5,223,023 matured and the Company has not
made the outstanding payment of $1,119,219 and $1,566,907. Accordingly, the debt
holder may declare the principal outstanding due and payable
immediately.
On June
21, 2010, the Company ceased production for maintenance of the manufacturing
systems. On October 15, 2010, the Company finished maintenance and resumed
production.
On
November 15, 2010, the Company ceased production due to the Company's cash flow
problem. The Company is seeking financial resources to solve the problem.
The
Company did not continue production yet.
The major
shareholder has committed to provide financial assistance of RMB 30 to 50
million (approximately $4.4 to $7.3 million) over the next few years, if
necessary.
On November 15, 2010, the Company obtained financial support
from major shareholder. The major shareholder agreed to extend the period of
loans amount to $12,012,953 for one more year when it's due and promise to
provided guarantee for future debt if necessary.
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)
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
4.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED)
|
Inter-company
accounts and transactions have been eliminated in consolidation.
The
Company has major customers who accounted for the following percentage of total
sales and total customer deposits:
Customer
|
|
Sales
|
|
|
Customer
Deposits
|
|
|
|
Six Months Ended September
30,
|
|
|
As
of September
|
|
|
As
of March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
30,
2010
|
|
|
2010
|
|
Company
A
|
|
|
48.29
|
%
|
|
|
18.99
|
%
|
|
|
76.06
|
%
|
|
|
83.32
|
%
|
Company
B
|
|
|
10.06
|
%
|
|
|
15.69
|
%
|
|
|
13.34
|
%
|
|
|
5.16
|
%
|
The
Company has major suppliers who accounted for the following percentage of total
purchases and total accounts payable/deposits:
Supplier
|
|
Purchases
|
|
|
Accounts Payable
/Deposits
|
|
|
|
Six Months Ended September 30,
|
|
|
As of September
|
|
|
As of March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
30, 2010
|
|
|
2010
|
|
Company
C
|
|
|
40.30
|
%
|
|
|
49.03
|
%
|
|
|
13.37
|
%
|
|
|
0.24
|
%
|
Company
D
|
|
|
18.86
|
%
|
|
|
12.47
|
%
|
|
|
15.03
|
%
|
|
|
12.51
|
%
|
Company
E
|
|
|
15.93
|
%
|
|
|
9.87
|
%
|
|
|
12.79
|
%
|
|
|
6.38
|
%
|
The sole
market of the Company is the PRC for the six months ended September 30, 2010 and
2009.
(c)
|
Economic
and Political Risks
|
The
Company's operations are conducted in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general
state
of 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.
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, 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.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
4.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
These
tiers include:
• Level
1—defined as observable inputs such as quoted prices in active
markets;
• Level
2—defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and
• Level
3—defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions.
The
assets and liabilities measured at fair value on a recurring basis subject to
the disclosure requirements of ASC 820-10 as of September 30, 2010 are as
follows:
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Carrying value
as of
September 30,
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Fair
value of warrants
|
|
$
|
410,531
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
410,531
|
|
Long-term
bank loan
|
|
$
|
2,984,585
|
|
|
$
|
-
|
|
|
$
|
2,984,585
|
|
|
$
|
-
|
|
Cash and
cash equivalents consist primarily of high rated money market funds at a variety
of well-known institutions with original maturities of three months or less.
Restricted cash represent time deposits on account to secure short-term debt.
The original cost of these assets approximates fair value due to their
short-term maturity. See Note 10.
The
carrying amounts of other financial assets and liabilities, such as notes
receivable, due from employees, due from a related party, accounts payable,
other payables and accrued liabilities, short-term debt, customer deposits, due
to employees, payable to contractors, due to related parties, and taxes payable,
approximate their fair values because of the short-term maturity of these
instruments. The fair value of the Company’s long-term bank loan is estimated
based on the current rates offered to the Company for debt of similar terms and
maturities. Under this method, the Company’s fair value of long-term bank loan
was not significantly different from the carrying value at September 30,
2010.
(f)
|
Derivative
Financial Instruments
|
The
Company evaluates all of its financial instruments to determine if such
instruments are derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is initially recorded at
its fair value and is then re-valued at each reporting date, with changes in the
fair value reported in the condensed consolidated statements of operations. For
stock-based derivative financial instruments, the Company uses the Black-Scholes
option pricing models to value the derivative instruments at inception and on
subsequent valuation dates. We estimate expected volatility at the valuation
date based on recent history of the Company's stock price. Forfeiture rate is
estimated based on historical forfeiture patterns and adjusted to reflect future
change in circumstances and facts, if any. The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting period.
Notes 15 and 16.
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. The Company’s cost of goods
sold does not include inbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs, internal transfer costs and other
distribution network costs.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
4.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Net
realizable value is based on estimated selling prices less any further costs
expected to be incurred for completion and disposal.
The
interest cost associated with debt relating to construction projects is
capitalized and included in the cost of the project. When no debt is incurred
specifically for a project, interest is capitalized on amounts expended on the
project using weighted-average cost of the Company’s outstanding borrowings.
Capitalization of interest ceases when the project is substantially complete or
development activity is suspended for more than a brief period. Capitalized
interest for the six months ended September 30, 2010 and 2009 was $521,723 and
$224,064, respectively.
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, 2010
|
|
|
March 31, 2010
|
|
|
September 30, 2009
|
|
Period
end RMB: $ exchange rate
|
|
|
6.7011
|
|
|
|
6.8263
|
|
|
|
-
|
|
Average
period RMB: $ exchange rate
|
|
|
6.7637
|
|
|
|
-
|
|
|
|
6.8325
|
|
Basic
loss per share is computed by dividing loss available to common shareholders by
the weighted average number of common shares outstanding during the period. The
diluted loss per share calculation gives effect to all potentially dilutive
common shares outstanding during the period using the treasury stock method.
Common equivalent shares consist of shares issuable upon the exercise of stock
warrants. As of September 30, 2010, common stock equivalents were composed of
warrants convertible into 876,000 shares of the Company's common stock. For the
six months ended September 30, 2010, common equivalent shares have been excluded
from the calculation of loss per share as their effect is
anti-dilutive.
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.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
4.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
The fuel
segment involves the manufacture and sale of methanol and 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:
Fuel
Segment
:
For The Three Months Ended September 30, 2010
|
|
|
|
DME
|
|
|
Methanol
|
|
|
Segment Total
|
|
Revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
COGS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
For The Three Months Ended September 30, 2009
|
|
|
|
DME
|
|
|
Methanol
|
|
|
Segment Total
|
|
Revenues
|
|
|
-
|
|
|
$
|
712,459
|
|
|
$
|
712,459
|
|
COGS
|
|
|
-
|
|
|
|
1,120,855
|
|
|
|
1,120,855
|
|
Gross
loss
|
|
|
-
|
|
|
$
|
(408,396
|
)
|
|
$
|
(408,396
|
)
|
For The Six Months Ended September 30, 2010
|
|
|
|
DME
|
|
|
Methanol
|
|
|
Segment Total
|
|
Revenues
|
|
|
-
|
|
|
$
|
2,064,376
|
|
|
$
|
2,064,376
|
|
COGS
|
|
|
-
|
|
|
|
2,526,749
|
|
|
|
2,526,749
|
|
Gross
loss
|
|
|
-
|
|
|
$
|
(462,373
|
)
|
|
$
|
(462,373
|
)
|
For
The Six Months Ended September 30, 2009
|
|
|
|
DME
|
|
|
Methanol
|
|
|
Segment
Total
|
|
Revenues
|
|
|
-
|
|
|
$
|
2,377,765
|
|
|
$
|
2,377,765
|
|
COGS
|
|
|
-
|
|
|
|
3,902,399
|
|
|
|
3,902,399
|
|
Gross
loss
|
|
|
-
|
|
|
$
|
(1,524,634
|
)
|
|
$
|
(1,524,634
|
)
|
Fertilizer
Segment:
For The Three Months Ended September 30, 2010
|
|
|
|
Urea
|
|
|
Ammonium
Bicarbonate
|
|
|
Liquefied
Ammonia
|
|
|
Ammonia
Water
|
|
|
Segment Total
|
|
Revenues
|
|
$
|
3,173,217
|
|
|
$
|
7,733
|
|
|
|
-
|
|
|
$
|
6,624
|
|
|
$
|
3,187,574
|
|
COGS
|
|
|
1,676,695
|
|
|
|
7,700
|
|
|
|
-
|
|
|
|
4,326
|
|
|
|
1,688,721
|
|
Gross
(loss) profit
|
|
$
|
1,496,522
|
|
|
$
|
33
|
|
|
|
-
|
|
|
$
|
2,298
|
|
|
$
|
1,498,853
|
|
|
|
For
The Three Months Ended Sepember 30, 2009
|
|
|
|
Urea
|
|
|
Ammonium
Bicarbonate
|
|
|
Liquefied
Ammonia
|
|
|
Ammonia
Water
|
|
|
Segment
Total
|
|
Revenues
|
|
$
|
6,105,901
|
|
|
$
|
575,771
|
|
|
$
|
83,278
|
|
|
$
|
75,706
|
|
|
$
|
6,840,656
|
|
COGS
|
|
|
7,436,132
|
|
|
|
755,343
|
|
|
|
123,020
|
|
|
|
86,815
|
|
|
|
8,401,310
|
|
Gross
loss
|
|
$
|
(1,330,231
|
)
|
|
$
|
(179,572
|
)
|
|
$
|
(39,742
|
)
|
|
$
|
(11,109
|
)
|
|
$
|
(1,560,654
|
)
|
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
4.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
For The Six Months Ended September 30, 2010
|
|
|
|
Urea
|
|
|
Ammonium
Bicarbonate
|
|
|
Liquefied
Ammonia
|
|
|
Ammonia
Water
|
|
|
Segment Total
|
|
Revenues
|
|
$
|
13,955,180
|
|
|
$
|
768,903
|
|
|
$
|
100,958
|
|
|
$
|
111,276
|
|
|
$
|
14,936,317
|
|
COGS
|
|
|
12,990,356
|
|
|
|
826,057
|
|
|
|
116,514
|
|
|
|
107,783
|
|
|
|
14,040,710
|
|
Gross
(loss) profit
|
|
$
|
964,824
|
|
|
$
|
(57,154
|
)
|
|
$
|
(15,556
|
)
|
|
$
|
3,493
|
|
|
$
|
895,607
|
|
|
|
For
The Six Months Ended Sepember 30, 2009
|
|
|
|
Urea
|
|
|
Ammonium
Bicarbonate
|
|
|
Liquefied
Ammonia
|
|
|
Ammonia
Water
|
|
|
Segment
Total
|
|
Revenues
|
|
$
|
11,829,408
|
|
|
$
|
1,246,878
|
|
|
$
|
301,557
|
|
|
$
|
181,825
|
|
|
$
|
13,559,668
|
|
COGS
|
|
|
13,521,389
|
|
|
|
1,460,477
|
|
|
|
407,537
|
|
|
|
202,738
|
|
|
|
15,592,141
|
|
Gross
loss
|
|
$
|
(1,691,981
|
)
|
|
$
|
(213,599
|
)
|
|
$
|
(105,980
|
)
|
|
$
|
(20,913
|
)
|
|
$
|
(2,032,473
|
)
|
(m)
|
New
Accounting Pronouncements
|
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and liabilities
measured under Level 3 of the fair value measurement hierarchy. This guidance is
effective for the Company beginning March 1, 2010. The adoption of this guidance
did not have a material effect on the Company’s condensed consolidated financial
statements as of September 30, 2010.
Inventories
consist of the following:
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Finished
goods
|
|
$
|
6,338
|
|
|
$
|
6,108,597
|
|
Raw
materials
|
|
|
1,220,838
|
|
|
|
989,483
|
|
Packing
materials
|
|
|
521,159
|
|
|
|
509,603
|
|
Total
inventories, net
|
|
$
|
1,748,335
|
|
|
$
|
7,607,683
|
|
The net
book value of $0 and $3,868,274 of finished goods inventory is pledged as
collateral for short-term debt at September 30, 2010 and March 31, 2010,
respectively. See Note 10.
For the
six months ended September 30, 2010 and 2009, the Company recorded a write-down
of inventories to net realizable value of $0 and $987,124,
respectively.
6.
|
RELATED
PARTY TRANSACTIONS
|
(I)
|
Due
from a Related Party
|
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Huaiyang
Desheng Chemical Co., Ltd
|
|
$
|
236,204
|
|
|
$
|
231,872
|
|
Huaiyang
Desheng Chemical Co., Ltd (“Huaiyang Desheng”) is a company controlled by a
director of the Company. The 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.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
6.
|
RELATED
PARTY TRANSACTIONS (CONTINUED)
|
(II)
|
Due
to Related Parties
|
|
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Principal:
|
|
|
|
|
|
|
|
Xinyang
Hong Chang Pipeline Gas Co., Ltd.
|
(a)
|
|
$
|
12,012,953
|
|
|
$
|
10,840,426
|
|
Long
Triumph Investments Limited
|
(b)
|
|
|
-
|
|
|
|
1,344,328
|
|
Chen
Siqiang
|
(c)
|
|
|
-
|
|
|
|
1,025,446
|
|
Wang
Guiquan
|
(d)
|
|
|
-
|
|
|
|
131,843
|
|
Zhou
Dianchang
|
(e)
|
|
|
-
|
|
|
|
73,246
|
|
Mai
Xiaofu
|
(f)
|
|
|
-
|
|
|
|
146,492
|
|
Yu
Zhiyang
|
(g)
|
|
|
-
|
|
|
|
43,948
|
|
Yang
Hongtao
|
(h)
|
|
|
-
|
|
|
|
43,948
|
|
Subtotal
|
|
|
$
|
12,012,953
|
|
|
$
|
13,649,677
|
|
|
|
|
|
|
|
|
|
|
|
Interest:
|
|
|
|
|
|
|
|
|
|
Xinyang
Hong Chang Pipeline Gas Co., Ltd.
|
(a)
|
|
|
1,472,940
|
|
|
|
934,227
|
|
Chen
Siqiang
|
(c)
|
|
|
258,226
|
|
|
|
204,269
|
|
Wang
Guiquan
|
(d)
|
|
|
31,625
|
|
|
|
24,716
|
|
Zhou
Dianchang
|
(e)
|
|
|
17,569
|
|
|
|
13,731
|
|
Mai
Xiaofu
|
(f)
|
|
|
35,775
|
|
|
|
28,087
|
|
Yu
Zhiyang
|
(g)
|
|
|
10,733
|
|
|
|
8,426
|
|
Yang
Hongtao
|
(h)
|
|
|
10,733
|
|
|
|
8,426
|
|
Subtotal
|
|
|
$
|
1,837,601
|
|
|
$
|
1,221,882
|
|
Total
|
|
|
$
|
13,850,554
|
|
|
$
|
14,871,559
|
|
(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 consists of the following at September 30,
2010:
|
Due
December 30, 2010, interest rate at 8.748% per annum,
unsecured
|
|
$
|
2,984,585
|
|
Due
January 13, 2011, interest rate at 10.62% per annum,
unsecured
|
|
|
447,688
|
|
Due
January 20, 2011, interest rate at 10.62% per annum,
unsecured
|
|
|
1,044,605
|
|
Due
March 1, 2011, interest rate at 10.62% per annum,
unsecured
|
|
|
746,146
|
|
Due
March 25, 2011, interest rate at 15% per annum, unsecured
|
|
|
746,146
|
|
Due
April 9, 2011, interest rate at 10.62% per annum,
unsecured
|
|
|
596,917
|
|
Due
April 14, 2011, interest rate at 10.62% per annum,
unsecured
|
|
|
895,375
|
|
Due
December 10, 2010, interest rate at 10.62% per annum,
unsecured
|
|
|
746,146
|
|
Due
December 28, 2010, interest rate at 10.62% per annum,
unsecured
|
|
|
447,688
|
|
Due
December 31, 2010, interest rate at 10.62% per annum,
unsecured
|
|
|
298,458
|
|
Due
January 25, 2011, interest rate at 10.62% per annum,
unsecured
|
|
|
298,458
|
|
Due
February 9, 2011, interest rate at 10.62% per annum,
unsecured
|
|
|
447,688
|
|
Due
November 20, 2011, interest rate at 24% per annum,
unsecured
|
|
|
74,615
|
|
No
fixed repayment term, interest free, unsecured
|
|
|
2,238,438
|
|
Total
|
|
$
|
12,012,953
|
|
Interest
expense for the six months ended September 30, 2010 and 2009 is $554,348 and
$208,660, respectively. Of the $554,348 of interest expense, $450,756 was
capitalized interest in construction in progress, since the amount was used for
construction. Also see Note 9.
(b)
|
Long
Triumph Investments Limited is a former shareholder of the Company. On
August 27, 2010, the Company entered into Indebtedness Conversion
Agreements with Long Triumph Agreement for the conversion of $1,344,328 of
debt into shares of common stock of the Company at a conversion rate of
$1.00 per share. See Note 14.
|
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
6.
|
RELATED
PARTY TRANSACTIONS
(CONTINUED)
|
(c)
|
Chen
Siqiang is the chairman of the board and chief executive officer of the
Company. On September 28, 2010, the Company entered into Indebtedness
Conversion Agreements with Chen Siqiang for the conversion of $1,030,791
of debt into shares of common stock of the Company at a conversion rate of
$1.00 per share. See Note 14. The interest expense for the six months
ended September 30, 2010 and 2009 of $49,677 and $49,202 was capitalized
in construction in progress, since the amount was used for construction.
Also see Note 9.
|
(d)
|
Wang
Guiquan is the president and director of the Company. On September 28,
2010, the Company entered into Indebtedness Conversion Agreements with
Wang Guiquan for the conversion of $132,530 of debt into shares of common
stock of the Company at a conversion rate of $1.00 per share. See Note 14.
The interest expense for the six months ended September 30, 2010 and 2009
of $6,387 and $6,326 was capitalized interest in construction in progress,
since the amount was used for construction. Also see Note
9.
|
(e)
|
Zhou
Dianchang is a director of the Company. On September 28, 2010, the Company
entered into Indebtedness Conversion Agreements with Zhou Dianchang for
the conversion of $73,628 of debt into shares of common stock of the
Company at a conversion rate of $1.00 per share. See Note 14. The interest
expense for the six months ended September 30, 2010 and 2009 of $3,548 and
$3,514 was capitalized in construction in progress, since the amount was
used for construction. Also see Note
9.
|
(f)
|
Mai
Xiaofu is a director of the Company. On September 28, 2010, the Company
entered into Indebtedness Conversion Agreements with Mai Xiaofu for the
conversion of $147,256 of debt into shares of common stock of the Company
at a conversion rate of $1.00 per share. See Note 14. The interest expense
for the six months ended September 30, 2010 and 2009 of $7,097 and $7,029
was capitalized in construction in progress, since the amount was used for
construction. Also see Note
9.
|
(g)
|
Yu
Zhiyang is a significant shareholder of the Company. On September 28,
2010, the Company entered into Indebtedness Conversion Agreements with Yu
Zhiyang for the conversion of $44,177 of debt into shares of common stock
of the Company at a conversion rate of $1.00 per share. See Note 14. The
interest expense for the six months ended September 30, 2010 and 2009 of
$2,129 and $2,109 was capitalized in construction in progress, since the
amount was used for construction. Also see Note
9.
|
(h)
|
Yang
Hongtao is a significant shareholder of the Company. On September 28,
2010, the Company entered into Indebtedness Conversion Agreements with
Yang Hongtao for the conversion of $44,177 of debt into shares of common
stock of the Company at a conversion rate of $1.00 per share. See Note 14.
The interest expense for the six months ended September 30, 2010 and 2009
of $2,129 and $2,109 was capitalized in construction in progress, since
the amount was used for construction. Also see Note
9.
|
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Current
|
|
$
|
221,934
|
|
|
$
|
225,519
|
|
Total
amount due from employees
|
|
$
|
221,934
|
|
|
$
|
225,519
|
|
Amounts
due from employees are 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.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
Plant and
equipment consist of the following:
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
At
cost:
|
|
|
|
|
|
|
Buildings
|
|
$
|
2,493,002
|
|
|
$
|
2,447,278
|
|
Machinery
|
|
|
25,673,023
|
|
|
|
25,196,080
|
|
Motor
vehicles
|
|
|
328,631
|
|
|
|
344,841
|
|
Office
equipment
|
|
|
286,338
|
|
|
|
272,839
|
|
|
|
|
28,780,994
|
|
|
|
28,261,038
|
|
Less: Accumulated
depreciation
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
573,350
|
|
|
|
513,328
|
|
Machinery
|
|
|
12,477,065
|
|
|
|
11,076,634
|
|
Motor
vehicles
|
|
|
254,403
|
|
|
|
247,040
|
|
Office
equipment
|
|
|
204,941
|
|
|
|
177,474
|
|
|
|
|
13,509,759
|
|
|
|
12,014,476
|
|
Plant
and equipment, net
|
|
$
|
15,271,235
|
|
|
$
|
16,246,562
|
|
Depreciation
expense for the six months ended September 30, 2010 and 2009 is $1,281,492 and
$1,284,068, respectively.
The net
book value of machinery of $7,469,320 and $7,332,326 is pledged as collateral
for a long-term bank loan at September 30, 2010 and March 31, 2010,
respectively. See Note 12.
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Cost
|
|
$
|
1,832,682
|
|
|
$
|
1,799,069
|
|
Less:
Accumulated amortization
|
|
|
217,373
|
|
|
|
195,395
|
|
Land
use rights, net
|
|
$
|
1,615,309
|
|
|
$
|
1,603,674
|
|
Amortization
expense for the six months ended September 30, 2010 and 2009 is $18,157 and
$17,974, respectively.
The net
book value of $1,615,309 and $1,603,674 of land use rights are pledged as
collateral for short-term bank loans at September 30, 2010 and March 31, 2010,
respectively. See Note 10.
Amortization
expense for the next five years and thereafter is as follows:
Six
months ended March 31, 2011
|
|
$
|
18,327
|
|
2012
|
|
|
36,654
|
|
2013
|
|
|
36,654
|
|
2014
|
|
|
36,654
|
|
2015
|
|
|
36,654
|
|
Thereafter
|
|
|
1,450,366
|
|
Total
|
|
$
|
1,615,309
|
|
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
9.
|
CONSTRUCTION
IN PROGRESS
|
Construction
in progress consists of the following:
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Plant
|
|
$
|
28,440,629
|
|
|
$
|
27,176,737
|
|
Machinery
|
|
|
2,139,745
|
|
|
|
2,183,122
|
|
Other
|
|
|
210,143
|
|
|
|
180,997
|
|
|
|
$
|
30,790,517
|
|
|
$
|
29,540,856
|
|
Capitalized
interest for six months ended September 30, 2010 and 2009 is $521,723 and
$224,064, respectively.
Plant
construction in progress of $3,198,430 and $3,139,768 is pledged as collateral
for short-term bank loans at September 30, 2010 and March 31, 2010,
respectively. See Note 10.
Short-term
debt consists of the following:
|
|
September 30,
2010
|
|
|
March 31,
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Bank
Loans:
|
|
|
|
|
|
|
Xinyang
Commercial Bank, due April 28, 2010, interest rate at 10.08% per annum,
collateralized by finished goods inventory. (Repaid on its due
date)
|
|
$
|
-
|
|
|
$
|
1,464,922
|
|
|
|
|
|
|
|
|
|
|
Guangdong
Development Bank, due May 12, 2010, interest rate at 5.31% per annum,
collateralized by land use rights and guaranteed by Xinyang Hong Chang
Pipeline Gas Co., Ltd. (Repaid on its due date)
|
|
|
-
|
|
|
|
4,394,767
|
|
|
|
|
|
|
|
|
|
|
Rural
Credit Cooperatives, due August 16, 2010, interest rate at 9.56% per
annum, collateralized by construction in progress. (Repaid on its due
date)
|
|
|
-
|
|
|
|
556,671
|
|
|
|
|
|
|
|
|
|
|
Xinyang
Commercial Bank, due August 4, 2010, interest rate at 10.08% per annum,
collateralized by finished goods inventory. (Repaid on its due
date)
|
|
|
-
|
|
|
|
1,464,922
|
|
|
|
|
|
|
|
|
|
|
Rural
Credit Cooperatives, due October 23, 2010, interest rate at 10.62% per
annum, collateralized by construction in progress. (Repaid on its due
date)
|
|
|
581,994
|
|
|
|
571,320
|
|
|
|
|
|
|
|
|
|
|
Xinyang
Commercial Bank, due January 4, 2011, interest rate at 10.08% per annum,
guaranteed by Xinyang Hong Chang Pipeline Gas Co., Ltd.
|
|
|
2,387,668
|
|
|
|
2,343,875
|
|
|
|
|
|
|
|
|
|
|
Xinyang
Commercial Bank, due November 30, 2010, interest rate at 10.08% per annum,
guaranteed by Xinyang Hong Chang Pipeline Gas Co., Ltd.
|
|
|
1,492,292
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Guangdong
Development Bank, due April 15, 2011, interest rate at 5.31% per annum,
collateralized by land use rights and guaranteed by Xinyang Hong Chang
Pipeline Gas Co., Ltd.
|
|
|
4,476,878
|
|
|
|
-
|
|
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
10.
|
SHORT-TERM
DEBT (CONTINUED)
|
|
|
September 30,
2010
|
|
|
March 31,
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Xinyang
Commercial Bank, due August 10, 2011, interest rate at 10.08% per annum,
guaranteed by Xinyang Hong Chang Pipeline Gas Co., Ltd.
|
|
|
1,492,292
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Rural
Credit Cooperatives, due August 24, 2011, interest rate at 9.56% per
annum, collateralized by construction in progress.
|
|
|
567,071
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Notes Payable to
Unrelated Companies
:
|
|
|
|
|
|
|
|
|
Due
May 2, 2010 (Repaid on its due date)
|
|
|
-
|
|
|
|
2,197,384
|
|
Due
May 26, 2010 (Repaid on its due date)
|
|
|
-
|
|
|
|
2,197,384
|
|
Due
August 2, 2010 (Repaid on its due date)
|
|
|
-
|
|
|
|
1,611,415
|
|
Due
August 3, 2010 (Repaid on its due date)
|
|
|
-
|
|
|
|
732,461
|
|
Due
September 16, 2010 (Repaid on its due date)
|
|
|
-
|
|
|
|
585,969
|
|
Due
October 6, 2010 (Repaid on its due date)
|
|
|
2,238,438
|
|
|
|
-
|
|
Due
October 8, 2010 (Repaid on its due date)
|
|
|
4,103,804
|
|
|
|
-
|
|
Due
October 12, 2010 (Repaid on its due date)
|
|
|
3,730,731
|
|
|
|
-
|
|
Due
October 14, 2010 (Repaid on its due date)
|
|
|
4,476,877
|
|
|
|
-
|
|
Due
October 29, 2010 (Repaid on its due date)
|
|
|
2,238,438
|
|
|
|
-
|
|
Due
November 5, 2010
|
|
|
2,238,438
|
|
|
|
-
|
|
Due
November 10, 2010
|
|
|
5,223,023
|
|
|
|
-
|
|
Due
December 1, 2010
|
|
|
2,238,438
|
|
|
|
-
|
|
Due
February 3, 2010
|
|
|
2,387,668
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Notes Payable to
Unrelated Individuals
:
|
|
|
|
|
|
|
|
|
Due
December 3, 2010, interest rate at 15% per annum,
unsecured
|
|
|
137,291
|
|
|
|
339,862
|
|
Due
April 13, 2011, interest rate at 7.2% per annum, unsecured
|
|
|
447,688
|
|
|
|
439,477
|
|
Due
January 15, 2011, interest rate at 6% per annum, unsecured
|
|
|
1,492,292
|
|
|
|
-
|
|
The
amount is unsecured, interest free, and has no fixed repayment
terms
|
|
|
91,030
|
|
|
|
-
|
|
|
|
$
|
42,042,351
|
|
|
$
|
18,900,429
|
|
Interest
expense for the six months ended September 30, 2010 and 2009 was $1,165,009 and
$886,486, respectively.
Notes
payable to unrelated companies are interest-free. All the notes payable are
subject to bank charges of 0.05% of the principal as a commission on each loan
transaction. Bank charges for notes payable were $14,304 and $5,854 for the six
months ended September 30, 2010 and 2009, respectively.
The notes
to an unrelated third party due on November 5 and November 10, 2010 matured
subsequently, and the Company has not made the outstanding payment of $1,119,219
and $1,566,907. Accordingly, the debt holder may declare the principal
outstanding due and payable immediately.
Restricted
cash of $23,205,145 and $3,662,306 is collateral for the notes payable at
September 30, 2010 and March 31, 2010, respectively.
Construction
in progress is pledged as collateral for short-term bank loans at September 30,
2010 and March 31, 2010. See Note 9.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
11.
|
CURRENT
PORTION OF LONG-TERM NOTES PAYABLE
|
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Due
December 31, 2010, interest free, unsecured
|
|
$
|
541,702
|
|
|
$
|
531,767
|
|
In
September 2003, the Company purchased plant and machinery, a building and a land
use right from Luoshan Fertilizer Plant, a bankrupt company, for $4,633,601
through long-term notes payable. The remaining balance at September 30, 2010 is
$541,702.
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Luoshan
Rural Credit Cooperatives
|
|
$
|
2,984,585
|
|
|
$
|
2,929,845
|
|
The
long-term bank loan is collateralized by the Company’s machinery, has an
interest rate of 9.558% per annum and is due March 19, 2012. See Note
7.
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%.
Income
tax expense for the three months ended September 30, 2010 and 2009 is summarized
as follows:
|
|
Six Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Current:
|
|
|
|
|
|
|
CIT
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
CIT
|
|
|
-
|
|
|
|
(85,773
|
)
|
Income
tax expense
|
|
$
|
-
|
|
|
$
|
(85,773
|
)
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Computed
“expected” benefit
|
|
$
|
829,218
|
|
|
$
|
1,559,789
|
|
Permanent
differences
|
|
|
(422,210
|
)
|
|
|
-
|
|
Valuation
allowance
|
|
|
(407,008
|
)
|
|
|
(1,645,562
|
)
|
Income
tax expense
|
|
$
|
-
|
|
|
$
|
(85,773
|
)
|
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
13.
|
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, 2010 and March 31, 2010 are as
follows:
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Current
portion:
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
11,048
|
|
|
$
|
362,250
|
|
Financial
expense
|
|
|
12,402
|
|
|
|
12,175
|
|
Welfare
|
|
|
10,493
|
|
|
|
10,300
|
|
Provision
for notes receivable
|
|
|
186,536
|
|
|
|
183,115
|
|
Other
expense
|
|
|
69,276
|
|
|
|
54,612
|
|
Total
current deferred tax assets
|
|
|
289,755
|
|
|
|
622,452
|
|
Non-current
portion:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
|
5,116,750
|
|
|
|
4,202,344
|
|
Valuation
allowance
|
|
|
(4,058,315
|
)
|
|
|
(3,651,307
|
)
|
Total
non-current deferred tax assets
|
|
|
1,058,435
|
|
|
|
551,037
|
|
Total
deferred tax assets
|
|
|
1,348,190
|
|
|
|
1,173,489
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Current
portion:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
394,794
|
|
|
|
374,721
|
|
Government
grant
|
|
|
20,892
|
|
|
|
30,031
|
|
Investment
income
|
|
|
17,581
|
|
|
|
17,258
|
|
Other
expenses
|
|
|
38,388
|
|
|
|
28,843
|
|
Total
current deferred tax liabilities
|
|
|
471,655
|
|
|
|
450,853
|
|
Non-current
portion:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
35,480
|
|
|
|
32,094
|
|
Depreciation
|
|
|
841,055
|
|
|
|
690,542
|
|
Total
non-current deferred tax liabilities
|
|
|
876,535
|
|
|
|
722,636
|
|
Total
deferred tax liabilities
|
|
|
1,348,190
|
|
|
|
1,173,489
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
In June
2006, the FASB issued ASC 740-10, 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, 2010, the Company
does not have a liability for unrecognized tax benefits. There was no effect on
financial condition or results of operations as a result of implementing ASC
740-10.
The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. Federal or State income tax examinations
by tax authorities for years after 2006. During the periods open to examination,
the Company has net operating loss (“NOL”) and tax credit carry forwards for
U.S. federal and state tax purposes that have attributes from closed periods.
Since these NOLs and tax credit carry forwards may be utilized in future
periods, they remain subject to examination. The Company also files certain tax
returns in the PRC. As of September 30, 2010 the Company was not aware of any
pending income tax examinations by tax authorities in the
PRC.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
The
Company’s policy is to record interest and penalties on uncertain tax positions
as income tax expense. As of September 30, 2010, the Company has no accrued
interest or penalties related to uncertain tax positions.
In May
2010, the Company sold 1,460,000 shares of common stock and warrants to purchase
730,000 shares of common stock to certain individuals at $1.25 per unit, for net
proceeds of $1,607,807. The Company incurred total expenses of $217,177, which
were directly related to the sale of the common stock, and the amount was
deducted from the total proceeds and recorded to additional paid-in capital for
the six months ended September 30, 2010.
The fair
value of the warrants acquired by the investors was $552,800, which was
determined using the Black-Scholes valuation method, using the following
assumptions: no expected dividend yield; a risk-free interest rate of 1.56% and
1.21%, respectively; an expected life of 3 years; and an estimated volatility of
88.23% and 106.83%, respectively, based on recent history of its stock
price.
The fair
value of the warrants acquired by Internet Securities Inc., the placement agent
in connection with the sale of common stock, was $159,776, which was determined
using the Black-Scholes valuation method, using the following assumptions: no
expected dividend yield; a risk-free interest rate of 2.47%; an expected life of
5 years; and an estimated volatility of 88.23% based on recent history of its
stock price.
At the
grant date, the fair value of warrants in connection with the sale of common
stock is $712,576 and was recorded as derivative liabilities. Also see Notes 15
and 16.
On August
27, 2010, the Company entered into Indebtedness Conversion Agreements with Long
Triumph Investments Limited and Intellect Goal Investments Limited for the
conversion of $1,439,899 of debt into shares of common stock of the Company, par
value $0.001, at a conversion rate of $1.00 per share. The Company recorded the
excess amount of debt over the par value of $1,438,459 to additional paid-in
capital.
On
September 28, 2010, the Company entered into Indebtedness Conversion Agreements
with related parties for the conversion of $1,472,559 of debt into shares of
common stock of the Company, par value $0.001, at a conversion rate of $1.00 per
share. The Company recorded the excess amount of debt over the par value of
$1,471,087 to additional paid-in capital. See Note 6.
Common
Stock Warrants (also see Note 16)
On May 3,
2010 and May 25, 2010, the Company issued two series of warrants to certain
investors to purchase 680,000 and 50,000 shares of common stock at $2 per share
with a term of three years (730,000 warrants in the aggregate). The fair values
of the warrants were recorded as derivative liabilities. The fair value of the
warrants was $515,961 and $36,839, respectively, at the grant date, which was
determined using the Black-Scholes valuation method, using the following
assumptions: no expected dividend yield; a risk-free interest rate of 1.56% and
1.21%, respectively; an expected life of 3 years; and an estimated volatility of
88.23% and 106.83%, respectively, based on recent history of its stock
price.
On May 3,
2010, the Company issued warrants to Internet Securities Inc., the placement
agent in connection with the sale of common stock, for the purchase of 146,000
shares of common stock at $1.25 per share with a term of five years. We recorded
the fair value of the warrants as derivative liabilities. The fair value of the
warrant was $159,776 at the grant date, which was determined using the
Black-Scholes valuation method, using the following assumptions: no expected
dividend yield; a risk-free interest rate of 2.47%; an expected life of 5 years;
and an estimated volatility of 88.23% based on recent history of its stock
price.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
At
September 30, 2010, warrants outstanding were as follows:
|
|
Numbers of Shares
Underlying Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Warrants
outstanding at March 31, 2010
|
|
|
-
|
|
|
$
|
-
|
|
Warrants
granted
|
|
|
876,000
|
|
|
|
1.88
|
|
Warrants
expired
|
|
|
-
|
|
|
|
-
|
|
Warrants
outstanding at September 30, 2010
|
|
|
876,000
|
|
|
|
1.88
|
|
The
following table summarizes information about warrants outstanding at September
30, 2010:
Warrants outstanding and exercisable
|
|
Numbers of Shares under Warrants
|
|
Exercise Price
|
|
Expiration Date
|
|
Weighted
Average
Exercise Price
|
|
680,000
|
|
$
|
2.00
|
|
May
2, 2013
|
|
$
|
2.00
|
|
50,000
|
|
$
|
2.00
|
|
May
24, 2013
|
|
$
|
2.00
|
|
146,000
|
|
$
|
1.25
|
|
May
2, 2015
|
|
$
|
1.25
|
|
876,000
|
|
$
|
1.25-2.00
|
|
|
|
$
|
1.88
|
|
The
aggregate intrinsic value of the 876,000 warrants outstanding and exercisable as
of September 30, 2010 was zero.
16.
|
DERIVATIVE
LIABILITIES
|
In June
2008, the FASB issued authoritative guidance on determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock. Under the
authoritative guidance, effective January 1, 2009, instruments which do not have
fixed settlement provisions are deemed to be derivative
instruments. The strike price of warrants issued by the Company is
denominated in US dollars, a currency other than the Company’s functional
currency, RMB. As a result, the warrants are not considered indexed to the
Company’s own stock. The fair value of certain of the Company’s warrants has
been characterized as derivative liabilities. The FASB’s guidance
requires the fair value of these liabilities be re-measured at the end of every
reporting period with the change in value reported in the statement of
operations.
At
September 30, 2010, the Company had 876,000 warrants outstanding with a strike
price denominated in US dollars, a currency other than the Company’s functional
currency, RMB.
The
derivative liabilities were valued using the Black-Scholes valuation model with
the following assumptions:
|
|
September 30, 2010
|
|
|
At the date of issuance
|
|
Risk-free
interest rate
|
|
0.64%
to 1.27%
|
|
|
1.21%
to 2.47%
|
|
Expected
volatility
|
|
|
120.41
|
%
|
|
88.23%
to 106.83%
|
|
Expected
life (in years)
|
|
2.6
to 4.6 years
|
|
|
3
to 5 years
|
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$
|
410,531
|
|
|
$
|
712,576
|
|
The
risk-free interest rate is based on the yield available on U.S. Treasury
securities. The Company estimates volatility based on the historical volatility
of its common stock. The expected life of the warrants is based on the
expiration date of the warrants. The expected dividend yield was based on the
fact that the Company has not paid dividends to common shareholders in the past
and does not expect to pay dividends to common shareholders in the
future.
The
Company measured the fair value of the warrants as of September 30, 2010 as
$410,531. For the six months ended September 30, 2010, the Company recorded a
gain on the change in the fair value of derivatives of $302,045.
NEW
ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS
ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
In
November 2007, the Company initiated a lawsuit in the Intermediate Court of
Xinyang City (the “Intermediate Court”) against the Xi County government and
Henan Shiji Jinyuan Chemicals Co., Ltd. (the “Shiji Jinyuan”, formerly Xixian
Fertilizer Plant) for non-payment of the Xi County government note receivable of
RMB 5 million (approximately $650,000) on its due date as set forth under the
Luoshan Agreement, and
sought
the enforcement of the terms of the note receivable and the Luoshan Agreement
for payment of the RMB 5 million (approximately $650,000) by both the Xi County
government and Shiji Jinyuan. On June 12, 2009, the court entered judgment
against the Xi County government and Shiji Jinyuan in amount of RMB 5 million
(approximately $650,000) to be paid before June 22, 2009. In addition, the
judgment ordered the Xi County government and Shiji Jinyuan to pay the Company
interest and late fee based on market rates. On December 16, 2009, the Xi County
government and Shiji Jinyuan appealed to the Higher Court of Henan Province
(“Higher Court”). On April 13, 2010, the Higher Court entered final judgment to
reject the appeal and sustain the original judgment. On June 17, 2010, the
Intermediate Court issued an enforcement notice to the Xi County government and
Shiji Jinyuan. The Xi County government and Shiji Jinyuan did not pay the amount
to the Company before June 21, 2010. On September 30, 2010, the Company had a
reserve against the RMB 5 million ($736,279) note of $736,279 due to the
uncertainty of collection.
The Company is in default of certain debt. See Note
10.
As of
September 30, 2010, the Company entered into agreements and made a down payment
of $25.1 million toward the purchase of production equipment to be used in the
production of methanol. The Company is required to pay the remainder of the
purchase price of approximately $7.82 million prior to delivery of the
equipment, which is estimated to occur in 2010. The amount paid is recorded in
construction in progress. Through September 30, 2010, the Company used its
working capital and borrowed money from its shareholders to fund the project.
The Company originally planned on completing the project by December 2009,
however, financing needs have delayed the estimated completion date of the
project until December 2010.
On
October 29, 2010, the Company obtained a short-term bank loan for RMB 3.8
million (approximately $0.57million) with an interest rate of 11.16% per annum
from Luoshan Rural Credit Cooperatives, which is due on October 25,
2011.
On
October 18, 2010, the Company entered into an Indebtedness Conversion Agreement
with Xingyang Hongchang Channel Gas Engineering Co., Ltd. for the conversion of
$3,010,200 of debt into 3,010,200 shares of common stock of the Company. The
converted debt consisted of loans used to fund the construction of the Company's
methanol production facility.
The Company defaulted on certain debt in November 2010. See
Note 10.
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, 2010. The
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles of the United States
(“GAAP”).
Forward
Looking Statements
We are including the following
discussion to inform our existing and potential security holders of some of the
risks and uncertainties that can affect us and to take advantage of the “safe
harbor” protection for forward-looking statements that applicable federal
securities laws afford. From time to time, our management or persons acting on
our behalf make forward-looking statements to inform existing and potential
security holders about our Company. These forward-looking statements include
information about possible or assumed future results of our operations. All
statements, other than statements of historical facts, included or incorporated
by reference in this report that address activities, events or developments that
we expect or anticipate may occur in the future, including such things as future
capital expenditures, business strategy, competitive strengths, goals, growth of
our business and operations, plans and references to future successes, may be
considered forward-looking statements. Also, when we use words such as
“anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” “forecast,”
“may,” “should,” “budget,” “goal,” “expect,” “probably” or similar expressions,
we are making forward-looking statements. Many risks and uncertainties may
impact the matters addressed in these forward-looking statements. Our
forward-looking statements speak only as of the date made and we will not update
such forward-looking statements unless the securities laws require us to do
so.
Some of
the key factors which could cause our future financial results and performance
to vary from those expected include:
|
Ÿ
|
The
loss of primary customers;
|
|
Ÿ
|
Our
ability to implement productivity improvements, cost reduction initiatives
or facilities expansions;
|
|
Ÿ
|
Market
developments affecting, and other changes in, the demand for our products
and the introduction of new competing
products;
|
|
Ÿ
|
Availability
or increases in the price of our primary raw materials or active
ingredients;
|
|
Ÿ
|
The
timing of planned capital
expenditures;
|
|
Ÿ
|
Our
ability to identify, develop or acquire, and market additional product
lines and businesses necessary to implement our business strategy and our
ability to finance such acquisitions and
development;
|
|
Ÿ
|
The
condition of the capital markets generally, which will be affected by
interest rates, foreign currency fluctuations and general economic
conditions;
|
|
Ÿ
|
The
ability to obtain registration and re-registration of our products under
applicable law;
|
|
Ÿ
|
The
political and economic climate in the foreign or domestic jurisdictions in
which we conduct business;
|
|
Ÿ
|
Other
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; and
|
|
Ÿ
|
The
Company is a going concern and could have difficulty obtaining additional
financing to continue operations and to refinance current
debt.
|
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.
Fair
Value of Financial Instruments
ASC
820-10, 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.
These
tiers include:
•Level
1—defined as observable inputs such as quoted prices in active
markets;
•Level
2—defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and
•Level
3—defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions.
The
assets and liabilities measured at fair value on a recurring basis subject to
the disclosure requirements of ASC 820-10 as of September 30, 2010 are as
follows:
|
|
Fair
Value
Measurements
at
Reporting
Date
Using
|
|
|
|
Carrying value as
of September 30,
|
|
|
Quoted Prices
in Active Markets
for Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
2010
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Fair
value of warrants
|
|
$
|
410,531
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
410,531
|
|
Long-term
bank loan
|
|
$
|
2,984,585
|
|
|
$
|
-
|
|
|
$
|
2,984,585
|
|
|
$
|
-
|
|
Cash and
cash equivalents consist primarily of high rated money market funds at a variety
of well-known institutions with original maturities of three months or less.
Restricted cash represent time deposits on account to secure short-term debt.
The original cost of these assets approximates fair value due to their
short-term maturity.
The
carrying amounts of other financial assets and liabilities, such as notes
receivable, due from employees, due from a related party, accounts payable,
other payables and accrued liabilities, short-term debt, customer deposits, due
to employees, payable to contractors, due to related parties, and taxes payable,
approximate their fair values because of the short-term maturity of these
instruments. The fair value of the Company’s long-term bank loan is estimated
based on the current rates offered to the Company for debt of similar terms and
maturities. Under this method, the Company’s fair value of long-term bank loan
was not significantly different from the carrying value at September 30,
2010.
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.
Impairment
of Long-Lived Assets
Authoritative
guidance issued by the FASB establishes guidelines regarding when impairment
losses on long-lived assets, which include property and equipment, should be
recognized, and how impairment losses should be measured. Management regularly
reviews property, equipment and other long-lived assets for possible
impairment. This review occurs quarterly, or more frequently if
events or changes in circumstances indicate the carrying amount of the asset may
not be recoverable. If there is indication of impairment, then
management prepares an estimate of future cash flows (undiscounted and without
interest charges) expected to result from the use of the asset and its eventual
disposition. If these cash flows are less than the carrying amount of
the asset, an impairment loss is recognized to write down the asset to its
estimated fair value. Management’s assumptions about cash flows
and discount rates require significant judgment. There were no
indications of impairment based on management’s assessment at September 30,
2010. Factors we consider important that could trigger an impairment
review include significant underperformance relative to historical or projected
future operating results, significant changes in the manner of the use of our
assets or the strategy for our overall business, and significant negative
industry or economic trends.
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.
Derivative
Financial Instruments
The
Company evaluates all of its financial instruments to determine if such
instruments are derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is initially recorded at
its fair value and is then re-valued at each reporting date, with changes in
the fair value reported in the condensed consolidated statements of
operations. For stock-based derivative financial instruments, the Company uses
the Black-Scholes option pricing models to value the derivative instruments at
inception and on subsequent valuation dates. We estimate expected volatility at
the valuation date based on recent history of the Company's stock price.
Forfeiture rate is estimated based on historical forfeiture patterns and
adjusted to reflect future change in circumstances and facts, if any. The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period.
Income
taxes
The Company utilizes ASC
740 “Accounting for Income Taxes”, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
Foreign
currency transactions and comprehensive income (loss)
Accounting principles generally require
that recognized revenue, expenses, gains and losses be included in net income.
Certain statements, however, require entities to report specific changes in
assets and liabilities, such as gain or loss on foreign currency translation, as
a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income. Transactions
occur in Chinese Renminbi (“RMB”). The unit of RMB is in Yuan.
Recent
Accounting Pronouncements
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.”
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and liabilities
measured under Level 3 of the fair value measurement hierarchy. This guidance is
effective for the Company beginning March 1, 2010. The adoption of this guidance
did not have a material effect on the Company’s condensed consolidated financial
statements as of September 30, 2010.
Overview
The Company was incorporated in the
State of Delaware on November 15, 2004, and its operating subsidiary, Henan
Jinding Chemical Industry Co. Ltd. (“Henan Jinding”), is headquartered in Henan
Province, the PRC. The Company is a 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 ASC 805
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.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2010 as Compared to
Three
Months Ended September 30, 2009
|
|
Three Months Ended
September 30, 2010
|
|
|
Three Months Ended
September 30, 2009
|
|
|
Comparisons
|
|
|
|
Amount
|
|
|
Percentage of
Revenues
|
|
|
Amount
|
|
|
Percentage
of Revenues
|
|
|
Change in
Amount
|
|
|
Increase
(Decrease) in
Percentage
|
|
Item
|
|
US $
|
|
|
(%)
|
|
|
US $
|
|
|
(%)
|
|
|
US $
|
|
|
(%)
|
|
Revenues
|
|
|
3,187,574
|
|
|
|
100.00
|
%
|
|
|
7,553,115
|
|
|
|
100.00
|
%
|
|
|
(4,365,541
|
)
|
|
|
(57.80
|
)%
|
Cost
of Goods Sold
|
|
|
(1,688,721
|
)
|
|
|
(52.98
|
)%
|
|
|
(9,522,165
|
)
|
|
|
(126.07
|
)%
|
|
|
7,833,444
|
|
|
|
(82.27
|
)%
|
Gross
profit (loss)
|
|
|
1,498,853
|
|
|
|
47.02
|
%
|
|
|
(1,969,050
|
)
|
|
|
(26.07
|
)%
|
|
|
3,467,903
|
|
|
|
(176.12
|
)%
|
General
& administrative
|
|
|
1,821,007
|
|
|
|
57.13
|
%
|
|
|
478,077
|
|
|
|
6.33
|
%
|
|
|
1,342,930
|
|
|
|
280.90
|
%
|
Selling
and distribution
|
|
|
10,988
|
|
|
|
0.34
|
%
|
|
|
260,196
|
|
|
|
3.44
|
%
|
|
|
(249,208
|
)
|
|
|
(95.78
|
)%
|
Research
and development
|
|
|
9,112
|
|
|
|
0.29
|
%
|
|
|
15,045
|
|
|
|
0.20
|
%
|
|
|
(5,933
|
)
|
|
|
(39.44
|
)%
|
Loss
from operations
|
|
|
(342,254
|
)
|
|
|
(10.74
|
)%
|
|
|
(2,722,368
|
)
|
|
|
(36.04
|
)%
|
|
|
2,380,114
|
|
|
|
(87.43
|
)%
|
Interest
expense, net
|
|
|
(430,593
|
)
|
|
|
(13.51
|
)%
|
|
|
(426,547
|
)
|
|
|
(5.65
|
)%
|
|
|
(4,046
|
)
|
|
|
0.95
|
%
|
Other
income (expenses), net
|
|
|
(459
|
)
|
|
|
(0.01
|
)%
|
|
|
6,263
|
|
|
|
0.08
|
%
|
|
|
(6,722
|
)
|
|
|
(107.33
|
)%
|
Change
in fair value of derivatives liabilities
|
|
|
69,115
|
|
|
|
2.17
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
69,115
|
|
|
|
100.00
|
%
|
Loss
before income taxes
|
|
|
(704,191
|
)
|
|
|
(22.09
|
)%
|
|
|
(3,142,652
|
)
|
|
|
(41.61
|
)%
|
|
|
2,438,461
|
|
|
|
(77.59
|
)%
|
Income
tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,763
|
)
|
|
|
(0.41
|
)%
|
|
|
30,763
|
|
|
|
(100.00
|
)%
|
Net
loss
|
|
|
(704,191
|
)
|
|
|
(22.09
|
)%
|
|
|
(3,173,415
|
)
|
|
|
(42.01
|
)%
|
|
|
2,469,224
|
|
|
|
(77.81
|
)%
|
Foreign
currency translation gain (loss)
|
|
|
43,290
|
|
|
|
1.36
|
%
|
|
|
17,755
|
|
|
|
0.24
|
%
|
|
|
25,535
|
|
|
|
143.82
|
%
|
Weighted
average shares outstanding basic and diluted
|
|
|
14,664,149
|
|
|
|
|
|
|
|
12,640,000
|
|
|
|
|
|
|
|
2,024,149
|
|
|
|
16.01
|
%
|
Net
loss per share, basic and diluted
|
|
|
(0.05
|
)
|
|
|
|
|
|
(0.25)
|
|
|
|
|
|
|
0.20
|
|
|
|
(80.00
|
)
%
|
Revenues,
Cost of Goods Sold and Gross Profit (Loss)
Revenues for the three months ended
September 30, 2010 were $3,187,574, which represented a decrease of 57.80% from
the same period in the prior year. This was mainly due to the Company stopping
all production for maintenance of the manufacturing systems from June 21, 2010
to October 15, 2010. This resulted in the decrease in sales volume of products
as compared to last year. The Company finished maintenance and resumed
production on October 15, 2010.
On
November 15, 2010, the Company ceased production due to the Company’s cash flow
problem. The Company is seeking financial resources to solve the
problem.
Cost of Goods Sold (“COGS”) for the
three months ended September 30, 2010 was $1,688,721, which was 52.98% of total
revenues and represents an 82.27% decrease, as compared to $9,522,165, and
126.07% of total revenues for the three months ended September 30, 2009. This
was mainly due to the decrease in sales volume and the production cost of
products as compared to the same period last year.
COGS as a percentage of revenue may
fluctuate in the future. This fluctuation may primarily be due to changes in the
price of raw materials, which can have a significant impact on the
COGS.
Gross loss is calculated by deducting
from revenues the cost of raw materials used to produce the finished products as
well as charges for depreciation, employee welfare, repairs to machinery and
equipment, all inventory costs and all other costs incident to or necessary for
the production of our products. The Company’s COGS line item does not include
any inbound freight charges, purchasing and receiving costs, inspection costs,
warehousing costs, internal transfer costs, and the other costs of our
distribution network. The Company’s gross profit may not be
comparable to those of other entities, since some entities include all of the
costs related to their distribution network in COGS and others exclude a portion
of them from gross profit.
Gross profit (loss) increased by
$3,467,903, or 176.12%, to $1,498,853 for the three months ended September 30,
2010 as compared to $(1,969,050) for the three months ended September 30,
2009. This increase was mainly due to the increase in the selling price and
the decrease in the production cost of products as compared to the same period
last year.
|
|
|
|
DME
|
|
|
Methanol
|
|
|
Urea
|
|
|
Ammonium
Bicarbonate
|
|
|
Liquefied
Ammonia
|
|
|
Ammonia
Water
|
|
2011Q2
|
|
Revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
3,173,217
|
|
|
|
7,733
|
|
|
|
-
|
|
|
|
6,624
|
|
|
|
COGS
|
|
|
-
|
|
|
|
-
|
|
|
|
1,676,695
|
|
|
|
7,700
|
|
|
|
-
|
|
|
|
4,326
|
|
|
|
Gross
(Loss) Profit
|
|
|
-
|
|
|
|
-
|
|
|
|
1,496,522
|
|
|
|
33
|
|
|
|
-
|
|
|
|
2,298
|
|
|
|
Gross
Margin
|
|
|
-
|
|
|
|
-
|
|
|
|
47.16
|
%
|
|
|
0.43
|
%
|
|
|
-
|
|
|
|
34.69
|
%
|
2010Q2
|
|
Revenues
|
|
|
-
|
|
|
|
712,459
|
|
|
|
6,105,901
|
|
|
|
575,771
|
|
|
|
83,278
|
|
|
|
75,706
|
|
|
|
COGS
|
|
|
-
|
|
|
|
1,120,855
|
|
|
|
7,436,132
|
|
|
|
755,343
|
|
|
|
123,020
|
|
|
|
86,815
|
|
|
|
Gross
Profit (Loss)
|
|
|
-
|
|
|
|
(408,396
|
)
|
|
|
(1,330,231
|
)
|
|
|
(179,572
|
)
|
|
|
(39,742
|
)
|
|
|
(11,109
|
)
|
|
|
Gross
Margin
|
|
|
-
|
|
|
|
(57.32
|
)%
|
|
|
(21.79
|
)%
|
|
|
(31.19
|
)%
|
|
|
(47.72
|
)%
|
|
|
(14.67
|
)%
|
Changes
|
|
Revenues
|
|
|
-
|
|
|
|
(712,459
|
)
|
|
|
(2,932,684
|
)
|
|
|
(568,038
|
)
|
|
|
(83,278
|
)
|
|
|
(69,082
|
)
|
|
|
Percentage
|
|
|
-
|
|
|
|
(100.00
|
)%
|
|
|
(48.03
|
)%
|
|
|
(98.66
|
)%
|
|
|
(100.00
|
)%
|
|
|
(91.25
|
)%
|
Sales of urea decreased $2,932,684, or
48.03%, to $3,173,217 for the three months ended September 30, 2010, as compared
to $6,105,901 for the three months ended September 30, 2009. This was mainly due
to the Company stopping urea production for maintenance of the manufacturing
systems from June 21, 2010 to October 15, 2010. This resulted in the decrease in
sales volume of products as compared to last year. The Company finished
maintenance and resumed production on October 15, 2010.
On
November 15, 2010, the Company ceased production due to the Company’s cash flow
problem. The Company is seeking financial resources to solve the
problem.
The gross margin of urea increased to
47.16% for the three months ended September 30, 2010, as compared to (21.79)%
for the three months ended September 30, 2009. This was mainly due to the
increase in the selling price and the decrease in the production cost as
compared to the same period last year.
Sales of ammonium bicarbonate for the
three months ended September 30, 2010 were $7,733, which represented an decrease
of 98.66% from the same period in the prior year. This was mainly due to the
Company stopping ammonium bicarbonate production for maintenance of the
manufacturing systems from June 21, 2010 to October 15, 2010. This resulted in
the decrease in sales volume of products as compared to last year. The Company
finished maintenance and resumed production on October 15, 2010. On November 15,
2010, the Company ceased production due to the Company’s cash flow problem. The
Company is seeking financial resources to solve the problem.
The gross margin of ammonium
bicarbonate increased to 0.43% for the three months ended September 30, 2010 as
compared to (31.19)% for the same period of the prior year. This was mainly due
to the increase in the selling price and the decrease in the production cost as
compared to the same period last year.
Sales of methanol decreased to $0 for
the three months ended September 30, 2010. This was mainly due to the Company
stopping methanol production for maintenance of the manufacturing systems from
June 21, 2010 to October 15, 2010. The Company finished maintenance and resumed
production on October 15, 2010. On November 15, 2010, the Company ceased
production due to the Company’s cash flow problem. The Company is seeking
financial resources to solve the problem.
Sales of liquefied
ammonia decreased to $0 for the three months ended September 30, 2010. This
was mainly due to the Company stopping methanol production for maintenance of
the manufacturing systems from June 21, 2010 to October 15, 2010. The Company
finished maintenance and resumed production on October 15, 2010. On November 15,
2010, the Company ceased production due to the Company’s cash flow problem. The
Company is seeking financial resources to solve the problem.
Sales of DME decreased to $0 for the
three months ended September 30, 2010. This was due to the decrease in the
selling price which would have resulted in a negative gross profit of DME
sales. Management ceased the production of DME temporarily. Based on
the management's estimation, when the market price of DME increases to over RMB
3,600 per ton in China, the Company's DME will have positive gross profit. The
Company plans to resume the production of DME in the near future, and expects
such production to return to normal levels within one year.
The gross margin of ammonia water
increased 49.36% for the three months ended September 30, 2010 as compared to
(14.67)% for the same period prior year. This was mainly due to the fact that
the increase in the selling price and the decrease in the production cost
as compared to the same period last year.
|
|
Three Months Ended
September 30, 2010
|
|
|
Three Months Ended
September 30, 2009
|
|
|
Comparisons
|
|
Provinces
|
|
Amount
US $
|
|
|
Percentage
of Revenues
(%)
|
|
|
Amount
US $
|
|
|
Percentage
of Revenues
(%)
|
|
|
Change in
Amount
US $
|
|
|
Increase
(Decrease) in
Percentage
(%)
|
|
Henan Province
|
|
|
605,591
|
|
|
|
19.00
|
%
|
|
|
2,616,881
|
|
|
|
34.64
|
%
|
|
|
(2,011,290
|
)
|
|
|
(76.86
|
)%
|
Guangdong
Province
|
|
|
2,487,181
|
|
|
|
78.03
|
%
|
|
|
3,869,100
|
|
|
|
51.23
|
%
|
|
|
(1,381,919
|
)
|
|
|
(35.72
|
)%
|
Hubei
Province
|
|
|
49,529
|
|
|
|
1.55
|
%
|
|
|
170,655
|
|
|
|
2.26
|
%
|
|
|
(121,126
|
)
|
|
|
(70.98
|
)%
|
Anhui
Province
|
|
|
45,273
|
|
|
|
1.42
|
%
|
|
|
839,772
|
|
|
|
11.12
|
%
|
|
|
(794,499
|
)
|
|
|
(94.61
|
)%
|
Hunan
Province
|
|
|
-
|
|
|
|
-
|
|
|
|
31,523
|
|
|
|
0.42
|
%
|
|
|
(31,523
|
)
|
|
|
(100.00
|
)%
|
Hebei
Province
|
|
|
-
|
|
|
|
-
|
|
|
|
25,184
|
|
|
|
0.33
|
%
|
|
|
(25,184
|
)
|
|
|
(100.00
|
)%
|
Total
|
|
|
3,187,574
|
|
|
|
100.00
|
%
|
|
|
7,553,115
|
|
|
|
100.00
|
%
|
|
|
(4,365,541
|
)
|
|
|
(57.80
|
)%
|
The sales
for three months ended September 30, 2010 in all provinces decreased as compared
to the same period last year. This was mainly due to the Company stopping all
production for maintenance of the manufacturing systems from June 21, 2010 to
October 15, 2010. This resulted in the decrease in sales volume of products as
compared to last year. The Company finished maintenance and resumed
production on October 15, 2010. On November 15, 2010, the Company ceased
production due to the Company’s cash flow problem. The Company is seeking
financial resources to solve the problem.
Operating
Expenses
The
Company incurred general and administrative expenses of $1,821,007 for the three
months ended September 30, 2010, representing an increase of $1,342,930, or
280.90%, as compared to $478,077 for the three months ended September 30, 2009.
This was mainly due to the Company stopped production for maintenance of the
manufacturing systems during June 21 to October 15, 2010. During the period when
production ceased, the Company ceased capitalizing certain costs into inventory
and expensed them to general and administrative expenses. The Company
finished maintenance and resumed production on October 15, 2010.
The Company incurred selling and
distribution expenses of $10,988 for the three months ended September 30, 2010,
a decrease of $249,208, or 95.78%, as compared to $260,196 for the three months
ended September 30, 2009.
This was mainly due to the
Company stopping urea production for maintenance of the manufacturing systems
from June 21, 2010 to October 15, 2010. This resulted in the decrease in sales
volume of products as compared to last year. The Company finished maintenance
and resumed production on October 15, 2010.
The Company incurred R&D expenses
of $9,112 for the three months ended September 30, 2010, representing a
decrease of $5,933, or 39.44%, compared to $15,045 for the three months ended
September 30, 2009.
Income
Tax Expense
The Company incurred income tax expense
of $0 for the three months ended September 30, 2010, a decrease of $30,763, or
100%, as compared to $30,763, for the three months ended September 30, 2009.
This decrease is mainly attributable to the decrease in the reserve against the
net operating loss carry forward deferred tax asset.
Net
Loss
The Company’s net loss of $704,191 for
the three months ended September 30, 2010 represented a decrease of $2,469,224,
or 77.81%, as compared to a net loss of $3,173,415 for the three months ended
September 30, 2009. This decrease was mainly due to the decrease in production
costs as compared to the same period last year offset by the increase in
the change in fair value of derivatives liabilities of $69,115 in the
reporting period.
Six
Months Ended September 30, 2010 as Compared to
Six
Months Ended September 30, 2009
|
|
Six Months Ended
September 30, 2010
|
|
|
Six Months Ended
September 30, 2009
|
|
|
Comparisons
|
|
|
|
Amount
|
|
|
Percentage
of Revenues
|
|
|
Amount
|
|
|
Percentage
of Revenues
|
|
|
Change in
Amount
|
|
|
Increase
(Decrease) in
Percentage
|
|
Item
|
|
US $
|
|
|
(%)
|
|
|
US $
|
|
|
(%)
|
|
|
US $
|
|
|
(%)
|
|
Revenues
|
|
|
17,000,693
|
|
|
|
100.00
|
%
|
|
|
15,937,433
|
|
|
|
100.00
|
%
|
|
|
1,063,260
|
|
|
|
6.67
|
%
|
Cost
of Goods Sold
|
|
|
(16,567,459
|
)
|
|
|
(97.45
|
)%
|
|
|
(19,494,540
|
)
|
|
|
(122.32
|
)%
|
|
|
2,927,081
|
|
|
|
(15.01
|
)%
|
Gross
profit ( loss)
|
|
|
433,234
|
|
|
|
2.55
|
%
|
|
|
(3,557,107
|
)
|
|
|
(22.32
|
)%
|
|
|
3,990,341
|
|
|
|
(112.18
|
)%
|
General
& administrative
|
|
|
2,469,372
|
|
|
|
14.53
|
%
|
|
|
1,206,715
|
|
|
|
7.57
|
%
|
|
|
1,262,657
|
|
|
|
104.64
|
%
|
Selling
and distribution
|
|
|
253,588
|
|
|
|
1.49
|
%
|
|
|
547,716
|
|
|
|
3.44
|
%
|
|
|
(294,128
|
)
|
|
|
(53.70
|
)%
|
Research
and development
|
|
|
27,460
|
|
|
|
0.16
|
%
|
|
|
42,673
|
|
|
|
0.27
|
%
|
|
|
(15,213
|
)
|
|
|
(35.65
|
)%
|
Loss
from operations
|
|
|
(2,317,186
|
)
|
|
|
(13.63
|
)%
|
|
|
(5,354,211
|
)
|
|
|
(33.60
|
)%
|
|
|
3,037,025
|
|
|
|
(56.72
|
)%
|
Interest
expense, net
|
|
|
(1,310,718
|
)
|
|
|
(7.71
|
)%
|
|
|
(887,699
|
)
|
|
|
(5.57
|
)%
|
|
|
(423,019
|
)
|
|
|
47.65
|
%
|
Other
income (expenses), net
|
|
|
8,988
|
|
|
|
0.05
|
%
|
|
|
2,754
|
|
|
|
0.02
|
%
|
|
|
6,234
|
|
|
|
226.36
|
%
|
Change
in fair value of derivatives liabilities
|
|
|
302,045
|
|
|
|
1.78
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
302,045
|
|
|
|
100.00
|
%
|
Loss
before income taxes
|
|
|
(3,316,871
|
)
|
|
|
(19.51
|
)%
|
|
|
(6,239,156
|
)
|
|
|
(39.15
|
)%
|
|
|
2,922,285
|
|
|
|
(46.84
|
)%
|
Income
tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(85,773
|
)
|
|
|
(0.54
|
)%
|
|
|
85,773
|
|
|
|
(100.00
|
)%
|
Net
loss
|
|
|
(3,316,871
|
)
|
|
|
(19.51
|
)%
|
|
|
(6,324,929
|
)
|
|
|
(39.69
|
)%
|
|
|
3,008,058
|
|
|
|
(47.56
|
)%
|
Foreign
currency translation gain (loss)
|
|
|
49,398
|
|
|
|
0.29
|
%
|
|
|
7,743
|
|
|
|
0.05
|
%
|
|
|
41,655
|
|
|
|
537.97
|
%
|
Weighted
average shares outstanding basic and diluted
|
|
|
14,108,315
|
|
|
|
|
|
|
|
12,640,000
|
|
|
|
|
|
|
|
1,468,315
|
|
|
|
11.62
|
%
|
Net
loss per share, basic and diluted
|
|
|
(0.24
|
)
|
|
|
|
|
|
|
(0.50
|
)
|
|
|
|
|
|
|
0.26
|
|
|
|
(52.00
|
)%
|
Revenues,
Cost of Goods Sold and Gross Profit (Loss)
Revenues
for the six months ended September 30, 2010 were $17,000,693, which represented
an increase of 6.67% from the same period in the prior year. This was mainly due
to the increase in the selling price of products as compared to the same period
last year.
Cost of Goods Sold (“COGS”) for the six
months ended September 30, 2010 was $16,567,459, which is 97.45% of total
revenues and represents a 15.01% decrease as compared to $19,494,540 and 122.32%
of total revenues for the six months ended September 30, 2009. This was mainly
due to the decrease in sales volume and the production cost of products as
compared to the same period last year.
Gross profit (loss) increased
$3,990,341, or 112.18%, to $433,234 for the six months ended September 30, 2010
as compared to $(3,557,107) for the six months ended September 30, 2009. This
increase was mainly due to the increase in the selling price and the production
cost of product as compared to the same period last year.
|
|
Six Months Ended
September 30, 2010
|
|
|
Six Months Ended
September 30, 2009
|
|
|
Comparisons
|
|
Products
|
|
Amount
US $
|
|
|
Percentage
of Revenues
(%)
|
|
|
Amount
US $
|
|
|
Percentage
of
Revenues
(%)
|
|
|
Change in
Amount
US $
|
|
|
Increase
(Decrease) in
Percentage
(%)
|
|
Urea
|
|
|
13,955,180
|
|
|
|
82.10
|
%
|
|
|
11,829,408
|
|
|
|
74.23
|
%
|
|
|
2,125,772
|
|
|
|
17.97
|
%
|
Ammonium
bicarbonate
|
|
|
768,903
|
|
|
|
4.52
|
%
|
|
|
1,246,878
|
|
|
|
7.82
|
%
|
|
|
(477,975
|
)
|
|
|
(38.33
|
)%
|
Methanol
|
|
|
2,064,376
|
|
|
|
12.14
|
%
|
|
|
2,377,765
|
|
|
|
14.92
|
%
|
|
|
(313,389
|
)
|
|
|
(13.18
|
)%
|
Liquefied
Ammonia
|
|
|
100,958
|
|
|
|
0.59
|
%
|
|
|
301,557
|
|
|
|
1.89
|
%
|
|
|
(200,599
|
)
|
|
|
(66.52
|
)%
|
Ammonia
Water
|
|
|
111,276
|
|
|
|
0.65
|
%
|
|
|
181,825
|
|
|
|
1.14
|
%
|
|
|
(70,549
|
)
|
|
|
(38.80
|
)%
|
Total
|
|
|
17,000,693
|
|
|
|
100.00
|
%
|
|
|
15,937,433
|
|
|
|
100.00
|
%
|
|
|
1,063,260
|
|
|
|
6.67
|
%
|
Sales of
urea increased $2,125,772, or 17.97%, to $13,955,180 for the six months ended
September 30, 2010 as compared to $11,829,408 for the six months ended September
30, 2009. This was mainly due to the increase in the selling price of urea as
compared to the same period of last year.
Sales of
ammonium bicarbonate decreased $477,975, or 38.33%, to $768,903 for the six
months ended September 30, 2010 as compared to $1,246,878 for the six months
ended September 30, 2009. This was mainly due to the Company stopping ammonium
bicarbonate production for maintenance of the manufacturing systems from June
21, 2010 to October 15, 2010. This resulted in the decrease in sales volume of
products as compared to last year. The Company finished maintenance and resumed
production on October 15, 2010. On November 15, 2010, the Company ceased
production due to the Company’s cash flow problem. The Company is seeking
financial resources to solve the problem.
Sales of
methanol decreased 13.18% to $2,064,376, from $2,377,765 for the six months
ended September 30, 2010 as compared to the same period of last year. This was
mainly due to the Company stopping methanol production for maintenance of the
manufacturing systems from June 21, 2010 to October 15, 2010. This resulted in
the decrease in sales volume of products as compared to last year. The Company
finished maintenance and resumed production on October 15, 2010. On November 15,
2010, the Company ceased production due to the Company’s cash flow problem. The
Company is seeking financial resources to solve the problem.
Sales of
liquefied ammonia decreased 66.52% to $100,958, from $301,557 for the six months
ended September 30, 2010 as compared to the same period of last year. This was
mainly due to the Company stopping methanol production for maintenance of the
manufacturing systems from June 21, 2010 to October 15, 2010. The Company
finished maintenance and resumed production on October 15, 2010. On November 15,
2010, the Company ceased production due to the Company’s cash flow problem. The
Company is seeking financial resources to solve the problem.
Sales of
ammonia water decreased 38.80% to $111,276, from $181,825 for the six months
ended September 30, 2010 as compared to the same period of last year. This was
mainly due to the Company stopping ammonia water production for maintenance of
the manufacturing systems from June 21, 2010 to October 15, 2010. This resulted
in the decrease in sales volume of products as compared to last year. The
Company finished maintenance and resumed production on October 15, 2010. On
November 15, 2010, the Company ceased production due to the Company’s cash flow
problem. The Company is seeking financial resources to solve the
problem.
Divided
by Regions
|
|
Six Months Ended
September 30, 2010
|
|
|
Six Months Ended
September 30, 2009
|
|
|
Comparisons
|
|
Provinces
|
|
Amount
US $
|
|
|
Percentage
of Revenues
(%)
|
|
|
Amount
US $
|
|
|
Percentage
of Revenues
(%)
|
|
|
Change in
Amount
US $
|
|
|
Increase
(Decrease) in
Percentage
(%)
|
|
Henan
Province
|
|
|
4,477,576
|
|
|
|
26.34
|
%
|
|
|
5,485,364
|
|
|
|
34.43
|
%
|
|
|
(1,007,788
|
)
|
|
|
(18.37
|
)%
|
Guangdong
Province
|
|
|
9,714,255
|
|
|
|
57.14
|
%
|
|
|
7,008,470
|
|
|
|
43.97
|
%
|
|
|
2,705,785
|
|
|
|
38.61
|
%
|
Hubei
Province
|
|
|
1,070,882
|
|
|
|
6.30
|
%
|
|
|
347,487
|
|
|
|
2.18
|
%
|
|
|
723,395
|
|
|
|
208.18
|
%
|
Anhui
Province
|
|
|
1,721,721
|
|
|
|
10.13
|
%
|
|
|
2,939,057
|
|
|
|
18.44
|
%
|
|
|
(1,217,336
|
)
|
|
|
(41.42
|
)%
|
Hunan
Province
|
|
|
2,199
|
|
|
|
0.01
|
%
|
|
|
94,521
|
|
|
|
0.59
|
%
|
|
|
(92,322
|
)
|
|
|
(97.67
|
)%
|
Hebei
Province
|
|
|
-
|
|
|
|
-
|
|
|
|
32,110
|
|
|
|
0.20
|
%
|
|
|
(32,110
|
)
|
|
|
(100.00
|
)%
|
Jiangxi
Province
|
|
|
-
|
|
|
|
-
|
|
|
|
30,424
|
|
|
|
0.19
|
%
|
|
|
(30,424
|
)
|
|
|
(100.00
|
)%
|
Guangxi
Province
|
|
|
14,060
|
|
|
|
0.08
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
14,060
|
|
|
|
100.00
|
%
|
Total
|
|
|
17,000,693
|
|
|
|
100.00
|
%
|
|
|
15,937,433
|
|
|
|
100.00
|
%
|
|
|
1,063,260
|
|
|
|
6.67
|
%
|
The sales
for the six months ended September 30, 2010 in the Guangdong Province and Hubei
Province increased by 38.61% and 208.18% respectively as compared to the same
period last year. This increase was mainly attributable to the Company’s
reinforcement of its marketing strategy and expansion of its market
share.
The sales
for the six months ended September 30, 2010 in other provinces decreased as
compared to the same period last year.
This was mainly due to the
Company stopping all production for maintenance of the manufacturing systems
from June 21, 2010 to October 15, 2010. This resulted in the decrease in sales
volume of products as compared to last year. The Company finished maintenance
and resumed production on October 15, 2010. On November 15, 2010, the Company
ceased production due to the Company’s cash flow problem. The Company is seeking
financial resources to solve the problem.
Operating
Expenses
The
Company incurred general and administrative expenses of $2,469,372 for the six
months ended September 30, 2010, representing an increase of $1,262,657, or
104.64%, as compared to $1,206,715 for the six months ended September 30, 2009.
This was mainly due to the Company stopped production for maintenance of the
manufacturing systems during June 21 to October 15, 2010. During the period when
production ceased, the Company ceased capitalizing certain costs into inventory
and expensed them to general and administrative expenses. The Company
finished maintenance and resumed production on October 15, 2010.
The Company incurred selling and
distribution expenses of $253,588 for the six months ended September 30, 2010, a
decrease of $294,128, or 53.7%, as compared to $547,716 for the six months ended
September 30, 2009. This was mainly due to the Company stopping urea production
for maintenance of the manufacturing systems from June 21, 2010 to October 15,
2010. This resulted in the decrease in sales volume of products as compared to
last year. The Company finished maintenance and resumed production on October
15, 2010.
The Company incurred R&D expenses
of $27,460 for the six months ended September 30, 2010, representing a decrease
of $15,213, or 35.65%, compared to $42,673 for the six months ended September
30, 2009.
Income
Tax Expense
The
Company incurred income tax expense of $0 for the six months ended September 30,
2010, a decrease of $85,773, or 100%, as compared to $85,773, for the six months
ended September 30, 2009. This decrease is mainly attributable to the decrease
in the reserve against the net operating loss carry forward deferred tax
asset.
Net
Loss
The
Company’s net loss of $3,316,871 for the six months ended September 30, 2010
represented a decrease of $3,008,058, or 47.56%, as compared to a net loss of
$6,324,929 for the six months ended September 30, 2009. This decrease was mainly
due to the decrease in the production cost as compared to the same period last
year offset by the increase in the change in fair value of derivatives
liabilities of $
302,045 in the reporting
period.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
|
|
Six
Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Net
cash provided by (used in)
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(5,704,962
|
)
|
|
$
|
(6,574,375
|
)
|
Investing
activities
|
|
|
(137,931
|
)
|
|
|
(3,201,599
|
)
|
Financing
activities
|
|
|
5,603,860
|
|
|
|
9,522,983
|
|
Net
change in cash and cash equivalents
|
|
|
(239,033
|
)
|
|
|
(252,991
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(36,690
|
)
|
|
|
(35,145
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
319,816
|
|
|
|
410,870
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
44,093
|
|
|
$
|
122,734
|
|
Cash flows used in operating activities
during the six months ended September 30, 2010 amounted to $5,704,962, which was
mainly due to the Company’s net loss of $3,316,871 in the reporting period and
the decrease in customer deposits by $9,642,232.
As of September 30, 2010, the cash
provided by investing activities was $137,931, which represented the expenditure
on construction of the third phase of the 600,000 ton DME facility
project.
As of September 30, 2010, the cash
provided by financing activities was $5,603,860, which represented the net
increase short-term debt and the increase in proceeds from issuance of common
stock in the reporting period.
Liquidity
The
Company has a working capital deficit of $44,219,656 as of September 30, 2010,
and the Company incurred a net loss of $3,316,871 and negative cash flow from
operations of $5,704,962 for the six months ended September 30, 2010.
On
November 5 and November 10, 2010, notes to an unrelated third party in the
principal amount of $2,238,438 and $5,223,023 matured and the Company has not
made the outstanding payment of $1,119,219 and $1,566,907. Accordingly, the debt
holder may declare the principal outstanding due and payable immediately.
The
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty. These matters raise
substantial doubt about the Company’s ability to continue as a going concern.
Management recognizes that the Company’s continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to allow the Company
to continue the development of its business plans and satisfy its current and
long-term obligations on a timely basis. The Company believes that it will be
able to complete the necessary steps in order to meet its cash requirements
throughout the fiscal year ending March 31, 2011. The condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
To
increase our cash resources, the Company obtained a short-term bank loan for RMB
3.8 million (approximately $0.57 million) with an interest rate of 11.16% per
annum from Luoshan Rural Credit Cooperatives, which is due on October 25, 2011.
Also in 2010, the Company obtained commitments from major shareholder to provide
working capital to the Company, if needed, in the form of loan. We believe our
working capital will increase and liquidity will be improved. We also believe
the Company has sufficient cash to sustain operations for the next 12
months.
As of
September 30, 2010, our total assets were $76,088,416 and our total liabilities
were $74,322,719. Our debt to asset ratio, calculated as total liabilities
(including short-term debt and payables) over total assets, was
97.68%.
As of September 30, 2010, our total
assets were $76,088,416 and our operating revenue for the six months ended
September 30, 2010 was $17,000,693, reflecting a total asset turnover of
0.22.
As of September 30, 2010, we had
working capital deficit of $44,219,656. This was mainly due to the increase in
the Company's net loss and capital expenditure in connection with the
construction of the third phase of the 600,000 ton DME facility project. We will
finance capital expenditures through bank loans and related party
loans.
We will
finance our business activity through bank loans and related party
loans. The Company obtained a short-term bank loan for RMB 3.8
million (approximately $0.57 million) with an interest rate of 11.16% per annum
from Luoshan Rural Credit Cooperatives, which is due on October 25, 2011. We
intend to finance other capital expenditures mainly from cash flows from our
operations, and from notes payable, bank loans and related party loans, if
needed. We believe that cash flow from our operations will improve as business
operations rebound and as the global economy gradually recovers. We believe that
existing cash and resources are sufficient to meet our projected operating
requirements during the next 12 months.
CONTINGENT
LIABILITIES
None.
OFF
BALANCE SHEET ARRANGEMENTS
None.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk.
Not Applicable.
Item
4. Controls
and Procedures.
A.
Evaluation of Disclosure Controls and Procedures:
The Company maintains disclosure
controls and procedures and internal controls designed to ensure that
information required to be disclosed in the Company's filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. The Company's management, with the participation of its
principal executive and financial officers, has evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q. The Company's principal executive
and financial officers have concluded, based on such evaluation, that such
disclosure controls and procedures were effective for the purpose for which they
were designed as of the end of such period.
B.
Changes in Internal Control over Financial Reporting:
There was no change in the Company's
internal control over financial reporting that was identified in connection with
such evaluation that occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item
1. Legal
Proceedings
On
December 29, 2004, the Company entered into an agreement (the “Luoshan
Agreement”) to purchase Luoshan Fertilizer Plant, a bankrupt company and to
assume $1.3 million in debt owed by Xixian Fertilizer Plant (the principal
shareholder of Luoshan Fertilizer Plant). Under the Luoshan Agreement, the
Company was to receive reimbursements of RMB 5 million (approximately $650,000)
from both the Luoshan County government and the Xi County government, which were
to be received before December 29, 2007. Luoshan County government paid its note
of RMB 5 million (approximately $650,000) to the Company on its due
date.
In
November 2007, the Company initiated a lawsuit in the Intermediate Court of
Xinyang City (the “Intermediate Court”) against the Xi County government and
Henan Shiji Jinyuan Chemicals Co., Ltd. (the “Shiji Jinyuan”, formerly Xixian
Fertilizer Plant) for non-payment of the Xi County government note receivable of
RMB 5 million (approximately $650,000) on its due date as set forth under the
Luoshan Agreement, and sought the enforcement of the terms of the note
receivable and the Luoshan Agreement for payment of the RMB 5 million
(approximately $650,000) by both the Xi County government and Shiji Jinyuan. On
June 12, 2009, the court entered judgment against the Xi County government and
Shiji Jinyuan in amount of RMB 5 million (approximately $650,000) to be paid
before June 22, 2009. In addition, the judgment ordered the Xi County government
and Shiji Jinyuan to pay the Company interest and late fee based on market
rates. On December 16, 2009, the Xi County government and Shiji Jinyuan appealed
to the Higher Court of Henan Province.(“Higher Court”). On April 13, 2010, the
Higher Court entered final judgment to reject the appeal and sustain the
original judgment. On June 17, 2010, the Intermediate Court issued enforcement
notice to the Xi County government and Shiji Jinyuan. The Xi County government
and Shiji Jinyuan did not pay the amount to the Company before June 21, 2010. On
September 30, 2010, the Company had a reserve against the RMB 5 million
($736,279) note of $736,279 due to the uncertainty of collection.
Item
1A. Risk
Factors.
Not
required.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
On August
26, 2010, the Company entered into Indebtedness Conversion Agreements with two
former stockholders, Long Triumph Investments Limited and Intellect Goal
Investments Limited, for the conversion of $700,000 and $739,899 of debt,
respectively, into shares of common stock of the Company at a conversion rate of
$1.00 per share. The converted debt consisted of advances made from
time to time to pay expense on behalf of the Company. The
consideration for the issuance of the shares of common stock of the Company is
the cancellation of the debt owed by the Company to Long Triumph Investments
Limited and Intellect Goal Investments Limited.
On
September 28, 2010, the Company entered into Indebtedness Conversion Agreements
with each of Chen Siqiang, Mai Xiaofu, Wang Guiquan, Zhou Dianchang, Yu Zhiyang
and Yang Hongtao (collectively, the “Holders”) for the conversion of $938,496,
$221,239, $132,743, $73,746, $54,351 and $54,351 of debt, respectively, into
shares of common stock of the Company at a conversion rate of $1.00 per
share. The converted debt consisted of loans used to fund the
construction of the Company’s methanol production facility. The
consideration for the issuance of the shares of common stock of the Company is
the cancellation of the debt owed by the Holders.
The shares of the Company’s common
stock were issued in reliance on exemptions from securities registration
afforded by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
of Regulation D as promulgated by the SEC under the Securities Act 1933, and in
reliance on similar exemptions under applicable state securities
laws. When appropriate, we determined that the purchaser of
securities described above was a sophisticated investor with the financial
ability to assume the risk of its investment in our securities and acquired such
securities for its own account and not with a view to any distribution thereof
to the public.
Item
3. Defaults
Upon Senior Securities.
None.
Item
4. (Removed
and Reserved).
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, 2010.
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 Description
|
|
|
|
2.1
|
|
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
|
|
Securities
Purchase and Registration Rights Agreement, dated May 3, 2010, by and
between the Company and the Investors listed on the Schedule of Buyers
attached thereto. (6)
|
|
|
|
10.2
|
|
Securities
Purchase and Registration Rights Agreement, dated May 25, 2010, by and
between the Company and the Investors listed on the Schedule of Buyers
attached thereto. (4)
|
|
|
|
10.3
|
|
Form
of Warrant. (6)
|
|
|
|
10.4
|
|
Indebtedness
Conversion Agreement, dated August 27, 2010, by and between the Company
and Long Triumph Investments Limited. (7)
|
|
|
|
10.5
|
|
Indebtedness
Conversion Agreement, dated August 27, 2010, by and between the Company
and Intellect Goal Investments Limited. (7)
|
|
|
|
10.6
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Chen Siqiang. (8)
|
|
|
|
10.7
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Mai Xiaofu. (8)
|
|
|
|
10.8
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Wang Guiquan. (8)
|
|
|
|
10.9
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Zhou Dianchang. (8)
|
|
|
|
10.10
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Yu Zhiyang. (8)
|
10.11
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Yang Hongtao. (8)
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act
of 2002 *
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act
of 2002 *
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act
of 2002 *
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
of 2002 *
|
|
|
|
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)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10Q for the period
ended June 30, 2010.
|
(5)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2008.
|
(6)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K dated May 4,
2010.
|
(7) Incorporated
by reference to the Company’s Current Report on Form 8-K dated September 1,
2010.
(8) Incorporated
by reference to the Company’s Current Report on Form 8-K dated September 30,
2010.
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 Qiang
|
|
Chen
Si Qiang
|
|
Chief
Executive Officer and Chairman of the Board
|
|
|
By:
|
/s/ Donglai Li
|
|
Donglai
Li
|
|
Chief
Financial Officer
|
Date: November
22, 2010
INDEX
TO EXHIBITS
Exhibit
Number
|
|
Exhibit Description
|
|
|
|
2.1
|
|
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
|
|
Securities
Purchase and Registration Rights Agreement, dated May 3, 2010, by and
between the Company and the Investors listed on the Schedule of Buyers
attached thereto. (6)
|
|
|
|
10.2
|
|
Securities
Purchase and Registration Rights Agreement, dated May 25, 2010, by and
between the Company and the Investors listed on the Schedule of Buyers
attached thereto. (4)
|
|
|
|
10.3
|
|
Form
of Warrant. (6)
|
|
|
|
10.4
|
|
Indebtedness
Conversion Agreement, dated August 27, 2010, by and between the Company
and Long Triumph Investments Limited. (7)
|
|
|
|
10.5
|
|
Indebtedness
Conversion Agreement, dated August 27, 2010, by and between the Company
and Intellect Goal Investments Limited. (7)
|
|
|
|
10.6
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Chen Siqiang. (8)
|
|
|
|
10.7
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Mai Xiaofu. (8)
|
|
|
|
10.8
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Wang Guiquan. (8)
|
|
|
|
10.9
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Zhou Dianchang. (8)
|
|
|
|
10.10
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Yu Zhiyang. (8)
|
|
|
|
10.11
|
|
Indebtedness
Conversion Agreement, dated September 28, 2010, by and between the Company
and Yang Hongtao. (8)
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act
of 2002 *
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act
of 2002 *
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act
of 2002 *
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
of 2002 *
|
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)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2010
|
(5)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2008.
|
(6)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K dated May 4,
2010.
|
(7)
Incorporated by reference to the Company’s Current Report on Form 8-K dated
September 1, 2010.
(8)
Incorporated by reference to the Company’s Current Report on Form 8-K dated
September 30, 2010.