10-Q 1 v202548_10q.htm
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
 
 
F -1

 
 
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.
 
 
F -2

 
 
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.
 
 
F -3

 
 
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.
  
 
F -4

 
 
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.
 
 
F -5

 
 
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”).

2. 
BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The condensed consolidated balance sheet information as of March 31, 2010 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K. These interim financial statements should be read in conjunction with that report.

3. 
GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company had a net loss of $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)
 
F -6

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.
 
(b) 
Concentrations

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.

(d) 
Use of Estimates

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

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

(e) 
Fair Value of Financial Instruments

ASC 820-10, Fair Value Measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.
 
F -7

 
NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE 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.

(g) 
Inventories
 
Inventories are stated at the lower of cost or net realizable value (market). The cost of raw materials is determined on a weighted average basis. Finished goods costs are determined on a weighted average basis and comprise direct materials, direct labor and an appropriate proportion of overhead. 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.
 
F -8

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.

(h)
Capitalized Interest

The interest cost associated with debt relating to construction projects is capitalized and included in the cost of the project. When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using weighted-average cost of the Company’s outstanding borrowings. Capitalization of interest ceases when the project is substantially complete or development activity is suspended for more than a brief period. Capitalized interest for the six months ended September 30, 2010 and 2009 was $521,723 and $224,064, respectively.

(i)
Revenue Recognition
 
Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:
 
-Persuasive evidence of an arrangement exists,
-Delivery has occurred or services have been rendered,
-The seller’s price to the buyer is fixed or determinable, and
-Collectability is reasonably assured.
 
(j)
Foreign Currency Translation

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

   
September 30, 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  

(k) 
Loss Per Share

Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding during the period. The diluted loss per share calculation gives effect to all potentially dilutive common shares outstanding during the period using the treasury stock method. Common equivalent shares consist of shares issuable upon the exercise of stock warrants. As of 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.

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

The Company has determined that there are two reportable segments:

The fertilizer segment is made up of four business units, which involve the manufacture and sale of urea, carbonate hydrogen ammonia, liquefied ammonia and ammonia water.
 
F -9

 
NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
 
4.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(l) 
Segments (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 )
  
F -10

 
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)

(l) 
Segments (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.

5.
INVENTORIES
 
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.
 
F -11

   
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.
 
F -12

 
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.

(III)
Due from employees

   
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.

 
F -13

 
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)
 
7. 
PLANT AND EQUIPMENT

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.

8.
LAND USE RIGHTS

   
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  
 
F -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)
 
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.

10.
SHORT-TERM DEBT

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       -  
 
F -15

 
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.
 
F -16

 
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.

12.
LONG-TERM BANK LOAN

   
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.

13.
INCOME TAXES

Corporation Income Tax (“CIT”)

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

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 )
 
F -17

 
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.

F -18

 
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.
 
14.
SHAREHOLDERS’ EQUITY

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

15.
WARRANTS

Common Stock Warrants (also see Note 16)

On May 3, 2010 and May 25, 2010, the Company issued two series of warrants to certain investors to purchase 680,000 and 50,000 shares of common stock at $2 per share with a term of three years (730,000 warrants in the aggregate). The fair 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.

F -19

 
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)
   
15.
WARRANTS (CONTINUED)
 
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.
 
F -20

 
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)
 
17.
CONTINGENCIES
 
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.

18. 
CAPITAL COMMITMENT

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.

19.
SUBSEQUENT EVENTS

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.
 
 
F -21

 
 
Item 2.    Management’s Discussion and Analysis of Financial Conditions and Results of Operations
  
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with the condensed consolidated financial statements and the accompanying notes of New Oriental Energy & Chemical Corp. (the “Company”, “we” or “our”) for the quarter ended 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.
 
 
22

 
 
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.

 
23

 
 
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.
 
 
24

 

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.

 
25

 
  
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.

 
26

 

       
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.

 
27

 

   
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.

 
28

 
 
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.

 
29

 

   
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.

 
30

 

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.

 
31

 

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.

 
32

 

Capital Resources

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.

 
33

 

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).

 
34

 

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)
 
35

 
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)
 

 *
Filed herewith.
(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.

 
36

 

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)
 

 *
Filed herewith.
(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.