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
    -     $ -