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| NOEC > SEC Filings for NOEC > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read together with the condensed consolidated financial statements and the accompanying notes of New Oriental Energy & Chemical Corp. (the "Company", "we" or "our") for the quarter ended June 30, 2008. The condensed consolidated financial statements have been prepared in accordance with the 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 generally 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 law affords. From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our Company. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as future capital expenditures, business strategy, competitive strengths, goals, growth of our business and operations, plans and references to future successes may be considered forward-looking statements. Also, when we use words such as "anticipate," "believe," "estimate," "intend," "plan," "project," "forecast," "may," "should," "budget," "goal," "expect," "probably" or similar expressions, we are making forward-looking statements. Many risks and uncertainties may impact the matters addressed in these forward-looking statements. Our forward-looking statements speak only as of the date made and we will not update such forward-looking statements unless the securities laws require us to do so.
Some of the key factors which could cause our future financial results and performance to vary from those expected include:
Ÿ The loss of primary customers;
Ÿ Our ability to implement productivity improvements, cost reduction initiatives or facilities expansions;
Ÿ Market developments affecting, and other changes in, the demand for our products and the introduction of new competing products;
Ÿ Availability or increases in the price of our primary raw materials or active ingredients;
Ÿ The timing of planned capital expenditures;
Ÿ Our ability to identify, develop or acquire, and market additional product lines and businesses necessary to implement our business strategy and our ability to finance such acquisitions and development;
Ÿ The condition of the capital markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;
Ÿ The ability to obtain registration and re-registration of our products under applicable law;
Ÿ The political and economic climate in the foreign or domestic jurisdictions in which we conduct business; and
Ÿ Other People's Republic of China (the "PRC") or foreign regulatory or legislative developments which affect the demand for our products generally or increase the environmental compliance cost for our products or impose liabilities on the manufacturers and distributors of such products.
The information contained in this report, identifies additional factors that could cause our results or performance to differ materially from those we express in our forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements which are included in this report and the exhibits and other documents incorporated herein by reference, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved.
Critical Accounting Policies and Estimates
Use of estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts receivable
The Company reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the turnover and adequacy of accounts receivable and adjust its collection strategies.
Inventories
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Company compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower.
Property and equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of: 30 years for building, 10 years for machinery, 5 years for office equipment and 8 years for vehicles.
Revenue recognition
Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations by the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
Income taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Foreign currency transactions and comprehensive income (loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Transactions occur in Chinese Renminbi ("RMB"). The unit of RMB is in Yuan.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements". This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No.160 is effective for the Company's fiscal year beginning October 1, 2009. Management is currently evaluating the effect of this pronouncement on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination.
This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company's fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009.
In March 2008, FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities". The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently evaluating the impact of adopting SFAS No.161 on our consolidated financial statements.
Overview
The Company was incorporated in the State of Delaware on November 15, 2004, and its operating subsidiary Henan Jinding Chemical Industry Co. Ltd. ("Jinding"), is headquartered in Henan Province, the PRC. The Company is a leading manufacturer and marketer of various products, including Urea, liquefied ammonia, ammonia water, methanol, ammonium bicarbonate, dimethyl ether ("DME") and liquefied petroleum gas.
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.
RESULT OF OPERATIONS
Three Months Ended June 30, 2008 as compared to
Three Months Ended June 30, 2007
Three Months Ended June 30, 2008 Three Months Ended June 30, 2007 Comparisons
Increase
Percentage Percentage Growth in (Decrease) in
Amount of Revenues Amount of Revenues Amount Percentage
Item US $ (%) US $ (%) US $ (%)
Revenues 15,965,093 100.00 % 14,727,290 100.00 % 1,237,803 8.40 %
Cost of Goods Sold (13,257,214 ) (83.04 )% (12,118,023 ) (82.28 )% (1,139,191 ) 9.40 %
Gross Profit 2,707,879 16.96 % 2,609,267 17.72 % 98,612 3.78 %
Research and development 20,433 0.13 % 51,662 0.35 % (31,229 ) (60.45 )%
Selling and distribution 277,989 1.74 % 435,049 2.95 % (157,060 ) (36.10 )%
General & administrative 949,161 5.95 % 428,226 2.91 % 520,935 121.65 %
Income from operations 1,460,296 9.15 % 1,694,330 11.5 % (234,034 ) (13.81 )%
Interest expense, net (186,755 ) (1.17 )% (99,834 ) (0.68 )% (86,921 ) 87.07 %
Other, net (32,167 ) (0.20 )% 10,456 0.07 % (42,623 ) (407.64 )%
Income before tax 1,241,374 7.78 % 1,604,952 10.90 % (363,578 ) (22.65 )%
Income tax 413,355 2.59 % 583,815 3.96 % (170,460 ) (29.20 )%
Income from continuing operation 828,019 5.19 % 1,021,137 6.93 % (193,118 ) (18.91 )%
Discontinued operation - 0.00 % 1,761 0.01 % (1,761 ) (100.00 )%
Net income (loss) 828,019 5.19 % 1,022,898 6.95 % (194,879 ) (19.05 )%
Foreign currency translation gain 440,034 2.76 % 341,582 2.32 % 98,452 28.82 %
Other comprehensive income, net 440,034 2.76 % 228,860 1.55 % 211,174 92.27 %
Comprehensive income 1,268,053 7.94 % 1,251,758 8.50 % 16,295 1.30 %
Weighted average shares outstanding
basic and diluted 12,640,000 12,640,000
Net income per share, basic and
diluted 0.07 0.08
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Revenues, Cost of Goods Sold and Gross Profit
Revenues for the first quarter of fiscal year 2009 were $15,965,093, which
represented an increase of 8.4% from the same period in the prior year. This
increase is mainly attributable to increased product selling price, which
prompted the Company to enhance its market business sales and resulted in better
sales growth as compared to the same period last year.
3 Months Ended 3 Months Ended
June 30, 2008 June 30, 2007 Comparisons
Increase
Percentage Percentage Growth in (Decrease) in
Amount of Revenues Amount of Revenues Amount Percentage
Products US $ (%) US $ (%) US $ (%)
Urea 9,917,995 62.12 % 9,217,132 62.59 % 700,863 7.60 %
Ammonium bicarbonate 661,044 4.14 % 798,675 5.42 % (137,631 ) (17.23 )%
Methanol 349,408 2.19 % 58,210 0.40 % 291,198 500.25 %
Liquefied Ammonia 34,318 0.22 % 174,821 1.19 % (140,503 ) (80.37 )%
DME 4,915,616 30.79 % 4,424,938 30.05 % 490,678 11.09 %
Ammonia Water 86,712 0.54 % 53,514 0.35 % 33,198 62.04 %
Total 15,965,093 100.00 % 14,727,290 100.00 % 1,237,803 8.40 %
3 Months Ended 3 Months Ended
June 30, 2008 June 30, 2007 Comparisons
Increase
Percentage Percentage Growth in (Decrease) in
Amount of Revenues Amount of Revenues Amount Percentage
Provinces US $ (%) US $ (%) US $ (%)
Henan Province 7,050,802 44.16 % 4,905,987 33.31 % 2,144,815 43.72 %
Guangdong Province 5,136,770 32.18 % 6,672,907 45.31 % (1,536,137 ) (23.02 )%
Hubei Province 1,914,738 11.99 % 1,550,274 10.53 % 364,464 23.51 %
Anhui Province 658,839 4.13 % 708,940 4.82 % (50,101 ) (7.07 )%
Hunan Province 68,998 0.43 % 249,298 1.69 % (180,300 ) (72.32 )%
Hebei Province 465,063 2.91 % 0 0.00 % 465,063 100.00 %
Jiangxi Province 254,955 1.60 % 596,795 4.05 % (341,840 ) (57.28 )%
Shandong Province 414,928 2.60 % 24,061 0.16 % 390,867 1624.48 %
Zhejiang Province 0 0.00 % 19,028 0.13 % (19,028 ) (100.00 )%
Total 15,965,093 100.00 % 14,727,290 100.00 % 1,237,803 8.40 %
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The increased sales revenue in the Company's primary geographic market for the first quarter of fiscal year 2009 is mainly attributable to the Company's adjustment of its sales structure and the enhancement of its marketing efforts when the selling price of energy chemical products increased, which resulted in an increase in the sales of DME and urea in Hubei, Shandong, Hebei and Henan provinces during the reporting period. The sales for the first quarter of fiscal year 2009 in Hunan, Guangdong and Jiangxi provinces has decreased, which was mainly due to a continued increase in the selling price of fertilizer product in the domestic market as a result of a decreased supply in fertilizer products. The Company made the decision to sell most of its fertilizer product locally.
Cost of Goods Sold ("COGS") for the first quarter of fiscal year 2009 was $13,257,214, which is 83.04% of total revenues and represents a 9.40% increase as compared to $12,118,023 and 82.28% of total revenues for the first quarter of fiscal year 2008. This is mainly due to the increased price of raw materials which has resulted to higher production cost 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. The Company will adopt proper measures to reduce fluctuations in the COGS.
For the three months ended June 30, 2008, as compared to the three months ended June 30, 2007:
3 Months Ended 3 Months Ended
June 30, 2008 June 30, 2007 Comparisons
Increase
Percentage Percentage Growth in (Decrease) in
Amount of Revenues Amount of Revenues Amount Percentage
Item US $ (%) US $ (%) US $ (%)
Revenues 15,965,093 100 % 14,727,290 100 % 1,237,803 8.40 %
Cost of Goods Sold (13,257,214 ) 83.04 % (12,118,023 ) 82.28 % 1,139,191 9.40 %
Gross Profit 2,707,879 16.96 % 2,609,267 17.72 % 98,612 3.78 %
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Gross profit is calculated by deducting from revenues the cost of raw materials used to produce the finished products as well as charges for depreciation, employee welfare, repairs to machinery and equipment, all inventory costs and all other costs incident to or necessary for the production of our products. The Company's cost of good sold line item does not include any of 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 cost of goods sold and others exclude a portion of them from gross profit.
Gross profit increased $98,612 or 3.78% to $2,707,879 for the three months ended June 30, 2008 as compared to $2,609,267 for the three months ended June 30, 2007. This was mainly due to the marketing and sale of energy chemical products by the Company during the period of increased pricing for energy chemical products, which helped offset the increase in prices for raw materials.
Ammonium Liquefied Ammonia
DME Methanol Urea Bicarbonate Ammonia Water
2009Q1 Revenues 4,915,616 349,408 9,917,995 661,044 34,318 86,712
COGS 4,028,452 240,020 8,080,680 783,190 28,411 96,461
Gross Profit 887,164 109,388 1,837,315 (122,146 ) 5,907 (9,749 )
Gross Profit % 18.05 % 31.31 % 18.53 % (18.48 )% 17.21 % (11.24 )%
2008Q1 Revenues 4,424,938 58,210 9,217,132 798,675 174,821 53,514
COGS 3,803,204 55,268 7,263,797 783,889 165,971 45,894
Gross Profit 621,734 2,942 1,953,335 14,786 8,850 7,620
Gross Profit % 14.05 % 5.05 % 21.19 % 1.85 % 5.06 % 14.24 %
Changes Revenues 490,678 291,198 700,863 (137,631 ) (140,503 ) 33,198
Revenue Growth 11.09 % 500.25 % 7.60 % (17.23 )% (80.37 )% 62.04 %
Gross Margin Growth 4.00 % 26.26 % (2.66 )% (20.33 )% 12.15 % (25.48 )%
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Sales of urea increased $700,863 or 7.60% to $9,917,995 for the three months ended June 30, 2008 as compared to $9,217,132 for the three months ended June 30, 2007. This was mainly due to the increase of the price for urea, the average selling price of which has increased by 38.64% as compared to the same period of last year.
The gross margin of urea decreased 2.66% to 18.53% for the three months ended June 30, 2008 as compared to 21.19% for the three months ended June 30, 2007. This was mainly due to the increased price of raw material which resulted in higher production cost as compared to the same period last year.
Sales of ammonium bicarbonate for the first quarter of fiscal year 2009 were $661,044, which represented a decrease of 17.23% from the same period in the prior year. This was mainly due to the adjustment of the product structure which led to the decrease in the production and sales of ammonium bicarbonate as compared to the same period last year.
Accordingly, the gross margins of ammonium bicarbonate decreased 20.33% to -18.48% for the three months ended June 30, 2008 as compared to 1.85% for the same period of the prior year. This was mainly due to the price increased in raw material which resulted in higher production costs as compared to the same period last year.
Sales of methanol for the three months ended June 30, 2008 increased 500.25% to $349,408, from $58,210 for the three months ended June 30, 2007. This was mainly due to the increase in sales volume and selling price as compared to the same period last year.
The gross margin of methanol increased 26.26% to 31.31% for the three months ended June 30, 2008 as compared to 5.05% for the same period of prior year. This was mainly attributable to the year-on-year growth rate of sales volume and the increased price for methanol as compared to the same period last year.
Sales of liquefied ammonia decreased $140,503 or 80.37% to $34,318 for the three months ended June 30, 2008 as compared to $174,821 for the three months ended June 30, 2007. This was mainly due to the adjustment of the product structure which resulted in the decreased output and sales volume for liquefied ammonia as compare to the same period last year.
The gross margin of liquefied ammonia increased 12.15% to 17.21% for the three months ended June 30, 2008 as compared to 5.06% for the three months ended June 30, 2007. This was mainly due to the increase in selling price of liquefied ammonia as compared to the same period last year.
Sales of DME increased $490,678 or 11.09% to $4,915,616 for the three months ended June 30, 2008 as compared to $4,424,938 for the three months ended June 30, 2007. This was mainly due to the increase in the selling price of DME, the average selling price of which has increased 49.6% as compared to the same period last year.
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