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| NOEC > SEC Filings for NOEC > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-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 September 30, 2008. The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States ("GAAP").
Forward Looking Statements
We are including the following discussion to inform our existing and potential security holders of some of the risks and uncertainties that can affect us and to take advantage of the "safe harbor" protection for forward-looking statements that applicable federal securities laws afford. From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our Company. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as future capital expenditures, business strategy, competitive strengths, goals, growth of our business and operations, plans and references to future successes, may be considered forward-looking statements. Also, when we use words such as "anticipate," "believe," "estimate," "intend," "plan," "project," "forecast," "may," "should," "budget," "goal," "expect," "probably" or similar expressions, we are making forward-looking statements. Many risks and uncertainties may impact the matters addressed in these forward-looking statements. Our forward-looking statements speak only as of the date made and we will not update such forward-looking statements unless the securities laws require us to do so.
Some of the key factors which could cause our future financial results and performance to vary from those expected include:
Ÿ The loss of primary customers;
Ÿ Our ability to implement productivity improvements, cost reduction initiatives or facilities expansions;
Ÿ Market developments affecting, and other changes in, the demand for our products and the introduction of new competing products;
Ÿ Availability or increases in the price of our primary raw materials or active ingredients;
Ÿ The timing of planned capital expenditures;
Ÿ Our ability to identify, develop or acquire, and market additional product lines and businesses necessary to implement our business strategy and our ability to finance such acquisitions and development;
Ÿ The condition of the capital markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;
Ÿ The ability to obtain registration and re-registration of our products under applicable law;
Ÿ The political and economic climate in the foreign or domestic jurisdictions in which we conduct business; and
Ÿ Other People's Republic of China (the "PRC") or foreign regulatory or legislative developments which affect the demand for our products generally or increase the environmental compliance cost for our products or impose liabilities on the manufacturers and distributors of such products.
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 Statement of Financial Accounting Standards ("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 Financial Accounting Standards Board ("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 Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) replaces SFAS No. 141 ("Statement 141"), Business Combinations. SFAS No. 141(R) 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.
SFAS No. 141(R) 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 and dimethyl ether ("DME").
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 September 30, 2008 as compared to Three Months Ended September 30, 2007
Three Months Ended Three Months Ended Comparisons
September 30, 2008 September 30, 2007 Increase
Percentage Percentage Growth in (Decrease) in
Item Amount of Revenues Amount of Revenues Amount Percentage
US $ (%) US $ (%) US $ (%)
Revenues 14,260,705 100.00 % 18,215,622 100.00 % (3,954,917 ) (21.71 )%
Cost of Goods Sold (15,212,114 ) (106.67 )% (16,376,557 ) (89.90 )% 1,164,443 (7.11 )%
Gross Profit (951,409 ) (6.67 )% 1,839,065 10.10 % (2,790,474 ) (151.73 )%
General & administrative 510,894 3.58 % 541,512 2.97 % (30,618 ) (5.65 )%
Selling and distribution 291,657 2.05 % 208,584 1.15 % 83,073 39.83 %
Research and development 89,982 0.63 % - 0.00 % 89,982 100.00 %
Income from operations (1,843,942 ) (12.93 )% 1,088,969 5.98 % (2,932,911 ) (269.33 )%
Interest expense, net (232,826 ) (1.63 )% (161,789 ) (0.89 )% (71,037 ) 43.91 %
Governments grants 1,008,964 7.08 % 79,332 0.44 % 929,632 1171.82 %
Other (expenses) income, net (1,209 ) (0.01 )% (2,644 ) (0.01 )% 1,435 (54.27 )%
Income before tax (1,069,013 ) (7.50 )% 1,003,868 5.51 % (2,072,881 ) (206.49 )%
Income taxes 478,567 3.36 % (160,976 ) (0.88 )% 639,543 (397.29 )%
Income from continuing
operation (590,446 ) (4.14 )% 842,892 4.63 % (1,433,338 ) (170.05 )%
Income from discontinued
operation - 0.00 % 1,761 0.01 % (1,761 ) (100.00 )%
Gain from disposition of
discontinued operation - 0.00 % 19,359 0.11 % (19,359 ) (100.00 )%
Net income (loss) (590,446 ) (4.14 )% 864,012 4.74 % (1,454,458 ) (168.34 )%
Foreign currency translation
gain 117,832 0.83 % 145,816 0.80 % (27,984 ) (19.19 )%
Other comprehensive income,
net 117,832 0.83 % 81,213 0.45 % 36,619 45.09 %
Comprehensive income (472,614 ) (3.31 )% 945,225 5.19 % (1,417,839 ) (150.00 )%
Weighted average shares
outstanding basic and diluted 12,640,000 - 12,640,000 - - -
Net income per share, basic
and diluted (0.05 ) - 0.07 - (0.12 ) -
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Revenues, Cost of Goods Sold and Gross Profit
Revenues for the three months ended September 30, 2008 were $14,260,705, which
represented a decrease of 21.71% from the same period in the prior year. This
was mainly due to the continually increased raw material price, which resulted
in higher production costs per unit. The Company adjusted its product structure,
and the production and sales volume of DME decreased substantially as compared
to the same period last year.
3 Months Ended 3 Months Ended Comparisons
September 30, 2008 September 30, 2007 Increase
Percentage Percentage Growth in (Decrease) in
Amount of Revenues Amount of Revenues Amount Percentage
Products US $ (%) US $ (%) US $ (%)
Urea 8,601,623 60.32 % 5,455,413 29.95 % 3,146,210 57.67 %
Ammonium bicarbonate 1,083,837 7.60 % 339,430 1.86 % 744,407 219.31 %
Methanol 366,753 2.57 % - 0.00 % 366,753 100.00 %
Liquefied Ammonia 131,205 0.92 % 171,889 0.94 % (40,684 ) (23.67 )%
DME 3,992,642 28.00 % 12,206,012 67.01 % (8,213,370 ) (67.29 )%
Ammonia Water 84,645 0.59 % 42,878 0.24 % 41,767 97.41 %
Total 14,260,705 100.00 % 18,215,622 100.00 % (3,954,917 ) (21.71 )%
3 Months Ended 3 Months Ended Comparisons
September 30, 2008 September 30, 2007 Increase
Percentage Percentage Growth in (Decrease) in
Amount of Revenues Amount of Revenues Amount Percentage
Provinces US $ (%) US $ (%) US $ (%)
Henan Province 3,947,312 27.68 % 5,900,446 32.39 % (1,953,134 ) (33.10 )%
Guangdong Province 7,397,425 51.87 % 2,911,816 15.99 % 4,485,609 154.05 %
Hubei Province 1,074,404 7.53 % 4,696,754 25.78 % (3,622,350 ) (77.12 )%
Anhui Province 525,106 3.68 % 695,899 3.82 % (170,793 ) (24.54 )%
Hunan Province - 0.00 % 11,615 0.06 % (11,615 ) (100.00 )%
Hebei Province 7,482 0.05 % 2,840,692 15.59 % (2,833,210 ) (99.74 )%
Jiangxi Province 33,745 0.24 % 1,074,966 5.90 % (1,041,221 ) (96.86 )%
Shandong Province 1,275,231 8.94 % - 0.00 % 1,275,231 100.00 %
Zhejiang Province - 0.00 % 83,434 0.46 % (83,434 ) (100.00 )%
Total 14,260,705 100.00 % 18,215,622 100.00 % (3,954,917 ) (21.71 )%
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The sales for the three months ended September 30, 2008 in the Guangdong Province increased by 154.05%. This increase was mainly attributable to the Company taking advantage of the increased selling price of fertilizer product in the domestic market, adjusting its product structure and enhancing its marketing efforts. As a result, the sales of Urea to Guangdong Province increased as compared to the same period last year. The sales for the three months ended September 30, 2008 in Shandong Province increased by 100%, which was mainly attributable to the increase in the sales volume of the DME product.
The sales for the three months ended September 30, 2008 in other provinces decreased as compared to the same period last year, the Company adjusted its product structure, and the sales volume of DME to these provinces decreased in the reporting period, which was mainly due to the continually increased raw material price, which resulted in higher production costs per unit.
Cost of Goods Sold ("COGS") for the three months ended September 30, 2008 was $15,212,114, which is 106.67% of total revenues and represents a 7.11% decrease as compared to $16,376,557 and 89.90% of total revenues for the three months ended September 30, 2007. This was mainly due to the decrease in sales volume of urea and DME 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. The Company will adopt proper measures to reduce fluctuations in the COGS.
For the Three months ended September 30, 2008, as compared to the Three months ended September 30, 2007:
3 Months Ended 3 Months Ended Comparisons
September 30, 2008 September 30, 2007 Increase
Percentage Percentage Growth in (Decrease) in
Amount of Revenues Amount of Revenues Amount Percentage
Item US $ (%) US $ (%) US $ (%)
Revenues 14,260,705 100.00 % 18,215,622 100.00 % (3,954,917 ) (21.71 )%
Cost of Goods Sold (15,212,114 ) (106.67 )% (16,376,557 ) (89.90 )% 1,164,443 (7.11 )%
Gross Profit (951,409 ) (6.67 )% 1,839,065 10.10 % (2,790,474 ) (151.73 )%
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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 COGS 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 COGS and others exclude a portion of them from gross profit.
Gross profit decreased $2,790,474, or 151.73%, to $(951,409) for the three months ended September 30, 2008, as compared to $1,839,065 for the three months ended September 30, 2007. This was mainly due to the continually increased raw material price, which resulted in higher production costs. The Company made adjustments to its product structure, and the sales revenue of DME decreased as compared to the same period last year; and the increased general and administrative expenses as the Company has strengthened the internal control in this reporting period as compared to the same period last year.
Ammonium Liquefied Ammonia
DME Methanol Urea Bicarbonate Ammonia Water
2009Q2 Revenues 3,992,642 366,753 8,601,623 1,083,837 131,205 84,645
COGS 4,529,406 445,628 8,733,875 1,234,487 150,900 117,818
Gross Profit (536,764 ) (78,875 ) (132,252 ) (150,650 ) (19,695 ) (33,173 )
Gross Profit % (13.44 )% (21.51 )% (1.54 )% (13.90 )% (15.01 )% (39.19 )%
2008Q2 Revenues 12,206,012 - 5,455,413 339,430 171,889 42,878
COGS 10,620,664 - 5,190,129 341,492 181,766 42,506
Gross Profit 1,585,348 - 265,284 (2,062 ) (9,877 ) 372
Gross Profit % 12.99 % 0.00 % 4.86 % (0.61 )% (5.75 )% 0.87 %
Changes Revenues (8,213,370 ) 366,753 3,146,210 744,407 (40,684 ) 41,767
Revenue
Growth (67.29 )% 100 % 57.67 % 219.31 % (23.67 )% 97.41 %
Gross Margin
Growth (26.43 )% (21.51) % (6.40 )% (13.29 )% (9.26 )% (40.06 )%
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Sales of Urea increased $3,146,210, or 57.67%, to $8,601,623 for the three months ended September 30, 2008, as compared to $5,455,413 for the three months ended September 30, 2007. This was mainly due to the substantial increase of the selling price for Urea, the selling price of which increased by 61.22% as compared to the same period of last year.
The gross margin of Urea decreased 6.40% to (1.54)% for the three months ended September 30, 2008, as compared to 4.86% for the three months ended September 30, 2007. This was mainly due to the fact that the growth rate of the product selling price was lower than the growth rate of the product cost per unit.
Sales of ammonium bicarbonate for the second quarter of fiscal year 2009 were $1,083,837, which represented an increase of 219.31% from the same period in the prior year. This was mainly due to the massive increase in the production and sales volume of ammonium bicarbonate as well as the increased selling price of ammonium bicarbonate as compared to the same period last year.
The gross margins of ammonium bicarbonate decreased 13.29% to (13.90)% for the three months ended September 30, 2008 as compared to (0.61)% for the same period of the prior year. This was mainly due to the fact that the growth rate of the product selling price was lower than the growth rate of the product cost per unit.
Sales of methanol for the three months ended September 30, 2008 increased 100% to $366,753, from $0 for the three months ended September 30, 2007. This was mainly due to the increased selling price of methanol, which led the Company to make adjustments to its product structure to sell part of the self produced methanol, and the self produced methanol was used entirely for the production of DME for the same period in the prior year. Methanol incurred a negative gross margin of 21.51% for the three months ended September 30, 2008, which was mainly due to the increasing cost of its raw material.
Sales of liquefied ammonia decreased $40,684, or 23.67%, to $131,205 for the three months ended September 30, 2008, as compared to $171,889 for the three months ended September 30, 2007. This was mainly due to the decrease in sales volume of liquefied ammonia as compared to the same period last year.
The gross margin of liquefied ammonia decreased 9.26% to (15.01)% for the three months ended September 30, 2008, as compared to (5.75)% for the three months ended September 30, 2007. This was mainly due to the fact that the growth rate of the product selling price was lower than the growth rate of the product cost per unit.
Sales of DME decreased $8,213,370, or 67.29%, to $3,992,642 for the three months ended September 30, 2008, as compared to $12,206,012 for the three months ended September 30, 2007. This was mainly due to the continually increased raw material price, which resulted in higher production costs.
The gross margin of DME decreased 26.43% to (13.44)% for the three months ended . . .
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