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| NOEC > SEC Filings for NOEC > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
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, 2009. 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:
† The loss of primary customers;
† Our ability to implement productivity improvements, cost reduction initiatives or facilities expansions;
† Market developments affecting, and other changes in, the demand for our products and the introduction of new competing products;
† Availability or increases in the price of our primary raw materials or active ingredients;
† The timing of planned capital expenditures;
† 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;
† The condition of the capital markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;
† The ability to obtain registration and re-registration of our products under applicable law;
† The political and economic climate in the foreign or domestic jurisdictions in which we conduct business; and
† 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
On April 1, 2009, the FASB approved FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends Statement 141(R) and eliminates the distinction between contractual and non-contractual contingencies. Under FSP FAS 141(R), an acquirer is required to recognize at fair value an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the acquirer applies the recognition criteria in SFAS No. 5, Accounting for Contingencies and Interpretation 14, "Reasonable Estimation of the Amount of a Loss - and interpretation of FASB Statement No. 5," to determine whether the contingency should be recognized as of the acquisition date or after it. The Company is currently evaluating the impact of the adoption of FAS 141(R)-1.
FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. It did not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. We are required to adopt this FSP for our interim and annual reporting periods ending after June 15, 2009. This FSP does not require disclosures for periods presented for comparative purposes at initial adoption. This FSP requires comparative disclosures only for periods ending after initial adoption. The Company is currently evaluating the impact of the adoption of FSP FAS115-2 and FAS 124-2.
On April 9, 2009, the FASB also approved FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments to require disclosures about fair value of financial instruments in interim period financial statements of publicly traded companies and in summarized financial information required by APB Opinion No. 28, Interim Financial Reporting. We are required to adopt this FSP for our interim and annual reporting periods ending after June 15, 2009. This FSP does not require disclosures for periods presented for comparative purposes at initial adoption. This FSP requires comparative disclosures only for periods ending after initial adoption. The Company is currently evaluating the impact of the adoption of FSP FAS 107-1 and APB 28-1.
In June 2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No.
46(R) ("FAS 167"). FAS 167 amends FASB 46(R) to require an enterprise to perform
an analysis and ongoing reassessments to determine whether the enterprises
variable interest or interests give it a controlling financial interest in a
variable interest entity and amends certain guidance for determining whether an
entity is a variable interest entity. It also requires enhanced disclosures that
will provide users of financial statements with more transparent information
about an enterprises involvement in a variable interest entity. FAS 167 is
effective as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009 and for all interim reporting periods
after that. The Company is currently evaluating the impact of the adoption of
FAS 167.
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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2009 as compared to
Three Months Ended June 30, 2008
Three Months Ended Three Months Ended Comparisons
June 30, 2009 June 30, 2008
Percentage of Percentage Change in Increase
Amount Revenues Amount of Revenues Amount (Decrease) in
Percentage
Item US $ (%) US $ (%) US $ (%)
Revenues 8,384,866 100.00 % 15,965,093 100.00 % (7,580,227 ) (47.48 )%
Cost of Goods Sold (9,973,189 ) (118.94 )% (13,257,214 ) (83.04 )% 3,284,025 (24.77 )%
Gross (loss) profit (1,588,323 ) (18.94 )% 2,707,879 16.96 % (4,296,202 ) (158.66 )%
General & administrative 727,934 8.68 % 949,161 5.95 % (221,227 ) (23.31 )%
Selling and distribution 287,540 3.43 % 277,989 1.74 % 9,551 3.44 %
Research and development 27,626 0.33 % 20,433 0.13 % 7,193 35.20 %
(Loss) income from
operations (2,631,423 ) (31.38 )% 1,460,296 9.15 % (4,091,719 ) (280.20 )%
Interest expense, net (461,917 ) (5.51 )% (186,755 ) (1.17 )% (275,162 ) 147.34 %
Other expenses, net (3,507 ) (0.04 )% (32,167 ) (0.20 )% 28,660 (89.10 )%
(Loss) income before income
taxes (3,096,847 ) (36.93 )% 1,241,374 7.78 % (4,338,221 ) (349.47 )%
Income tax (55,008 ) (0.66 )% (413,355 ) (2.59 )% 358,347 (86.69 )%
Net (loss) income (3,151,855 ) (37.59 )% 828,019 5.19 % (3,979,874 ) (480.65 )%
Foreign currency translation
(loss) gain (9,672 ) (0.12 )% 440,034 2.76 % (449,706 ) (102.20 )%
Other comprehensive (loss)
income (9,672 ) (0.12 )% 440,034 2.76 % (449,706 ) (102.20 )%
Comprehensive (loss) income (3,161,527 ) (37.71 )% 1,268,053 7.94 % (4,429,580 ) (349.32 )%
Weighted average shares
outstanding basic and
diluted 12,640,000 12,640,000 0 0.00 %
Net (loss) income per share,
basic and diluted (0.25 ) 0.07 (0.32 ) -
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Revenues, Cost of Goods Sold and Gross Profit
Revenues for the three months ended June 30, 2009 were $8,384,866, which
represented a decrease of 47.48% from the same period in the prior year. The
decrease was mainly due to the decrease in sales volume and the selling price of
DME and Urea.
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Three Months Ended Three Months Ended Comparisons
June 30, 2009 June 30, 2008
Increase
Percentage of Percentage of Change in (Decrease) in
Products Amount Revenues Amount Revenues Amount Percentage
US $ (%) US $ (%) US $ (%)
Urea 5,724,165 68.27 % 9,917,995 62.12 % (4,193,830 ) (42.29 )%
Ammonium bicarbonate 671,142 8.00 % 661,044 4.14 % 10,098 1.53 %
Methanol 1,665,163 19.86 % 349,408 2.19 % 1,315,755 376.57 %
Liquefied Ammonia 218,243 2.60 % 34,318 0.21 % 183,925 535.94 %
DME - - 4,915,616 30.79 % (4,915,616 ) (100.00 )%
Ammonia Water 106,153 1.27 % 86,712 0.54 % 19,441 22.42 %
Total 8,384,866 100.00 % 15,965,093 100.00 % (7,580,227 ) (47.48 )%
Three Months Ended Three Months Ended Comparisons
June 30, 2009 June 30, 2008
Increase
Provinces Percentage Percentage Change in (Decrease) in
Amount of Revenues Amount of Revenues Amount Percentage
US $ (%) US $ (%) US $ (%)
Henan Province 2,868,226 34.21 % 7,050,802 44.16 % (4,182,576 ) (59.32 )%
Guangdong Province 3,125,464 37.26 % 5,136,770 32.18 % (2,011,306 ) (39.16 )%
Hubei Province 176,689 2.11 % 1,914,738 11.99 % (1,738,049 ) (90.77 )%
Anhui Province 2,113,675 25.21 % 658,839 4.13 % 1,454,836 220.82 %
Hunan Province 63,344 0.76 % 68,998 0.43 % (5,654 ) (8.19 )%
Hebei Province 6,670 0.08 % 465,063 2.91 % (458,393 ) (98.57 )%
Jiangxi Province 30,798 0.37 % 254,955 1.60 % (224,157 ) (87.92 )%
Shandong Province - - 414,928 2.60 % (414,928 ) (100.00 )%
Total 8,384,866 100.00 % 15,965,093 100.00 % (7,580,227 ) (47.48 )%
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The sales for the three months ended June 30, 2009 in the Anhui Province increased by 220.82%. This increase was mainly attributable to the fact that the Company's reinforcement of its marketing strategy and expansion of the market share. As a result, the sales of Methanol in Anhui Province increased as compared to the same period last year.
The sales for the three months ended June 30, 2009 in other provinces decreased as compared to the same period last year. The decrease was mainly attributable to the fact that the Company made adjustments to its product structure, and the sales volume of Urea and DME decreased in these provinces.
Cost of Goods Sold ("COGS") for the three months ended June 30, 2009 was $9,973,189, which is 118.94% of total revenues and represents a 24.77% decrease as compared to $13,257,214 and 83.04% of total revenues for the three months ended June 30, 2008. This was in line with the lower sales volume offset by increased raw materials prices, such as coal, which accounts for a majority of the Company's raw materials.
COGS as a percentage of revenue may fluctuate in the future. This fluctuation may primarily be due to changes in the price of raw materials, which can have a significant impact on the COGS.
Gross 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 by $4,296,202, or 158.66%, to $1,588,323 for the three months ended June 30, 2009 as compared to $2,707,879 for the three months ended June 30, 2008. This decrease was mainly due to the decrease in the selling price of Urea and DME product, and the increase of the price of raw materials, which resulted in higher production costs. As a result, the Company adjusted its product structure, and the sales volume of Urea and DME decreased substantially as compared to the same period last year.
Ammonium Liquefied Ammonia
DME Methanol Urea Bicarbonate Ammonia Water
2010Q1 Revenues - 1,665,163 5,724,165 671,142 218,243 106,153
? COGS - 2,735,103 6,135,880 707,467 279,688 115,051
? Gross (Loss) Profit - (1,069,940 ) (411,715 ) (36,325 ) (61,445 ) (8,898 )
? Gross Margin - (64.25 )% (7.19 )% (5.41 )% (28.15 )% (8.38 )%
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 (Loss) 887,164 109,388 1,837,315 (122,146 ) 5,907 (9,749 )
? Gross Margin 18.05 % 31.31 % 18.53 % (18.48 )% 17.21 % (11.24 )%
Changes Revenues (4,915,616 ) 1,315,755 (4,193,830 ) 10,098 183,925 19,441
? Revenue Growth (100 )% 376.57 % (42.29 )% 1.53 % 535.94 % 22.42 %
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Sales of Urea decreased $4,193,830, or 42.29%, to $5,724,165 for the three months ended June 30, 2009, as compared to $9,917,995 for the three months ended June 30, 2008. This decrease was mainly due to the decrease in sales volume and the selling price as compared to the same period of last year.
The gross margin of Urea decreased to (7.19)% for the three months ended June 30, 2009, as compared to 18.53% for the three months ended June 30, 2008. This was mainly due to the decrease in the selling price and the increase in the cost of production as compared to the same period of last year.
Sales of ammonium bicarbonate for the three months ended June 30, 2009 were $671,142, which represented an increase of 1.53% from the same period in the prior year. This was mainly due to the appreciation of RMB to USD.
The gross margins of ammonium bicarbonate increased to (5.41)% for the three months ended June 30, 2009 as compared to (18.48)% for the same period of the prior year. This was mainly due to the growth rate of selling price is higher than the growth rate of the product cost per unit.
Sales of methanol for the three months ended June 30, 2009 increased 376.57% to $1,665,163, from $349,408 for the three months ended June 30, 2008. This increase was mainly due to the increase in sales volume of Methanol as compared to the same period of last year. Methanol incurred a negative gross margin of 64.25% for the three months ended June 30, 2009, which was mainly due to the increased cost of raw material.
Sales of liquefied ammonia increased $183,925, or 535.94%, to $218,243 for the three months ended June 30, 2009, as compared to $34,318 for the three months ended June 30, 2008. This was mainly due to the increase in sales volume of liquefied ammonia as compared to the same period last year.
The gross margin of liquefied ammonia decreased to (28.15%) for the three months ended June 30, 2009, as compared to 17.21% for the three months ended June 30, 2008. 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 to $0 for the three months ended June 30, 2009. This decrease was mainly due to the decrease in the selling price and the increase in higher production costs. As a result, the Company reduced the production volume of DME.
Sales of ammonia water increased $19,441, or 22.42%, to $106,153 for the three months ended June 30, 2009 as compared to $86,712 for the three months ended June 30, 2008. This was mainly due to the increase in both sales volume and selling price of ammonia water as compared to the same period last year.
The gross margin of ammonia water increased to (8.38%) for the three months ended June 30, 2009 as compared to (11.24%) for the same period prior year. This was mainly due to the increase in the selling price and sales volume of liquefied ammonia as compared to the same period last year.
Operating Expenses
The Company incurred selling and distribution expenses of $287,540 for the three months ended June 30, 2009, an increase of $9,551, or 3.44%, as compared to $277,989 for the three months ended June 30, 2008.
The Company incurred general and administrative expenses of $727,934 for the three months ended June 30, 2009, representing a decrease of $221,227, or 23.31%, as compared to $949,161 for the three months ended June 30, 2008. This was mainly due to the decrease in consulting fees and evaluation fees as compared to the same period last year.
The Company incurred R&D expenses of $27,626 for the three months ended June 30, 2009, representing an increase of $7,193, or 35.2%, compared to $20,433 for the three months ended June 30, 2008.
Income Tax
The Company incurred income tax expense of $55,008 for the three months ended June 30, 2009, a decrease of $358,347, or 86.69%, as compared to $413,355 for the three months ended June 30, 2008. This decrease is mainly attributable . . .
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