Transfer Agent and Registrar

 

Our transfer agent is Corporate Stock Transfer, located at 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209. Their telephone number is (303) 282-4800.

Securities Authorized for Issuance Under Equity Compensation Plans

 

As of the fiscal year ended March 31, 2010, we have no shares of our common stock or preferred stock that are issuable under compensation plans approved by our security holders.

Recent Sales of Unregistered Securities

 

On May 3, 2010, the Company entered into a Securities Purchase and Registration Rights Agreement (the “First Purchase Agreement”) and a Warrant Agreement, with certain accredited investors (collectively, the “First Investors”), pursuant to which the Company issued 1,360,000 units (the “Units”) to the Investors, consisting of (i) one (1) share of our common stock, par value $0.001, and (ii) a Warrant to purchase one half (½) of one (1) share of common stock with an exercise price of Two Dollars ($2.00) per share (the “First Offering”). The purchase price for each Unit is $1.25 and the aggregate purchase price for the Units sold in the Offering was $1,700,000.

On May 25, 2010, the Company entered into a separate Securities Purchase and Registration Rights Agreement (the “Additional Purchase Agreement,” and together with the First Purchase Agreement, the “Purchase Agreements”) and a Warrant Agreement with Joseph Zilfi, an accredited investor (the “Second Investor,” and together with the First Investors, the “Investors”), pursuant to which the Company issued 100,000 Units to the Second Investor, consisting of (i) one (1) share of our common stock, par value $0.001, and (ii) a Warrant to purchase one half (½) of one (1) share of common stock with an exercise price of Two Dollars ($2.00) per share (the “Second Offering,” and together with the First Offering, the “Offerings”).  The purchase price for each Unit is $1.25 and the aggregate purchase price for the Units sold in the Second Offering was $125,000.

 

The Warrants have a 2½ year term and will not be exercisable until 6 months following the issuance of the Warrants.

 

Pursuant to the terms of the Purchase Agreements, the Company shall, on or prior to sixty (60) calendar days following the closing of each of the Offerings, use all reasonable efforts to prepare and file with the SEC a registration statement covering the shares of the Common Stock and the shares underlying the Warrants issued in connection with the applicable Offering.

 

The Company engaged Internet Securities, Inc. as placement agent (the “Placement Agent”) in connection with the Offerings.  The Company will pay the Placement Agent an amount equal 10% of the aggregate gross proceeds raised in the Offerings in cash and a 5 year warrant to purchase 10% of the Securities sold in the Offerings (the “Placement Agent Warrant”). The Placement Agent Warrant shall have the same terms as the Warrant, except that the exercise price of the Placement Agent Warrant shall be $1.25.

 

The Company sold the Units in the Offerings in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D as promulgated by the SEC under the Securities Act 1933.  When appropriate, we determined that the purchaser of securities described above was a sophisticated investor with the financial ability to assume the risk of its investment in our securities and acquired such securities for its own account and not with a view to any distribution thereof to the public. Where required by applicable law, the certificates evidencing the securities bear legends stating that the securities are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.

 

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Item 6.                   Selected Financial Data.

Not required.

Item 7.

Management Discussion and Analysis of Financial Conditions and Results of Operations

The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words "believes," "anticipates," "may," "will," "should," "expect," "intend," "estimate," "continue," and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.

 

Our Company engages in the business of manufacturing and selling urea, liquefied ammonium, methanol, ammonium bicarbonate, dimethyl ether (“DME”) products. The Company’s products are primarily marketed and sold in the PRC.

 

Our Company currently has the capacity to produce 150,000 tons of ammonia per year, 150,000 tons of DME per year, 150,000 tons of urea per year, 60,000 tons of ammonium bicarbonate per year and 100,000 tons of methanol per year. During the second quarter of fiscal year ended March 31, 2009, we expanded the Company’s annual DME capacity to 150,000 ton per year. For the year end of March 31, 2010, the Company’s total revenues were $32,463,882.

 

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;

 

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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 (“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.

 

SIGNIFICANT ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The policies discussed below are considered by management to be critical to an understanding of our financial statements.

Revenue recognition

Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to the customers. We generally recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price fee is fixed or determinable, and collectability is reasonably assured.

Income taxes

Provision for income and other related taxes have been provided in accordance with the tax rates and laws in effect in the PRC.

Income tax expense is computed based on pre-tax income included in the consolidated statements of operations. Deferred income taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if there is a strong likelihood the items will expire before its benefits are realized or if its future utilization is uncertain.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, "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. FIN 48 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 March 31, 2010, the Company does not have a liability for unrecognized tax benefits.

 

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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 China. As of March 31, 2010 the Company was not aware of any pending income tax examinations by China tax authorities.

The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of March 31, 2010, the Company has no accrued interest or penalties related to uncertain tax positions.

Inventories

Inventories are stated at the lower of cost or net realizable value, which is based on estimated selling prices less any further costs expected to be incurred for completion and disposal. Cost of raw materials is calculated using the weighted average method. Finished goods costs are determined using the weighted average method and comprise direct materials, direct labor and an appropriate proportion of overhead.

Recent Accounting Pronouncements

On April 1, 2009, the FASB approved ASC 805-20 (formerly 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 ASC 805-20, 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 adoption of ASC 805-20 did not have a material impact on the Company’s financial statements..

ASC 320-10 (formerly FSP FAS 115-2 and FAS 124-2) amends 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 adoption of ASC 320-10 did not have a material impact on the Company’s consolidated financial statements.

On April 9, 2009, the FASB also approved ASC 825-10 (formerly 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 adoption of ASC 825-10 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASC 810-10 (formerly SFAS No. 167, Amendments to FASB Interpretation No. 46(R)), which requires 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 enterprise’s involvement in a variable interest entity. SFAS No. 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. It’s not expected that this adoption will have a material impact on the Company’s financial statements.

 

In April 2009, the FASB updated guidance related to fair-value measurements to clarify the guidance related to measuring fair-value in inactive markets, to modify the recognition and measurement of other-than-temporary impairments of debt securities, and to require public companies to disclose the fair values of financial instruments in interim periods. This updated guidance became effective for the Company beginning June 1, 2009. The Company does not expect the adoption will have an impact on its consolidated financial position or results of operations.

 

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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 became effective for the Company beginning March 1, 2010. The Company does not expect the adoption will have an impact on its consolidated financial position or results of operations..

In May 2009, the FASB issued ASC 855-10 (formerly SFAS No. 165, Subsequent Events) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009. The adoption did not have an impact on the Company’s financial statements.

KNOWN TRENDS OR UNCERTAINTIES

The fertilizer production segment is the traditional business of the Company. The market for this segment is stable and rigid. China is one of the largest agricultural producing countries, so the demands for such products are strong. We believe the market demands for the alternative energy products segment, which includes Methanol and DME, will continually increase. We will focus our efforts on fertilizer production, but there will not be any significant expansion plan in the near future. We have put more effort in alternative energy production by building a new 200,000 tons/year methanol production line, which is expected to be completed by the first quarter of calendar year 2011.

All the Company’s current products are manufactured using coal as the raw material. As the market price of feed coal has shown a significant increasing trend, production costs have increased as well. The selling prices of some of our fertilizer products have increased correspondingly. For example, the current market selling price for Urea is about 1,650 RMB/Ton. Recently, the National Development and Reform Committee of People’s Republic of China have announced to increase the price for refined oil and electricity. This might stimulate further growth in such a trend of increasing prices.

CAPITAL EXPENDITURES

Capital expenditures are mainly related to the on-going project of 200,000 tons/year Methanol, which is expected to be completed around the first quarter of calendar year 2011. The funding for those projects mainly comes from bank debt.

 

OFF BALANCE-SHEET FINANCING ARRANGEMENTS

The Company does not have any off-balance sheet financing arrangements.

RESULTS OF OPERATION

Our operating results are presented on a consolidated basis for the year ended March 31, 2010, as compared to the year ended March 31, 2009.

 

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The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of operations for the 12 months ended March 31, 2010 and 2009.

 

		Year Ended March 31, 2010								Year Ended March 31, 2009								Comparisons
																						Increase
Item		Amount				Percentage of Revenues				Amount				Percentage of Revenues				Change in Amount				(Decrease) in Percentage
		US $				(%)				US $				(%)				US $				(%)
Revenues			32,463,882				100.00	%			52,545,647				100.00	%			(20,081,765	)			(38.22	)%
Cost of Goods Sold			38,037,303				117.17	%			54,038,734				102.84	%			(16,001,431	)			(29.61	)%
Gross loss			(5,573,421	)			(17.17	)%			(1,493,087	)			(2.84	)%			(4,080,334	)			273.28	%
General & administrative			3,007,330				9.26	%			2,626,115				5.00	%			381,215				14.52	%
Selling and distribution			1,342,669				4.14	%			1,147,596				2.18	%			195,073				17.00	%
Research and development			83,722				0.26	%			141,029				0.27	%			(57,307	)			(40.63	)%
Loss from operations			(10,007,142	)			(30.83	)%			(5,407,827	)			(10.29	)%			(4,599,315	)			85.05	%
Interest expense, net			(1,963,012	)			(6.05	)%			(1,095,716	)			(2.09	)%			(867,296	)			79.15	%
Government grants			1,903				0.01	%			1,437,748				2.74	%			(1,435,845	)			(99.87	)%
Other (expenses) income, net			13,677				0.04	%			(98,206	)			(0.19	)%			111,883				(113.93	)%
Loss before tax			(11,954,574	)			(36.82	)%			(5,164,001	)			(9.83	)%			(6,790,573	)			131.50	%
Income tax benefit (expense)			(846,280	)			(2.61	)%			1,434,994				2.73	%			(2,281,274	)			(158.97	)%
Net loss			(12,800,854	)			(39.43	)%			(3,729,007	)			(7.10	)%			(9,071,847	)			243.28	%
Foreign currency translation gain			8,067				0.02	%			457,781				0.87	%			(449,714	)			(98.24	)%
Other comprehensive income			8,067				0.02	%			457,781				0.87	%			(449,714	)			(98.24	)%
Comprehensive loss			(12,792,787	)			(39.41	)%			(3,271,226	)			(6.23	)%			(9,521,561	)			291.07	%
Weighted average shares outstanding basic and diluted			12,640,000								12,640,000								-				-
Net loss per share, basic and diluted			(1.01	)							(0.30	)							(0.71	)			236.67	%

   

REVENUE

The Company’s consolidated revenue for the year ended March 31, 2010 was $32,463,882, which represented a decrease of 38.22% from the same period in the prior year. The decrease was mainly due to the following factors:  (i) the decrease in the selling price and the sales volume of Urea as compared to the same period last year and (ii) the decrease in the selling price of DME resulted in a negative gross profit of DME. As a result of the decrease in the selling price of DME, the management ceased the production of DME temporarily. Based on the management's estimation, when the market price of DME increases to over RMB 3,150 per ton in China, the Company's DME will have positive gross profit. The Company plans to resume the production of DME in the near future and recover to the normal level within one year.

		2010								2009								Comparisons
Products		Amount US $				Percentage of Revenue (%)				Amount US $				Percentage of Revenue (%)				Change in Amount US $				Increase (Decrease) in Percentage (%)
Urea			22,111,977				68.11	%			34,490,637				65.65	%			(12,378,660	)			(35.89	)%
Ammonium bicarbonate			2,815,418				8.67	%			3,716,301				7.07	%			(900,883	)			(24.24	)%
Methanol			6,247,997				19.25	%			1,813,959				3.45	%			4,434,038				244.44	%
Liquefied Ammonia			858,949				2.65	%			972,655				1.85	%			(113,706	)			(11.69	)%
DME			-				-				11,160,655				21.24	%			(11,160,655	)			(100.00	)%
Ammonia Water			429,541				1.32	%			391,440				0.74	%			38,101				9.73	%
Total			32,463,882				100.00	%			52,545,647				100.00	%			(20,081,765	)			(38.22	)%

 

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The sales of Urea decreased 35.89% to $22,111,977 for the year ended March 31, 2010 from $34,490,637 for the year ended March 31, 2009. This was mainly due to the decrease in sales volume and the selling price of Urea as compared to the same period of last year.

The revenue generated from Ammonium Bicarbonate decreased 24.24% to $2,815,418 for the year ended March 31, 2010 from $3,716,301 for the year ended March 31, 2009. This was mainly due to the decrease in sales volume and the selling price of Ammonium Bicarbonate as compared to the same period of last year.

The sales of Methanol increased 244.44% to $6,247,997 for the year ended March 31, 2010 from $1,813,959 for the year ended March 31, 2009. This increase was mainly due to the increase in sales volume of Methanol as compared to the same period of last year.

The revenue contribution from Liquefied Ammonia decreased 11.69% to $858,949 for the year ended March 31, 2010 from $972,655 for the year ended March 31, 2009. The Liquefied Ammonia is an intermediate product created during the synthetic ammonia production process and can be sold directly as finished product. Normally, Liquefied Ammonia is converted to Urea which results in a higher return for the Company. Therefore, we only sell Liquefied Ammonia to external buyers when: i) the Urea production line was unable to fully convert the Liquefied Ammonia (such as failure of the production line); or ii) the selling price of Liquefied Ammonia is relatively high due to market conditions.

Sales of DME decreased to $0 for the year ended March 31, 2010. This decrease was mainly due to the decrease in the selling price which resulted in a negative gross profit of DME. Therefore, the management ceased the production of DME temporarily. Based on the management's estimation, when the market price of DME increases to over RMB 3,150 per ton in China, the Company's DME will have positive gross profit. The Company plans to resume the production of DME in the near future and recover to the normal level within one year.

The sales of Ammonia Water increased 9.73% to $429,541 for the year ended March 31, 2010 from $391,440 for the year ended March 31, 2009. Ammonia Water is a by product created during the synthetic ammonia production process. During the year, we improved our technology and organized production more scientifically to enhance the recycle rate of Ammonia Water, which has resulted in higher output and sales of Ammonia Water. The increase of Ammonia Water output not only could increase income, but also could reduce environmental pollution.

The following is a breakdown of our revenues geographically:

 

		2010								2009								Comparisons
Provinces		Amount US $				Percentage of Revenue (%)				Amount US $				Percentage of Revenue (%)				Change in Amount US $				Increase (Decrease) in Percentage (%)
Henan Province			9,917,716				30.55	%			19,284,127				36.71	%			(9,366,411	)			(48.57	)%
Guangdong Province			12,927,119				39.82	%			21,892,372				41.66	%			(8,965,253	)			(40.95	)%
Anhui Province			7,245,938				22.32	%			3,038,519				5.78	%			4,207,419				138.47	%
Hubei Province			2,100,413				6.47	%			4,672,991				8.89	%			(2,572,578	)			(55.05	)%
Hunan Province			201,276				0.62	%			250,896				0.48	%			(49,620	)			(19.78	)%
Jiangxi Province			29,217				0.09	%			1,053,286				2.00	%			(1,024,069	)			(97.23	)%
Zhe Jiang Province			9,739				0.03	%			-				-				9,739				100	%
Shan Dong Province			-				-				1,855,865				3.53	%			(1,855,865	)			(100.00	)%
Hebei Province			32,464				0.10	%			497,591				0.95	%			(465,127	)			(93.48	)%
Total			32,463,882				100.00	%			52,545,647				100.00	%			(20,081,765	)			(38.22	)%

For the year ended March 31, 2010, sales in Anhui Province increased by 138.47% as compared to the same period last year. This increase was mainly attributable to the Company’s reinforcement of its marketing strategy and expansion of the market share.

The sales for the year ended March 31, 2010 in other provinces decreased as compared to the same period last year. The decrease was mainly due to the following factors:  (i) the decrease in the selling price and the sales volume of Urea as compared to the same period last year and (ii) the decrease in the selling price of DME resulted in a negative gross profit of DME. As a result of the decrease in the selling price of DME, the management ceased the production of DME temporarily. Based on the management's estimation, when the market price of DME increases to over RMB 3,150 per ton in China, the Company's DME will have positive gross profit. The Company plans to resume the production of DME in the near future and recover to the normal level within one year.

 

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Top 5 Customers:

 

				% of Total Revenue
Customer Name		Sales		Fiscal Year Ended March 31, 2010				Fiscal Year Ended March 31, 2009
1. Guangdong Province Materials Import and Export Co., Ltd		27% Urea			18.43	%			6.98	%
2. Shan Tou Supply and Marketing Cooperatives Group		24% Urea			16.42	%			11.46	%
3. Dingyun Co.,Ltd		9%   Urea			5.98	%			-
4. Sinofert Co., Ltd		9%   Urea			5.96	%			20.89	%
5. Fuyang Ruilong Chemical Co., Ltd.		27% Methanol			5.12	%			1.15	%

 

Urea was mainly sold to customers 1, 2, 3 and 4, which accounted for 69% of the total sales of Urea. We expect this trend to continue for the foreseeable future. Methanol was sold to customer 5, which accounted for 14% of the total sales of Methanol.

COST OF GOODS SOLD (COGS)

COGS for the year ended March 31, 2010 was $38,037,303 which is 117.17% of total revenues and represents a 29.61% decrease as compared to $54,038,734 and 102.84% of total revenues for the year ended March 31, 2009. This was mainly due to the decrease in sales volume of products as compared to the same period last year.

China has significant coal resources, and while the price of coal has been at elevated levels compared to historical norms, management believes that a consolidation is in order, which should reduce prices and benefit the Company going forward. Initially it was not feasible to include the sifted fine-coal derived from lump-coal directly in the chemical process, so it was utilized together with other fine-coal purchased from other suppliers only as a heating and burning resource due to fine-coal having a market price 25% less than lump-coal. With the launch of the “coal-stick” line last year, which utilized fine-coal in a new stick-shaped product, and the launch of differential-pressure dynamos in fiscal year 2009, our management team is confident that production costs will be reduced in the future.

COGS sold 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.

GROSS PROFIT

For the fiscal years ended March 31, 2010 and 2009, the relevant portions of the statements of income (loss) are presented below:

		2010								2009								Comparisons
Item		Amount US $				Percentage of Revenue (%)				Amount US $				Percentage of Revenue (%)				Change in Amount US $				Increase (Decrease) in Percentage (%)
Revenues			32,463,882				100.00	%			52,545,647				100.00	%			(20,081,765	)			(38.22	)%
Cost of Goods Sold			38,037,303				117.17	%			54,038,734				102.84	%			(16,001,431	)			(29.61	)%
Gross (Loss) Profit			(5,573,421	)			(17.17	)%			(1,493,087	)			(2.84	)%			(4,080,334	)			(273.28	)%

Gross profit is calculated by deducting from revenues the raw materials used to produce the finished products as well as charges for depreciation, employee welfare, repairs to machinery and equipment, all inventorial costs and all other costs incident to or necessary for the production of our products.

The Company’s gross profit decreased by $4,080,334, or 273.28%, to $(5,573,421) for the year ended March 31, 2010 as compared to $(1,493,087) for the year ended March 31, 2009. The decrease was mainly due to the decrease in the selling price and the sales volume of products as compared to the same period last year.

 

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OPERATING (LOSS) INCOME

The Company’s consolidated operating (loss) income for the year ended March 31, 2010 decreased 74.22% to $(9,421,585) from $(5,407,827) reported for the year ended March 31, 2009. The decrease was mainly due to the decrease in the selling price and the sales volume of products as compared to the same period last year.

OPERATING EXPENSES

 

Selling and distribution expenses

 

The Company incurred selling and distribution expenses of $1,342,669 for the year ended March 31, 2010, an increase of $195,073, or 17%, as compared to $1,147,596 for the year ended March 31, 2009.  The increase was mainly due to the increase in sales of urea to other provinces, which resulted in the increase in the selling and distribution expenses as compared to the same period last year.

 

General and administrative expenses

The Company incurred general and administrative expenses of $3,007,330 for the year ended March 31, 2010, representing an increase of $381,215 or 14.52%, as compared to $2,626,115 for the year ended March 31, 2009.  The increase was mainly due to the increase in the provision for uncollectible notes receivable as compared to the same period last year.

Research and development

The Company incurred R&D expenses of $83,722 for the year ended March 31, 2010, representing a decrease of $57,307, or 40.63%, compared to $141,029 for the year ended March 31, 2009.  The decrease was mainly due to the decrease in consulting fees and evaluation fees of R&D project as compared to the same period last year.

INTEREST EXPENSE, NET

Interest expense for the fiscal year ended March 31, 2010 was $1,963,012, which represents a 79.15% increase from $1,095,716 for the prior fiscal year. The increase was mainly due to the increase in the growing demand for financing; therefore the cost of financing increased correspondingly.

GOVERNMENT GRANTS

 

Government grants represent grants received from the PRC Government to assist the Company’s environment protection. This amount is recognized when the proceeds are received or collectible.

During the fiscal years ended March 31, 2010 and 2009, grants amounting to $1,903 and $1,437,748 were received from Henan provincial bureau of finance, respectively. This grant money is used to support the Company’s environmental protection program. This subsidy is allocated according to the progress of the project.

OTHER INCOME (EXPENSES), NET

Other income for the fiscal year ended March 31, 2010 were $13,677, which represents a 113.93% increase from $(98,206) for the year ended March 31, 2009.

INCOME TAX

 

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 as of January 1, 2008. The new CIT rate applicable to the Company starting January 1, 2008 is 25%, replacing the previous tax rate of 33%.

 

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The Company’s income tax (expense) benefit differs from the “expected” tax expense (computed by applying the CIT rate of 25% percent to income before income taxes) as follows:

		2010				2009
Computed “expected” benefit (expense)		$	2,988,644			$	1,291,000
Permanent differences			(183,617	)			143,994
Valuation allowance			(3,651,307	)			-
Income tax (expense) benefit		$	(846,280	)		$	1,434,994

The Company incurred income tax expense of $846,280 for the year ended March 31, 2010; a decrease of $2,281,274, or 158.97%, as compared to income tax benefit of $1,434,994 for the year ended March 31, 2009. This increase is mainly attributable to the increase in the reserve against the net operating loss carry forwards and deferred tax assets.

NET INCOME (LOSS)

 

The Company’s net income of $(12,800,854) for the year ended March 31, 2010 represented a decrease of $9,071,847, or 243.28%, as compared to $(3,729,007) for the year ended March 31, 2009. This decrease was mainly due to the decrease in the selling price and the sales volume of products as compared to the same period last year.

 

RESULTS BY SEGMENT

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, Ammonium Bicarbonate, Liquefied Ammonia and Ammonia Water.

The fuel segment involves the manufacture and sale of Methanol, Dimethyl Ether (“DME”).

Fuel Segment

DME

		For the Years Ended March 31,
		2010				2009
Revenues			-			$	11,160,655
COGS			-			$	11,472,683
Gross (loss) profit			-			$	(312,028	)
Gross (loss) profit %			-				(2.80	)%

Sales of DME decreased to $0 for the year ended March 31, 2010. This decrease was mainly due to the decrease in the selling price of DME resulting in a negative gross profit of DME. Therefore, the management ceased the production of DME temporarily. Based on the management's estimation, when the market price of DME increases to over RMB 3,150 per ton in China, the Company's DME will have positive gross profit. The Company plans to resume the production of DME in the near future and recover to the normal level within one year.

Methanol

		For the Years Ended March 31,
		2010				2009
Revenues		$	6,247,997			$	1,813,959
COGS		$	8,588,674			$	2,541,367
Gross (loss) profit		$	(2,340,677	)		$	(727,408	)
Gross (loss) profit %			(37.46	)%			(40.10	)%

Gross (loss) profit as a percentage of revenues increased 2.64% to (37.46)% for the year ended March 31,2010 as compared to (40.10)% for the year ended March 31, 2009. This increase was mainly due to the decrease in the production cost as compared to the same period last year.

 

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Fertilizer Segment

Urea

		For the Years Ended March 31,
		2010				2009
Revenues		$	22,111,977			$	34,490,637
COGS		$	24,633,563			$	34,353,676
Gross (loss) profit		$	(2,521,586	)		$	136,961
Gross (loss) profit %			(11.40	)%			0.40	%

Gross (loss) profit as a percentage of revenues decreased 11.80% to (11.40)% for the year ended March 31,2010 as compared to 0.40% for the year ended March 31, 2009. This was mainly due to the decrease in the selling price being greater than the decrease in the corresponding cost per unit.

Ammonium Bicarbonate

		For the Years Ended March 31,
		2010				2009
Revenues		$	2,815,418			$	3,716,301
COGS		$	3,328,876			$	3,983,331
Gross (loss) profit		$	(513,458	)		$	(267,030	)
Gross (loss) profit %			(18.24	)%			(7.19	)%

Gross (loss) profit as a percentage of revenues decreased 11.05% to (18.24)% for the year ended March 31,2010 as compared to (7.19)% for the year ended March 31, 2009. This was mainly due to the decrease in the selling price being greater than the decrease in the corresponding cost per unit.

Liquefied Ammonia

		For the Years Ended March 31,
		2010				2009
Revenues		$	858,949			$	972,655
COGS		$	1,022,468			$	1,230,332
Gross (loss) profit		$	(163,519	)		$	(257,677	)
Gross (loss) profit %			(19.04	)%			(26.49	)%

Gross (loss) profit as a percentage of revenues increased 7.45% to (19.04)% for the year ended March 31,2010 as compared to (26.49)% for the year ended March 31, 2009. The Liquefied Ammonia is an intermediate product created during the synthetic ammonia production process and can be sold directly as finished product. Normally, Liquefied Ammonia is converted to Urea which results in a higher return for the Company. Therefore, we only sell Liquefied Ammonia to external buyers when: i) the Urea production line was unable to fully convert the Liquefied Ammonia (such as failure of the production line); or ii) the selling price of Liquefied Ammonia is relatively high due to market conditions.

Ammonia Water

		For the Years Ended March 31,
		2010				2009
Revenues		$	429,541			$	391,440
COGS		$	463,722			$	457,345
Gross (loss) profit		$	(34,181	)		$	(65,905	)
Gross (loss) profit %			(7.96	)%			(16.84	)%

Gross (loss) profit as a percentage of revenues increased 8.88% to (7.96)% for the year ended March 31,2010 as compared to (16.84)% for the year ended March 31, 2009. This increase was mainly due to the decrease in the production cost as compared to the same period last year.

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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

		2010				2009
Net cash provided by (used in)
Operating activities		$	(7,511,738	)		$	5,201,090
Investing activities			(1,515,828	)			(14,469,207	)
Financing activities			8,988,303				2,194,742
Net change in cash and cash equivalents			(39,263	)			(7,073,375	)
Effect of exchange rate changes on cash and cash equivalents			(51,791	)			(3,563	)
Cash and cash equivalents at beginning of year			410,870				7,487,808
Cash and cash equivalents at end of year		$	319,816			$	410,870

Cash flows used in operating activities during the year ended March 31, 2010 amounted to $7,511,738, which was mainly due to the Company’s net loss of $12,800,854 in the reporting period and the increase in Inventories by $7,030,806.

As of March 31, 2010, the cash used in investing activities was $1,515,828, which mainly represented the expenditure on construction of the third phase of the 600,000 ton DME facility project.

As of March 31, 2010, the cash provided by financing activities was $8,988,303, which represented the net increase short-term debt and the increase in due to related parties in the reporting period.

Liquidity

 

The Company has a working capital deficit of $44,151,502 as of March 31, 2010, and the Company incurred a net loss of $12,800,854 for the year ended March 31, 2010. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management recognizes that the Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow the Company to continue the development of its business plans and satisfy its current and long-term obligations on a timely basis. The Company believes that it will be able to complete the necessary steps in order to meet its cash requirements throughout the fiscal year ending March 31, 2011.

 

The Company’s 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 April 15, 2010, the Company obtained a short-term bank loan for RMB 30 million (approximately $4.39 million) with an interest rate of 5.31% per annum from Guangdong Development Bank, which is due on April 15, 2011.

 

On April 30, 2010, the Company obtained a short-term bank loan for RMB 10 million (approximately $1.46 million) with an interest rate of 10.08% per annum from Xinyang Commercial Bank, which is due on November 30, 2010.

 

On May 3, 2010, the Company entered into a Securities Purchase and Registration Rights Agreement (“Purchase Agreement”) and a Warrant Agreement (the “Warrant”) with certain accredited investors (the “Investors”), pursuant to which the Company issued One Million Three Hundred Sixty Thousand (1,360,000) units (the “Units”) to the Investors, consisting of (i) one (1) share of Common Stock of the Company, par value $0.001 (the “Common Stock”), and (ii) a Warrant to purchase one half (½) of one (1) share of Common Stock with an exercise price of Two Dollars ($2.00) per share (the “Offering”). The purchase price for each Unit is One Dollar and Twenty-Five Cents ($1.25) and the aggregate purchase price for the Units sold in the Offering was One Million Seven Hundred Thousand Dollars ($1,700,000).  The Company has raised $1.82 million from the Offering as of June 21, 2010.

 

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Capital Resources

As of March 31, 2010, our total assets were $62,182,646 and our total liabilities were $60,957,166. Our debt to asset ratio, calculated as total liabilities (including short-term debt and payables) over total assets, was 0.98.

As of March 31, 2010, our total assets were $62,182,646 and our operating revenue was $32,463,882 reflecting a total asset turnover of 0.52.

As of March 31, 2010, we had a working capital deficiency of $44,151,502. This was mainly due to the increase in the Company’s net loss.

Properties description

All land in China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations.

Our office in Henan, China is located at Xicheng Industrial Zone, Luoshan, Xinyang, Henan, PRC. This office consists of approximately 342,142 square meters. The land use agreement has a 50-year term which expires on January 15, 2055.

As of March 31, 2010, the Company incurred $3,455,870 in construction-in-progress costs, which are primarily attributable to the construction of the third phase of Methanol project (200,000 Ton/Year).

All these development projects are on the Company’s Henan property.

 

We believe that all our properties and equipment have been adequately maintained, are generally in good condition, and are suitable and adequate for our business. 

 

Item 7A.          Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 8.             Financial Statements and Supplementary Data.

 

Reference is made to pages F-2 through F-21 comprising a portion of this annual report on Form 10-K.

 

Item 9.             Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A(T).     Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2010.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules, regulations and related forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating and implementing possible controls and procedures.

 

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Based upon its evaluation, our management has concluded that, as of March 31, 2010, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules, regulations and related forms, and that such information was accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only with proper authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The Company’s management has assessed the effectiveness of our internal control over financial reporting as of March 31, 2010. In making its assessment, management used the criteria described in Internal Control - Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on these criteria, the Company’s management has concluded that the Company’s internal control over financial reporting was effective as of March 31, 2010.

This annual report on Form 10-K does not include an attestation report of the Company’s registered independent public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered independent public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. Beginning with the fiscal year ending March 31, 2010, Section 404 of the Sarbanes-Oxley Act will require us to provide with our annual report on Form 10-K an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the fiscal year ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Item 9B.          Other Information.

 

Not applicable.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

As of March 31, 2010, set forth below are the names of our directors and executive officers, their ages, all positions and offices that they hold with the Company, the period during which they have served as such, and their business experience during at least the last five years.

 

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Name		Age		Position Held		Experience
Chen Si Qiang		46		Chairman of the Board Chief Executive Officer		Mr. Chen has been the Chairman of the Board and the Chief Executive Officer of the Company since October 2006. Mr. Chen has been the Chairman of the Board of Directors of Jinding since 2003. From 2000 to present, he served as the Chairman of the Board of Directors of Xinyang Hongchang Channel Gas Engineering Company Limited. From 1999 to 2000, Mr. Chen served as the Chairman to Xinyang City Channel Gas Company.
Wang Gui Quan		41		Director, President		Mr. Wang has been the President and Director of the Company since October 2006. Mr. Wang has been a director of Jinding since 2003 and the General Manager and Secretary of Jinding since October 2003. From May 1998 to September 2003, Mr. Wang was the Factory Director and Vice Secretary of Xixian Chemical Fertilizer.
Zhou Dian Chang		44		Director		Mr. Zhou has been a Director of the Company since October 2006. Mr. Zhou has been the Chairman of the Board of Directors of Jinding since November 2004. From August 2004 to November 2004, he served as Deputy General Manager of the Xinyang Hongchang Group. From August 1997 to August 2004, Mr. Zhou served as the General Manager of the Henan Xinyang Real Estate Trading Center.
Howard S. Barth		57		Director		Mr. Barth has been a Director of the Company since April 2007. Mr. Barth is a member of the Canadian Institute of Chartered Accountants and the Ontario Institute of Chartered Accountants. He earned his B.A. and M.B.A. at York University and has over 26 years of experience as a certified accountant. Until recently, he was chief executive officer and president with Yukon Gold Corporation, Inc., a public company which is dual-listed in the U.S. and Canadian markets. He is currently a director of Yukon Gold Corporation Inc. and has served on its audit committee. He is also a member of the Board of Directors and chairman of the audit committee for Nuinsco Resources Limited, a TSX-listed exploration company.
Yan Shi		46		Director		Mr. Yan has been a Director of the Company since April 2007. Mr. Yan is a registered CPA in the People’s Republic of China, a registered assets evaluator, registered coinage master and has worked as the vice managing director of Henan Yili Accountancy since 2002. Prior to that he was the vice general manager of Henan Huajian Project Evaluation & Consulting Corp. and the director of the Auditing Department of Henan Huajian Accountancy.
Qi Lei		36		Director		Mr. Qi has been a Director of the Company since April 2007. Mr. Qi is an economist who has worked as the general manager of Henan Yuanneng Mining Investment Corp. for the past five years. Prior to that he was the general manager of Henan Xinyang Hongchang Pipeline Gas Co. Ltd. and the manager of Henan Xinyang Shihe Borough Pipeline Gas Corp.

 

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Xiaokai Cao		41		Director		Mr. Xiaokai has been a Director of the Company since April 2007. Mr. Xiaokai is an economist who received an MBA from Hull University in the United Kingdom. From 2002 to 2005, he was the general manager of Shanghai Pulan Pawn Corp., from 2006 to present he worked as general manager of Henan Yuan-Neng Investment Corp.
Li Dong Lai		44		Chief Financial Officer		Mr. Li has been the Vice President of the Company since October 2006. Mr. Li has been the Chief Financial Officer of Jinding since September 2003. From October 1999 to August 2003, he served as the Vice Finance to Controller of the Xinyang Tianti Mining Development Co., Ltd.
Wu Peng		44		Vice President		Mr. Wu has been the Vice President of the Company since October 2006. Mr. Wu has been the standing Deputy General Manager of Jinding since 1996. He has been involved in Jinding from 1990 since the Company’s days as the Luoshan Chemical Fertilizer Factory.
Wang Xiang Fu		43		Vice President		Mr. Wang has been the Vice President of the Company since October 2006. Mr. Wang has been the Deputy General Manager of Jinding since 1987.

 

 Family Relationships

There are currently no family relationships between the directors or executive officers of the Company.

Involvement in Certain Legal Proceedings

None.

Committees of the Board of Directors

On April 9, 2007, our Board of Directors approved and authorized the establishment of three new committees to facilitate and assist the Board of Directors in the execution of its responsibilities: the Audit Committee, the Compensation Committee and the Nominations/Corporate Governance Committee. In accordance with the listing standards of the NASDAQ Stock Market, all the committees are comprised solely of non-employee, independent Directors. Charters for each committee are available on the Company’s website at www.neworientalenergy.com. The charter of each committee is also available in print to any stockholder who requests it. The table below shows current membership for each of the standing committees of our Board of Directors.

 

Audit Committee		Compensation Committee		Nominating/Corporate Governance Committee
Howard S. Barth (Chair)		Xiaokai Cao (Chair)		Qi Lei (Chair)
Yan Shi		Yan Shi		Xiaokai Cao
Xiaokai Cao		Qi Lei		Howard S. Barth

 

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Audit Committee

Pursuant to its charter, the Audit Committee provides assistance and guidance to the Board of Directors in fulfilling its oversight responsibilities to the Company’s stockholders with respect to the Company’s corporate accounting and reporting practices as well as the quality and integrity of the Company’s financial statements and reports. Membership on the Audit Committee is intended to be restricted to directors who are independent of management and free from any relationship that, in the opinion of the Board of Directors, could interfere with the exercise of independent judgment as a committee member.

The Audit Committee is comprised solely of non-employee Directors, all of whom our Board of Directors has determined are independent pursuant to the rules of the Nasdaq Stock Market (the “Nasdaq Rules”). Our Board of Directors has determined that all the members of the Audit Committee are financially literate pursuant to the Nasdaq Rules. Our Board of Directors also conducted a qualitative assessment of Mr. Barth’s level of knowledge and experience based on a number of factors, including his formal education and experience, and has determined that Mr. Barth is an Audit Committee Financial Expert within the meaning stipulated by the Securities and Exchange Commission.

Nominating Committee

Code of Ethics

 

On April 9, 2007, the Company adopted a Code of Business Conduct and Ethics that applies to all its employees including its executive officers. The Company’s Code of Business Conduct and Ethics was filed as an exhibit to the Company’s Form 8-K, filed on April 10, 2007.

 Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, executive officers and persons who own more than 10% of our common stock, to file with the SEC initial reports of ownership on Form 3, reports of changes in ownership on Form 4 and annual reports concerning their ownership on Form 5. Directors, executive officers and greater than 10% shareholders are required to furnish the Company with copies of all Section 16(a) forms they file.

 

To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, with respect to the fiscal year ended March 31, 2010, the executive officers, directors and beneficial owners of more than 10% of our common stock have filed their initial statements of ownership on Form 3 on a timely basis, and the officers, directors and beneficial owners of more than 10% of our common stock have also filed the required Forms 4 or 5 on a timely basis. There were no transactions that were not reported timely.

 

Item 11. Executive Compensation.

Summary Compensation Table

The following table sets forth information about compensation paid or accrued by us during the years ended March 31, 2010, 2009 and 2008 to our executive officers who served during the fiscal year ended March 31, 2010. No executive officers who served during the most recently completed fiscal year have been omitted from the table.

 

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Name & Principal Position

Year

Salary ($)

Bonus ($)

Stock Awards ($)

Option Awards ($)

Non-Equity Incentive Plan Compensation ($)

Change in Pension value and Nonqualified deferred compensation earnings ($)

All other Compensation ($)

Total ($)

Chen Si Qiang

2010

22,500

N/A

N/A

N/A

N/A

N/A

N/A

22,500

CEO

2009

22,500

N/A

N/A

N/A

N/A

N/A

N/A

22,500

2008

22,500

N/A

N/A

N/A

N/A

N/A

N/A

22,500

Wang Gui Quan

2010

15,000

N/A

N/A

N/A

N/A

N/A

N/A

15,000

President

2009

15,000

N/A

N/A

N/A

N/A

N/A

N/A

15,000

2008

15,000

N/A

N/A

N/A

N/A

N/A

N/A

15,000

Zhou Dian Chang

2010

18,750

N/A

N/A

N/A

N/A

N/A

N/A

18,750

(1)

2009

18,750

N/A

N/A

N/A

N/A

N/A

N/A

18,750

2008

18,750

N/A

N/A

N/A

N/A

N/A

N/A

18,750

Li Dong Lai

2010

10,000

N/A

N/A

N/A

N/A

N/A

N/A

10,000

CFO (2)

2009

10,000

N/A

N/A

N/A

N/A

N/A

N/A

10,000

2008

10,000

N/A

N/A

N/A

N/A

N/A

N/A

10,000

Wu Peng

2010

10,000

N/A

N/A

N/A

N/A

N/A

N/A

10,000

Vice President

2009

10,000

N/A

N/A

N/A

N/A

N/A

N/A

10,000

2008

10,000

N/A

N/A

N/A

N/A

N/A

N/A

10,000

Wang Xiang Fu

2010

10,000

N/A

N/A

N/A

N/A

N/A

N/A

10,000

Vice President

2009

10,000

N/A

N/A

N/A

N/A

N/A

N/A

10,000

2008

10,000

N/A

N/A

N/A

N/A

N/A

N/A

10,000

Ben Wang

2010

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Former CFO (3)

2009

50,000

N/A

N/A

N/A

N/A

N/A

N/A

50,000

2008

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

 

(1) Mr. Zhou received compensation with respect to his position as Chairman of Jinding.

  

(2) Mr. Li was appointed as Chief Financial Officer of the Company, effective February 9, 2009.

  

(3) Mr. Wang resigned from his position as Chief Financial Officer of the Company, effective February 7, 2009.

  

As of March 31, 2010, the Company did not have any “Grants of Plan-Based Awards”, “Outstanding Equity Awards at Fiscal Year-End”, “Option Exercises and Stock Vested”, “Pension Benefits”, or “Nonqualified Deferred Compensation”. Nor did the Company have any “Post-Employment Payments” to report.

  

There was no officer whose salary and bonus for the period exceeded $100,000. The amounts listed in the table above were paid by Jinding, the wholly owned subsidiary of our wholly owned subsidiary KHL.

  

While we do have employment agreements with our executive officers, the salary for our executive officers is at the discretion of our Board of Directors. We expect to pay substantially similar compensation to our executives in the future. The Board of Directors seeks to provide senior management with level of assured cash compensation in the form of base salary that facilitates an appropriate lifestyle given their professional status and accomplishments.

  

We have no stock option or profit-sharing programs for the benefit of directors, officers or other employees, but our Board of Directors may recommend adoption of one or more such programs in the future.

Employment Agreements

Employment Contract, dated April 27, 2006, by and between Henan Jinding Chemical Industry Co., Ltd (“Jinding”) and Mr. Wang Xiang Fu. Mr. Wang shall serve as Jinding’s Deputy General Manager for a period of five (5) years until April 30, 2011.

Employment Contract, dated September 28, 2003, by and between Henan Jinding Chemical Industry Co., Ltd. and Mr. Li Dong Lai. Mr. Li shall serve as Jinding’s Deputy General Manager for a period of eight (8) years until September 30, 2011.

Employment Contract, dated April 28, 2006, by and between Henan Jinding Chemical Industry Co., Ltd. and Mr. Wu Peng. Mr. Wu shall serve as Jinding’s Deputy General Manager for a period of five (5) years until April 30, 2011.

Benefit Plans

The Company’s employees enjoy the rights and benefits of the Company’s official benefit plan. The Company pays for our employees’ pension, unemployment insurance, medical insurance and work injury insurance. The Company also maintains a reserve fund for any medical emergency necessities.

Compensation of Directors  

The Company does not pay compensation to its directors. All directors are reimbursed for out-of-pocket expenses in connection with attendance at Board of Director’s and/or committee meetings. The Company may establish other compensation plans (e.g. options, cash for attending meetings, etc.) in the future.

 

42

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Compensation Committee Interlocks and Insider Participation in Compensation Decisions

During the last fiscal year, none of the Company’s executive officers served on the board of directors or compensation committee of any other entity whose executive officers served either the Company’s Board of Directors or Compensation Committee.  

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth information regarding the beneficial ownership of our common stock as of June 29, 2010 for each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

				Amount and Nature of Beneficial Ownership(2)
Title of Class		Name and Address of Beneficial Owner(1)		Number of Shares (3)				Percent of Voting Stock (4)
Common		Auto Chance International Limited			7,500,000				53.19
Common		Chen Si Qiang (5)			7,500,000				(6	)

 

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(1)

Unless otherwise noted, the address is that of the Company.

 

(2)

On June 29, 2010, there were 14,100,000 shares of our common stock outstanding. Each person named above has sole investment and voting power with respect to all shares of the common stock shown as beneficially owned by the person, except as otherwise indicated below.

 

(3)

Under applicable rules promulgated by the U. S. Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), a person is deemed the “beneficial owner” of a security with regard to which the person, directly or indirectly, has or shares (a) the voting power, which includes the power to vote or direct the voting of the security, or (b) the investment power, which includes the power to dispose or direct the disposition of the security, in each case irrespective of the person’s economic interest in the security. Under these SEC rules, a person is deemed to beneficially own securities which the person has the right to acquire within 60 days through (x) the exercise of any option or warrant or (y) the conversion of another security.

 

(4)

In determining the percent of our common stock owned by a person (a) the numerator is the number of shares of our common stock beneficially owned by the person, including shares the beneficial ownership of which may be acquired within 60 days upon the exercise of options or warrants or conversion of convertible securities, and (b) the denominator is the total of (i) the 14,100,000 shares of our common stock outstanding on June 29, 2010 and (ii) any shares of our common stock which the person has the right to acquire within 60 days upon the exercise of options or warrants or conversion of convertible securities. Neither the numerator nor the denominator includes shares which may be issued upon the exercise of any other options or warrants or the conversion of any other convertible securities.

 

(5)

Through his position as a stockholder in Auto Chance International Limited, Chen Si Qiang has the power to dispose of or direct the disposition of the 7,500,000 shares of common stock of the Company owned by Auto Chance International Limited. As a result, Chen Si Qiang may, under the rules of the Securities and Exchange Commission, be deemed to be the beneficial owner of the shares of common stock. Chen Si Qiang disclaims beneficial ownership of the shares of common stock reported as beneficially owned by him, except to the extent of his pecuniary interest as a stockholder of Auto Chance International Limited.

 

(6)

Represents the individual’s ownership of the 7,500,000 shares of Auto Chance International Limited.

 

The following table sets forth information regarding the beneficial ownership of our common stock as of June 29, 2010 for each of our officers and directors and all our officers and directors as a group. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

 

43

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				Amount and Nature of Beneficial Ownership(2)
Title of Class		Name and Address of Beneficial Owner(1)		Number of Shares (3)				Percent of Voting Stock (4)
Common		Chen Si Qiang, Chairman and CEO (5)			7,500,000				(6	)
Common		Wang Gui Quan, Director and President			-0-				-0-
Common		Zhou Dian Chang, Director			-0-				-0-
Common		Howard S. Barth, Director			-0-				-0-
Common		Yan Shi, Director			-0-				-0-
Common		Qi Lei, Director			-0-				-0-
Common		Xiaokai Cao, Director			-0-				-0-
Common		Li Dong Lai, Chief Financial Officer			-0-				-0-
Common		Wu Peng, Vice President			-0-				-0-
Common		Wang Xiang Fu, Vice President			-0-				-0-
Common		All Directors and Officers as a Group (10 persons)			7,500,000				53.19	%

 

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(1)

Unless otherwise noted, the address is that of the Company.

 

(2)

On June 29, 2010, there were 14,100,000 shares of our common stock outstanding. Each person named above has sole investment and voting power with respect to all shares of the common stock shown as beneficially owned by the person, except as otherwise indicated below.

 

(3)

Under applicable rules promulgated by the U. S. Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), a person is deemed the “beneficial owner” of a security with regard to which the person, directly or indirectly, has or shares (a) the voting power, which includes the power to vote or direct the voting of the security, or (b) the investment power, which includes the power to dispose or direct the disposition of the security, in each case irrespective of the person’s economic interest in the security. Under these SEC rules, a person is deemed to beneficially own securities which the person has the right to acquire within 60 days through (x) the exercise of any option or warrant or (y) the conversion of another security.

 

(4)

In determining the percent of our common stock owned by a person (a) the numerator is the number of shares of our common stock beneficially owned by the person, including shares the beneficial ownership of which may be acquired within 60 days upon the exercise of options or warrants or conversion of convertible securities, and (b) the denominator is the total of (i) the 14,100,000 shares of our common stock outstanding on June 29, 2010 and (ii) any shares of our common stock which the person has the right to acquire within 60 days upon the exercise of options or warrants or conversion of convertible securities. Neither the numerator nor the denominator includes shares which may be issued upon the exercise of any other options or warrants or the conversion of any other convertible securities.

 

(5)

Through his position as a stockholder in Auto Chance International Limited, Chen Si Qiang has the power to dispose of or direct the disposition of the 7,500,000 shares of common stock of the Company owned by Auto Chance International Limited. As a result, Chen Si Qiang may, under the rules of the Securities and Exchange Commission, be deemed to be the beneficial owner of the shares of common stock. Chen Si Qiang disclaims beneficial ownership of the shares of common stock reported as beneficially owned by him, except to the extent of his pecuniary interest as a stockholder of Auto Chance International Limited.

 

(6)

Represents the individual’s ownership of the 7,500,000 shares of Auto Chance International Limited.

 

Securities Authorized for Issuance Under Equity Compensation Plans.

As of the fiscal year ended March 31, 2009, we have no shares of our common stock or preferred stock that are issuable under compensation plans approved by our security holders.

44

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Item 13. Certain Relationships and Related Transactions, and Director Independence.

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 following:

Due June 30, 2010, interest rate at 8.748% per annum, unsecured		$	2,929,846
Due August 13, 2010, interest rate at 10.62% per annum, unsecured			439,477
Due August 20, 2010, interest rate at 10.62% per annum, unsecured			1,025,446
Due September 1, 2010, interest rate at 10.62% per annum, unsecured			732,461
Due September 25, 2010, interest rate at 15% per annum, unsecured			732,461
Due October 9, 2010, interest rate at 10.62% per annum, unsecured			585,969
Due October 14, 2010, interest rate at 10.62% per annum, unsecured			878,953
Due December 10, 2010, interest rate at 10.62% per annum, unsecured			732,461
Due December 28, 2010, interest rate at 10.62% per annum, unsecured			439,477
Due December 31, 2010, interest rate at 10.62% per annum, unsecured			292,984
Due January 25, 2011, interest rate at 10.62% per annum, unsecured			292,984
Due February 9, 2011, interest rate at 10.62% per annum, unsecured			439,477
No fixed repayment term, interest free, unsecured			1,318,430
Total		$	10,840,426

 

Interest expense for the years ended March 31, 2010 and 2009 is $640,723 and $308,495, respectively. Of the $640,723 of interest expense, $530,626 was capitalized interest in construction in progress, since the amount was used for construction. The largest aggregate amount of principal outstanding since April 1, 2008 is $2,929,846.  The amount of principal paid over the life of the loan is $0.

b)

Long Triumph Investments Limited is a former shareholder of the Company. The amount represents advances from Long Triumph Investments Limited. The amount is unsecured, interest free, and has no fixed repayment terms. The largest aggregate amount of principal outstanding since April 1, 2008 is $1,344,328.  The amount of principal paid over the life of the loan is $0.

(c)

Chen Siqiang is the chairman of the board and chief executive officer of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on September 3, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $98,374 and $93,309 was capitalized in construction in progress, since the amount was used for construction. The largest aggregate amount of principal outstanding since April 1, 2008 is $292,984. The amount of principal paid over the life of the loan is $0.

(d)

Wang Guiquan is the president and director of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on July 18, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $12,648 and $11,883 was capitalized in construction in progress, since the amount was used for construction. The largest aggregate amount of principal outstanding since April 1, 2008 is $131,843.  The amount of principal paid over the life of the loan is $219,997.

(e)

Zhou Dianchang is a director of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due July 18, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $7,027 and $6,602 was capitalized in construction in progress, since the amount was used for construction. The largest aggregate amount of principal outstanding since April 1, 2008 is $73,246.  The amount of principal paid over the life of the loan is $0.

(f)

Mai Xiaofu is a director of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on July 2, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $14,053 and $13,819 was capitalized in construction in progress, since the amount was used for construction. The largest aggregate amount of principal outstanding since April 1, 2008 is $146,492.  The amount of principal paid over the life of the loan is $0.

 

45

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(g)

Yu Zhiyang is a significant shareholder of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on July 2, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $4,216 and $4,146 was capitalized in construction in progress, since the amount was used for construction. The largest aggregate amount of principal outstanding since April 1, 2008 is $43,948.  The amount of principal paid over the life of the loan is $0.

 

(h)

Yang Hongtao is a significant shareholder of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on July 2, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $4,216 and $4,146 was capitalized in construction in progress, since the amount was used for construction. The largest aggregate amount of principal outstanding since April 1, 2008 is $43,948.  The amount of principal paid over the life of the loan is $0.

(i)

Li Dong Lai, the Vice-President of the Company, loaned $219,996 (includes outstanding principal and    interest as of September 30, 2008) to the Company. The amount is unsecured, has an interest rate of 14.4% per annum and was due on October 13, 2008. There was no interest paid on the loan because the full amount was repaid on its due date. The largest aggregate amount of principal outstanding since April 1, 2008 is $219,996. The amount of principal paid over the life of the loan is $219,996.

Director Independence

Messrs. Howard S. Barth, Yan Shi, Qi Lei and Xiaokai Cao are all non-employee Directors, and all of whom our Board of Directors has determined are independent pursuant to Nasdaq Rules and the rules of the Securities and Exchange Commission. All of the members of our Audit Committee, Nominating/Corporate Governance Committee and Compensation Committee are independent pursuant to the Nasdaq Rules and the rules of the Securities and Exchange Commission.

Item 14. Principal Accounting Fees and Services.

 

The firm of Weinberg & Company, P.A. acts as our principal accountant. The following is a summary of fees incurred for services rendered.

Audit Fees

During the fiscal years ended March 31, 2010 and 2009, the fees for our principal accountant were the following:

		Fiscal Year ended
		March 31, 2009				March 31, 2010
Quarterly reviews		$	150,604			$	90,000
Audit of consolidated financial statements included in this Annual Report on Form 10-K		$	155,000			$	155,000
Total		$	305,604			$	245,000

Audit Related Fees

During the fiscal years ended March 31, 2010 and 2009, the fees for our principal accountant for the rendering of assurance and related services reasonably related to the performance of the audit or review of financial statements were $0 and $1,150, respectively.

Tax Fees

 

During the fiscal years ended March 31, 2010 and 2009, there were no fees for our principal accountant for the rendering of tax compliance, tax advice and tax planning.

All Other Fees

During the fiscal years ended March 31, 2010 and 2009, there were no fees billed for products and services provided by the principal accountant other than those set forth above.

 

46

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Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Accountant

The policy of the Audit Committee is to pre-approve all audit and non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax fees, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. The Audit Committee has delegated pre approval authority to certain committee members when expedition of services is necessary. The independent accountants and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent accountants in accordance with this pre-approval delegation, and the fees for the services performed to date. All of the services described above in this Item 14 were approved in advance by the Audit Committee during the fiscal year ended March 31, 2010.

 

PART IV  

 

Item 15. Exhibits and Financial Statement Schedules

The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:

 

Exhibit Number		Exhibit Description
2.1		Share Exchange Agreement dated as of October 11, 2006, between Sports Source, Kinfair Holdings Limited and Auto Chance International Limited. (2)
2.2		Share Transfer Agreement, dated February 29, 2006, between Kinfair Holdings Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu, Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)
2.3		Stock Purchase Agreement, dated February 19, 2006, by and between Henan Jinding Chemical Industry Co., Ltd. and Kinfair Holdings Limited. (2)
3.1		Certificate of Incorporation of the Company, as amended by the current report on Form 8-K filed with the SEC on February 7, 2007 (1)
3.2		Bylaws of the Company, as amended by the current report on Form 8-K/A filed with the SEC on February 23, 2007 (1)
4.1		Specimen of Common Stock Certificate (3)
10.1		Form of Labor Contract for Henan Jinding Chemical Industry Co., Ltd. (2)
10.2		Land Use Certificates issued to Luoshan Jinding Chemical Industry Co., Ltd. by the People’s Government of Luoshan County. (2)
10.3		Securities Purchase and Registration Rights Agreement, dated May 3, 2010, by and between the Company and the Investors listed on the Schedule of Buyers attached thereto. (7)
10.4		Form of Warrant. (7)
14.1		Code of Business Conduct and Ethics, adopted April 9, 2007 (4)
21.1		Subsidiaries of the Company (5)
24.1		Power of Attorney (set forth on signature page)
31.1		Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (5)
31.2		Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (5)

 

47

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32.1		Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (5)
99.1		Loan Agreement, dated August 8, 2008, by and between New Oriental Energy & Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd. (6)

 

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(1)	Incorporation by reference to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-125131).

(2)	Incorporated by reference to the Company's Current Report on Form 8-K dated October 13, 2006.

(3)	Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2008.

(4)	Incorporated by reference to the Company's Current Report on Form 8-K dated April 10, 2007.

(5)	Filed herewith.

(6)	Incorporated by reference to the Company’s Form 10-Q for the period ended June 30, 2008.

(7)	Incorporated by reference to the Company’s Current Report on Form 8-K dated May 4, 2010

 

48

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

CONTENTS

 

PAGE	F - 1	REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM
PAGE	F - 2	CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2010 AND 2009
PAGE	F - 3	CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
PAGE	F - 4	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
PAGE	F - 5	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
PAGE	F - 6-21	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM

To the Board of Directors and Shareholders of:

New Oriental Energy & Chemical Corp.

We have audited the accompanying consolidated balance sheets of New Oriental Energy & Chemical Corp. and Subsidiaries (the “Company”) as of March 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive loss, changes in shareholders' equity and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Oriental Energy & Chemical Corp. and Subsidiaries as of March 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company incurred a net loss of $12,800,854 and has negative cash flows from operations of $7,511,738 for the year ended March 31, 2010 and has a working capital deficit of $44,151,502 at March 31, 2010.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Weinberg & Company, P.A.

Boca Raton, Florida

June 21, 2010

F-1

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		March 31, 2010				March 31, 2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	319,816			$	410,870
Restricted cash			3,662,306				4,388,596
Notes receivable, net of reserve of $732,461  and $146,287 at March 31, 2010 and 2009, respectively			42,483				722,242
Inventories, net			7,607,683				1,678,626
Prepayments for goods			275,735				301,450
Due from employees			225,519				18,424
Other assets			35,762				19,152
Due from a related party			231,872				253,959
Deferred taxes			622,452				307,404
Total current assets			13,023,628				8,100,723
Long-term investment			-				469,580
Plant and equipment, net			16,246,562				18,695,469
Land use rights, net			1,603,674				1,637,352
Construction in progress			29,540,856				25,703,868
Deposits			1,208,607				2,123,963
Deferred taxes			551,037				1,422,756
Other long-term assets			8,282				11,049
Total long-term assets			49,159,018				50,064,037
TOTAL ASSETS		$	62,182,646			$	58,164,760
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable		$	8,672,865			$	9,697,419
Other payables and accrued liabilities			1,169,859				887,920
Short-term debt			18,900,429				15,743,355
Customer deposits			10,814,494				2,907,587
Due to employees			16,810				11,419
Payable to contractors			1,175,726				1,477,066
Due to related parties			14,871,559				8,350,223
Deferred taxes			450,853				432,232
Taxes payable			570,768				570,009
Current portion of long-term notes payable			531,767				-
Total current liabilities			57,175,130				40,077,230
LONG-TERM LIABILITIES
Long-term bank loan			2,929,845				2,925,730
Long-term note payable			-				531,020
Deferred taxes			722,636				452,242
Due to employees			129,555				160,271
Total long-term liabilities			3,782,036				4,069,263
TOTAL LIABILITIES		$	60,957,166			$	44,146,493
SHAREHOLDERS' EQUITY
Common stock, par value $0.001 per share; 30,000,000 shares authorized, 12,640,000 shares issued and outstanding at March 31, 2010 and 2009, respectively			12,640				12,640
Additional paid-in capital			4,573,205				4,573,205
Retained earnings (restricted portion was $0 and $950,327 at March 31, 2010 and 2009, respectively )			(5,903,362	)			6,897,492
Accumulated other comprehensive income			2,542,997				2,534,930
TOTAL SHAREHOLDERS' EQUITY			1,225,480				14,018,267
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	62,182,646			$	58,164,760

 

See accompanying notes to the consolidated financial statements.

F-2

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

		2010				2009
REVENUES		$	32,463,882			$	52,545,647
COST OF GOODS SOLD			38,037,303				54,038,734
GROSS LOSS			(5,573,421	)			(1,493,087	)
General and administrative			3,007,330				2,626,115
Selling and distribution			1,342,669				1,147,596
Research and development			83,722				141,029
LOSS FROM OPERATIONS			(10,007,142	)			(5,407,827	)
OTHER INCOME (EXPENSES)
Interest expense, net			(1,963,012	)			(1,095,716	)
Government grants			1,903				1,437,748
Other income (expenses), net			13,677				(98,206	)
LOSS BEFORE INCOME TAXES			(11,954,574	)			(5,164,001	)
INCOME TAX (EXPENSE) BENEFIT			(846,280	)			1,434,994
NET LOSS			(12,800,854	)			(3,729,007	)
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain			8,067				457,781
OTHER COMPREHENSIVE INCOME			8,067				457,781
COMPREHENSIVE LOSS		$	(12,792,787	)		$	(3,271,226	)
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED			12,640,000				12,640,000
NET LOSS PER SHARE, BASIC AND DILUTED		$	(1.01	)		$	(0.30	)

 

See accompanying notes to the consolidated financial statements.

 

F-3

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NEW ORIENTAL ENERGY & CHEMICAL CORP.AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

 

										Additional								Accumulated Other
		Common stock								Paid-in				Retained				Comprehensive
		Shares				Par value				Capital				Earnings				Income				Total
BALANCE AT MARCH 31, 2008			12,640,000			$	12,640			$	4,573,205			$	10,626,499			$	2,077,149			$	17,289,493
Foreign currency translation gain			-				-				-				-				457,781				457,781
Net loss			-				-				-				(3,729,007	)			-				(3,729,007	)
BALANCE AT MARCH 31, 2009			12,640,000			$	12,640			$	4,573,205			$	6,897,492			$	2,534,930			$	14,018,267
Foreign currency translation gain			-				-				-				-				8,067				8,067
Net loss			-				-				-				(12,800,854	)			-				(12,800,854	)
BALANCE AT MARCH 31, 2010			12,640,000			$	12,640			$	4,573,205			$	(5,903,362	)		$	2,542,997			$	1,225,480

 

See accompanying notes to the consolidated financial statements.

 

F-4

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

 

		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(12,800,854	)		$	(3,729,007	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			2,599,354				2,688,996
Loss on disposal of plant and equipment			-				40,278
Deferred taxes			845,686				(1,439,594	)
Write-down of inventories to net realizable value			1,108,274				337,532
Provision for uncollectible notes receivable			585,557				-
Changes in operating assets and liabilities:
(Increase) Decrease In:
Inventories			(7,030,806	)			154,882
Prepayments for goods			25,715				895,381
Other assets			(16,610	)			115,841
Due from a related party			22,087				(253,959	)
Increase (Decrease) In:
Accounts payable			(1,024,554	)			8,040,536
Other payables and accrued liabilities			281,939				462,191
Customer deposits			7,906,907				(1,312,940	)
Due to employees			5,391				-
Due to a related party			(19,824	)			55,936
Taxes payable			-				(854,983	)
Net cash (used in) provided by operating activities			(7,511,738	)			5,201,090
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash			726,290				1,050,213
Payment for long-term investment			-				(433,057	)
Purchases of plant and equipment			(61,501	)			(159,978	)
Purchases of construction in progress			(3,455,870	)			(14,881,798	)
Deposits			917,698				(91,358	)
Proceeds from sale of long-term investment			469,910				-
Proceeds from disposal of plant and equipment			-				96,188
Due from employees			(207,095	)			6,809
Notes receivable			94,740				(56,226	)
Net cash used in investing activities			(1,515,828	)			(14,469,207	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term debt			31,722,563				26,404,908
Repayments of short-term debt			(28,589,832	)			(29,061,711	)
Proceeds from long-term bank loans			-				2,925,730
Due to related parties			5,855,572				1,925,815
Net cash provided by financing activities			8,988,303				2,194,742
NET DECREASE IN CASH AND CASH QUIVALENTS			(39,263	)			(7,073,375	)
Effect of exchange rate changes on cash			(51,791	)			(3,563	)
Cash and cash equivalents at beginning of year			410,870				7,487,808
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	319,816			$	410,870
SUPPLEMENTARY CASH FLOW INFORMATION
Income taxes paid		$	-			$	880,549
Interest paid		$	1,110,848			$	748,657

 

SUPPLEMENTAL NON-CASH DISCLOSURES:

During 2010 and 2009, $25,656 and $718,045 respectively, was transferred from construction in progress to plant and equipment.

 

See accompanying notes to the consolidated financial statements.

 

F-5

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

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.	GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company had a net loss of $12,800,854 and has negative cash flows from operations of $7,511,738 for the year ended March 31, 2010, and has a working capital deficit of $44,151,502 at March 31, 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 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 April 15, 2010, the Company obtained a short-term bank loan for RMB 30 million (approximately $4.39 million) with an interest rate of 5.31% per annum from Guangdong Development Bank, which is due on April 15, 2011.

On April 30, 2010, the Company obtained a short-term bank loan for RMB 10 million (approximately $1.46 million) with an interest rate of 10.08% per annum from Xinyang Commercial Bank, which is due on November 30, 2010.

On May 3, 2010, the Company entered into a Securities Purchase and Registration Rights Agreement (“Purchase Agreement”) and a Warrant Agreement (the “Warrant”) with certain accredited investors (the “Investors”), pursuant to which the Company issued One Million Three Hundred Sixty Thousand (1,360,000) units (the “Units”) to the Investors, consisting of (i) one (1) share of Common Stock of the Company, par value $0.001 (the “Common Stock”), and (ii) a Warrant to purchase one half (½) of one (1) share of Common Stock with an exercise price of Two Dollars ($2.00) per share (the “Offering”). The purchase price for each Unit is One Dollar and Twenty-Five Cents ($1.25) and the aggregate purchase price for the Units sold in the Offering was One Million Seven Hundred Thousand Dollars ($1,700,000).  Also see Note 18.

3.	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)

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:

F-6

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

 

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Customer		Sales								Customer Deposits
		2010				2009				2010				2009
Company A			18.43	%			6.98	%			83.32	%			49.94	%
Company B			16.42	%			11.46	%			5.16	%			14.45	%
Company C			5.98	%			-				2.57	%			-
Company D			5.96	%			20.89	%			-				3.56	%
Company E			5.12	%			1.15	%			-				1.52	%

The Company has major suppliers who accounted for the following percentage of total purchases and total accounts payable/deposits:

Supplier		Purchases								Accounts Payable /Deposits
		2010				2009				2010				2009
Company F			26.80	%			-				7.46	%			-
Company G			21.84	%			14.29	%			12.14	%			9.52	%
Company H			15.73	%			6.06	%			6.19	%			12.27	%
Company I			11.81	%			18.32	%			8.68	%			1.39	%
Company J			6.36	%			12.73	%			3.14	%			6.89	%

The sole market of the Company is the PRC for the years ended March 31, 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 (formerly SFAS No. 157, Fair Value Measurements) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.

 

These tiers include:

•Level 1—defined as observable inputs such as quoted prices in active markets;

 

F-7

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

 

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

•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.

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 11. These balances are subject to withdrawal restrictions and totaled $3,662,306 and $4,388,596 as of March 31, 2010 and 2009, respectively.

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, taxes payable and long-term bank loan, approximate their fair values because of the short maturity of these instruments.

(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.

Net realizable value is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.

(h)	Prepayments for Goods

Prepayments for goods represent cash paid in advance to suppliers for purchases of raw materials.

(i)	Customer Deposits

Customer deposits consist of amounts paid to the Company in advance for the sale of products in the PRC. The Company receives these amounts and recognizes them as a current liability until the revenue can be recognized when the goods are delivered.

(j)	Plant and Equipment

Plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives are as follows:

 

Buildings	40 years
Machinery	10 years
Motor vehicles	10 years
Office equipment	5 years

 

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.

(k)	Construction in Progress

Construction in progress represents direct costs of construction or the acquisition cost of buildings or machinery and prepayments. Capitalization of these costs ceases and the construction in progress is transferred to fixed assets when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until the assets are completed and ready for their intended use.

 

F-8

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(l)	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 years ended March 31, 2010 and 2009 was $671,160 and $386,464, respectively.

(m)	Land Use Rights

According to the laws of China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. The land use rights granted to the Company are being amortized using the straight-line method over the lease term of fifty years.

(n)	Impairment of Long-Term Assets

Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in Statement of Financial Accounting Standards (“SFAS”) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company also periodically evaluates the amortization periods of its depreciable assets to determine whether subsequent events and circumstances warrant revised estimates of the useful lives. There was no impairment for the years ended March 31, 2010 and 2009.

(o)	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.

(p)	Government Grants

Government grants represented grants received from the PRC Government for assisting the Company’s environment protection. The amount is recognized when the proceeds are received or collectible. During 2010 and 2009, respectively $1,903 and $1,437,748 were received from the PRC Government for assisting the Company’s environment protection procedures.

(q)	Retirement Benefits

Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to operations as incurred. Retirement benefits amounting to $199,302 and $169,803 were charged to operations for the years ended March 31, 2010 and 2009, respectively.

(r)	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.

 

 

F-9

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

		2010				2009
Year end RMB: $ exchange rate			6.8263				6.8359
Average yearly RMB: $ exchange rate			6.8311				6.9275

(s)	Income Taxes

The Company accounts for income tax using the liability method. Deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future utilization is uncertain.

(t)	Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to recognize under current accounting standards as components of comprehensive income should be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current components of comprehensive income are the foreign currency translation adjustment and the unrealized gain on marketable securities.

(u)	Loss Per Share

Basic loss per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no potentially dilutive securities for the years ended March 31, 2010 and 2009.

(v)

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.

The fuel segment involves the manufacture and sale of Methanol, 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 Year Ended March 31, 2010
		DME				Methanol				Segment Total
Revenues			-			$	6,247,997			$	6,247,997
COGS			-				8,588,674				8,588,674
Gross loss			-			$	(2,340,677	)		$	(2,340,677	)

 

 

F-10

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(v)	Segments (Continued)

 

For The Year Ended March 31, 2009
		DME				Methanol				Segment Total
Revenues		$	11,160,655			$	1,813,959			$	12,974,614
COGS			11,472,683				2,541,367				14,014,050
Gross loss		$	(312,028	)		$	(727,408	)		$	(1,039,436	)

Fertilizer Segment:

For The Year Ended March 31, 2010
		Urea				Ammonium Bicarbonate				Liquefied Ammonia				Ammonia Water				Segment Total
Revenues		$	22,111,977			$	2,815,418			$	858,949			$	429,541			$	26,215,885
COGS			24,633,563				3,328,876				1,022,468				463,722				29,448,629
Gross loss		$	(2,521,586	)		$	(513,458	)		$	(163,519	)		$	(34,181	)		$	(3,232,744	)

 

For The Year Ended March 31, 2009
		Urea				Ammonium Bicarbonate				Liquefied Ammonia				Ammonia Water				Segment Total
Revenues		$	34,490,637			$	3,716,301			$	972,655			$	391,440			$	39,571,033
COGS			34,353,676				3,983,331				1,230,332				457,345				40,024,684
Gross profit (loss)		$	136,961			$	(267,030	)		$	(257,677	)		$	(65,905	)		$	(453,651	)

(w)	New Accounting Pronouncements

On April 1, 2009, the FASB approved ASC 805-20 (formerly 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 ASC 805-20, 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 adoption of ASC 805-20 did not have a material impact on the Company’s financial statements..

ASC 320-10 (formerly FSP FAS 115-2 and FAS 124-2) amends 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 adoption of ASC 320-10 did not have a material impact on the Company’s consolidated financial statements.

On April 9, 2009, the FASB also approved ASC 825-10 (formerly 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 adoption of ASC 825-10 did not have a material impact on the Company’s consolidated financial statements.

 

F-11

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(w)	New Accounting Pronouncements (Continued)

In June 2009, the FASB issued ASC 810-10 (formerly SFAS No. 167, Amendments to FASB Interpretation No. 46(R)), which requires an enterprise to perform an analysis and ongoing reassessments to determine whether the enterprise’s 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 enterprise’s involvement in a variable interest entity. SFAS No. 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. It’s not expected that this adoption will have a material impact on the Company’s financial statements.

In April 2009, the FASB updated guidance related to fair-value measurements to clarify the guidance related to measuring fair-value in inactive markets, to modify the recognition and measurement of other-than-temporary impairments of debt securities, and to require public companies to disclose the fair values of financial instruments in interim periods. This updated guidance became effective for the Company beginning June 1, 2009. The Company does not expect the adoption will have an impact on its consolidated financial position or results of operations.

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 Company does not expect the adoption will have an impact on its consolidated financial position or results of operations..

In May 2009, the FASB issued ASC 855-10 (formerly SFAS No. 165, Subsequent Events), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10 is effective for interim and annual periods ending after June 15, 2009. The adoption did not have an impact on the Company’s financial statements.

4.	NOTES RECEIVABLE

Notes receivable at March 31, 2010 and 2009 consist of the following:

		2010				2009
Bank acceptance notes:
Due July 29, 2010 (subsequently settled)		$	7,325			$	-
Due August 2, 2010 (subsequently settled)			7,325				-
Due August 9, 2010 (subsequently settled)			5,860				-
Due August 10, 2010 (subsequently settled)			7,325				-
Due September 9, 2010 (subsequently settled)			14,648				-
Due July 8, 2009 (subsequently settled)			-				14,629
Due June 29, 2009 (subsequently settled)			-				36,571
Due June 28, 2009 (subsequently settled)			-				29,257
Due June 25, 2009 (subsequently settled)			-				5,851
Due June 30, 2009 (subsequently settled)			-				6,901
Due April 30, 2009 (subsequently settled)			-				14,629
Due April 9, 2009 (subsequently settled)			-				14,629
Due April 21, 2009 (subsequently settled)			-				14,629
Subtotal		$	42,483			$	137,096
Notes receivable from unrelated companies:
Due December 31, 2007 (past due)			732,461				731,433
Provision for notes receivable			(732,461	)			(146,287	)
Total		$	42,483			$	722,242

 

 

F-12

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

The balance of notes receivable due December 31, 2007 from unrelated companies represents due from the Xi county government which is interest-free and unsecured. The Company provided a full valuation allowance against the Xi county government notes receivable at March 31, 2010. Also see Note 16.

5.	INVENTORIES

Inventories consist of the following:

 

		March 31, 2010				March 31, 2009
Finished goods		$	6,108,597			$	182,559
Raw materials			989,483				1,006,135
Packing materials			509,603				489,932
Total inventories, net		$	7,607,683			$	1,678,626

The net book value of $3,868,274 and $182,559 of finished goods inventory is pledged as collateral for short-term debt at March 31, 2010 and 2009, respectively. See Note 11.

For the years ended March 31, 2010 and 2009, the Company recorded a write-down of inventories to net realizable value of $1,108,274 and $337,532, respectively.

6.	RELATED PARTY TRANSACTIONS

(I)	Due from a Related Party

 

		March 31, 2010				March 31, 2009
Current:
Huaiyang Desheng Chemical Co., Ltd		$	231,872			$	253,959

Huaiyang Desheng Chemical Co., Ltd (“Huaiyang Desheng”) is a company controlled by a director of the Company. For the years ended March 31, 2010 and 2009, Huaiyang Desheng purchased $0 and $29,941 of raw materials from Henan Jinding, and sold $135,001 and $61,633 of finished goods to Henan Jinding. The remaining 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.

(II)	Due to Related Parties

			March 31, 2010				March 31, 2009
Principal:
Xinyang Hong Chang Pipeline Gas Co., Ltd.	(a)		$	10,840,426			$	4,973,742
Long Triumph Investments Limited	(b)			1,344,328				1,344,328
Chen Siqiang	(c)			1,025,446				1,024,006
Wang Guiquan	(d)			131,843				131,658
Zhou Dianchang	(e)			73,246				73,143
Mai Xiaofu	(f)			146,492				146,287
Yu Zhiyang	(g)			43,948				43,886
Yang Hongtao	(h)			43,948				43,886
Subtotal			$	13,649,677			$	7,780,936
Interest:
Xinyang Hong Chang Pipeline Gas Co., Ltd.	(a)			934,227				422,472
Chen Siqiang	(c)			204,269				105,677
Wang Guiquan	(d)			24,716				12,042
Zhou Dianchang	(e)			13,731				6,690
Mai Xiaofu	(f)			28,087				14,004
Yu Zhiyang	(g)			8,426				4,201
Yang Hongtao	(h)			8,426				4,201
Subtotal			$	1,221,882			$	569,287
Total			$	14,871,559			$	8,350,223

 

 

F-13

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

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 following:

Due June 30, 2010, interest rate at 8.748% per annum, unsecured		$	2,929,846
Due August 13, 2010, interest rate at 10.62% per annum, unsecured			439,477
Due August 20, 2010, interest rate at 10.62% per annum, unsecured			1,025,446
Due September 1, 2010, interest rate at 10.62% per annum, unsecured			732,461
Due September 25, 2010, interest rate at 15% per annum, unsecured			732,461
Due October 9, 2010, interest rate at 10.62% per annum, unsecured			585,969
Due October 14, 2010, interest rate at 10.62% per annum, unsecured			878,953
Due December 10, 2010, interest rate at 10.62% per annum, unsecured			732,461
Due December 28, 2010, interest rate at 10.62% per annum, unsecured			439,477
Due December 31, 2010, interest rate at 10.62% per annum, unsecured			292,984
Due January 25, 2011, interest rate at 10.62% per annum, unsecured			292,984
Due February 9, 2011, interest rate at 10.62% per annum, unsecured			439,477
No fixed repayment term, interest free, unsecured			1,318,430
Total		$	10,840,426

Interest expense for the years ended March 31, 2010 and 2009 is $640,723 and $308,495, respectively. Of the $640,723 of interest expense, $530,626 was capitalized interest in construction in progress, since the amount was used for construction. Also see Note 10.

b)	Long Triumph Investments Limited is a former shareholder of the Company. The amount represents advances from Long Triumph Investments Limited. The amount is unsecured, interest free, and has no fixed repayment terms.

(c)

Chen Siqiang is the chairman of the board and chief executive officer of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on September 3, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $98,374 and $93,309 was capitalized in construction in progress, since the amount was used for construction. Also see Note 10.

(d)

Wang Guiquan is the president and director of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on July 18, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $12,648 and $11,883 was capitalized interest in construction in progress, since the amount was used for construction. Also see Note 10.

(e)

Zhou Dianchang is a director of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due July 18, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $7,027 and $6,602 was capitalized in construction in progress, since the amount was used for construction. Also see Note 10.

(f)

Mai Xiaofu is a director of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on July 2, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $14,053 and $13,819 was capitalized in construction in progress, since the amount was used for construction. Also see Note 10.

 

(g)

Yu Zhiyang is a significant shareholder of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on July 2, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $4,216 and $4,146 was capitalized in construction in progress, since the amount was used for construction. Also see Note 10.

 

F-14

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

6.	RELATED PARTY TRANSACTIONS (CONTINUED)

(II)	Due to Related Parties (continued)

(h)

Yang Hongtao is a significant shareholder of the Company. The amount is unsecured, has an interest rate of 9.6% per annum and is due on July 2, 2010. The interest expense for the years ended March 31, 2010 and 2009 of $4,216 and $4,146 was capitalized in construction in progress, since the amount was used for construction. Also see Note 10.

(III)

Due from employees

		March 31, 2010				March 31, 2009
Current		$	225,519			$	18,424
Total amount due from employees		$	225,519			$	18,424

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.

7.	LONG-TERM INVESTMENT

		March 31, 2010				March 31, 2009
Luoshan Rural Credit Cooperatives		$	-			$	469,580

The amounts represented 3.07% interest of Luoshan Rural Credit Cooperatives and the Company accounted for its investment in Luoshan Rural Credit Cooperative using the cost method. In November 2009, the Company sold all its interest in Luoshan Rural Credit Cooperatives, for $ 469,910. The net gain from the sale was $14,914 and is included in “Other income” in the Consolidated Statements of Operations and Comprehensive Loss.

8.	PLANT AND EQUIPMENT

Plant and equipment consist of the following:

 

		March 31, 2010				March 31, 2009
At cost:
Buildings		$	2,447,278			$	2,432,852
Machinery			25,196,080				25,102,781
Motor vehicles			344,841				328,878
Office equipment			272,839				269,743
			28,261,038				28,134,254
Less: Accumulated depreciation
Buildings			513,328				413,860
Machinery			11,076,634				8,699,555
Motor vehicles			247,040				196,885
Office equipment			177,474				128,485
			12,014,476				9,438,785
Plant and equipment, net		$	16,246,562			$	18,695,469

Depreciation expense for the years ended March 31, 2010 and 2009 is $2,560,617 and $2,651,794, respectively.

The net book value of machinery of $7,332,326 and $7,322,029 is pledged as collateral for a long-term bank loan at March 31, 2010 and 2009, respectively. See Note 13.

 

F-15

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

9.	LAND USE RIGHTS

		March 31, 2010				March 31, 2009
Cost		$	1,799,069			$	1,796,542
Less: Accumulated amortization			195,395				159,190
Land use rights, net		$	1,603,674			$	1,637,352

Amortization expense for the years ended March 31, 2010 and 2009 is $35,956 and $35,456, respectively.

The net book value of $1,603,674 and $0 of land use rights are pledged as collateral for short-term bank loans at March 31, 2010 and 2009, respectively. See Note 11.

Amortization expense for the next five years and thereafter is as follows:

2011		$	35,981
2012			35,981
2013			35,981
2014			35,981
2015			35,981
Thereafter			1,423,769
Total		$	1,603,674

 

10.	CONSTRUCTION IN PROGRESS

Construction in progress consists of the following:

 

		March 31, 2010				March 31, 2009
Plant		$	27,176,737			$	23,461,536
Machinery			2,183,122				2,086,359
Other			180,997				155,973
		$	29,540,856			$	25,703,868

 

Capitalized interest for the years ended March 31, 2010 and 2009 is $671,160 and $386,464, respectively.

Plant construction in progress of $3,139,768 and $3,107,418 is pledged as collateral for the short-term bank loans at March 31, 2010 and 2009, respectively. See Note 11.

 

11.	SHORT-TERM DEBT

Short-term debt consists of the following:

 

		March 31, 2010				March 31, 2009
Bank Loans:
Xinyang Commercial Bank, due April 28, 2010, interest rate at 10.08% per annum, collateralized by finished goods inventory. (Subsequently 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. (Subsequently repaid on its due date)			4,394,767				-
Rural Credit Cooperatives, due June 16, 2010, interest rate at 9.56% per annum, collateralized by construction in progress. (Subsequently repaid on its due date)			556,671				-

 

 

F-16

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

		March 31, 2010				March 31, 2009
Xinyang Commercial Bank, due August 4, 2010, interest rate at 10.08% per annum, collateralized by finished goods inventory.			1,464,922				-
Rural Credit Cooperatives, due October 23, 2010, interest rate at 10.62% per annum, collateralized by construction in progress.			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.			2,343,875				-
Xinyang Commercial Bank, due April 25, 2009, interest rate at 11.56% per annum, collateralized by finished goods inventory. (Subsequently repaid on its due date)			-				1,462,865
Rural Credit Cooperatives, due June 12, 2009, interest rate at 14.19% per annum, collateralized by construction in progress. (Subsequently repaid on its due date)			-				570,517
Rural Credit Cooperatives, due October 16, 2009, interest rate at 14.19% per annum, collateralized by construction in progress. (Subsequently repaid on its due date)			-				570,517
Xinyang Commercial Bank, due August 3, 2009, interest rate at 11.34% per annum, collateralized by finished goods inventory. (Subsequently repaid on its due date)			-				1,462,865
Xinyang Commercial Bank, due December 29, 2009, interest rate at 11.56% per annum, collateralized by finished goods inventory. (Subsequently repaid on its due date)			-				2,340,584
Notes Payable to Unrelated Companies:
Due May 2, 2010 (subsequently repaid on its due date)			2,197,384				-
Due May 26, 2010 (subsequently repaid on its due date)			2,197,384				-
Due August 2, 2010			1,611,415				-
Due August 3, 2010			732,461				-
Due September 16, 2010			585,969				-
Due April 28, 2009 (subsequently repaid on its due date)			-				731,433
Due April 30, 2009 (subsequently repaid on its due date)			-				1,462,866
Due May 24, 2009 (subsequently repaid on its due date)			-				877,719
Due May 25, 2009 (subsequently repaid on its due date)			-				877,719
Due May 26, 2009 (subsequently repaid on its due date)			-				1,024,006
Due May 27, 2009 (subsequently repaid on its due date)			-				877,719
Due July 15, 2009 (subsequently repaid on its due date)			-				731,433
Due July 16, 2009 (subsequently repaid on its due date)			-				731,433
Due July 23, 2009 (subsequently repaid on its due date)			-				877,719
Due August 10, 2009 (subsequently repaid on its due date)			-				585,146
Notes Payable to Unrelated Individuals:
Due June 3, 2010, interest rate at 15% per annum, unsecured (subsequently repaid $205,089 on April 9, 2010)			339,862				558,814
Due April 13, 2010, interest rate at 7.2% per annum, unsecured			439,477				-
		$	18,900,429			$	15,743,355

 

 

F-17

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

11.	SHORT-TERM DEBT (CONTINUED)

Interest expense for the years ended March 31, 2010 and 2009 was $1,310,029 and $1,274,696, 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 $9,515 and $9,910 for the years ended March 31, 2010 and 2009, respectively.

Restricted cash of $3,662,306 and $4,388,596 is collateralized for the notes payable at March 31, 2010 and 2009 respectively.

Inventory of $0 and $182,559 is collateralized for the notes payable at March 31, 2010 and 2009 respectively.

 

The net book value of $3,868,274 and $182,559 of finished goods inventory is pledged as collateral for short-term bank loans at March 31, 2010 and 2009 respectively. See Note 5.

12.	CURRENT PORTION OF LONG-TERM NOTES PAYABLE

		March 31, 2010				March 31, 2009
Due December 31, 2010, interest free, unsecured		$	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 March 31, 2010 is $531,767.

13.	LONG-TERM BANK LOAN

		March 31, 2010				March 31, 2009
Luoshan Rural Credit Cooperatives		$	2,929,845			$	2,925,730

 

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 8.

14.	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%, replacing the previous tax rate of 33%.

Income tax (expense) benefit for the years ended March 31, 2010 and 2009 is summarized as follows:

		2010				2009
Current:
CIT		$	-			$	225,056
Deferred:
CIT			(846,280	)			1,209,938
Income tax (expense) benefit		$	(846,280	)		$	1,434,994

The Company’s income tax (expense) benefit differs from the “expected” tax expense (computed by applying the CIT rate of 25% percent to income before income taxes) as follows:

 

F-18

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

14.	INCOME TAXES (CONTINUED)

		2010				2009
Computed “expected” benefit (expense)		$	2,988,644			$	1,291,000
Permanent differences			(183,617	)			143,994
Valuation allowance			(3,651,307	)			-
Income tax (expense) benefit		$	(846,280	)		$	1,434,994

The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of March 31, 2010 and 2009 are as follows:

 

		March 31, 2010				March 31, 2009
Deferred tax assets:
Current portion:
Cost of sales		$	362,250			$	169,956
Financial expense			12,175				13,876
Welfare			10,300				21,263
Provision for notes receivable			183,115				36,571
Other expense			54,612				65,738
Total current deferred tax assets			622,452				307,404
Non-current portion:
Net operating loss carry forward			4,202,344				1,422,756
Valuation allowance			(3,651,307	)
Total non-current deferred tax assets			551,037				1,422,756
Total deferred tax assets			1,173,489				1,730,160
Deferred tax liabilities:
Current portion:
Cost of sales			374,721				348,565
Government grant			30,031				49,006
Investment income			17,258				17,233
Other expenses			28,843				17,428
Total current deferred tax liabilities			450,853				432,232
Non-current portion:
Amortization			32,094				26,586
Depreciation			690,542				425,656
Total non-current deferred tax liabilities			722,636				452,242
Total deferred tax liabilities			1,173,489				884,474
Net deferred tax assets (liabilities)		$	-			$	845,686

 

In June 2006, the FASB issued ASC 740-10 (formerly FIN 48, 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 March 31, 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.

 

F-19

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

14.	INCOME TAXES (CONTINUED)

The PRC net loss carried forward for tax purposes will expire five years from when the loss is incurred. The expiring amounts for the five years after 2010 are as follows:

Expired year		Amount
2011		$	-
2012			-
2013			-
2014			5,680,614
2015			11,129,121
Total		$	16,809,735

 

The Company has not recorded a provision for U.S. federal income tax for the year ended March 31, 2010 due to the net operating loss carry forward in the United States. Net operating loss carry forward in the United States as of March 31, 2010 was $433,658 and it will begin to expire in 2011 and will end in 2016.

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 March 31, 2010 the Company was not aware of any pending income tax examinations by tax authorities in the PRC.

The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of March 31, 2010, the Company has no accrued interest or penalties related to uncertain tax positions.

15.	SHAREHOLDERS’ EQUITY

On October 11, 2006, a share exchange agreement was reached between the Company, Kinfair Holding Limited (“KHL”) and KHL’s shareholders. The Company issued 7,500,000 shares representing 59.34% of total common stock in exchange of 100% of KHL common stock at the completion of the transaction. Henan Jinding Chemical Co., Ltd. (“Jinding”) is a wholly owned subsidiary of KHL. Jinding is the principal operating subsidiary of KHL.

 

In 2010 and 2009, the subsidiaries of the Company in China did not transfer any earnings to the surplus reserve fund due to net operating loss. Subject to certain restrictions set out in the PRC Companies Law, the surplus reserve fund may be distributed to shareholders in the form of share bonus issues and/or cash dividends. The Company’s retained earnings in the amount of $0 and $950,327 is restricted as of March 31, 2010 and 2009, respectively.

 

16.	CONTINGENCIES

On December 29, 2004, the Company entered into an agreement (the “Luoshan Agreement”) to purchase Luoshan Fertilizer Plant, a bankrupt company and to assume $1.3 million in debt owed by Xixian Fertilizer Plant (the principal shareholder of Luoshan Fertilizer Plant). Under the Luoshan Agreement, the Company was to receive reimbursements of RMB 5 million (approximately $650,000) from both the Luoshan county government and the Xi county government, which were to be received before December 29, 2007. Luoshan county government paid its note of RMB 5 million (approximately $650,000) to the Company on its due date.

In November 2007, the Company initiated a lawsuit in the Intermediate Court of Xinyang City (the “Intermediate Court”) against the Xi county government and Henan Shiji Jinyuan Chemicals Co., Ltd. (the “Shiji Jinyuan”, formerly Xixian Fertilizer Plant) for non-payment of the Xi county government note receivable of RMB 5 million (approximately $650,000) on its due date as set forth under the Luoshan Agreement, and sought the enforcement of the terms of the note receivable and the Luoshan Agreement for payment of the RMB 5 million (approximately $650,000) by both the Xi county government and Shiji Jinyuan. On June 12, 2009, the court entered judgment against Xi county government and Shiji Jinyuan in amount of RMB 5 million

 

F-20

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NEW ORIENTAL ENERGY & CHEMICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MARCH 31, 2010 AND 2009

16.	CONTINGENCIES (CONTINUED)

(approximately $650,000) to be paid before June 22, 2009. In addition, the judgment ordered the Xi county government and Shiji Jinyuan to pay the Company interest and late fee based on market rates. On December 16, 2009, Xi county government and Shiji Jinyuan appealed to the Higher Court of Henan Province.(“Higher Court”). On April 13, 2010, the Higher Court entered final judgment to reject the appeal and sustain the original judgment. On June 17, 2010, the intermediate Court issued enforcement notice to Xi county government and Shiji Jinyuan. The Xi County Government and Shiji Jinyuan did not pay the amount to the Company before June 21, 2010. At March 31, 2010, the Company has a reserve against the RMB 5 million ($732,461) note of $732,461 due to the uncertainty of collection.

17.	CAPITAL COMMITMENT

As of March 31, 2010, the Company entered into an agreement and made a down payment of $25.1 million toward the purchase of production equipment to be used in the Methanol project. The Company is required to pay the remainder of the purchase price of approximately $7.82 million prior to delivery of the equipment, which is estimated to occur in 2010. The amount paid is recorded in construction in progress. Through March 31, 2010, the Company used its working capital and borrowed money from its shareholders to fund the project. The Company originally planned on completing the project by December 2009, however, financing needs have delayed the estimated completion date of the project until September 2010.

18.	SUBSEQUENT EVENTS

On April 15, 2010, the Company obtained a short-term bank loan for RMB 30 million (approximately $4.39 million) with an interest rate of 5.31% per annum from Guangdong Development Bank, which is due on April 15, 2011.

On April 30, 2010, the Company obtained a short-term bank loan for RMB 10 million (approximately $1.46 million) with an interest rate of 10.08% per annum from Xinyang Commercial Bank, which is due on November 30, 2010.

On May 3, 2010, the Company entered into a Securities Purchase and Registration Rights Agreement (“Purchase Agreement”) and a Warrant Agreement (the “Warrant”) with certain accredited investors (the “Investors”), pursuant to which the Company issued One Million Three Hundred Sixty Thousand (1,360,000) units (the “Units”) to the Investors, consisting of (i) one (1) share of Common Stock of the Company, par value $0.001 (the “Common Stock”), and (ii) a Warrant to purchase one half (½) of one (1) share of Common Stock with an exercise price of Two Dollars ($2.00) per share (the “Offering”). The purchase price for each Unit is One Dollar and Twenty-Five Cents ($1.25) and the aggregate purchase price for the Units sold in the Offering was One Million Seven Hundred Thousand Dollars ($1,700,000).

The Company engaged Internet Securities, Inc. as placement agent (the “Placement Agent”) in connection with the Offering. The Company will pay the Placement Agent an amount equal to ten percent (10%) of the aggregate gross proceeds raised in the Offering in cash and a five (5) year warrant to purchase ten percent (10%) of the Securities sold in the Offering (the “Placement Agent Warrant”). The Placement Agent Warrant shall have the same terms as the Warrant, except that the exercise price of the Placement Agent Warrant shall be One Dollar and Twenty Five Cents ($1.25).

The warrants vest only at the date on which financing is closed. The financing was not closed, and the Company has raised $1.82 million from the Offering as of June 21, 2010.  Once the financing is closed the Company will value the warrants using the Black-Scholes pricing model.  The Company is currently evaluating whether the warrants should be accounted for as derivatives since the Company’s functional currency is the RMB, which is different from the currency of the warrants.

 

 

F-21

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NEW ORIENTAL ENERGY & CHEMICAL CORP.
	By:	/s/ Chen Si Qiang
		Chen Si Qiang
		Chief Executive Officer and Chairman of the Board
Dated: June 29, 2010

POWER OF ATTORNEY

The registrant and each person whose signature appears below hereby appoint Chen Si Qiang as attorney-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to the report with the U. S. Securities and Exchange Commission.

In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Chen Si Qiang
Chen Si Qiang		Chief Executive Officer		June 29, 2010
		(Principal Executive Officer) and
		Chairman of the Board
/s/ Donglai Li
Donglai Li		Chief Financial Officer (Principal		June 29, 2010
		Accounting Officer)
/s/ Wang Gui Quan
Wang Gui Quan		President and Director		June 29, 2010
/s/ Zhou Dian Chang
Zhou Dian Chang		Director		June 29, 2010
/s/ Yan Shi
Yan Shi		Director		June 29, 2010
/s/ Qi Lei
Qi Lei		Director		June 29, 2010
/s/ Xiaokai Cao
Xiaokai Cao		Director		June 29, 2010
/s/ Howard S. Barth
Howard S. Barth		Director		June 29, 2010

 

S-1

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Index to Exhibits

Exhibit Number		Exhibit Description
2.1		Share Exchange Agreement dated as of October 11, 2006, between Sports Source, Kinfair Holdings Limited and Auto Chance International Limited. (2)
2.2		Share Transfer Agreement, dated February 29, 2006, between Kinfair Holdings Limited, Xinyang Hongchang Channel Gas Engineering Co., Ltd., Mai XiaoFu, Wang Guiquan, Yu Zhiyang and Yang Hongtao. (2)
2.3		Stock Purchase Agreement, dated February 19, 2006, by and between Henan Jinding Chemical Industry Co., Ltd. and Kinfair Holdings Limited. (2)
3.1		Certificate of Incorporation of the Company, as amended by the current report on Form 8-K filed with the SEC on February 7, 2007 (1)
3.2		Bylaws of the Company, as amended by the current report on Form 8-K/A filed with the SEC on February 23, 2007 (1)
4.1		Specimen of Common Stock Certificate (3)
10.1		Form of Labor Contract for Henan Jinding Chemical Industry Co., Ltd. (2)
10.2		Land Use Certificates issued to Luoshan Jinding Chemical Industry Co., Ltd. by the People’s Government of Luoshan County. (2)
10.3		Securities Purchase and Registration Rights Agreement, dated May 3, 2010, by and between the Company and the Investors listed on the Schedule of Buyers attached thereto. (7)
10.4		Form of Warrant. (7)
14.1		Code of Business Conduct and Ethics, adopted April 9, 2007 (4)
21.1		Subsidiaries of the Company (5)
24.1		Power of Attorney (set forth on signature page)
31.1		Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (5)
31.2		Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 (5)
32.1		Certification under Section 906 of the Sarbanes-Oxley Act of 2002 (5)
99.1		Loan Agreement, dated August 8, 2008, by and between New Oriental Energy & Chemical Corp. and Xinyang Hong Chang Pipeline Gas Co., Ltd. (6)

  

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(1)	Incorporation by reference to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-125131).

(2)	Incorporated by reference to the Company's Current Report on Form 8-K dated October 13, 2006.

(3)	Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 2008.

(4)	Incorporated by reference to the Company's Current Report on Form 8-K dated April 10, 2007.

(5)	Filed herewith.

(6)	Incorporated by reference to the Company’s Form 10-Q for the period ended June 30, 2008.

(7)	Incorporated by reference to the Company’s Current Report on Form 8-K dated May 4, 2010.

 

 

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