Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. þ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
þ
The
issuer's revenues for the fiscal year ended March 31, 2008 were
$67,832,920.
The
aggregate market value of the common stock held by non-affiliates, based on
the
closing price of the common stock as of July 11, 2008 was approximately
$24,312,200.
As
of
July 2, 2008, the number of shares outstanding of the issuer's common stock
is
12,640,000 shares.
Transitional
Small Business Disclosure Format (Check one):
Yes
¨
No
þ
NEW
ORIENTAL ENERGY & CHEMICAL CORP.
TABLE
OF CONTENTS TO ANNUAL REPORT
ON
FORM 10-KSB
YEAR
ENDED MARCH 31, 2008
|
Item
1.
|
Description
of Business.
|
|
||
|
Item
2.
|
Description
of Property.
|
|
||
|
Item
3.
|
Legal
Proceedings.
|
|
||
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
|
||
|
Item
5.
|
Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities.
|
|
||
|
Item
6.
|
Management’s
Discussion and Analysis or Plan of Operation.
|
|
||
|
Item
7.
|
Financial
Statements.
|
|
||
|
Item
8.
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure.
|
|
||
|
Item
8A(T).
|
Controls
and Procedures.
|
|
||
|
Item
8B.
|
Other
Information
|
|
||
|
Item
9.
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section
16(a) of the Exchange Act.
|
|
||
|
Item
10.
|
Executive
Compensation.
|
|
||
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
|
||
|
Item
12.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
|
||
|
Item
13.
|
Exhibits.
|
|
||
|
Item
14.
|
Principal
Accountant Fees and Services.
|
|
PART
I
Item
1. Description
of Business.
Except
as
otherwise indicated by the context, references in this Annual Report to “we,”
“us,” “our,” or the “Company” are to the combined business of New Oriental
Energy & Chemical Corp. and its indirect wholly-owned subsidiary, Henan
Jinding Chemical Co., Ltd. (“Jinding”).
Introduction
New
Oriental Energy & Chemical Corp. (Formerly Sports Source, Inc.) (“NOEC” or
the "Company") was incorporated under the laws of the State of Delaware on
November 15, 2004. On November 22, 2006 the Company changed its name to New
Oriental Energy & Chemical Corp.
On
October 11, 2006, we completed a stock exchange transaction (the “Exchange
Transaction”) with the stockholder of Kinfair Holding Limited (“KHL”). The
Exchange Transaction was consummated under Delaware law and pursuant to the
terms of that certain Securities Exchange Agreement dated effective as of
October 11, 2006 (the “Exchange Agreement”).
Pursuant
to the Exchange Agreement, 13,700,000 shares of common stock held by the
Company’s sole director and majority shareholder were cancelled and the Company
issued shares of our common stock to the stockholder of KHL, in exchange for
100% of the outstanding capital stock of KHL. Pursuant to the Exchange
Transaction, KHL became our wholly owned subsidiary. We carry on our business
through KHL’s wholly owned subsidiary, Jinding.
Description
of Business
We,
through the operations of Jinding, have been engaged in the manufacture and
distribution of fertilizer and chemical products. The products are distributed
to markets in the Peoples’ Republic of China (“PRC”).
Our
primary business is the manufacture and sale of urea, a chemical used as
fertilizer for crops and in certain manufacturing processes, including the
manufacture of resin, plastic and medicine. In the last fiscal year, 56.5%
of
our revenue was generated through the sale of urea. We also produce and sell
methanol. Methanol sales accounted for approximately 18.8% of our revenue in
our
last full fiscal year.
Our
other
products include Ammonium Hydrogen Carbonate, which can be used as a fertilizer
for crops and in the pharmaceutical and food industries. In addition, another
product we have developed is Dimethyl Ether (“DME”). DME has a variety of
industrial applications in the production of pesticides, cosmetics and as a
refrigerant. It may also be used as a component of a variety of common
industrial chemicals. We believe the potential market for DME is particularly
attractive because it can be used as an alternative to conventional
petroleum-based diesel fuel in diesel engines that have undergone minor
modifications to permit the use of DME.
DME
can
be derived from methanol and possess several advantages over conventional diesel
fuel. Petroleum-based diesel fuel is increasingly expensive in the PRC. Because
the PRC has limited petroleum reserves in relation to its growing demand, the
cost of petroleum-based fuels is driven by global oil prices. Also, the use
of
DME addresses environmental concerns. DME burns cleaner, producing relatively
little exhaust as compared with diesel fuel. It also has a better combustion
efficiency, increasing the performance of engines burning DME by 10% to 15%,
as
compared with conventional diesel fuel. We believe the market for DME in the
PRC
will expand.
All
of
our products are manufactured in our factory in Xicheng Industrial Zone,
Luoshan, Henan Province in the PRC. We own and operate a thermal power station
with the capacity to generate 3000 kilowatt of thermal power per hour at our
factory in Henan. The power station uses thermal energy that is a by-product
of
our chemical production operations. We use the resulting electricity in our
plant. We sell all of our products inside the PRC, primarily through regional
distributors with whom we have long term relationships. We have approximately
1,375 full-time employees (including 200 new employees in the training period),
of which 83 employees are part of our management and 46 employees are involved
in research and development. For the fiscal year ended March 31, 2008, we had
gross revenue of $67,832,920 with a net income of $4,062,941.
History
and Organizational Structure
NOEC
(formerly known as Sports Source, Inc.) was incorporated under the laws of
the
State of Delaware on November 15, 2004. Jinding was incorporated in September
2003 and commenced business on October 1, 2003. KHL was formed on January
7, 2006 as a Hong Kong company. Jinding is a wholly-owned subsidiary of KHL.
KHL
is a wholly-owned subsidiary of NOEC whose sole business is to act as a holding
company for Jinding.
Jinding
is located in the Xicheng Industrial Zone of Luoshan, Henan Province, PRC.
KHL
is located in Room 42, 4/F, New Henry House, 10 Ice House Street, Central,
Hong
Kong.
Jinding
was originally formed and named the Luoshan Fertilizer Factory. In October
2003,
the assets of the Luoshan Fertilizer Factory were acquired by the following
shareholders: Xinyang Hongchang Group, a company formed in China, with a 63.63%
interest, Mr. Wang Guiquan with a 9% interest, Mr. Mai Xiaofu, with a 15%
interest, Mr. Zhou Dianchang, with a 5% interest, Mr. Yu Zhiyang, with a
3.685% interest and Mr. Yang Hongtao, with a 3.685% interest in
Jinding.
On
February 29, 2006, KHL entered into a Share Transfer Agreement with Xinyang
Hongchang Group, Mai Xiaofu, Wang Guiquan, Zhou Dianchang, Yu Zhiyang and Yang
Hongtao (collectively, the “Sellers”), in which the Sellers transferred their
interest in Jinding to KHL for an aggregate purchase price of RMB 38,000,000.
As
a result of this transaction, KHL owns all of the capital stock of
Jinding.
As
noted
above, on October 11, 2006, NOEC entered into the Exchange Agreement with KHL
and Auto Chance Limited, the sole stockholder of KHL. Auto Chance International
Limited, is owned by the following six shareholders: Messrs. Chen Si Qiang,
Mai
Xiao Fu, Wang Gui Quan, Zhou Dian Chang, You Zhi Yang and Yang Hong Tao. Of
this
group of shareholders, Messrs. Chen Si Qiang, Wang Gui Quan and Zhou Dian Chang
are involved in the management of Jinding and NOEC. Pursuant to the Exchange
Agreement, 13,700,000 shares of common stock held by the Company’s sole director
and majority shareholder were cancelled and the Company issued shares of our
common stock to the stockholder of KHL, in exchange for 100% of the outstanding
capital stock of KHL. Pursuant to the Exchange Transaction, KHL became a
wholly-owned subsidiary of NOEC. NOEC carries on its business through KHL’s
wholly owned subsidiary, Jinding.
Products
As
an
overview, we manufacture urea and coal-based chemicals including Ammonium
Bicarbonate, Liquid Ammonia, Methanol and DME. Ammonium Bicarbonate and Liquid
Ammonia are mainly used for nitrogenous fertilizers and raw materials of
chemical products. Methanol and DME are chemical materials and clean
alternatives to fossil fuel. They are used in the chemical industry,
pharmaceutical industry, light industry and textile industry.
We
develop and produce the following top-selling products with the following
chemical composition:
|
Fuel
Product
|
Product
General Information
|
|
|
DME
CH 3 OCH 3
|
DME
is a type of clean fuel. It has a single component, short carbon
chain,
and is contains oxygen, it therefore, has a strong burning performance,
high thermal efficiency and no smoking combustion. Similar to the
Liquefied Petroleum Gas (“LPG”), DME is in a gas state when decompressed
and the combustor can be used without being changed.
|
|
|
Methanol
CH 3 OH
|
Methanol
is a clear, colorless, combustible, toxic liquid. Methanol is a clear,
combustible, toxic liquid, Methanol, or methyl alcohol, also called
wood
alcohol, has a molecular weight of 32.04. Methanol is a poisonous
chemical
which attacks the nervous system and contains a strong anesthetic
effect.
|
|
Fertilizer
Product
|
Product
General Information
|
|
|
Urea
CO(NH 2 ) 2
|
Urea
is a nitrogen-containing chemical product. It is produced chemically
from
synthetic ammonia and carbon dioxide. Urea can be produced in a variety
of
forms, such as pills, granules, flakes, pellets, crystals and solutions.
The Company produces urea in the form of granules.
|
|
|
Ammonium
hydrogen
carbonate
NH 4 HCO 3
|
Ammonium
hydrogen carbonate is a nitrogenous fertilizer which contains
approximately 17% nitrogen. Ammonium hydrogen carbonate is stable
in 20°C
temperature. When the temperature rises, it is easily
decomposed.
|
Urea
Features
of Urea
Urea
is a
nitrogen-containing chemical product which is produced on a scale of some
100,000,000 tons per year worldwide. Urea is produced commercially from
synthetic ammonia and carbon dioxide. Urea can be produced as pills, granules,
flakes, pellets, crystals and solutions. The Company produces urea in the form
of granules.
More
than
90% of world production is destined for use as a fertilizer. Urea is highly
soluble in water and is therefore also very suitable for use in fertilizer
solutions, e.g. in “foliar feed” fertilizers. Urea has the highest nitrogen
content of all solid nitrogenous fertilizers in common use. It therefore has
the
lowest transportation costs per unit of nitrogen nutrient.
Urea
is
produced commercially from two raw materials, ammonia and carbon dioxide. Large
quantities of carbon dioxide are produced during the manufacture of ammonia
from
coal or from hydrocarbons such as natural gas and petroleum derived raw
materials. This allows direct synthesis of urea from these raw materials. Our
Urea products are derived from coal that is domestically produced in the
PRC.
Applications
of Urea
Urea’s
principal commercial applications include use as: (i) a main component of
fertilizer, providing a relatively cheap source of fixed nitrogen to promote
crop growth, (ii) a raw material for the manufactures of plastics
specifically, urea-formaldehyde resin, (iii) a raw material for the
manufacture of various glues (urea-formaldehyde or urea-melamine-formaldehyde
(the latter being waterproof and used for marine plywood) and (iv) a
component of animal feed, providing a relatively cheap source of fixed
nitrogen.
Methanol
Features
of Methanol
Methanol
(or methyl alcohol), also called wood alcohol, is not only an important chemical
product and raw material but also one of China’s future “clean energies.” Among
the fundamental organic chemical materials in the world, methanol is second
only
to ethylene.
The
molecular formula of methanol is CH4O and structural formula of being CH3OH
(with molecular weight of 32.04), methanol is a colorless liquid at normal
temperature and pressure. Methanol can dissolve in water, and in organic
solvents, such as ethanol, ether and acetone. It may be volatile and the
explosion limit of its vapor in the air is 6.0-36.5% (volume ratio). Methanol
is
a neurotoxin, which is also a relatively strong narcotic. In use of methanol,
special attention should be paid to explosion and fire protection.
Applications
of Methanol
Methanol
is mainly used for the production of medicine, pesticide, dye, plastic,
synthetic protein, fiber, formaldehyde, methyl ether. It can also be used as
a
component of a type of new fuel, improving the performance of gasoline or diesel
oil when combined and used in engines that have been built or modified for
this
fuel.
Production
and Revenue
With
the
completion of its 100,000 tons/year DME project in August 2007, the Company
is
no longer selling methanol to customers (with few exceptional cases when the
margin of methanol is higher than that of DME). Currently, our self-made
methanol with 50,000 tons/year capacity can support around 20% to 25% of our
150,000 tons/year DME production.
Ammonium
Bicarbonate
Features
of Ammonium Bicarbonate
Ammonium
acid carbonate is also called “salvolatile” or “Ammonium Bicarbonate.” Ammonium
acid carbonate currently constitutes approximately 50% of China’s aggregate
nitrogenous fertilizer and plays an important role in China’s agricultural
production. Ammonium acid carbonate is a white, crystalline powder that is
soluble in water.
The
molecular formula of ammonium acid carbonate is NH4HCO3. It contains
approximately 17% nitrogen. Ammonium acid carbonate is a nitrogenous fertilizer
free from (sulfur) sulfate radical. It contains no harmful medium substance
and
final decompounding substance does not affect soil quality and is one of the
safest nitrogenous fertilizers.
Another
characteristic of ammonium acid carbonate is that its ammonium ion is easily
absorbed by soil particles. When buried in soil, it is liable to run off due
to
infiltration along with water, with leaching loss of only being 1/3 to 1/10
of
other nitrogenous fertilizers. Thus, as long as ammonium acid carbonate can
be
thoroughly exposed to soil and can be absorbed sufficiently, it is not any
more
volatile than other nitrogenous fertilizers. In some conditions, for example
when buried deeply in calcareous soil, there’s less loss of ammonium acid
carbonate than with other nitrogenous fertilizers.
Applications
of Ammonium Bicarbonate
Ammonium
acid carbonate is mainly used for agricultural purposes and is suitable for
various crops as well as all types of soil. The purified product can be used
in
the food industry, as well as in such industries as pharmaceutical,
galvanization and rubber overshoes.
In
the
food industry, ammonium acid carbonate is used as a leavening agent in breads,
cookies, waffles and cake and also as a substitute for yeast in baking. During
baking, ammonium acid carbonate decomposes into gaseous products without
affecting the flavor.
In
the
chemical industry, ammonium acid carbonate acts as an auxiliary in the
production of catalysts. The product is also a neutralizing and buffering agent
for organic and inorganic acids. Ammonium acid carbonate is additionally used
to
reduce formaldehyde emissions from wood particle boards. Furthermore, ammonium
acid carbonate can also and has been used as an additive in cleaners and
polishes.
Dimethyl
Ether (“DME”)
Background
As
the
PRC’s dependency on imported petroleum has increased in recent years, the PRC
continues to seek to develop alternatives to petroleum fuels that are cleaner
and can be produced domestically. As a petroleum alternative fuel, DME has
already drawn wide attention in various countries. Taking advantage of the
PRC’s
rich coal and natural gas resources, companies in the PRC are producing DME
using a combination of their own technology and advanced foreign
techniques.
Our
production of DME has been limited by market demands. We anticipate that as
the
demand for diesel grows with increasing consumption of petroleum in the PRC,
there will be increasing demand for DME. While the PRC has a relatively low
petroleum reserve, it is a country rich in coal resources. It is therefore
of
strategic significance for the PRC to take advantage of its rich domestic coal
resources and produce a clean domestically produced fuel as an alternative
to
petroleum products.
Features
of DME
DME
is a
colorless gas with a slight ether flavor. DME can be combined with liquidated
petroleum gas (“LPG”), coal gas or natural gas to improve their combustion
properties and increase heat quantities. DME with a purity rate of 95% or more
can be used to substitute LPG as a fuel. Furthermore, DME can be used as
chemical feedstock for production of spray paint, insecticides, air fresheners,
fixtures, anti-rust sprays and lubricants.
The
Company is utilizing the catalytic dehydration of methanol process and such
process is protected by a patent in the PRC jointly owned by Sichuan Tianyi
Technology Co., Ltd and Southwestern Chemical Industry Design
Institute.
To
produce DME, the Company uses the advanced technique of catalytic dehydration
of
methanol. The material is run through an oil segregator into a methanol
synthetic tower to be synthesized into crude methanol which then enters an
ether
tower together with hydrogen and nitrogen. The methanol is dehydrated into
DME
by combining pressure catalyzers and a mixture of methanol. DME is then cooled
and put into a segregating machine and the separated gases are further refined.
DME can achieve a purity level of 99.9%. DME can be a substitute of LPG. This
technique involves a simpler process and consumes less energy, while producing
a
high quality product.
Application
of DME
In
addition to being widely adopted in the fine chemical industry, pharmaceutical
industry and pesticide industry, DME can substitute for Freon as an aerosol
propellant and a refrigerant. DME also can be substituted for LPG as a
non-industrial fuel, as well as a bio-diesel fuel for automotive vehicles
(modified to accept bio-diesel). With a better combustion property, DME has
greater heating efficiency producing safe and clean exhaust.
Below
are
some of the currently-known applications of DME:
| · |
An
Additive for Liquefied Petroleum Gas (“LPG”) and Non-Industrial Fuel
Substitute to LPG (for residential and automotive uses).
|
Like
LPG,
DME can be stored as a gas state after being compressed. However, compared
to
LPG, DME has a stronger combustion performance and greater heating efficiency.
Furthermore, DME is safer than LPG with regard to transportation, storage and
use. DME has a higher evaporation rate and when used as an automobile fuel,
it
increases the power of engines by approximately 10% to 15%. In addition, when
used as a fuel for automobiles DME increases combustion efficiency by
approximately 2% to 3%. Automobiles that have been modified to use DME as a
fuel
typically exhibit a reduction in combustion noise by 5-10 decibels. As a result
of the higher evaporation power rate, pollutant emissions including nitric
oxide
and carbon monoxide are quite low, thereby satisfying modern emission standards,
including European directives 94/12/ec and 96/69/ec as established by the
European Economy Committee (“Europe III”).
| · |
Environmental
Friendly Refrigerant for Refrigerators and Air
Conditioners
|
DME
can
be used as a substitute for Freon as the refrigerant used in refrigerators
and
in air conditioners. Unlike Freon, DME does not harm the earth’s ozone layer.
Other benefits of using DME include its low boiling point, stronger vaporizing
effects and its lower prices as compared with Freon.
| · |
Pesticide,
Cosmetics and Everyday Chemical
Products
|
As
an
aerosol product, DME has been widely adopted in the production of pesticides,
cosmetics, and everyday chemical products (e.g. detergent, hair
gel).
| · |
Chemical
Feedstock
|
DME
has
been widely adopted in the chemical industry as an alkylation agent and a
coupling agent. DME is the chemical feedstock for the production of acetic
acid,
acetate and hydrocyanic acid.
Production
and Revenue
|
Production
(ton)
|
Sales (ton)
|
Price
(RMB)
|
Revenue (RMB)
|
Price
with
Tax
(RMB)
|
Price ($)
|
Revenue ($)
|
||||||||||||||||
|
April
2007
|
2,665
|
2,919
|
¥
|
3,206
|
¥
|
9,358,946
|
3,751
|
$
|
|
$
|
1,265,159
|
|||||||||||
|
May
2007
|
3,761
|
3,800
|
¥
|
3,358
|
¥
|
12,761,380
|
3,929
|
$
|
|
$
|
1,725,106
|
|||||||||||
|
June2007
|
3,466
|
3,499
|
¥
|
3,448
|
¥
|
12,065,841
|
4,034
|
$
|
|
$
|
1,631,081
|
|||||||||||
|
July
2007
|
5,225
|
5,143
|
¥
|
3,353
|
¥
|
17,244,446
|
3,923
|
$
|
|
$
|
2,331,134
|
|||||||||||
|
Aug
2007
|
9,597
|
9,638
|
¥
|
3,613
|
¥
|
34,820,010
|
4,227
|
$
|
|
$
|
4,707,030
|
|||||||||||
|
Sept
2007
|
||||||||||||||||||||||