CHINA
YILI PETROLEUM COMPANY AND SUBSIDIARIES
|
|
(A
DEVELOPMENT STAGE COMPANY)
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|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
From
Inception
|
|
|
|
Three
months ended
|
|
|
May
27, 2005
|
|
|
|
March
31,
|
|
|
|
|
|
To
|
|
|
|
2009
|
|
|
2008
|
|
|
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
57,987 |
|
|
|
73,095 |
|
|
|
937,503 |
|
Imputed
Interest expense - stockholders
|
|
|
4,905 |
|
|
|
- |
|
|
|
22,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
COSTS AND EXPENSES
|
|
|
62,892 |
|
|
|
73,095 |
|
|
|
959,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
$ |
(62,892 |
) |
|
$ |
(73,095 |
) |
|
$ |
(959,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS |
|
|
|
|
|
|
(171,616) |
|
|
|
57,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$ |
(62,892 |
) |
|
$ |
(244,711 |
) |
|
$ |
(902,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME :
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(20,023 |
) |
|
|
278,615 |
|
|
|
900,715 |
|
TOTAL
COMPREHENSIVE INCOME (LOSS)
|
|
$ |
(82,915 |
) |
|
$ |
33,904 |
|
|
$ |
(1,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.00 |
) |
|
|
(0.00 |
) |
|
|
|
|
Discontinued
operations
|
|
|
- |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
29,748,348 |
|
|
|
20,736,969 |
|
|
|
|
|
The accompanying notes are an integral part of
financial statements |
|
|
CHINA
YILI PETROLEUM COMPANY AND SUBSIDIARIES
|
|
(
A DEVELOPMENT STAGE COMPANY)
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
three months ended
|
|
|
From
Inception
|
|
|
|
March
31,
|
|
|
May
27, 2005
|
|
|
|
|
|
|
|
|
|
To
|
|
|
|
2009
|
|
|
2008
|
|
|
March
31, 2009
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(62,892 |
) |
|
$ |
(244,711 |
) |
|
|
(902,263 |
) |
(Income)
Loss from discontinued operations
|
|
|
- |
|
|
|
171,616 |
|
|
|
(57,430 |
) |
Net
income (loss) from continuing operations
|
|
|
(62,892 |
) |
|
|
(73,095 |
) |
|
|
(959,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
10,396 |
|
|
|
9,925 |
|
|
|
115,018 |
|
Imputed
interest
|
|
|
4,905 |
|
|
|
- |
|
|
|
22,190 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
sundry current assets
|
|
|
(90 |
) |
|
|
30,517 |
|
|
|
(337 |
) |
Accounts
payable
|
|
|
- |
|
|
|
(20,977 |
) |
|
|
1,679,375 |
|
Accrued
expenses
|
|
|
(2,811 |
) |
|
|
118,057 |
|
|
|
84,253 |
|
Deferred
revenue
|
|
|
- |
|
|
|
(45,103 |
) |
|
|
- |
|
Net
effect of discontinued operations
|
|
|
- |
|
|
|
(51,021 |
) |
|
|
- |
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(50,492 |
) |
|
|
(31,697 |
) |
|
|
940,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
- |
|
|
|
(21,949 |
) |
|
|
(9,030,688 |
) |
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
- |
|
|
|
(21,949 |
) |
|
|
(9,030,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable-stockholders
|
|
|
- |
|
|
|
62,432 |
|
|
|
- |
|
Loan
received from stockholder
|
|
|
47,702 |
|
|
|
46,410 |
|
|
|
412,772 |
|
Payament
received from related party
|
|
|
|
|
|
|
58,163 |
|
|
|
|
|
Capital
contributions
|
|
|
- |
|
|
|
- |
|
|
|
6,779,661 |
|
Net
effect of discontinued operations
|
|
|
- |
|
|
|
(120,595 |
) |
|
|
- |
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
47,702 |
|
|
|
46,410 |
|
|
|
7,192,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE ON CASH
|
|
|
(2 |
) |
|
|
2,523 |
|
|
|
900,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
(2,792 |
) |
|
|
(4,713 |
) |
|
|
3,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
- BEGINNING OF PERIOD
|
|
$ |
6,057 |
|
|
|
47,091 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
- END OF PERIOD
|
|
$ |
3,265 |
|
|
$ |
42,378 |
|
|
$ |
3,265 |
|
The accompanying notes are an
integral part of financial statements
|
|
CHINA
YILI PETROLUEM COMPANY AND SUBSIDIARIES
(A
Development Stage Company)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2009
1. BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements of China Yili Petroleum
Company (the “Company”) reflect all material adjustments consisting of only
normal recurring adjustments which, in the opinion of management, are necessary
for a fair presentation of results for the interim periods. Certain
information and footnote disclosures required under accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2008 as filed with the Securities
and Exchange Commission.
The
preparation of financial statements in conformity with accounting principles
generally accepted 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 financial statements and those estimates. Estimates that are
particularly susceptible to change include assumptions used in determining the
fair value of securities owned and non-readily marketable
securities.
The
results of operations for the three months ended March 31, 2009 are not
necessarily indicative of the results to be expected for the entire year or for
any other period.
The
Company’s functional currency in the Chinese Renminbi (“RMB”); however, the
accompanying financial statements have been translated and presented in United
States Dollars (“USD”).
2 BUSINESS
DESCRIPTION AND HISTORY
China
Yili Petroleum Company ("China Yili" or “the Company”), a development stage
company, intends to refine heavy oil into asphalt, fuel oil and lubricants
through its wholly-owned subsidiary.
Since
inception, Yili has been developing its facilities and obtaining the requisite
approvals from the Chinese government and has not earned any revenue from
operations. Accordingly, the Company’s activities have been accounted
for as those of a Development Stage Enterprise, as set forth in Financial
Accounting Standards Board Statement No. 7 (“SFAS 7”). Among the
disclosures required by SFAS 7 are that the Company’s financial statements be
identified as those of a development stage company, and that the statements of
operations, stockholders’ equity and cash flows disclose activity since the date
of the Company’s inception.
3 GOING
CONCERN
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As shown on the accompanying
financial statements, the Company‘s current liabilities exceeded its current
assets by $2,172,797 at March 31, 2009. The Company sustained an
accumulative loss of $959,694 from its inception to date. The Company
has not earned any revenues from continuing operations since
inception. These factors, among others, raise substantial doubt about
the Company’s ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
4 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in
consolidation.
Uses
of estimates in the preparation of financial statements
The
preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of net revenue and expenses during each reporting
period. Actual results could differ from those
estimates.
Cash
The
Company includes in cash and cash equivalents all short-term, highly liquid
investments that mature within three months of their acquisition
date. Cash equivalents consist principally of investments in
interest-bearing demand deposit accounts and liquidity funds with financial
institutions and are stated at cost, which approximates fair value.
The
Company also maintains cash with financial institutions in the PRC which are not
insured or otherwise protected.
Property
and equipment
Property
and equipment are recorded at cost. Depreciation is provided in
amounts sufficient to amortize the cost of the related assets over their useful
lives using the straight line method for financial reporting
purposes.
The
Company’s subsidiary leases a parcel of land, on which the office and production
facilities of the Company are situated, pursuant to a real estate contract from
the local government of the PRC government expiring in 2056.
Maintenance,
repairs and minor renewals are charged to expense when
incurred. Replacements and major renewals are
capitalized.
Impairment
of long-lived assets
The
Company accounts for the impairment of long-lived assets in accordance with SFAS
No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”. Long-lived
assets are reviewed for impairment when circumstances indicate the carrying
value of an asset may not be recoverable. For assets that are to be held and
used, an impairment is recognized when the estimated undiscounted cash flows
associated with the asset or group of assets is less than their carrying
value. If impairment exists, an adjustment is made to write the asset
down to its fair value, and a loss is recorded as the difference between the
carrying value and fair value. Fair values are determined based on
quoted market values, discounted cash flows or internal and external appraisals,
as applicable. Assets to be disposed of are carried at the lower of
carrying value or estimated net realizable value.
Deferred
income taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (ASFAS
109") which requires that deferred tax assets and liabilities be recognized for
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. In addition, SFAS 109 requires recognition of future tax
benefits, such as carryforwards, to the extent that realization of such benefits
is more likely than not and that a valuation allowance be provided when it is
more likely than not that some portion of the deferred tax asset will not be
realized.
Foreign
currency translation
The
assets and liabilities of the Company’s subsidiary, using the local currency as
its functional currency, are translated to U.S. Dollars based on the current
exchange rate prevailing at each balance sheet date and any resulting
translation adjustments are included in Accumulated Other Comprehensive Income
(Loss). The Company’s revenues and expenses are translated into U.S.
Dollars using the average exchange rates prevailing for each period
presented.
Income
(loss) per common share
Basic
income (loss) per common share amounts are computed by dividing net income by
weighted-average common stock outstanding during the period. Diluted
income (loss) per common share are calculated using weighted-average shares
outstanding, adjusted for the dilutive effect of shares issuable upon the
assumed exercise of common stock equivalents. As of March 31, 2009
and 2008 there were no common stock equivalents outstanding.
Comprehensive
income
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by shareholders and distributions to shareholders. Among
other disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements. Comprehensive income includes net income
and the foreign currency translation gain, net of tax.
Statement
of cash flows
In
accordance with Statement of Financial Accounting Standards No. 95, “Statement
of cash Flows,” cash flows from the Company’s operations are calculated based
upon the local currencies. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.
Fair
value of financial instruments
Statement
of Financial Accounting Standards No. 107, “Disclosures
about Fair Value of Financial Instruments”, requires that the Company
disclose estimated fair values of financial instruments.
The
Company’s financial instruments primarily consist of cash and cash equivalents,
accounts receivable, other receivables, advances to suppliers, accounts payable,
accrued expenses and other sundry current liabilities and related party advances
and borrowings.
As
of the balance sheet dates, the estimated fair values of financial instruments
were not materially different from their carrying values as presented on the
balance sheet. This is attributed to the short maturities of the
instruments and that interest rates on the borrowings approximate those that
would have been available for loans of similar remaining maturity and risk
profile at the respective balance sheet dates.
New
accounting pronouncements
In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
160, “Non-controlling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51”. This statement improves the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards that require the ownership interests in subsidiaries held by parties
other than the parent and the amount of consolidated net income attributable to
the parent and to the non-controlling interest be clearly identified and
presented on the face of the consolidated statement of income, changes in a
parent’s ownership interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently, when a subsidiary is
deconsolidated, any retained non-controlling equity investment in the former
subsidiary be initially measured at fair value, entities provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. SFAS No. 160
affects those entities that have an outstanding non-controlling interest in one
or more subsidiaries or that deconsolidate a subsidiary. SFAS No.
160 became effective for the Company on January 1, 2009. Early adoption is
prohibited. The adoption of this statement did not have a material effect on the
Company's financial statements.
In
December 2007, FASB issued SFAS 141R “Business
Combinations”. These new standards significantly change the accounting
for reporting of business combination transactions in consolidated financial
statements. The key aspects of SFAS 141R include requiring the
acquiring entity in a business combination to recognize the full fair value of
assets acquired and liabilities assumed in the transaction; establishing the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requiring the expensing of most transaction and
restructuring costs. Those standards are effective for the Company as
of January 1, 2009.
In
March 2008 the FASB issued FAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133”. FAS No. 161 changes the disclosure
requirements for derivative instruments and hedging
activities. Entities are required to provide disclosures about (a)
how and why derivative instruments are used, (b) how derivative instruments
and related hedged items are accounted for under FSS No. 133, “Accounting for
Derivative Instruments and Hedging Activities, and its related
interpretations, and (c) how derivative instruments and related hedged items
affect the entity’s financial position, financial performance and cash
flows. FAS No. 161 is effective January 1, 2009. The
Company is currently evaluating the impact of adopting this
statement.
6 PROPERTY
AND EQUIPMENT
Yili
Asphalt acquired a 50 year land lease from the PRC. The amount
is being amortized over the life of the lease.
A
summary of property and equipment and the estimated lives used in the
computation of depreciation and amortization are as follows:
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
Life
|
Right
to use land
|
|
$ |
246,590 |
|
|
$ |
247,205 |
|
50
years
|
Building
and building improvements
|
|
|
1,767,418 |
|
|
|
1,771,826 |
|
39
years
|
Machinery
and equipment
|
|
|
4,728,385 |
|
|
|
4,736,644 |
|
7
years
|
Office
equipment and furniture
|
|
|
57,720 |
|
|
|
61,398 |
|
7
years
|
Automobiles
|
|
|
153,708 |
|
|
|
154,092 |
|
7
years
|
|
|
|
6,953,821 |
|
|
|
6,971,165 |
|
|
Accumulated
depreciation and amortization
|
|
|
(115,018 |
) |
|
|
(104,878 |
) |
|
|
|
|
6,838,803 |
|
|
|
6,866,287 |
|
|
Construction
in progress
|
|
|
2,076,867 |
|
|
|
2,082,047 |
|
|
|
|
$ |
8,915,670 |
|
|
$ |
8,948,336 |
|
|
7 DUE
TO STOCKHOLDERS
Amounts
due certain stockholders of China Yili Petroleum Company, are non-interest
bearing and are due on demand. Interest was imputed
at 5% per annum for the three months ended March 31, 2009.
8 INCOME
TAXES
The Company has net operating loss carry-forwards of
approximately $960,000 which expire between 2012 and 2013.
The
Company has a deferred tax asset resulting from the tax loss carry-forwards of
approximately $240,000 for which the Company has provided a 100% valuation
allowance.
9 RISK
FACTORS
Vulnerability
due to Operations in PRC
The
Company’s operations may be adversely affected by significant political,
economic and social uncertainties in the PRC. Although the PRC
government has been pursuing economic reform policies for more than 20 years, no
assurance can be given that the PRC government will continue to pursue such
policies or that such policies may not be significantly altered, especially in
the event of a change in leadership, social or political disruption or
unforeseen circumstances affecting the PRC’s political, economic and social
conditions. There is also no guarantee that the PRC government’s
pursuit of economic reforms will be consistent or effective.
Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible. The People’s Bank of China or other banks are authorized
to buy and sell foreign currencies at the exchange rates quoted by the People’s
Bank of China. Approval of foreign currency payments by the People’s
Bank of China or other institutions requires submitting a payment application
form together with suppliers’ invoices, shipping documents and signed
contracts.
Since
the Company has its primary operations in the PRC, the majority of its revenues
will be settled in RMB, not U.S. Dollars. Due to certain restrictions on
currency exchanges that exist in the PRC, the Company’s ability to use revenue
generated in RMB to pay any dividend payments to its shareholders may be
limited.
Environmental
concerns
The
refining of petroleum involves the production of pollutants. In
addition, the transportation of petroleum products entails a risk of spills that
may result in long-term damage to the environment. There is increasing concern
in China, however, over the degradation of the environment that has accompanied
its recent industrial growth. It is likely that additional government
regulation will be introduced in order to protect the
environment. Compliance with such new regulations could impose
substantial additional costs to the Company.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Results of Operations
Economic
and Industry Trend
In the
past years, China has experienced high growth of real estate boom which also
triggered the rapid development of construction industry that using asphalt as a
major material. However, in 2007, the Chinese government implemented a
series of policies and regulations to curb inflation and the property market.
These policies, together with the worldwide financial crisis in 2008, has
resulted a slowdown of the real estate market in China and our business, in
turn, has been affected in 2008. Recently, the Chinese government has
changed its policy and prioritized boosting of the economy. The Chinese
government has adopted new policies to address the slowdown of the real estate
market, such as reducing stamp duties and transactions fees, lowering interest
rates. The Chinese government has also decided to inject a stimulus package to
boost the overall economy. From all of these, we have seen signs of recovery of
the market in China.
For the
three months ended March 31, 2009 and 2008, the Company did not start generating
revenue or profitable operation.
Total
costs and expenses reported by the Company for periods of the
three-month-ended March 31, 2009 were mainly attributable to the
general and administrative expenses which generally consisted of the
facilities maintenance and depreciation cost. Compared to the
expenses of $73,095 incurred during the three months ended March 31,
2008, our total costs and expenses have decreased by $15,108 or 20%. The
Company's costs and expenses primarily
involved expenses related to its activities in completing its factory,
finalizing the development of its products, and securing the government licenses
necessary for it to carry out its business plan. In
addition, the Company also incured expenses resulting from its status
as a U.S. public company and its efforts to enter into the U.S. capital
market.
Net loss from continuing
operations was $62,892 for the quarter ended March 31,
2009. For the quarter ended March 31, 2008, the Company incurred a net
loss of $73,095 from its continuing operations. And for the quarter ended March
31, 2008, net loss attributed to the Company's discontinued business of ASAP
Expo was $171,616.
Liquidity
and Capital Resources
Management
anticipates that Yili Asphalt will commence revenue-producing operations in the
coming months. In order to do so, however, Yili Asphalt will have to
obtain approximately $500,000 in working capital to fund the initiation of
operations. Management plans to approach a Chinese bank in order to borrow
those funds on a secured basis, since Yili Asphalt has $8.9 million in capital
assets on its books that are currently free of liens. To date, however, it
has not obtained a commitment for the funds. If there is a delay in
securing the necessary funds, the date for initiation of revenue-producing
operations will be likewise delayed.
Because the Company’s refining process
yields three different end products (asphalt, diesel fuel, lubricants), the
Company’s initial operations will entail a sudden increase in working capital
demands. Among the more significant funding demands will
be:
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Inventory. Yili
Asphalt will have to fund the carrying cost of a large inventory of
products, including the investment in raw petroleum, the cost of storage,
and the cost of transportation.
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Marketing. Yili
Asphalt intends to engage in direct marketing of all products
lines. Management expects that its direct marketing program
will prove to be more efficient over the long term than a distribution
network. However, the initial burden on its working capital
will be considerable, as Yili Asphalt will have to carry the full cost of
a sales staff, the expenses of their marketing activities, such as travel,
entertainment, and promotion, and the expenses attendant to sales
accounting.
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Potentially
Inefficient Use of Facilities. To optimize the utilization of
our refinery, we will have to generate sales of our products in the
proportions in which the refinery is designed to produce
them: roughly 6:3:2 for fuel, asphalt and lubricants
respectively. It is unlikely that sales will occur naturally in
those proportions. If sales in one or two of the categories lag
the other(s), management will face the Hobson’s choice of delaying
production in the faster selling category, thus losing the benefit of the
demand for that category, or tolerating excess inventories of the slower
selling categories. This situation would result in additional
demands on our working capital.
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In
addition to our need for working capital to initiate production, our business
plan calls for substantial capital investment over the next twelve
months. The primary purposes for which we anticipate a need for
capital are:
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Additional
Working Capital for Growth. We believe there is a high demand
for our products in Inner Mongolia and the neighboring
provinces. If we are correct, then demand could enable us to
quickly expand our operations to full capacity. Growth at that
rapid rate would require a commitment of many millions of Dollars for
working capital. Our management will have to assess the value
of the market opportunities that present themselves, and weight them
against the cost of such capital as may be made available to
us.
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Construction
of Dedicated Rail Line. The government of Inner Mongolia has
committed to construct a rail line that will have a siding at our
refinery. Construction is rescheduled in 2009. The
benefit to us in terms of reduced transportation costs would be
substantial. The government’s proposal, however, contemplates
that Yili Asphalt will make a substantial capital contribution toward the
construction project. The amount of the contribution has not
been determined.
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Acquisition
of Refinery. Chunshi Li, our Chairman, has committed to
purchase Mongolia Kailu Yili Asphalt Co., Ltd., an asphalt company with a
production capacity of 100,000 tons. He intends to assign his rights in
Mongolia Kailu to Yili Asphalt if we are able to fund the
cost. The purchase price will be 20 million RMB (approximately
$2.7 million). In addition, Mongolia Kailu is currently
unproductive due to deterioration of its facilities. In order
to bring it back online, we will have to fund the construction of a
waterproof coiled material production line at its plant, which will entail
an investment of several million more
Renminbi.
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At the present time, we have received
no commitments for the funds required for our planned capital
investments. Obtaining those funds, if we can do so, will require
that we issue substantial amounts of equity securities or incur significant
debts. We believe that the expected return on those investments will
justify the cost. Without additional funding, the Company will not be able
to pursue its business model. If adequate funds are not available or are not
available on acceptable terms when required, we would be required to
significantly curtail our operations and would not be able to fund the
development of the business envisioned by our business model. These
circumstances could have a material adverse effect on our business and result in
our inability to continue to operate as a going concern.
Off-Balance Sheet
Arrangements
The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on its financial condition or results of
operations.
The Company's management under the supervision and with the
participation of the Company's Chief Executive Officer (the "CEO") and Chief
Financial Officer (the "CFO"), performed an evaluation of the effectiveness of
the design, maintenance and operation of the Company's disclosure controls and
procedures as of March 31, 2009. Pursuant
to Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934, “disclosure controls and procedures”
means controls and other procedures that are designed to insure that information
required to be disclosed by China Yili in the reports that it files
with the Securities and Exchange Commission is recorded, processed, summarized
and reported within the time limits specified in the Commission’s
rules. “Disclosure controls and procedures” include, without limitation,
controls and procedures designed to insure that information China
Yili is required to disclose in the reports it files with the Commission is
accumulated and communicated to our Chief Executive Officer and Chief Financial
Officer as appropriate to allow timely decisions regarding required
disclosure. Based on his evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that China Yili's system of disclosure controls and
procedures was effective as of March 31, 2009 for the purposes described in this
paragraph.