REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
China
Jianye Fuel Inc.:
We have audited the accompanying
consolidated balance sheets of China Jianye Fuel Inc. and subsidiaries (the
“Company”) as of September 30, 2008, and the related statements of
operations and comprehensive income, stockholders’ equity, and cash flows for
three months ended September 30, 2008. These consolidated financial
statements are the responsibility of the Company's management.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons respnsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware
of any material modifications that should be made to the accompanying financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
Parsippany,
New Jersey
November
14, 2008
CHINA
JIANYE FUEL, INC
CONSOLIDATED
BALANCE SHEET
ASSETS
(UNAUDITED)
|
|
|
September
30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2008
|
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
84,801 |
|
|
$ |
129,635 |
|
|
Accounts receivable, net of
allowance for doubtful accounts of $29,193 and $29,113 at September 30,
2008 and June 30, 2008, respectively
|
|
|
5,402,038 |
|
|
|
5,793,568 |
|
|
Inventory
|
|
|
659,984 |
|
|
|
662,571 |
|
|
Advances to
suppliers
|
|
|
1,027,111 |
|
|
|
1,031,406 |
|
|
Prepaid expenses
|
|
|
165,407 |
|
|
|
203,793 |
|
|
Other Current
assets
|
|
|
158,420 |
|
|
|
147,481 |
|
|
Total Current
Assets
|
|
|
7,497,761 |
|
|
|
7,968,454 |
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
2,763,787 |
|
|
|
2,833,086 |
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
52,892 |
|
|
|
55,040 |
|
|
Total Assets
|
|
$ |
10,314,440 |
|
|
$ |
10,856,580 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$ |
764,661 |
|
|
$ |
1,215,896 |
|
|
VAT tax payable
|
|
|
443,384 |
|
|
|
434,580 |
|
|
Income tax
payable
|
|
|
528,235 |
|
|
|
526,791 |
|
|
Other current
liabilities
|
|
|
930,199 |
|
|
|
873,471 |
|
|
Total Current
Liabilities
|
|
|
2,666,479 |
|
|
|
3,050,738 |
|
|
Total Liabilities
|
|
|
2,666,479 |
|
|
|
3,050,738 |
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
Common Stock, $0.001 par value,
200,000,000 shares authorized, 29,976,923 shares issued and
outstanding
|
|
|
29,977 |
|
|
|
29,977 |
|
|
Additional paid-in
capital
|
|
|
5,695,058 |
|
|
|
5,695,058 |
|
|
Retained Earnings
|
|
|
1,161,050 |
|
|
|
1,343,116 |
|
|
Accumulated other comprehensive
income
|
|
|
761,876 |
|
|
|
737,691 |
|
|
Total Stockholders’
Equity
|
|
|
7,647,961 |
|
|
|
7,805,842 |
|
|
Total Liabilities and
Stockholders' Equity
|
|
$ |
10,314,440 |
|
|
$ |
10,856,580 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
- 2
-
CHINA
JIANYE FUEL, INC
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME
(UNAUDITED)
|
|
|
For the Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
SALES
|
|
$ |
122,841 |
|
|
$ |
47,888 |
|
|
COST
OF GOODS SOLD
|
|
|
110,808 |
|
|
|
47,256 |
|
|
GROSS
PROFIT
|
|
|
12,033 |
|
|
|
632 |
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
|
|
|
193,865 |
|
|
|
12,244 |
|
|
LOSS
FROM OPERATIONS
|
|
|
(181,832 |
) |
|
|
(11,612 |
) |
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(234 |
) |
|
|
- |
|
|
INCOME
BEFORE PROVISION FOR INCOME TAX
|
|
|
(182,066 |
) |
|
|
(11,612 |
) |
|
PROVISION
FOR INCOME TAX
|
|
|
- |
|
|
|
- |
|
|
NET
LOSS
|
|
|
(182,066 |
) |
|
|
(11,612 |
) |
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
24,185 |
|
|
|
93,696 |
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
$ |
( 157,881 |
) |
|
$ |
82,084 |
|
|
BASIC
EARNINGS PER SHARE
|
|
$ |
( 0.01 |
) |
|
$ |
( 0.00 |
) |
|
DILUTED
EARNINGS PER SHARE
|
|
$ |
( 0.01 |
) |
|
$ |
( 0.00 |
) |
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
29,976,923 |
|
|
|
4,948,500 |
|
|
DILUTED
|
|
|
29,976,923 |
|
|
|
4,948,500 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
- 3
-
CHINA
JIANYE FUEL, INC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
For
the Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(182,066 |
) |
|
$ |
(11,612 |
) |
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
- |
|
|
|
- |
|
|
provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
86,430 |
|
|
|
25,380 |
|
|
Changes in current assets and
current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
407,664 |
|
|
|
|
|
|
Inventory
|
|
|
4,407 |
|
|
|
(27,241 |
) |
|
Advances
to suppliers
|
|
|
7,127 |
|
|
|
|
|
|
Prepaid
expense
|
|
|
38,969 |
|
|
|
|
|
|
Other
current assets
|
|
|
(10,541 |
) |
|
|
(25,969 |
) |
|
Accounts
payable and accrued expenses
|
|
|
(454,848 |
) |
|
|
464 |
|
|
VAT
tax payable
|
|
|
7,617 |
|
|
|
(4,739 |
) |
|
Income
tax payable
|
|
|
|
|
|
|
|
|
|
Due
to related parties
|
|
|
|
|
|
|
106,305 |
|
|
Other
current liabilities
|
|
|
54,372 |
|
|
|
(59,592 |
) |
|
Total Adjustments
|
|
|
141,197 |
|
|
|
14,608 |
|
|
Net Cash Provided By (Used In)
Operating Activities
|
|
|
(40,869 |
) |
|
|
2,996 |
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Acquisition of property and
equipment
|
|
|
(4,347 |
) |
|
|
- |
|
|
Net Cash Used In Investing
Activities
|
|
|
(4,347 |
) |
|
|
- |
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Repayment to shareholder
loans
|
|
|
- |
|
|
|
(2,653 |
) |
|
Net Cash Used In Financing
Activities
|
|
|
- |
|
|
|
(2,653 |
) |
|
EFFECT
OF FOREIGN CURRENCY TRANSLATION ON CASH
|
|
|
382 |
|
|
|
10 |
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(44,834 |
) |
|
|
353 |
|
|
CASH
AND CASH EQUIVALENTS – BEGINNING
|
|
|
129,635 |
|
|
|
561 |
|
|
CASH
AND CASH EQUIVALENTS – ENDING
|
|
$ |
84,801 |
|
|
$ |
914 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
- 4
-
CHINA
JIANYE FUEL, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 AND 2007
(UNAUDITED)
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
AND DESCRIPTION OF BUSINESS
China
Jianye Fuel Inc. was incorporated as Standard Commerce, Inc. (“Standard
Commerce”) in December 1994 in Nevada. On November 13, 2007, Standard Commerce
acquired the outstanding capital stock of American Jianye Ethanol Company, Inc.,
a Delaware corporation (“American Jianye”) and changed its name to China Jianye
Fuel Inc. For accounting purposes, the acquisition was treated as a
recapitalization of American Jianye. American Jianye is a holding company that
owns 100% of Zhao Dong Jianye Fuel Co., Ltd. (“Zhao Dong”), a corporation
organized under the laws of the People’s Republic of China. The accompanying
consolidated financial statements include the financial statements of China
Jianye Fuel Inc. and its subsidiaries (the “Company”). The Company’s primary
business is to manufacture and distribute ethanol and methanol as alternative
fuel for automobile use.
BASIS
OF PRESENTATION
The
Company’s Consolidated Financial Statements include the accounts of its direct
wholly-owned subsidiaries and its indirect proportionate share of subsidiaries
owned by the wholly-owned subsidiaries. All intercompany balances and
transactions are eliminated in consolidation. The accompanying unaudited
financial statements have been prepared in accordance with GAAP for interim
financial information and with the instructions to Form 10-Q and Regulation S-X
applicable to small business issuers. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
Interim results are not necessarily indicative of results for a full year. In
the opinion of management, all adjustments considered necessary for a fair
presentation of the financial position and the results of operations and cash
flows for the interim periods have been included.
NOTE
2 - INTERIM FINANCIAL STATEMENTS
These
interim financial statements should be read in conjunction with the audited
financial statements for the year ended June 30, 2008, as not all disclosures
required by generally accepted accounting principles for annual financial
statements are presented. The interim financial statements follow the same
accounting policies and methods of computations as the audited financial
statements for the year ended June 30, 2008.
NOTE
3 – EARNINGS (LOSS) PER SHARE
The
Company presents earnings per share on a basic and diluted basis. Basic earnings
per share have been computed by dividing net earnings by the weighted average
number of common shares outstanding. Diluted earnings per share has been
computed by dividing net earnings plus convertible preferred dividends and
interest expense (after-tax) on convertible debt by the weighted average number
of common shares outstanding including the dilutive effect of equity securities.
The weighted average number of common shares calculated for Diluted EPS excludes
the potential common stock that would be exercised under the options and
warrants granted to officers because the inclusion of the potential shares from
these options and warrants would cause an anti-dilutive effect by increasing the
net earnings per share.
NOTE
3 – EARNINGS (LOSS) PER SHARE (continued)
|
|
|
Three
Months Ended Sept. 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
loss
|
|
$ |
( 182,066 |
) |
|
$ |
( 11,612 |
) |
|
Weighted
average common shares
|
|
|
29,976,923 |
|
|
|
4,948,500 |
|
|
Effect
of diluted securities:
|
|
|
- |
|
|
|
- |
|
|
Weighted
average common shares
|
|
|
29,976,923 |
|
|
|
4,948,500 |
|
|
Basic
net income per share
|
|
$ |
( 0.01 |
) |
|
$ |
( 0.00 |
) |
|
Diluted
net income per share
|
|
$ |
( 0.01 |
) |
|
$ |
( 0.00 |
) |
NOTE
4 – INVENTORY
Inventory
at September 30, 2008 and June 30, 2008 consisted of the following:
|
|
|
September 30,2008
|
|
|
June 30,2008
|
|
|
Raw
materials
|
|
$ |
566,795 |
|
|
$ |
594,495 |
|
|
Packaging
supplies
|
|
|
28,935 |
|
|
|
32,058 |
|
|
Finished
goods
|
|
|
64,254 |
|
|
|
36,018 |
|
|
Total
|
|
$ |
659,984 |
|
|
$ |
662,571 |
|
NOTE
5 – ADVANCES TO SUPPLIERS
As a common business practice in China, the Company is required to make advance
payments to certain suppliers for raw material procurement and construction.
Such advances are interest-free and unsecured.
- 5 -
CHINA
JIANYE FUEL, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER
30, 2008 AND 2007
(UNAUDITED)
NOTE
6– PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2008 and June 30, 2008 consisted of the
following:
|
|
|
September 30,2008
|
|
|
June 30,2008
|
|
|
Property
and equipment
|
|
$ |
3,402,714 |
|
|
$ |
3,386,419 |
|
|
Less:
accumulated depreciation
|
|
|
638,927 |
|
|
|
553,333 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,763,787 |
|
|
$ |
2,833,086 |
|
Depreciation expense for the three months ended September 30, 2008 and 2007 was
$84,129 and $24,859, respectively.
NOTE
7– INTANGIBLE ASSETS
Net intangible assets at September 30, 2008 and June 30, 2008 were as
follows:
|
|
|
September 30,2008
|
|
|
June 30,2008
|
|
|
Rights
to use land
|
|
$ |
73,589 |
|
|
$ |
73,387 |
|
|
Less:
accumulated amortization
|
|
|
20,697 |
|
|
|
18,347 |
|
|
Total
|
|
$ |
52,892 |
|
|
$ |
55,040 |
|
Amortization expense for the three months ended September 30, 2008 and 2007
amounted to $2,301 and $521, respectively.
NOTE
8 – OTHER PAYABLE
Other payable represents a short-term loan from a third party individual for
purchasing raw materials. It is unsecured and non-interest bearing.
NOTE
9 – EMPLOYEE WELFARE PLAN
The Company has established an employee welfare plan in accordance with Chinese
law and regulations. The Company makes annual contributions of 14% of all
employees' salaries to the employee welfare plan.
NOTE
10 – RISK FACTORS
For the
three months ended September 30, 2008 and 2007, the Company had two vendors that
provided approximately 99% and 50% of the Company’s raw materials. Total
purchases from these vendors amounted to $77,625 and 34,380 for the three months
ended September 30, 2008 and 2007, respectively.
For the
three months ended September 30, 2008, four customers accounted for
approximately 72% of the Company’s net sales. Total sales made to these two
customers amounted to $88,370. For the three months ended September 30, 2007,
one major customer accounted for approximately 48% of the net sales. Total sales
made to this customer were $23,096.
The
Company's operations are carried out 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 as well as by the general
state of the PRC’s economy. The Company's business may be influenced by changes
in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
NOTE
11 - CONCENTRATIONS OF CREDIT RISK
Financial
instruments which potentially subject the Company to credit risk consist
principally of cash on deposit with financial institutions. Management believes
that the financial institutions that hold the Company’s cash and cash
equivalents are financially sound and minimal credit risk exists with respect to
these investments.
- 6 -
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
Forward-Looking
Statements: No Assurances Intended
In addition to historical information, this Quarterly Report contains
forward-looking statements, which are generally identifiable by use of the words
“believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,”
“projects,” or similar expressions. These forward-looking statements represent
Management’s belief as to the future of Eastern Environment Solutions, Corp.
Whether those beliefs become reality will depend on many factors that are
not under Management’s control. Many risks and uncertainties exist that
could cause actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled “Management’s
Discussion and Analysis—Risk Factors That May Affect Future Results.” Readers
are cautioned not to place undue reliance on these forward-looking statements.
We undertake no obligation to revise or publicly release the results of any
revision to these forward-looking statements.
Results of Operations
Zhao Dong Jianye Fuel
commenced operations in 2004. Until the spring of 2008, however, its
activities were essentially developmental. Its research and
development efforts have led to the development of a series of fuel products and
the award of several patents. With funds provided by its Chairman,
Jianye Wang, it has developed a state-of-the-art refinery for the production of
methanol-based and ethanol-based fuels. And it has organized a staff
of engineers, managers and sales professionals that will be able to support its
full-scale entry into the fuel market.
Until the year ended June 30, 2008, the Company’s revenue-producing activities
had been incidental to the company’s research and development
activities. Prior to September 30, 2007, Zhao Dong Jianye Fuel sold
modest amounts of fuel to a variety of customers, primarily to (a) develop the
channels through which it will market when it commences full scale production
and (b) introduce new products to those markets for testing and
publicity.
During the quarter ended December 31, 2007, however, Zhao Dong Jianye Fuel
recorded its first significant revenue - $3,449,434, with a sale and delivery of
fuel additives to Zhanjiang Runtong Trading Corp. In the quarter ended March 31,
2008, we realized our first significant revenue from the sale of fuel, as we
sold 4,200 tons of methanol-based fuel to CIPC Heilongjiang HuBei, a fuel
distributor, for $3,249,795. These two sales represented
approximately 97% of our revenues for the year ended June 30,
2008. Zhanjiang Runtong Trading Corp. and CIPC Heilongjiang HuBei are
unrelated third parties, and the transactions were the result of arms length
negotiation. In the 4th quarter
of the year ended June 30, 2008, however, our sales totaled only $212,335,
primarily consisting of incidental sales of sample batches.
Entering the first quarter of the fiscal year of 2009, the company
continued its efforts to test and publicize various types of fuel products in
the markets. As a result of these efforts, our sales revenue for the three
months ended September 30, 2008 was $122,841, compared to $47,888 for the
quarter ended on September 30, 2007. These sales again represent our
distribution of sample batches to potential customers, and do not represent the
type of marketing that will accompany full production.
During
the three months ended September 30, 2008, we have achieved initial
success in developing new businesses relationships. Specifically, we
have executed long-term supply contracts with two customers for our fuel
products. In July, 2008, Zhao Dong Jianye Fuel entered into a contract with
Zhuhai Zhonghuan Oil Ltd., which contemplates that the customer will purchase
15,000 tons of ethanol-based automobile fuel per month. In September, 2008, Zhao
Dong Jianye Fuel entered into contract with Shanxi Province Hanzhong Xilan
Liquefied Petroleum Limited to provide the company 200 to 300 tons of M30 fuel
each month. However, neither of these contracts represents a binding
purchase commitment – the customers commit to one month of purchases at a time –
and neither contract produced significant sales during the quarter ended
September 30, 2008. But the contracts do suggest the manner in which
we are expecting to achieve the goal of a consistent stream of revenue from the
sale of our main products of fuels.
Our
gross profit margin during the quarter ended September 30, 2008 was
10%. This figure is not meaningful, however, since we have not
commenced full scale production. When we start our full production and sales of
our major fuel products, we expect our gross profit margin to be significantly
higher than that which is customary for refiners of petroleum-based
fuels. This should occur because the market price of the raw
materials for methanol-based fuels (i.e. methanol and petroleum distillate)
are substantially lower than the market price for gasoline. At
current market prices, we believe that we will be able to produce methanol-based
fuel for $27 to $40 per ton less than the prevailing cost of refining gasoline
with comparable octane levels. The price advantage can only be
achieved, however, when we produce our fuels in quantities that make efficient
use of our refinery and ship it in quantities that enable us to obtain wholesale
shipping charges. Those conditions will be achieved only after we
obtain the funds necessary to bring our operations up to the full production
level.
Our
selling, general and administrative expenses increased significantly from the
first quarter of 2007 ($12,244) to the first quarter of 2008
($193,865). The main reasons for the increase were (a)
increased expenses of operating our facility, as we prepare for full production,
and (b) the professional and other costs attendant to functioning as a U.S.
public company, a situation initiated in November 2007. As we
commence full-scale production, our operating expenses will continue to
increase, primarily due to (a) increased staff required for production and
marketing, (b) increased selling expense required to develop and expanded market
for our products, and (c) increased depreciation expense. Currently,
we only depreciate the portion of our facility that has been put into active
use. The denominator for our depreciation calculation will increase
when our entire facility is engaged in production.
Due to our lack of significant revenues, the Company’s revenue less expenses
produced a net loss of $182,066 in the quarter ended September 30, 2008,
compared to our net loss of $11,612 in the three months ended on September 30,
2007. During the quarter ended on September 30, 2007, as we organized
our business, our net loss remained modest, despite our lack of gross
profit.
During
the three months ended September 30, 2008, our operations reduced our cash
position by $40,869. This occurred primarily because we reduced out
accounts payable and accrued expenses by $454,848, in order to preserve the
goodwill of our vendors, while the two customers who accounted for 97% of our
sales in fiscal 2008 paid only a small portion of their debt to us, resulting in
a net reduction of $407,664 in our accounts
receivable.
Our business operates primarily in Chinese RMB (“RMB”), but we report our
results in our SEC filings in U.S. Dollars. The conversion of our
accounts from RMB to Dollars results in translation
adjustments. While our net income is added to the retained earnings
on our balance sheet; the translation adjustments are added to a line item on
our balance sheet labeled “accumulated other comprehensive income,” since it is
more reflective of changes in the relative values of U.S. and Chinese currencies
than of the success of our business. During the quarter ended on
September 30, 2008, the effect of converting our financial results to Dollars
was to add $24,185 to our accumulated other comprehensive income.
Liquidity and Capital
Resources
Our
operations to date have been funded primarily by capital contributions and
short-term loans from our Chairman, Jianye Wang, which have been adequate to
bring us to the point where we are prepared to commence full scale
production.
Our
working capital at September 30, 2008 totaled $4,831,282. Included in our
working capital, however, was $5,402,038 in accounts receivable, almost all of
which are owed by the two customers who were the source of 97% of our 2008
revenue. We are not certain when those receivables will be
paid. Also included in working capital was an advance payment to the
raw material suppliers in the amount of $1,027,111. The recipient of this
advance payment will be our primary source of petroleum distillate, and we made
this payment in accord with Chinese custom, to enable the refinery to expand its
production capacity in anticipation of doing a large amount of business with
us. We have, therefore, only a small amount of liquid
assets.
In
order to commence full scale operations, we will need approximately $4,000,000
to purchase raw materials and fund our initial receivables. On our
September 30, 2008 balance sheet, we have property and equipment with a book
value of $2,763,787 on which there is no lien. We expect that some
amount of the funds that we require can be obtained by pledging those assets to
secure a loan. The remainder, however, will be obtained from the sale
of equity. To date we have no commitment from any source for either
debt or equity financing.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition or results
of operations.
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Risk Factors That May Affect Future
Results
You
should carefully consider the risks described below before buying our common
stock. If any of the risks described below actually occurs, that
event could cause the trading price of our common stock to decline, and you
could lose all or part of your investment.
Because we have not yet commenced our full scale production operations,
unexpected factors may hamper our efforts to implement our business
plan.
Our business plan contemplates that we will become a fully-integrated refiner
and marketer of methanol-based fuel oil. To date, however, we have
produced and marketed our fuels only in limited quantities. If the
necessary funding can be obtained, we will commence operations on a much larger
scale. The complexity of this undertaking means that we are likely to
face many challenges, some of which are not yet foreseeable. Problems
may occur with our raw material acquisition, with the roll-out of efficient
manufacturing processes, and with our ability to deliver fuel
efficiently. If we are not able to minimize the costs and delays that
result, our business plan may fall short of its goals, and we will be unable to
achieve profitability.
The capital investments that we plan may result in dilution of the equity of our
present shareholders.
Our business plan contemplates that we
will invest approximately $4 million in the start-up of our full-scale
operations. We intend to raise a large portion of the necessary funds
by selling equity in our company. At present we have no commitment
from any source for those funds. We cannot determine, therefore, the
terms on which we will be able to raise the necessary funds. It is
possible that we will be required to dilute the value of our current
shareholders’ equity in order to obtain the funds. If, however, we
are unable to raise the necessary funds, our growth will be limited, as will our
ability to compete effectively.
The market for methanol-based fuel is
not developed in China.
One of the greater challenges that we
will face in the implementation of our business plan will be the development of
widespread acceptance of methanol as automobile fuel. Because our
products perform as an alternative to conventional gasoline-based fuel, we will
be challenged by the inertial effect of the association of gasoline with
automobiles. Until we commence widespread marketing activities, we
will not know the extent to which we will be able to persuade distributors and,
ultimately, consumers, to trust our fuels in their automobiles. If we
are unable to effect a change in the public concept of automobile fuel, our
business plan may fail.
Zhao
Dong Jianye Fuel’s profitability will be dependent on market prices for
methanol, ethanol and gasoline.
Zhao Dong
Jianye Fuel’s profitability and financial condition will be significantly
affected by the selling price for methanol-based fuel. That price, in
turn, will depend on the market prices for competitive products, specifically
gasoline and ethanol. Uncontrolled market forces ultimately drive the
price and supply of each of these fuels. Factors that affect these
market prices include the level of consumer product demand, governmental
regulations and taxes, the level of foreign imports of oil and natural gas, and
the overall economic environment. Significant declines in world wide prices for
oil could have a material adverse effect on our success in introducing
methanol-based fuels.
Zhao Dong Jianye Fuel creates products
that may have harmful effects on the environment if not stored and handled
properly prior to use, which could result in significant liability and
compliance expense.
The
distribution of methanol-based fuel involves the controlled use of materials
that are hazardous to the environment. Zhao Dong Jianye Fuel cannot eliminate
the risk of accidental contamination or discharge and any resulting problems
that occur. Government regulations govern the use, manufacture, storage,
handling and disposal of these materials. Zhao Dong Jianye Fuel may be named a
defendant in any suit that arises from the improper handling, storage or
disposal of these products. Zhao Dong Jianye Fuel could also be subject to civil
damages in the event of an improper or unauthorized release of, or exposure of
individuals to, hazardous materials. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair Zhao Dong Jianye Fuel’ research, development and production
efforts.
An
increase in raw material prices could increase Zhao Dong Jianye Fuel’s costs and
decrease its profits.
Changes
in the cost of raw materials could significantly affect Zhao Dong Jianye Fuel’s
business. Although the cost of methanol has traditionally been relatively
stable, increased use of methanol for fuel would create increased demand and
could introduce volatility into the market for methanol. Our other
two primary raw materials, gasoline distillate and ethanol, already trade in
volatile markets. The market price for gasoline distillate is a
function of the market price of oil, which has been highly volatile in recent
years. The market price of ethanol depends primarily on the
availability of feedstocks, which again has become volatile in recent years due
to the heightened demand caused by the widespread acceptance of ethanol as a
fuel supplement. Increased prices in any of these markets could
decrease Zhao Dong Jianye Fuel’s profitability. Zhao Dong Jianye Fuel
does not expect to enter into hedging contracts with respect to raw material
prices, but will rely on its Chairman’s network of industry relationships to
obtain the best available prices.
Reliance
on third party suppliers for raw materials may affect Zhao Dong Jianye Fuel’s
production and profitability.
To date,
Zhao Dong Jianye Fuel has no binding commitments for the supply of raw
materials, although it has established a favourable relationship with its
primary distillate supplier by making a large advance payment. Even
as it develops supply arrangements, Zhao Dong Jianye Fuel’s suppliers could
terminate the contracts and sell to other buyers, or enter into the
methanol-based fuel production business in direct competition with Zhao Dong
Jianye Fuel. If Zhao Dong Jianye Fuel’s suppliers do not perform
their obligations as agreed, Zhao Dong Jianye Fuel will not be able to maintain
its refinery operations at an efficient level, and may itself default in
satisfying deliver orders, all of which would adversely affect Zhao Dong Jianye
Fuel’ profitability.
Increased government regulation of our
production and/or marketing operations could diminish our profits.
The fuel production and supply business
is highly regulated. Government authorities are concerned with effect
of fuel distribution on the national and local economy. To achieve
optimal availability of fuel, governments regulate many key elements of both
production and distribution of fuel. Increased government regulation
may affect our business in ways that cannot be predicted at this time,
potentially involving price regulation, distribution regulation, and regulation
of manufacturing processes. Any such regulation or a combination
could have an adverse effect on our profitability.
In addition, the day-to-day operations
of our business will require frequent interaction with representatives of the
Chinese government institutions. The national, provincial and local
governments in the People’s Republic of China are highly
bureaucratized. The effort to obtain the registrations, licenses and
permits necessary to carry out our business activities can be
daunting. Significant delays can result from the need to obtain
governmental approval of our activities. These delays can have an
adverse effect on the profitability of our operations. In addition,
compliance with regulatory requirements applicable to fuel manufacturing and
distribution may increase the cost of our operations, which would adversely
affect our profitability.
Our business and growth will suffer if
we are unable to hire and retain key personnel that are in high
demand.
Our future success depends on our
ability to attract and retain highly skilled engineers, chemists, industrial
technicians, production supervisors, and marketing personnel. In
general, qualified individuals are in high demand in China, and there are
insufficient experienced personnel to fill the demand. In a
specialized scientific field, such as ours, the demand for qualified individuals
is even greater. If we are unable to successfully attract or retain
the personnel we need to succeed, we will be unable to implement our business
plan.
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We may have difficulty establishing
adequate management and financial controls in China.
The People’s Republic of China has only
recently begun to adopt the management and financial reporting concepts and
practices that investors in the United States are familiar with. We
may have difficulty in hiring and retaining employees in China who have the
experience necessary to implement the kind of management and financial controls
that are expected of a United States public company. If we cannot
establish such controls, we may experience difficulty in collecting financial
data and preparing financial statements, books of account and corporate records
and instituting business practices that meet U.S. standards.
Capital outflow policies in China
may hamper our ability to pay dividends to shareholders in the United
States.
The People’s Republic of China has
adopted currency and capital transfer regulations. These regulations require
that we comply with complex regulations for the movement of capital. Although
Chinese governmental policies were introduced in 1996 to allow the
convertibility of RMB into foreign currency for current account items,
conversion of RMB into foreign exchange for capital items, such as foreign
direct investment, loans or securities, requires the approval of the State
Administration of Foreign Exchange. We may be unable to obtain all of the
required conversion approvals for our operations, and Chinese regulatory
authorities may impose greater restrictions on the convertibility of the RMB in
the future. Because most of our future revenues will be in RMB, any inability to
obtain the requisite approvals or any future restrictions on currency exchanges
will limit our ability to pay dividends to our shareholders.
Currency fluctuations may adversely
affect our operating results.
Zhao Dong Jianye Fuel generates
revenues and incurs expenses and liabilities in RMB, the currency of the
People’s Republic of China. However, as a subsidiary of China Jianye
Fuel, it will report its financial results in the United States in U.S.
Dollars. As a result, our financial results will be subject to the
effects of exchange rate fluctuations between these currencies. From
time to time, the government of China may take action to stimulate the Chinese
economy that will have the effect of reducing the value of RMB. In
addition, international currency markets may cause significant adjustments to
occur in the value of the RMB. Any such events that result in a
devaluation of the RMB versus the U.S. Dollar will have an adverse effect on our
reported results. We have not entered into agreements or purchased
instruments to hedge our exchange rate risks.
We have limited business insurance
coverage.
The insurance industry in China is
still at an early stage of development. Insurance companies in China offer
limited business insurance products, and do not, to our knowledge, offer
business liability insurance. As a result, we do not have any business liability
insurance coverage for our operations. Moreover, while business disruption
insurance is available, we have determined that the risks of disruption and cost
of the insurance are such that we do not require it at this time. Any business
disruption, litigation or natural disaster might result in substantial costs and
diversion of resources.
China Jianye Fuel is not likely to hold
annual shareholder meetings in the next few years.
Management does not expect to hold
annual meetings of shareholders in the next few years, due to the expense
involved. The current members of the Board of Directors were
appointed to that position by the previous directors. If other
directors are added to the Board in the future, it is likely that the current
directors will appoint them. As a result, the shareholders of China
Jianye Fuel will have no effective means of exercising control over the
operations of China Jianye Fuel.
ITEM
3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
ITEM 4. CONTROLS AND
PROCEDURES
(a) Evaluation of
disclosure controls and procedures.
The term
“disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to
the controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,
processed, summarized and reported within required time periods. The Company’s
management, with the participation of the Chief Executive Officer and the Chief
Financial Officer, has evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by this report (the
“Evaluation Date”). Based on that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer have concluded that, as of the Evaluation
Date, such controls and procedures were effective.
(b) Changes in internal
controls.
The term
“internal control over financial reporting” (defined in SEC Rule 13a-15(f))
refers to the process of a company that is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company’s management, with the participation
of the Chief Executive Officer and Chief Financial Officer, has evaluated any
changes in the Company’s internal control over financial reporting that occurred
during the fiscal quarter covered by this quarterly report, and they have
concluded that there was no change to the Company’s internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
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PART II -
OTHER INFORMATION
OTHER
INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
The company is not party to any material legal proceeding.
ITEM
2. CHANGES IN SECURITIES
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
|
31
|
Rule
13a-14(a) Certification – CEO
|
|
31
|
Rule
13a-14(a) Certification - CFO
|
- 10 -
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly
authorized.
CHINA
JIANYE FUEL, INC.
Date:
November 14, 2008
By:
/s/ Jianye
Wang
Jianye
Wang, Director
Chief
Executive Officer and Chief Financial Officer
- 11 -