CHINA
YILI PETROLEUM COMPANY AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
(Unaudited)
1
Basis of
Presentation
The
accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted for interim financial information
and with the instructions to Form 10-Q and Article 8 of Regulation S-X relating
to smaller reporting companies. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles (“GAAP”) for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been
included. Operating results for the three and six-month periods ended
June 30, 2008 are not necessarily indicative of the results to be expected for
the year ended December 31, 2008
The
balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by GAAP for complete financial statements.
For
further information, refer to the consolidated financial statements and
footnotes thereto included in our Annual Report on Form 10-KSB for the year
ended December 31, 2007 filed on April 15, 2008.
2 MERGER
TRANSACTION AND REVERSE SPLIT
On August
13, 2007 ASAP Show, Inc. (“ASAP Show”) acquired the outstanding capital stock of
Sino-American Petroleum Group, Inc., a Delaware Corporation (“Sino-American
Petroleum”). Sino-American Petroleum is a holding company that owns
all of the registered capital of Tongliao Yili Asphalt Co. (“Yili Asphalt”), a
corporation organized under the laws of the People’s Republic of China
(“PRC”). Yili Asphalt is engaged in the business of refining heavy
oil into asphalt, fuel oil and lubricants. All of Yili Asphalt’s
business is currently in China.
In
connection with the closing of the acquisition (the “Merger”) on August 13,
2007, the following took place:
• ASAP
Show issued to the stockholders of Sino-American Petroleum 200,000 shares of
Series A Preferred Stock, which will be convertible into 569,348,000 shares of
common stock after the distribution of the ASAP Expo Shares discussed
below.
• ASAP
Show issued 100,000 shares of Series A Preferred Stock for
$600,000. The 100,000 shares will be convertible into 284,674,000
shares of common stock after the distribution of the ASAP Expo shares discussed
below. The three purchasers assigned their interest in most of the
Series A Preferred shares to other individuals, none of whom acquired sufficient
shares to be a controlling stockholder of ASAP Show.
• Prior
to the Merger, ASAP Show assigned all of its pre-Merger business and assets to
ASAP Expo, Inc., its wholly-owned subsidiary, and ASAP Expo, Inc. assumed
responsibility for all of the liabilities of ASAP Show that existed prior to the
merger. At the same time, ASAP Show entered into a management
agreement with Frank Yuan, its previous CEO, and ASAP Expo, Inc. The
management agreement provides that Mr. Yuan will manage ASAP Expo, Inc. within
his discretion, provided that his actions or inactions do not threaten material
injury to ASAP Show. The management agreement further provides that
Mr. Yuan will cause ASAP Expo, Inc, to file a registration statement with the
Securities and Exchange Commission that will, when declared effective, permit
ASAP Show to distribute all of the outstanding shares of ASAP Expo, Inc. to the
holders of its common stock. After the registration statement is
declared effective, the Board of Directors of ASAP Show will fix a record date,
and stockholders of record on that date will receive the shares of ASAP Expo,
Inc. in proportion to their ownership of ASAP Show common stock.
• On
October 22, 2007, ASAP Show, Inc. changes its corporate name to China Yili
Petroleum Company (“the Company”) and announced a 1-29 reverse
split.
The above merger was accounted for as a
reverse merger, since the former shareholders of Sino-American Petroleum and its
wholly-owned subsidiary, Yili Asphalt, effectively control the Company and,
accordingly, Sino-American Petroleum is considered to be the surviving
entity.
On January 7, 2008, 222,493 shares of
the Company’s Series A Convertible Preferred Stock was converted into 21,839,943
shares of the Company’s Common Stock.
3 BUSINESS
DESCRIPTION
Tongliao
Yili Asphalt is engaged in the business of refining heavy oil into asphalt, fuel
oil and lubricants. ASAP Expo, Inc. is engaged in the business of organizing
trade-shows and innovative means of financing international
trade. All revenue included in the financial statements come from
ASAP.
4 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of consolidation
The
accompanying consolidated financial statements include the accounts of China
Yili Petroleum Company and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated in
consolidation.
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.
New accounting
pronouncements
In July
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109,” (“FIN 48”), 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 income tax returns. An uncertain tax
position will be recognized if it is determined that it is more likely than not
to be sustained upon examination. The tax position is measured as the
largest amount of benefit that is greater than fifty percent likely of being
realized upon ultimate settlement.
The
cumulative effect of applying the provisions of this interpretation is to be
reported as a separate adjustment to the opening balance of retained earnings in
the year of adoption. FIN 48 is effective for fiscal years beginning
after December 15, 2006.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The
objective of SFAS 157 is to increase consistency and comparability in fair value
measurements and to expand disclosures about fair value measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on the
Company's future reported financial position or results of
operations.
In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
159, “The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115”. This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115 “Accounting for Certain Investments
in Debt and Equity Securities” applies to all entities with
available-for-sale and trading securities. SFAS No. 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provision of SFAS No. 157, “Fair Value Measurements”.
The adoption of this statement did not have a material effect on the Company's
financial statements.
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 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Early adoption is prohibited. The adoption of this statement is not expected to
have a material effect on the Company's financial
statements.
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:
| |
|
Amount |
|
Life |
|
Right
to use land
|
|
$ |
245,857 |
|
50
years
|
|
Building
and building improvements
|
|
|
1,800,098 |
|
39
years
|
|
Machinery
and equipment
|
|
|
4,714,329 |
|
7
years
|
|
Office
equipment and furniture
|
|
|
60,567 |
|
7
years
|
|
Automobiles
|
|
|
153,251 |
|
7
years
|
|
|
|
|
6,974,102 |
|
|
|
Accumulated
depreciation and amortization
|
|
|
83,577 |
|
|
|
|
|
|
6,890,525 |
|
|
|
Construction
in progress
|
|
|
2,032,761 |
|
|
|
|
|
$ |
8,923,286 |
|
|
6 BUSINESS
SEGMENTS
|
|
|
SIX MONTHS ENDED JUNE 30, 2008
|
| |
|
|
Yili
Asphalt |
|
|
|
ASAP
Expo |
|
|
Total |
|
| Statement
of income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
- |
|
|
$ |
249,901 |
|
$ |
249,901 |
|
|
Expenses
|
|
|
120,173 |
|
|
|
522,391 |
|
|
642,565 |
|
|
Other
income
|
|
|
- |
|
|
|
(17,400 |
) |
|
(17,400 |
) |
|
Net
income (loss)
|
|
$ |
(120,173 |
) |
|
$ |
(255,091 |
) |
$ |
(375,264 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
631 |
|
|
$ |
30,798 |
|
$ |
31,429 |
|
|
Sundry
current assets
|
|
|
336 |
|
|
|
31,342 |
|
|
31,678 |
|
|
Property
and equipment
|
|
|
8,923,286 |
|
|
|
- |
|
|
8,923,286 |
|
|
Total
assets
|
|
$ |
8,924,253 |
|
|
$ |
62,140 |
|
$ |
8,986,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
1,964,627 |
|
|
$ |
1,489,908 |
|
$ |
3,454,535 |
|
|
Stockholders’
equity (deficiency)
|
|
|
6,959,626 |
|
|
|
(1,427,768 |
) |
|
5,531,858 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
8,924,253 |
|
|
$ |
62,140 |
|
$ |
8,986,393 |
|
7 EARNINGS
PER SHARE
Outstanding
shares prior to August 13, 2007, the date of the Merger, are
indeterminable. The total shares issued are therefore used as the
average shares outstanding.
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
All of the revenue and 81% of the
expenses reported by the Company for the six months ended June 30, 2008 were
generated by ASAP Expo. There are, however, no revenue or expenses
attributable to ASAP Expo reported for the six months ended June 30,
2007. Because the merger of Yili Asphalt into the Company on August
13, 2007 is accounted for as a reverse merger, the historic financial statements
of Yili Asphalt have replaced the historic financial statements of the Company
prior to the reverse merger. Only the results of operations of ASAP
Expo occurring after August 13, 2007 are consolidated in the financial results
reported in this Quarterly Report. For this reason the Company’s
statements of operations for the first six months of 2007 reflect only the
expenses incurred by Yili Asphalt in that period, and none of the revenue or
expenses previously reported by the Company for that period.
The
$249,901 in revenue reported by ASAP Expo for the first six months of 2008 arose
primarily from its business of selling exhibit space at trade shows, in
particular the show that ASAP Expo promotes each February. Trade show
business is seasonal, however, with revenue typically peaking at the time of the
ASAP Global Sourcing shows held in February and August each year. In
line with that trend, ASAP Expo realized $240,161 in revenue in the three months
ended March 31, 2008 and only $9,740 during the three months ended June 30,
2008. By way of comparison, during the twelve months that
ended on May 31, 2007, approximately 58% of annual tradeshow revenue was
generated by ASAP Expo in connection with its August show and approximately 42%
in connection with its February show. The revenue reported in this Quarterly
Report for the three and six month periods ended June 30, 2008, therefore, is
not necessarily indicative of the annual revenue that ASAP Expo will
realize.
Of the
$625,165 in expenses/(other income) reported by the Company for the first six
months of 2008, $504,992 were attributable to the operations of ASAP Expo,
including $411,784 incurred during the three months ended March 31, 2008 and
$93,208 incurred during the three months ended June 30, 2008. These
expenses generally involve production costs, marketing expenses, promotion costs
and travel expenses relating to the show staged in February. The $120,173 in
expenses attributable to the operations of Yili Asphalt during the six months
ended June 30, 2008 ($47,085 in the three months ended June 30, 2008) 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, Yili
Asphalt now incurs expenses resulting from its new status as a U.S. public
company and its efforts to enter into the U.S. capital market.
ASAP Expo
realized a net loss of $255,091 for the six months ended June 30, 2008, and a
net loss of $83,468 for the three months ended June 30, 2008. Yili
Asphalt realized a net loss of $120,173 for the six month period and $47,085 for
the three month period ended June 30, 2008. The consolidated net loss
for the Company was $375,264 during the six months ended June 30, 2008 and
$130,553 during the three months ended June 30, 2008. In each case,
the net loss was not materially different than the net loss recorded by the
Company for the first half and second quarter of 2007, as the reduction in loss
by Yili Asphalt from 2007 to 2008 has been offset by the losses recorded by ASAP
Expo. The level of operations exhibited in this Report is likely to
continue in the immediate future until (a) the Company terminates its
relationship with ASAP Expo and/or (b) Yili Asphalt obtains the funds needed to
commence commercial-scale production.
The business of Yili Asphalt operates
primarily in Chinese Renminbi, 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, which are reported on our Consolidated
Statements of Operations as a middle step between net income and comprehensive
income. The net income is added to the retained earnings on our
balance sheet; while the translation adjustment is 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. In the first six months of 2008, the
effect of converting our financial results to Dollars was to add $427,184 to our
comprehensive income.
Liquidity
and Capital Resources
The
Company’s agreement with the management of ASAP Expo provides that ASAP Expo
will, after it is spun-off to the Company’s shareholders, indemnify the Company
against any liabilities that arose prior to August 13, 2007 or that relate to
the business of ASAP Expo. For this reason, the discussion of liquidity and
capital resources below involves the business plan and resources of Yili Asphalt
only.
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 from a Chinese bank 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:
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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.
|
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:
|
·
|
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.
|
|
·
|
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 scheduled in 2008. 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.
|
|
·
|
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.
|
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. However, our plan, if accomplished, will
significantly increase the risks to our liquidity.
Off-Balance Sheet
Arrangements
The
Company has no any 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.
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
petroleum production operations, unexpected factors may hamper our efforts to
implement our business plan.
We will not record our first sale of
petroleum products until we secure working capital. Our business plan
contemplates that we will engage in a three-pronged marketing operation,
involving production and sales of diesel fuel, asphalt as well as
lubricants. Implementation of that business plan will also entail
complex production operations and an active sales force. Because
these are areas in which we have limited experience, problems may occur with
production or marketing that we have not anticipated, which would interfere with
our business, and prevent us from achieving profitability.
Our profits will be limited unless we
are able to secure a sufficient supply of heavy oil.
We manufacture our products by refining
petroleum. The price of petroleum on both the Chinese market and the
international market is much higher today than it was five years ago, and our
expectation is that the price will remain high for the foreseeable
future. Particularly in China, which has experienced unprecedented
industrial growth in the past twenty years, the demand for petroleum exceeds the
supply. Therefore, in order to achieve efficient operations, it will
be necessary for us to develop redundant sources of heavy oil, as we cannot rely
on one or two relationships to provide the steady flow of oil that we will
need. If we are unable to achieve that redundancy and have
interruptions in our petroleum supplies, our profitability will be
limited.
Fluctuations in oil prices could impede
our efforts to achieve profitability.
The market price of crude oil
fluctuates dramatically, driven by economic, political and geological factors
that are completely outside our control. We do not intend to engage
in hedging against changes in crude oil prices. As a result, a sudden
increase in the cost of our raw material – i.e. oil – could reduce or eliminate
our profit margin. Although we could respond to the increase by a
proportionate increase in our price list, competitive forces might prevent us
from doing so – in particular competition from asphalt and diesel fuel producers
that are themselves oil producers and are thus shielded from the full effect of
increased oil prices.
The capital investments that we plan
for the next two years may result in dilution of the equity of our present
shareholders.
Our business plan contemplates that we
will invest at least 30 million RMB ($3.8 million) in working capital and
acquisitions during the next twelve months, and an undetermined amount in the
development of a rail line to our refinery. We intend to raise a
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.
A recession in China could
significantly hinder our growth.
The growing demand for petroleum
products in China has been swelled, in large part, by the recent dramatic
increases in industrial production in China. The continued growth of
our market will depend on continuation of recent improvements in the Chinese
economy. If the Chinese economy were to contract and investment
capital became limited, construction projects would be delayed or abandoned, and
the demand for our asphalt would be reduced. Many financial
commentators expect a recession to occur in China in the near
future. The occurrence of a recession could significantly hinder our
efforts to implement our business plan.
Increased environmental regulation
could diminish our profits.
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. At the present time we estimate that our
compliance with applicable government regulations designed to protect the
environment will cost us 1 million RMB (approximately $125,000) per
year. 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 on us substantial costs, which would reduce our
profits.
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 petroleum engineers, production
supervisors, transportation specialists 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.
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.
Government regulation may hinder our
ability to function efficiently.
The national, provincial and local
governments in the People’s Republic of China are highly
bureaucratized. The day-to-day operations of our business require
frequent interaction with representatives of the Chinese government
institutions. 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 petroleum refining may
increase the cost of our operations, which would adversely affect our
profitability.
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.
Yili Asphalt generates revenues and
incurs expenses and liabilities in Renminbi, the currency of the People’s
Republic of China. However, as a subsidiary of the Company, 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 Renminbi. In addition,
international currency markets may cause significant adjustments to occur in the
value of the Renminbi. Any such events that result in a devaluation
of the Renminbi 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.
The Company 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 Company’s shareholders
will have no effective means of exercising control over the Company’s
operations.
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ITEM
3
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures. Our Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of our
disclosure controls and procedures as of June 30, 2008. 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 Petroleum 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 Petroleum 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 Petroleum’s system
of disclosure controls and procedures was effective as of June 30, 2008 for the
purposes described in this paragraph.
Changes in Internal
Controls. There was no change in internal controls over
financial reporting (as defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act or 1934) identified in connection with the evaluation
described in the preceding paragraph that occurred during China Yili Petroleum’s
second fiscal quarter that has materially affected or is reasonably likely to
materially affect China Yili Petroleum’s internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item 2. Changes in
Securities and Small
Business Issuer Purchase of Equity Securities
(c) Unregistered sales of
equity securities
None.
(e) Purchases of
equity securities
The
Company did not repurchase any of its equity securities that were registered
under Section 12 of the Securities Exchange Act during the 2nd quarter
of fiscal 2008.
Item
6. Exhibits
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31
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Rule
13a-14(a) Certification
|
32 Rule
13a-14(b) Certification
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.
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|
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CHINA
YILI PETROLEUM COMPANY
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|
Date:
August 14, 2008
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By: /s/ Chunshi
Li
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|
|
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Chunshi
Li,
Chief
Executive Officer
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