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EX-32.1 - CERTIFICATION - CHINA YILI PETROLEUM COex32-1.htm



U. S. Securities and Exchange Commission
Washington, D. C. 20549

FORM 10-Q

[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

[   ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____

Commission File No. 0-51554

China Yili Petroleum Company
(Name of Registrant in its Charter)
 
Nevada
 
20-2934409
(State of Other Jurisdiction of incorporation or organization)
 
(I.R.S. Employer I.D. No.)
 
TONGLIAO ECONOMIC DEVELOPMENT DISTRICT, TONGLIAO F4 638229, P.R. CHINA
(Address of Principal Executive Offices)

Issuer's Telephone Number: (973) 506-9295
 
Indicate  by check mark  whether the  Registrant  (1) has filed all reports required to be filed by Sections 13 or 15(d) of the  Securities Exchange Act of 1934  during  the  preceding  12 months  (or for such shorter  period  that the Registrant was required to file such reports),  and (2) has been subject to such filing requirements for the past 90 days.    Yes  X      No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes   X       No_
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
 
Large accelerated filer ___ Accelerated filer ___  Non-accelerated filer  ___  Smaller reporting company _X_
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes __       No   X
 
As of September 14, 2011, 29,748,348 shares of common stock, par value $.001 per share, were outstanding.
 
 
 

 
 
TABLE OF CONTENTS
     
Page No
Part I
 
Financial Information
 
Item 1.
 
Unaudited Financial Statements :
 
   
Consolidated Balance Sheets – June 30, 2011 and December 31, 2010
2
   
Consolidated Statements of Operations and Comprehensive Losses – for the Three and  Six Months Ended June 30, 2011 and 2010 and the Period from Inception to June 30, 2011
3
   
Consolidated Statements of Cash Flows – for the Six Months Ended June 30, 2011 and 2010 and the Period from Inception to June 30, 2011
4
   
Notes to Condensed Consolidated Financial Statements
5
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
10
Item 3
 
Quantitative and Qualitative Disclosures about Market Risk
11
Item 4
 
Controls and Procedures
11
Part II
 
Other Information
 
Item 1.
 
Legal Proceedings
12
Items 1A.
 
Risk Factors
12
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
12
Item 3.
 
Defaults upon Senior Securities
13
Item 4.
 
Reserved
13
Item 5.
 
Other Information
13
Item 6.
 
Exhibits
13
Signatures
 
 
 
 

 

CHINA YILI PETROLEUM COMPANY AND SUBSIDIARIES
           
(A DEVELOPMENT STAGE COMPANY)
           
CONSOLIDATED BALANCE SHEETS
           
             
             
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
Cash
  $ 693     $ 692  
Other sundry current assets
    1,332       547  
TOTAL CURRENT ASSETS
    2,025       1,239  
                 
Property and equipment, net of accumulated depreciation
    9,335,991       9,176,508  
                 
TOTAL ASSETS
  $ 9,338,016     $ 9,177,747  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 2,186,341     $ 2,143,942  
Due to shareholder
    401,141       378,700  
Accrued expenses
    740,638       648,365  
TOTAL CURRENT LIABILITIES
    3,328,120       3,171,007  
                 
STOCKHOLDERS' EQUITY
               
Common stock, $0.001 par value,
               
   100,000,000 shares authorized,
               
   29,748,348 shares issued and outstanding
               
   at June 30, 2011 and December 31, 2010
    29,748       29,748  
                 
Preferred stock, $0.001 par value,
               
   4,700,000 shares authorized
               
   0 shares issued and outstanding
               
   at June 30, 2011 and December 31, 2010
    -       -  
                 
Preferred stock, Series A, $0.001 par value,
               
   300,000 shares authorized
               
   0 shares issued and outstanding
               
   at June 30, 2011 and December 31, 2010
    -       -  
                 
Additional paid-in capital
    6,809,275       6,799,332  
Deficit accumulated during development stage
    (2,059,555 )     (1,932,293 )
Accumulated other comprehensive income
    1,230,428       1,109,953  
TOTAL STOCKHOLDERS' EQUITY
    6,009,896       6,006,740  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 9,338,016     $ 9,177,747  
 
The accompanying notes are an integral part of the consolidated financial statements

 
2

 

CHINA YILI PETROLEUM COMPANY AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSES
(Unaudited)
                               
                           
From Inception
 
   
For the three months ended
   
For the six months ended
   
May 27, 2005
 
   
June 30,
   
June 30,
   
to
 
   
2011
   
2010
   
2011
   
2010
   
June 30, 2011
 
                               
                               
Sales
  $ -     $ -     $ -     $ -     $ -  
                                         
COSTS AND EXPENSES:
                                       
Cost of sales
                                       
General and administrative expenses
    66,667       107,332       117,319       177,957       2,000,192  
Interest expense
    5,196       4,102       9,943       7,902       59,363  
TOTAL COST AND EXPENSES
    71,863       111,434       127,262       185,859       2,059,555  
                                         
NET LOSS FROM CONTINUING OPERATIONS
    (71,863 )     (111,434 )     (127,262 )     (185,859 )     (2,059,555 )
                                         
INCOME FROM DISCONTINUED OPERATIONS
    -       -       -       -       57,430  
                                         
NET LOSS
    (71,863 )     (111,434 )     (127,262 )     (185,859 )     (2,002,125 )
                                         
OTHER COMPREHENSIVE INCOME (LOSS):
                                       
  Foreign currency translation adjustments
    99,342       39,484       120,475       40,498       1,230,428  
TOTAL COMPREHENSIVE INCOME (LOSS)
  $ 27,479     $ (71,950 )   $ (6,787 )   $ (145,361 )   $ (771,697 )
                                         
                                         
                                         
Basic and diluted loss per common share:
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.01 )        
                                         
                                         
Weighted average number of shares outstanding:
    29,748,348       29,748,348       29,748,348       29,748,348          
                                         
                                         
                                         
 
The accompanying notes are an integral part of the consolidated financial statements

 
3

 

CHINA YILI PETROLEUM COMPANY AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
                   
               
From Inception
 
   
For the six months ended
   
May 27, 2005
 
   
June 30
   
to
 
   
2011
   
2010
   
June 30, 2011
 
OPERATING ACTIVITIES:
                 
Net loss from continued operations
  $ (127,262 )   $ (185,859 )   $ (2,002,125 )
Loss from discontinued operations
  $ -     $ -     $ (57,430 )
Net loss
  $ (127,262 )   $ (185,859 )   $ (2,059,555 )
                         
Adjustments to reconcile net loss to net
                       
  cash provided by (used in) operating activities:
                       
   Depreciation
    21,762       27,490       222,819  
   Imputed interest
    9,943       7,902       59,362  
Changes in operating assets and liabilities:
                       
  Other sundry current assets
    (774 )     -       (1,332 )
  Accounts payable
    -       -       2,186,341  
  Accrued expenses
    80,856       106,345       740,638  
                         
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    (15,474 )     (44,122 )     1,148,273  
                         
INVESTING ACTIVITIES:
                       
     Acquisition of property and equipment
    -       -       (9,558,810 )
NET CASH USED IN INVESTING ACTIVITIES
    -       -       (9,558,810 )
                         
FINANCING ACTIVITIES:
                       
                         
     Loan received from stockholder
    16,348       42,191       401,141  
     Capital contribution
    -       -       6,779,661  
                         
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    16,348       42,191       7,180,802  
                         
EFFECT OF EXCHANGE RATE ON CASH
    (874 )     2       1,230,428  
                         
INCREASE (DECREASE) IN CASH
    1       (1,930 )     692  
                         
CASH - BEGINNING OF PERIOD
    692       3,161       -  
                         
CASH - END OF PERIOD
  $ 693     $ 1,231     $ 692  
The accompanying notes are an integral part of the consolidated financial statements
 
4

 
 
CHINA YILI PETROLEUM COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011
(Unaudited)

 1           BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet as of December 31, 2010 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. These interim financial statements should be read in conjunction with that report.
 
 
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on April 15, 2011.
 
The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the accompanying financial statements have been translated and presented in United States Dollars (“USD”).
 
2            BUSINESS DESCRIPTION
 
China Yili Petroleum Company and subsidiaries ( “the Company”), a development stage company, intend to refine heavy oil into asphalt, fuel oil and lubricants through its wholly-owned subsidiary.
 
Since inception, the Company 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.  The Company’s financial statements are identified as those of a development stage company, and 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 $3,326,095 on June 30, 2011. The Company has sustained an accumulative loss of $2,059,555 from its inception to June 30, 2011. In addition, 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.

 
5

 
 
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.
 
Impairment 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
 
Deferred tax assets and liabilities are 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, 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 assets 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 June 30, 2011 and June 30, 2010, there were no common stock equivalents outstanding.
 
 
6

 
 
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.
 
Fair value of financial instruments
 
The Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
 
 
·
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
 
 
·
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
 
 
·
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
 
 
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts payable, and accrued expenses, approximate fair value due to the short-term nature of these items. The Company did not identify any other assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with ASC 820.
 
5            DUE TO STOCKHOLDER
 
Amounts due to a stockholder of the Company, are non-interest bearing and are due on demand. Interest was imputed at 5% per annum for the six month periods ended June 30, 2011 and 2010.
 
6            INCOME TAXES
 
The Company has net operating loss carry-forwards in China and United States of approximately $2,000,000 which expire between 2011 and 2016.
 
The Company has a deferred tax asset resulting from the tax loss carry-forwards of approximately $500,000 for which the Company has provided a 100% valuation allowance.
 

 
7

 

7
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.
 
             Risks of Losses
 
The Company is potentially exposed to risks of losses that may result from business interruptions, injury to others (including employees) and damage to property.  These losses may be uninsured, especially due to the fact that the Company’s operations are in China, where business insurance is not readily available.  If: (i) information is available before the Company’s financial statements are issued or are available to be issued indicates that such loss is probable and (ii) the amount of the loss can be reasonably estimated, an estimated loss will be accrued by a charge to income.  If such loss is probable but the amount of loss cannot be reasonably estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period.  As of June 30, 2011, the Company has not experienced any uninsured losses from injury to others or other losses.
 
            Potential Limitations on the Payment of Dividends
 
The PRC government imposes control over the conversion of Renminbi, or RMB, into foreign currencies. Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of RMB into foreign exchange by Foreign Investment Enterprises, or FIEs, for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in China.  On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items. Enterprises in China, including FIEs, which require foreign exchange for transactions relating to current account items, if within a certain limited amount may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs. Conversions in excess of prescribed limits, however, require the prior approval of SAFE.
 
 Obtaining approval from SAFE for foreign currency conversions can be a time-consuming process.  Moreover, the PRC government from time to time modifies its regulations regarding conversion of RMB into foreign currencies, and may in the future impose further restrictions on transactions relating to current accounts.  For all these reasons, our ability to pay dividends in the future may be limited by our inability to readily transfer funds from our PRC subsidiary to our U.S. parent corporation.
 
 
8

 

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.
 
8           SUBSEQUENT EVENT
 
We have evaluated events after the date of these financial statements through the date that these financial statements were issued. There were no material subsequent events as of that date.
 
 
9

 
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Economic and Industry Trends

In past years, China has experienced a real estate boom, which also triggered the rapid development of the construction industry, which uses asphalt as a major material. However, in 2010, the Chinese government implemented a series of policies and regulations to curb inflation in the property market. These policies, together with the worldwide financial crisis started in late 2008, have resulted in a slowdown of the real estate market in China and our business, in turn, has been affected. 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.
 
Results of Operations
 
The Company has not yet initiated sales and production activities.  As a result, during the three and six month periods ended June 30, 2011 and 2010, the Company did not generate any revenue.  Nor did it incur any cost of goods sold.  At this time it is not possible to predict when the Company will initiate operations, as that will depend on the availability of financing and demand for the Company’s products.
 
Total operating expenses reported by the Company for the three and six month periods ended June 30, 2011 and 2010 were mainly attributable to the general and administrative expenses which generally consisted of facilities maintenance, depreciation cost and professional fees. The Company is currently merely sustaining its facility and its organization until it obtains the financing necessary to initiate operations.  For that reason, its expenses have fallen from 2010, when we were still finalizing development of our products and obtaining licenses.  Operating expenses of $71,863 and $127,262, respectively, were incurred during the three and six months ended June 30, 2011, a reduction from the $111,434 and $185,859 incurred in the three and six months ended June 30, 2010.  In both periods, the Company’s expenses incurred expenses resulting from its status as a U.S. public company and its efforts to enter into the U.S. capital market.
 
Liquidity and Capital Resources
 
Management hopes that Yili Asphalt will commence revenue-producing operations in the near future. 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 $9.0 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:
 
·  
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.  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. 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 does 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.
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not  applicable.

Item 4. Controls and Procedures

  Evaluation of Disclosure Controls and Procedures.
 
  The Company's management under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design, maintenance and operation of the Company's disclosure controls and procedures as of June 30, 2011. 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. In carrying out the evaluation, our Chief Executive and Chief Financial Officer observed the three material weaknesses:

 
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Inadequate staffing and supervision within the accounting operations of our company. The relatively small number of employees who are responsible for accounting functions prevents us from segregating duties within our internal control system.  The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews.

Lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters.  Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in the City of Tongliao. None of our employees has substantial experience or familiarity with U.S accounting principles.  The lack of personnel in our Tongliao office who are trained in U.S. accounting principles is a weakness because it could lead to improper classification of items and other failures to make the entries and adjustments necessary to comply with U.S. GAAP.

  
Lack of independent control over related party transactions.  Chunshi Li is the sole director and sole officer of China Yili Petroleum Company.  From time to time Mr. Li has made loans to finance the operations of Yili Asphalt, has contributed assets to Yili Asphalt, and has arranged transactions between Yili Asphalt and other entities under his control.  The absence of other directors or officers to review these transactions is a weakness because it could lead to improper classification of such related party transactions.

Based on his evaluation, our Chief Executive Officer and Chief Financial Officer concluded that China Yili's system of disclosure controls and procedures was not effective as of June 30, 2011 for the purposes described in this paragraph.
 
Changes in Internal Control over Financial Reporting
 
During the three months ended June 30, 2011, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

 PART II      OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
 
The company is not party to any material legal proceeding.

ITEM 1A.  RISK FACTORS

There has been no material change to the risk factors set forth in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2010.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(c) Unregistered sales of equity securities
 
None.
 
 
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(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 2011.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. RESERVED
 
 
ITEM 5. OTHER INFORMATION
 
None.
 
ITEM 6. EXHIBITS

      31
Rule 13a-14(a) Certification

      32
Rule 13a-14(b) Certification
  
101.Ins XBRL Instance
101.Sch XBRL Schema
101.Cal XBRL Calculation
101.Def
XBRL Definition
101.Lab XBRL Label
101.Pre XBRL Presentation
 
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 Yili Petroleum Company
 
Date : September 14, 2011
 /s/Chunshi Li
 
 Chunshi Li, Chief Executive Officer
 
 and Chief Financial Officer
 
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