NOTE 1 - NATURE OF BUSINESS
Longwei Petroleum Investment Holding Limited (the “Company”) is an energy company engaged in the wholesale distribution of finished petroleum products in the People’s Republic of China (the “PRC”). The Company’s oil and gas operations consist of transporting, storage and selling finished petroleum products, entirely in the PRC. The Company purchases diesel, gasoline, fuel oil and solvents (the “Products”) from various petroleum refineries in the PRC. The Company’s headquarters are located in Taiyuan City, Shanxi Province (“Taiyuan”). The Company has a storage capacity for its Products of 220,000 metric tons located at three storage facilities within Shanxi: Taiyuan, Gujiao and Huajie, which have an individual storage capacity of approximately 50,000 metric tons (“mt”), 70,000mt, and 100,000mt, respectively. The Company is 1 of 3 licensed intermediaries in Taiyuan and the sole licensed intermediary in the regions around Gujiao and Huajie that operates its own large scale storage tanks. The Company has the necessary licenses to operate and sell Products not only in Shanxi but throughout the entire PRC. The Company seeks to earn profits by selling its Products at competitive prices with timely delivery to transportation companies, coal mining operations, power supply and industrial customers, large-scale gas stations and small, independent gas stations. The Company also earns revenue from agency fees by acting as a purchasing agent for other intermediaries in Shanxi, and through limited sales of diesel and gasoline at two retail gas stations, each located at the Company’s facilities in Taiyuan and Gujiao. The sales price and the cost basis of the Company’s products are largely dependent on regulations and retail price control measures instituted and controlled by the PRC government, as well as the price of crude oil. The price of crude oil is subject to fluctuation due to a variety of factors, all of which are beyond the Company’s control.
The Company was incorporated under the laws of the State of Colorado on March 17, 2000 as Tabatha II, Inc. On October 12, 2007, the Company changed its name to Longwei Petroleum Investment Holding Limited.
Control by Principal Shareholders
The Company’s directors, executive officers and their affiliates or related parties, own beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, the directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company's assets or business.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the consolidated financial statements.
Management’s Representation of Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited financial statements at June 30, 2012 as filed in the Company’s Form 10-K filed with the SEC on September 13, 2012.
Foreign Currency Translation and Other Comprehensive Income
Total comprehensive income is defined as all changes in stockholders’ equity during a period, other than those resulting from investments by and distributions to stockholders (i.e. issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for currency translation. The gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statements of income. The total comprehensive income represents the activity for a period net of related tax and was a loss of $645,500 and a gain of $2,855,524 for the three month periods ended September 30, 2012 and 2011, respectively.
Accumulated other comprehensive income related to the foreign currency translation in the consolidated statement of shareholders’ equity amounted to $31,126,520 and $31,772,020 as of September 30, 2012 and June 30, 2012, respectively. The balance sheet amounts with the exception of equity at September 30, 2012 and June 30, 2012 were translated at RMB 6.3265 to $1.00 USD and RMB 6.3143 to $1.00 USD, respectively. The average translation rates applied to income statement amounts for the three month periods ended September 30, 2012 and 2011 were at RMB 6.3257 to $1.00 USD and RMB 6.4132 to $1.00 USD, respectively.
Concentration of Risk
Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash. The Company maintains cash balances at financial institutions or state owned banks within the PRC, which do not provide for insurance against lost funds. The Company also maintains cash balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits of $250,000 for banks located in the US. Balances at financial institutions or state owned banks within the PRC are not insured and amounted to $14,184,478 and $11,168,560 at September 30, 2012 and June 30, 2012, respectively. As of September 30, 2012 and June 30, 2012, the Company was within the limits and had $76,944, respectively, in deposits in excess of federally insured limits in its US bank. The Company has not experienced any losses with regard to its bank accounts and believes it is not exposed to any risk of loss on its cash in bank accounts.
The Company operates in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the USD and RMB.
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 United States and PRC, and by the general state of the economy in the PRC. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the US. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected 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.
Reclassification
Certain reclassifications have been made to the consolidated financial statements as of June 30, 2012 and for the three months ended September 30, 2011 in order to conform to the condensed consolidated financial statement presentation as of and for the three months ended September 30, 2012. These reclassifications had no effect on net income or cash flows as previously reported.
Recent Accounting Pronouncements
In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the Codification). The Codification became the single official source of authoritative, nongovernmental U.S. GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption did not have a material impact on the Company’s consolidated financial position or results of operations.
Accounting Standards Update (“ASU”) ASU No. 2010-09 (ASC Topic 855), which amends Subsequent Events Recognition and Disclosures, ASU No. 2009-16 (ASC Topic 860), which amends Accounting for Transfer of Financial Assets, ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures - Overall, ASU No. 2009-08, Earnings per Share, ASU No. 2009-12(ASC Topic 820), Investments in Certain Entities That Calculate Net Asset Value per Share, and various other ASU’s No. 2009-2 through ASU No. 2012-07 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.
Other accounting standards have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the Company’s financial statements.
NOTE 3 – COMMITMENTS AND CONTINGENCIES
Commitments
The Company has no rent expense or lease commitments for the three month periods ended September 30, 2012 and 2011.
The Company has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for the Company’s business and at prevailing market prices. No material annual loss is expected from these commitments.
The Company has advances to ten refineries for inventory in the amount of $109,578,172, which will be offset against future purchases from the suppliers.
Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, environmental matters and tax matters. An accrual for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. As of September 30, 2012 the Company has not recognized an accrual for any loss contingency.
Legal Matters
The Company is not involved in any legal matters except for those arising in the normal course of business. While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might be involved in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
NOTE 4 – ACCOUNTS RECEIVABLE
The Company’s business operations are conducted in the PRC. During the normal course of business, the Company extends unsecured credit to its customers. Management reviews its accounts receivable on a regular basis to determine if an allowance for doubtful accounts is necessary and adequate. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Through the date of these financial statements, the Company has never experienced a significant bad debt. As a result, no allowance for doubtful accounts has been recorded. Trade accounts receivable as of September 30, 2012 and June 30, 2012 consisted of the following:
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September 30,
2012
(in thousands)
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June 30,
2012
(in thousands)
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Trade Accounts Receivable
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Less: Allowance for Doubtful Accounts
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NOTE 5 – INVENTORIES
As of September 30, 2012 and June 30, 2012, inventory consisted of significant quantities of diesel and gasoline, among others, as outlined herein:
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September 30,
2012
(in thousands)
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June 30,
2012
(in thousands)
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NOTE 6 – ADVANCES TO SUPPLIERS
As of September 30, 2012 and June 30, 2012, advances to suppliers consisted of significant deposits on account with the Company’s suppliers, which are petroleum refineries. The deposits are held by the Company’s suppliers to ensure that the delivery of inventory to the Company is made in a timely manner. The Company attempts to maintain a significant balance on account with suppliers with the expectation of receiving preferential pricing and delivery of product from suppliers.
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September 30,
2012
(in thousands)
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June 30,
2012
(in thousands)
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NOTE 7 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
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September 30,
2012
(in thousands)
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June 30,
2012
(in thousands)
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Machinery and Storage Equipment
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Total Property, Plant and Equipment
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Less: Accumulated Depreciation
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Property, Plant and Equipment, net
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Depreciation expense for the three months ended September 30, 2012 and 2011 was $557,129 and $514,876, respectively.
NOTE 8 – LAND USE RIGHTS, NET
Land use rights, net consisted of the following:
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September 30, 2012
(in thousands)
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June 30, 2012
(in thousands)
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Less: Accumulated amortization
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The Company did not recognize any amortization expense for the three-months ended September 30, 2012 and 2011, respectively. The Company purchased the fixed assets on September 26, 2012 and will begin amortizing the land use rights over 40 years.
NOTE 9 – TAXES
Taxes payable consisted of the following:
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September 30, 2012
(in thousands)
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June 30,
2012
(in thousands)
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Business Taxes and Other Payables
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Income Taxes
On March 16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income Tax Law (“New EIT Law”) which became effective on January 1, 2008. Pursuant to the New EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied consistently to both domestic-invested enterprises and foreign-invested enterprises.
Taiyuan Yahua Energy Conversion Ltd., Shanxi Zhonghe Energy Conversion Ltd. and Shanxi Heitan Zhingyou Petrochemical Co. Ltd. are taxed pursuant to the New EIT Law with a unified enterprise income tax rate of 25%. None of these companies had income taxes due during the three month periods ended September 30, 2012 and 2011. Since these three entities have minimal business operations, the three entities are unlikely to have profits in future periods. As a result, all deferred tax assets and liabilities are deminimus, and management would have a 100% valuation allowance for all deferred tax assets.
The operating subsidiary of Taiyuan Longwei Economy & Trading Ltd. is taxed pursuant to the New EIT Law with a unified enterprise income tax rate of 25%. This entity had taxes due for the three month periods ended September 30, 2012 and 2011 of $6.2 million and $5.3 million, respectively.
Longwei Petroleum Investment Holding Limited (BVI) is exempt from income tax on all sources of income pursuant to the tax law in the British Virgin Islands. However, pursuant and subsequent to the reverse merger, the parent company in U.S. may pay tax in future years.
United States of America
The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate. As the Company has no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of September 30, 2012 and 2011.
Colorado
The Company is incorporated in the State of Colorado but does not conduct business in Colorado. As the Company has no income generated in the State of Colorado, there was no corporate tax expense or tax liability due to the State of Colorado as of September 30, 2012 and 2011.
British Virgin Islands
The Company’s subsidiary, Longwei Petroleum Investment Holding Limited (BVI), is incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, is not subject to income taxes. As the Company has no income generated in the British Virgin Islands, there was no corporate tax expense or tax liability due to the British Virgin Islands as of September 30, 2012 and 2011.
People’s Republic of China
Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income is 25% for the Company’s PRC subsidiaries. There is no tax provision in the US for the three month periods ended September 30, 2012 or 2011, respectively.
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For the Three Months Ended
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September 30, 2012
(in thousands)
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September 30, 2011
(in thousands)
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Taxable Income (loss) before income tax
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Provision for Income Taxes
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Effective tax rate – worldwide (PRC rate)
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Reconciliation of U.S. statutory rate to effective income tax rate
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Tax rate difference (between domestic and foreign)
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Effective worldwide tax rate
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Other* - The percentage represents the expenses incurred by the Company that were not deductible or taxable for PRC income tax purposes.
The Company did not have any significant temporary differences relating to deferred tax liabilities as of September 30, 2012 or June 30, 2012. (All of the NOL has 100% allowance.) A valuation allowance for the deferred tax assets is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.
Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent such earnings are indefinitely invested outside of the U.S. As of September 30, 2012 and 2011, the above accumulated adjusted earnings of non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal income tax rate, additional U.S. income taxes would have to be provided if such earnings were remitted currently.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. The components of the deferred tax assets and liabilities are individually classified as current or non-current based on their characteristics. Deferred tax assets and liabilities are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A provision has not been made at September 30, 2012 or June 30, 2012 for U.S. or additional foreign withholding taxes of undistributed earnings of foreign subsidiaries because it is the present intention of management to reinvest the undistributed earnings indefinitely in foreign operations. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.
The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the government. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.
Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of September 30, 2012 and June 30, 2012 are not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of September 30, 2012 and June 30, 2012, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on the current PRC tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows as of September 30, 2012 and 2011.
Effective January 1, 2007, the Company adopted ASC 740-10,
“Accounting for Uncertainty in Income Taxes”
(formerly “FIN 48”, an interpretation of FASB statement No. 109), Accounting for Income Taxes. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of September 30, 2012 and June 30, 2012, the Company does not have a liability for unrecognized tax benefits, but the tax years are still open for examination.
Value Added Tax
In accordance with the relevant taxation laws in the PRC, the normal VAT rate for the Company’s Products for domestic sales is 17%, which is levied on the invoiced value of sales and is payable by the purchaser. The Company is required to remit the VAT it collects to the tax authority. The value added tax refundable represents the VAT that the Company paid for the purchasing products and can be used to deduct the VAT related to the sale of products.
NOTE 10 – PREFERRED STOCK - OCTOBER 2009 FINANCING
On October 29, 2009, the Company entered into a securities purchase agreement, with several investors, including institutional, accredited and non-US persons and entities (the “Investors”), pursuant to which the Company issued and sold units, comprised of its newly designated Series A Convertible Preferred Stock (the “Series A Preferred Stock”), and warrants (the “Warrants”), for a purchase price of US $1.10 per unit (the “October 2009 Financing”). The Company sold 13,499,274 units in the aggregate, which included (i) 13,499,274 shares of Series A Preferred Stock and (ii) Warrants to purchase an additional 13,499,274 shares of common stock at an exercise price of US $2.255 per share (the “Exercise Price”) with a three-year term. Gross proceeds totaled $14,849,201, or net proceeds of $12,381,281 net of issuance costs of $2,467,920. The Company’s placement agent also received Warrants to purchase 1,349,927 shares of the Company’s common stock as part of their compensation under the same terms as the Investors.
The Exercise Price is subject to adjustments in certain circumstances for stock splits, combinations, dividends and distributions, reclassification, exchange or substitution, reorganization, merger, consolidation or sales of assets, issuance of additional shares of common stock or equivalents. The Warrants may not be exercised if it would result in the holder beneficially owning more than 4.9% of the Company’s outstanding common shares.
Accounting for the Warrants
The Company analyzed the Warrants in accordance with ASC Topic 815 to determine whether the Warrants meet the definition of a derivative under ASC Topic 815 and, if so, whether the Warrants meet the scope exception of ASC Topic 815, which is that contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments for purposes of ASC Topic 815. The Company adopted the provisions of ASC Topic 815 subtopic 40
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”
(“ASC Topic 815 subtopic 40”) on July 1, 2009, which applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC Topic 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of adopting ASC Topic 815 subtopic 40, the Company concluded that the Warrants issued in the October 2009 Financing should be treated as a derivative liability because the Warrants are entitled to a price adjustment provision to allow the Exercise Price to be reduced in the event the Company issues or sells any additional shares of common stock at a price per share less than the then-applicable Exercise Price or without consideration, which is typically referred to as a “down-round protection” or “anti-dilution” provision. According to ASC Topic 815 subtopic 40, the “down-round protection” provision is not considered to be an input to the fair value of a fixed-for-fixed option on equity shares which leads the Warrants to fail to be qualified as indexed to the Company’s own stock and then to fail to meet the scope exceptions of ASC Topic 815. Therefore, the Company accounted for the Warrants as derivative liabilities under ASC Topic 815 (codification of EITF 00-19). Pursuant to ASC Topic 815, derivatives should be measured at fair value and re-measured at fair value with changes in fair value recorded in earnings under the other income/expense in the consolidated statement of operations at each reporting period. During the three month period ended September 30, 2012 and 2011, the Company recorded a loss on warrant re-valuation of $575,138 and a gain on warrant re-valuation of $2,126,653, respectively.
Fair Value of the Warrants
Fair value is generally based on independent sources such as quoted market prices or dealer price quotations. To the extent certain financial instruments trade infrequently or are non-marketable securities, they may not have readily determinable fair values. The Company estimated the fair value of the Warrants and Series A Preferred Stock using a Lattice Pricing Model and available information that management deems most relevant. Among the factors considered in determining the fair value of financial instruments are discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price and trading history of similarly traded securities, and other factors generally pertinent to the valuation of financial instruments. The following table provides the valuation inputs used to value the Warrants issued in connection with the October 2009 Financing.
October 2009 Financing Warrants - Valuation Inputs
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Attribute
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September 30,
2012
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June 30, 2012
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October 29, 2009
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Contractual Life (Years)*
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In accordance with ASC Topic 470-20, “
Debt with Conversion and Other Options,”
the gross proceeds of $14,849,201 from the October 2009 Financing were first allocated to the warrant derivative based on its fair value of $7,327,517 with the residual value of $7,521,684 allocated to the Series A Preferred Stock as of October 29, 2009. The remeasured fair value of the Warrants as of September 30, 2012 was $895,543.
Key Terms of October 2009 Financing
Additional key terms of the Series A Preferred Stock sold by the Company in the October 2009 Financing are described in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on November 2, 2009 and provide the relevant contractual terms and actual copies of the documents associated with the October 2009 Financing.
Stock Warrant Activity
The following is a summary of the Company’s stock warrant activity through September 30, 2012. Only one class of warrants outstanding – related to the October 2009 Financing stock warrants, adjusted for any changes in the exercise price of the stock warrants:
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Stock Warrants
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Weighted Average Exercise Price
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Outstanding – June 30, 2011
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Exercisable – June 30, 2011
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Outstanding – June 30, 2012
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Exercisable – June 30, 2012
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Outstanding – September 30, 2012
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Exercisable – September 30, 2012
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The following is a summary of the Company’s stock warrants outstanding as of September 30, 2012. Only one class of warrants outstanding – related to the October 2009 Financing stock warrants, adjusted for any changes in the exercise price of the stock warrants:
Warrants Outstanding
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Warrants Exercisable
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Range of
exercise price
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Number Outstanding
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Weighted Average Remaining
Contractual Life (in years)*
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Weighted Average Exercise Price
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Number Exercisable
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Weighted Average Exercise Price
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*The warrants’ contractual life was extended from an expiration date of October 29, 2012 until November 29, 2012 under the same terms and conditions.
NOTE 11 – STOCKHOLDERS’ EQUITY
The Company is authorized to issue 600,000,000 shares, in aggregate, consisting of 500,000,000 shares of common stock, no par value, and 100,000,000 shares of preferred stock, no par value. The Company's current Certificate of Incorporation authorizes the Board of Directors (the “Board”) to determine the preferences, limitations and relative rights of any class or series of preferred stock prior to issuance. Each such class or series must be given distinguishable designated rights prior to issuance. As of September 30, 2012, the Company had 814,643 shares of Series A Preferred Stock and 100,989,966 shares of common stock issued and outstanding. As of June 30, 2012, the Company had 914,643 shares of Series A Preferred Stock and 100,889,966 shares of common stock issued and outstanding.
Recent Sale of Securities
During the three months ended September 30, 2012, the Chief Financial Officer earned and was vested in 15,000 shares of restricted common stock pursuant to his consulting agreement. The shares have been accrued as stock based compensation, but have not been issued.
During the three months ended September 30, 2012, the holders of Series A Preferred Stock elected to convert an aggregate of 100,000 shares of such Series A Preferred Stock into an aggregate of 100,000 shares of common stock.
The above referenced transactions did not involve any underwriters, underwriting discounts or commissions, or any public offering. The issuance of these securities was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of the Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
NOTE 12 – EARNINGS PER SHARE
FASB ASC Topic 260,
“Earnings Per Share”
, requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations.
The Company only has common stock and the following convertible instruments outstanding at September 30, 2012:
1. 814,643 Preferred Shares – convertible on a 1:1 basis for common shares
2. 11,542,252 October 2009 Financing Warrants – exercisable at $2.255 per share
3. 24,000 Common Shares – issuable to officers, directors and consultants under various agreements
Total number of potential additional dilutive common shares outstanding as of September 30, 2012 was 12,380,895 from outstanding convertible instruments.
Basic earnings per share is calculated by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the assumption that all dilutive convertible shares, stock options, warrants and other equity awards were converted or exercised during the period. Dilution is computed by applying the treasury stock method. Under this method, warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The following table sets forth the computation of basic and dilutive net income per share:
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For the Three Months Ended
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September 30, 2012
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September 30, 2011
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Net income attributable to common stockholders*
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Basic weighted average outstanding shares of common stock
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Weighted number of dilutive shares
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Diluted weighted average common stock and common stock equivalents
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Dilutive* (September 30, 2011 – Restated)
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*The diluted earnings per share calculation deducts the gain from the warrant derivative liability of $2,126,653 for the three months ended September 30, 2011 from the net income attributable to common stockholders in the numerator for the diluted earnings per share. The diluted earnings per share for the three month period ended September 30, 2011, as previously reported, were $0.18 per share. The diluted earnings per share for the period were recalculated to properly apply the adjustment for the gain from the warrant derivative liability and restated to reflect the adjusted net income attributable to common shareholders of $15,709,473 for the diluted earnings per share calculation.
NOTE 13 - SEGMENT INFORMATION
The Company operates under the following business segments:
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1.
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Product Sales - The Company purchases and sells diesel, gasoline, fuel oil and solvents in the PRC.
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2.
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Agency Fees - The Company acts as an agent in the purchase and sale of the Products by other intermediaries in the PRC.
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Three Month Period Ended
September 30, 2012
(In Thousands)
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Product Sales
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Agency Fees
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Consolidated
Total
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Three Month Period Ended
September 30, 2011
(In Thousands)
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Product Sales
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Agency Fees
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Consolidated
Total
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Product Sales
The Company derives the bulk of its revenue from sales of diesel, gasoline, fuel oil and solvents. The product sales revenues are recognized when customers take possession of goods in accordance with the terms of purchase order agreements that evidence agreed upon pricing and when collectability is reasonably assured. Cost of revenues for product sales include costs to purchase and transport the product to the Company and costs, if any, to deliver the goods to the customer.
Agency Fees
Agency fee revenues consist of fees, similar to a sales commission, charged to intermediaries who lack the required licenses to purchase directly from refineries, as well as the volume purchasing capability of the Company. Agency fee revenues are recognized when there is evidence of an arrangement that specifies pricing and irrevocable receipt of product and collection has occurred. Cost of agency fee service revenues consists of selling commission, transportation or other costs, if any, associated with the agency fee arrangement. For the three month periods ended September 30, 2012 and 2011, respectively, the Company did not transport or handle the products associated with the agency fees and only acted in a broker capacity allowing other intermediaries to use its licenses to take possession of the products. The Company considers any costs associated with Agency fee revenues immaterial and has not allocated any costs to Agency fees for the three month periods ended September 30, 2012 and 2011, respectively.
NOTE 14 – ASSET PURCHASE
Longwei completed an Asset Purchase Agreement for the purchase of the assets of Huajie Petroleum Co., Ltd. (“Huajie”) on September 26, 2012. The Company acquire the assets of Huajie, a fuel storage depot in northern Shanxi Province (located in Xingyuan, Shanxi) including fuel tanks with a 100,000 metric ton storage capacity. The Company has paid RMB 700 million (approximately USD $110.6 million) for the assets. The assets were non-operational with no revenue-producing history and included land use rights for 98 acres of land, 100,000 tonnage fuel tanks with accessory facilities and equipment, a special transportation railway line, and a 3,000-square-meter office building. The Company engaged a third-party, independent valuation firm for the appraisal of the fair market value of the assets acquired. Longwei has accounted for the purchase of the assets as an asset purchase. The Company used its cash on hand and conversion of working capital assets to finance the acquisition.
Longwei has accounted for the purchase of the Huajie assets as an Asset Purchase. The Company has used this accounting treatment for the purchase of assets because the purchase does not meet the definition of a “Business” for a business combination. The accounting requirements for an acquisition of net assets or equity interests that are deemed to be an Asset Purchase differs from those used for a Business Combination, which may require audited financial statements of the entity acquired.
Because the definition of a Business in Rule 11-01(d), differs somewhat from that of ASC 805, the Company has undertaken a separate analysis under Rule 11-01(d) when evaluating the reporting requirements of SEC Regulation S-X, as well as the definition of a Business in ASC 805. Rule 11-01(d) of Regulation S-X defines a Business for determining when separate financial statements are required to be filed with the SEC. The principle in the rule is whether there is sufficient continuity in the revenue generating activity so that pre-acquisition financial statements would be meaningful to investors. The assets acquired do not meet the definition of a Business under rule 11-01(d). FASB ASC Topic 805 defines a Business as capable of being conducted and managed as an integrated set of activities utilizing its assets and requires two essential elements - inputs and processes applied to those inputs, which together are or will be used to create outputs. The assets acquired have no inputs, no operating history, no employees or other attributes described above, as well as no liabilities or encumbrances and do not meet the definition of a Business under ASC 805. Therefore, based on the Company’s evaluations performed for the purposes of determining the accounting treatment of the assets acquired, the assets do not constitute a Business as defined above and have been properly accounted for an Asset Purchase.
NOTE 15 – SUBSEQUENT EVENTS
The Company has evaluated for subsequent events up to the date the condensed consolidated financial statements were issued, and has concluded the following events need to be reported during this period:
On October 17, 2012, Holders of Series A Preferred Stock elected to convert an aggregate of 100,000 shares of such Series A Preferred Stock into an aggregate of 100,000 shares of common stock.
On October 29, 2012, the holders of Warrants elected to exercise an aggregate of 314,603 Warrants into an aggregate of 314,603 shares of common stock for aggregate proceeds to the Company of $709,430 in cash.
On November 6, 2012, the holders of Warrants elected to exercise an aggregate of 29,700 Warrants into an aggregate of 29,700 shares of common stock for aggregate proceeds to the Company of $66,974 in cash.