XASE:LPH Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period for          , 2012
 
Commission File No. 001-34793

LONGWEI PETROLEUM
INVESTMENT HOLDING LIMITED

 (Name of registrant as specified in its charter)
 
Colorado
 
84-1536518
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
No. 30 Guanghau Avenue, Wan Bailin District, Taiyuan City, Shanxi Province,China
 
030024
(Address of principal executive offices)
 
(Zip Code)
 
(727) 641-1357
 (Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 o
 
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.
  Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
(Do not check if a smaller reporting company)
o
 
Smaller reporting company
o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x
 
As of May 10, 2012, the registrant had 100,766,966 shares of its common stock issued and outstanding.
 
 
 
 
1

 
 
 
 
 TABLE OF CONTENTS
 
       
PAGE
   
PART I
   
ITEM 1.
 
Condensed Consolidated Financial Statements
 
F-1
   
Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and June 30, 2011
 
F-1
   
Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the Nine Months Ended March 31, 2012 and March 31, 2011
 
F-2
   
Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the Three Months Ended March 31, 2012 and March 31, 2011
 
F-3
   
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2012 and March 31, 2011
 
F-4
   
Notes to the Unaudited Condensed Consolidated Financial Statements
 
F-5
ITEM 2.
 
Management’s Discussion and Analysis or Plan of Operation
 
3
ITEM 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
12
ITEM 4.
 
Controls and Procedures
 
13
         
   
PART II
   
ITEM 1.
 
Legal Proceedings
 
14
ITEM 1A.
 
Risk Factors
 
14
ITEM 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
14
ITEM 3.
 
Defaults Upon Senior Securities
 
14
ITEM 4.
 
Mine Safety Disclosures
 
14
ITEM 5.
 
Other Information
 
14
ITEM 6
 
Exhibits
 
14
         
   
SIGNATURES
 
15
 
 
 
 
2

 
 
ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
Longwei Petroleum Investment Holding Limited and Subsidiaries
Condensed Consolidated Balance Sheets

 
   
March 31,
 2012
   
June 30,
 2011
 
Assets
 
(In Thousands)
 
 Current Assets:
           
   
(Unaudited)
       
Cash
 
$
6,889
   
$
9,422
 
Accounts Receivable, Net of Allowance for Doubtful Accounts of $0
as of March 31, 2012 and June 30, 2011
   
32,385
     
23,883
 
Inventories
   
61,302
     
51,489
 
Advances to Suppliers
   
90,188
     
57,756
 
                 
Total Current Assets
   
190,764
     
142,550
 
                 
 Deposit
   
87,046
     
85,093
 
 Property Plant and Equipment, Net
   
47,177
     
45,662
 
                 
Total Assets
 
$
324,987
   
$
273,305
 
                 
Liabilities and Stockholders' Equity
               
Current Liabilities:
               
                 
Accounts Payable
 
$
815
   
$
589
 
Warrant Derivative
   
2,291
     
2,893
 
Taxes Payable
   
5,858
     
8,096
 
                 
Total Current Liabilities
   
8,964
     
11,578
 
                 
Total Liabilities
   
8,964
     
11,578
 
                 
Stockholders' Equity:
               
                 
Preferred Stock, No Par Value, 100,000,000 Shares Authorized; 914,643 and 914,643
Issued and Outstanding as of March 31, 2012 and June 30, 2011
   
418
     
418
 
Common Stock, No Par Value; 500,000,000 Shares Authorized; 100,766,966 and 100,751,966
Issued and Outstanding as of March 31, 2012 and June 30, 2011
   
31,519
     
31,502
 
Additional Paid-in Capital
   
7,992
     
7,992
 
Retained Earnings
   
244,545
     
196,641
 
Other Comprehensive Income
   
31,549
     
25,174
 
                 
    Total Stockholders’ Equity
   
316,023
     
261,727
 
                 
Total Liabilities and Stockholders’ Equity
 
$
324,987
   
$
273,305
 
 
The accompanying notes to these consolidated financial statements are an integral part of these financial statements.

 
 
 
F-1

 
 

Longwei Petroleum Investment Holding Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income
 
                 
   
For the Nine Months Ended
March 31,
 
   
2012
   
2011
   
(In Thousands, Except
Per Share Data)
             
Net Sales
 
$
374,236
   
$
353,106
 
                 
Cost of Sales
   
307,983
     
283,397
 
                 
Gross Profit
   
66,253
     
69,709
 
                 
Operating Expenses
   
2,889
     
4,097
 
                 
Operating Income
   
63,364
     
65,612
 
                 
 Derivative Income (Expense)
   
602
     
(7,948
)
 Interest Income
   
12
     
12
 
 Interest Expense
   
-
     
-
 
                 
Income Before Income Tax Expense
   
63,978
     
57,676
 
                 
Income Tax Expense
   
(16,029
)
   
(16,809
)
                 
Net Income
   
47,949
     
40,867
 
                 
Foreign Currency Translation Adjustment
   
6,375
     
9,550
 
                 
Comprehensive Income
 
$
54,324
   
$
50,417
 
                 
Net Income
 
$
47,949
   
$
40,867
 
Preferred Stock Dividends Paid in Cash
   
(45
)
   
(186
)
                 
Net Income Attributable to Common Stockholders 
 
$
47,904
   
$
40,681
 
                 
Earnings per Common Share:
               
Basic
 
$
0.48
   
$
0.42
 
                 
Diluted
 
$
0.47
   
$
0.40
 
                 
Weighted Average Common Shares Outstanding:
               
Basic
   
100,762
     
96,931
 
                 
Diluted
   
101,764
     
101,508
 
 
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
 
 
 
 
F-2

 
 
 
Longwei Petroleum Investment Holding Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income
 
   
For the Three Months Ended
March 31,
 
   
2012
   
2011
   
(In Thousands, Except
Per Share Data)
             
Net Sales
 
$
129,221
   
$
119,574
 
                 
Cost of Sales
   
107,367
     
95,486
 
                 
Gross Profit
   
21,854
     
24,088
 
                 
Operating Expenses
   
913
     
1,081
 
                 
Operating Income
   
20,941
     
23,007
 
                 
 Derivative Income (Expense)
   
(733
)
   
9,221
 
 Interest Income
   
4
     
3
 
 Interest Expense
   
-
     
-
 
                 
Income Before Income Tax Expense
   
20,212
     
32,231
 
                 
Income Tax Expense
   
(5,286
)
   
(5,860
)
                 
Net Income
   
14,926
     
26,371
 
                 
Foreign Currency Translation Adjustment
   
1,874
     
3,272
 
                 
Comprehensive Income
 
$
16,800
   
$
29,643
 
                 
Net Income
 
$
14,926
   
$
26,371
 
Preferred Stock Dividends Paid in Cash
   
(15
)
   
(25
)
                 
Net Income Attributable to Common Stockholders 
 
$
14,911
   
$
26,346
 
                 
Earnings per Common Share:
               
Basic
 
$
0.15
   
$
0.26
 
                 
Diluted
 
$
0.15
   
$
0.26
 
                 
Weighted Average Common Shares Outstanding:
               
Basic
   
100,767
     
100,197
 
                 
Diluted
   
101,796
     
102,137
 
 
The accompanying notes to consolidated financial statements are an integral part of these financial statements.

 
 
 
F-3

 
 
 
  Longwei Petroleum Investment Holding Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 
   
For the Nine Months Ended
March 31,
 
   
2012
   
2011
 
   
(In Thousands)
 
Cash Flows From Operating Activities:
           
Net Income
 
$
47,949
   
$
40,867
 
                 
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
               
        Depreciation and Amortization
   
1,580
     
1,399
 
        Stock Based Compensation
   
17
     
857
 
        Changes in Warrant Derivative Liability
   
(602
)
   
7,948
 
        (Increases) Decreases in Assets:
               
                  Accounts Receivable
   
(7,955
)
   
(915
)
                  Inventories
   
(8,631
)
   
(22,451
)
                  Advances to Suppliers
   
(31,106
)
   
28,007
 
         Increases (Decreases) in Liabilities:
               
                  Accounts Payable
   
213
     
(189
)
                  Taxes Payable
   
(2,424
)
   
(2,258
)
Net Cash Provided By (Used in) Operating activities
   
(959
)
   
53,265
 
                 
Cash Flows From Investing Activities:
               
         Purchase and Improvements to Land and Buildings
   
(2,057
)
   
(1,960
)
         Deposit made to Acquire Fixed Assets
   
-
     
(32,232
)
Net Cash Provided By (Used in) Investing Activities
   
(2,057
)
   
(34,192
)
                 
Cash Flows From Financing Activities:
               
         Payment of Dividends
   
(45
)
   
(186
)
         Proceeds from the Exercise of Warrants
   
-
     
2,908
 
Net Cash Provided By (Used in) Financing Activities
   
(45
)
   
2,722
 
                 
Effect of Exchange Rate Changes in Cash
   
528
     
443
 
                 
(Decrease) Increase in Cash
   
(2,533
)
   
22,238
 
                 
Cash, Beginning of Period
   
9,422
     
10,125
 
                 
Cash, End of Period
 
$
6,889
   
$
32,363
 
                 
Supplemental Cash Flow Information:
               
         Cash Paid During the Year for:
               
                Income Taxes
 
$
18,303
   
$
17,250
 
                 
Supplemental Schedule of Noncash Investing and Financing Activities:
               
         Conversion of Preferred Stock into Common Stock
 
$
-
   
$
  2,572
 
 
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 

 
 
 
F-4

 
 
 
Longwei Petroleum Investment Holding Limited and Subsidiaries
Footnotes to the Unaudited Condensed Consolidated Financial Statements

 
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 total storage capacity for its Products of 120,000 metric tons located at its fuel depot storage facilities in Taiyuan and in Gujiao, Shanxi (“Gujiao”), with 50,000 metric tons and 70,000 metric tons of capacity, respectively at each location. The Gujiao facility was acquired in January of 2009 and commenced operations in November of 2009. The Company is 1 of 3 licensed intermediaries in Taiyuan and the sole licensed intermediary in Gujiao 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 coal mining operations, power supply customers, large-scale gas stations and small, independent gas stations. The Company also earns revenue under an agency fee 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. 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.
 
In June 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification ("Codification" or "ASC") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.  All accounting references have been updated and therefore, FASB references have been replaced with ASC references.

Principles of Consolidation
 
The consolidated financial statements, prepared in accordance with GAAP, include the assets, liabilities, revenues, expenses and cash flows of the Company and all of its subsidiaries. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books and records of the Company’s subsidiaries to present them in conformity with GAAP.  Many of our estimates and assumptions involved in the application of GAAP may have a material impact on reported financial condition, and operation performance and on the comparability of such reported information over different reporting periods. All significant intercompany balances and transactions have been eliminated in consolidation.  The accompanying consolidated financial statements are presented in U.S. Dollars.
 
 
 
 
F-5

 
 
 
  Subsidiaries
State and Countries 
Registered In
 
Percentage of
 Ownership
 
Longwei Petroleum Investment Holding Limited
British Virgin Islands
    100.0
%
 
Taiyuan Yahua Energy Conversion Ltd.
People’s Republic of China
    100.0
%
 
Shanxi Zhonghe Energy Conversion Ltd.
People’s Republic of China
    100.0 % (a)
Taiyuan Longwei Economy & Trading Ltd.
People’s Republic of China
    100.0 % (a)
Shanxi Heitan Zhingyou Petrochemical Co., Ltd
People’s Republic of China
    100.0 % (a)
 
(a)
A total of 95% of the ownership units are held by the Company’s subsidiaries. The remaining 5% of the ownership units are held in trust for the benefit of the Company’s subsidiaries in accordance with local Chinese regulations, therefore no non-controlling interest is recognized.  The 5% ownership units are held in trust by our Chairman and CEO, Mr. Cai Yongjun, for the benefit of Taiyuan Yahua Energy Conversion Ltd. and Shanxi Zhonghe Energy Conversion Ltd.  The 5% ownership unit held in trust for the benefit of Taiyuan Longwei Economy & Trading Ltd. is held by an individual who is also an employee of the Company. This ownership structure is organized to comply with PRC and local business ownership requirements.
 
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, 2011 as filed in the Company Form 10-K filed with the SEC on September 13, 2011.

Use of Estimates
 
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We base these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events.  These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  By their nature, estimates are subject to an inherent degree of uncertainty.  Actual results may differ from management’s estimates.  The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
 
Foreign Currency Translation and Other Comprehensive Income
 
The accounts of the Company’s PRC subsidiaries are maintained in the PRC Renminbi (“RMB”) and the accounts of the US parent company are maintained in the US Dollar (“USD”).   The accounts of the PRC subsidiaries were translated into USD in accordance with the provisions of FASB ASC Topic 830, “Foreign Currency Matters”, with the RMB as the functional currency for the PRC subsidiaries.  According to ASC 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates; and statement of income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC Topic 220, “Comprehensive Income,” which establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements.
 
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 gain of $1,873,527 and a gain of $3,272,004 for the three month periods ended March 31, 2012 and 2011, respectively.  The total comprehensive income was a gain of $6,374,869 and a gain of $9,550,124 for the nine month periods ended March 31, 2012 and 2011, respectively.
 
Accumulated other comprehensive income related to the foreign currency translation in the consolidated statement of shareholders’ equity amounted to $31,548,931 and $25,174,062 as of March 31, 2012 and June 30, 2011, respectively.  The balance sheet amounts with the exception of equity at March 31, 2012 and June 30, 2011 were translated at RMB 6.3185 to $1.00 USD and RMB 6.4635 to $1.00 USD, respectively.  The average translation rates applied to income statement amounts for the three month periods ended March 31, 2012 and 2011 were at RMB 6.3088 to $1.00 USD and RMB 6.5804 to $1.00 USD, respectively.  The average translation rates applied to income and cash flow statement amounts for the nine month periods ended March 31, 2012 and 2011 were at RMB 6.3626 to $1.00 USD and RMB 6.6703 to $1.00 USD, respectively.
 
 
F-6

 
 
 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 for banks located in the US.  Balances at financial institutions or state owned banks within the PRC are not insured and amounted to $6,043,836 and $7,940,056 at March 31, 2012 and June 30, 2011, respectively.  As of March 31, 2012 and June 30, 2011, the Company had $476,724 and $1,227,500, 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.
 
The Company is susceptible to credit risk on accounts receivable from customers and advances to suppliers.  Generally, the Company does not obtain security from its customers or vendors in support of these accounts.
 
Payments of dividends may be subject to some restrictions due to the fact that the operating activities are conducted in subsidiaries residing in the PRC.
 
Fair Value Measurements
 
Effective January 1, 2009, the FASB ASC Topic 825, “Financial Instruments,” requires disclosure about fair value of financial instruments.
 
To clarify the definition of fair value for financial reporting, the Company applies the provisions of FASB ASC Subtopic 820-10, “Fair Value Measurements” (FASB Statement No. 157, “Fair Value Measurements”), for fair value measurements of financial assets and financial liabilities and for the fair value measurements of non financial items that are recognized or disclosed at fair value in the financial statements.  FASB ASC Subtopic 820-10 also establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
 
FASB ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurement for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

FASB ASC Subtopic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  FASB ASC Subtopic 820-10 establishes three levels of inputs that may be used to measure fair value.  The hierarchy gives highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).  The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.  These inputs are summarized in the three broad levels listed below.
 
 
Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
 
 
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).
 
 
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
 
The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a nonrecurring basis are those that are adjusted to fair value when a significant event occurs.  The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.  The Company had a warrant derivative liability carried at fair value on a recurring basis at March 31, 2012.
 
 
F-7

 
 
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as reported during the nine months ended March 31, 2012, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).  A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
 
Description
 
Level 1:
Quoted Prices in Active Markets for Identical Assets
   
Level 2:
Significant Other Observable Inputs
   
Level 3:
Significant Unobservable Inputs
   
Total at
March 31, 2012
 
                         
Warrant Derivative Liability
 
$
-
   
$
2,291,057
   
$
-
   
$
2,291,057
 
                                 
Total
 
$
-
   
$
2,291,057
   
$
-
   
$
2,291,057
 
 
The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction.  For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion.  For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
 
Valuation Techniques
 
The Company’s financial assets valued based upon Level 2 inputs are comprised of detached common stock purchase warrants, namely the stock warrants issued in connection with the Company’s October 2009 financing.  The Company estimated the fair value of the derivative liabilities 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 flow, 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 Company did not identify any other nonrecurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.
 
Reclassification
 
Certain reclassifications have been made to the consolidated financial statements as of June 30, 2011 and for the nine and three months ended March 31, 2011 in order to conform to the condensed consolidated financial statement presentation as of and for the nine and three months ended March 31, 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. 2011-12 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.
 
 
F-8

 
 
Segment Reporting

The Company uses the management approach in determining operating segments.  The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decision, allocating resources and assessing performance as the source of determining the Company’s reportable operating segments.  The Company’s chief executive officer has been identified as the chief operating decision maker.  The Company has determined that it has two reportable operating segments as defined by FASB ASC Subtopic 280-10, “Segment Reporting: Overall”, which are the wholesale distribution of petroleum products, wherein the Company takes possession of the product, and agency fees earned as a sales commission, wherein the Company does not take possession of the product.

NOTE 3 – COMMITMENTS AND CONTINGENCIES
 
Commitments

The Company has no rent expense or lease commitments for the nine and three month periods ended March 31, 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 several refineries for inventory in the amount of $90,188,004, 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 March 31, 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 March 31, 2012 and June 30, 2011 consisted of the following:
 
   
March 31, 2012
(in thousands)
 
June 30, 2011
(in thousands)
 
           
Trade Accounts Receivable
 
$
32,385
   
$
23,883
 
Less: Allowance for Doubtful Accounts
   
-
     
-
 
Totals
 
$
32,385
   
$
23,883
 
 
 
F-9

 
 
NOTE 5 – INVENTORIES
 
As of March 31, 2012 and June 30, 2011, inventory consisted of significant quantities of diesel and gasoline, among others, as outlined herein:
 
   
March 31, 2012
(in thousands)
   
June 30, 2011
(in thousands)
 
             
Diesel
 
$
          32,484
   
$
26,748
 
Gasoline
   
27,847
     
23,907
 
Fuel Oil
   
468
     
548
 
Solvents
   
503
     
286
 
Total
 
$
61,302
   
$
51,489
 
 
NOTE 6 – ADVANCES TO SUPPLIERS
 
As of March 31, 2012 and June 30, 2011, 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.

   
March 31, 2012
(in thousands)
   
June 30, 2011
(in thousands)
 
             
Advances to Suppliers
 
$
90,188
   
$
57,756
 
Total
 
$
90,188
   
$
57,756
 

NOTE 7 – DEPOSIT

Longwei entered into a letter of intent with Shangxi Jiangtong Chemicals Co., Ltd. (“Jiangtong”) to acquire the assets of Jiangtong’s wholly-owned subsidiary Huajie Petroleum Co., Ltd. (“Huajie”).  The Company intends to acquire the assets of 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 a deposit of 550 million RMB (approximately USD $87.0 million) toward the full purchase price of 700 million RMB (approximately USD $110.8 million).  The assets are non-operational with no revenue-producing history and include 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 acqusition is subject to final due diligence and board approval.  The Company intends to use its cash on hand, bank and other financing, and working capital assets to finance the acquisition.
 
The Company engaged a third-party, independent valuation firm for the appraisal of the fair market value of the assets to be acquired.  Longwei will account for the purchase of the proposed assets as an asset purchase.  The Company will use 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 to be 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 to be 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 to be acquired, the assets do not constitute a business as defined above and should be properly accounted for as an asset purchase.

 
F-10

 
 
NOTE 8 – PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consisted of the following: 
 
March 31, 2012
(in thousands)
   
June 30, 2011
(in thousands)
 
                 
Buildings
 
$
5,375
   
$
5,617
 
Machinery and  Storage Equipment
   
36,890
     
32,816
 
Railway
   
14,291
     
14,698
 
Motor Vehicles
   
293
     
287
 
Total Property, Plant and Equipment
   
56,849
     
53,418
 
   Less: Accumulated Depreciation
   
(9,672
)
   
(7,756
)
Property, Plant and Equipment, net
   
47,177
     
45,662
 
 
Depreciation expense for the nine months ended March 31, 2012 and 2011 was $1,579,932 and $1,399,176, respectively.  Depreciation expense for the three months ended March 31, 2012 and 2011 was $534,850 and $469,078, respectively.

NOTE 9 – TAXES
 
Taxes payable consisted of the following: 
 
   
March 31, 2012
(in thousands)
   
June 30, 2011
(in thousands)
 
             
Income Tax Payable
 
$
4,871
   
$
6,516
 
Value Added Tax Payable
   
862
     
1,404
 
Business Taxes and Other Payables
   
125
     
176
 
Total
 
$
5,858
   
$
8,096
 
 
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. and Shanxi Zhonghe Energy Conversion Ltd. are taxed pursuant to the New EIT Law with a unified enterprise income tax rate of 25%. Neither company had income taxes due during the nine month or three month periods ended March 31, 2012 and 2011.  Since these two entities have minimal business operations, the two 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 subsidiaries of Taiyuan Longwei Economy & Trading Ltd. and its subsidiary Shanxi Heitan Zhingyou Petrochemical Co. Ltd. (Gujiao operations) are taxed pursuant to the New EIT Law with a unified enterprise income tax rate of 25%.  These entities had taxes due during the three months ended March 31, 2012 and 2011 of $5,285,942 and $5,859,878, respectively.  These entities had taxes due during the nine months ended March 31, 2012 and 2011 of $16,029,457 and $16,809,044, 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 March 31, 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 March 31, 2012 and 2011.
 
 
F-11

 

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 March 31, 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 nine and three month periods ended March 31, 2012 or 2011, respectively.
 
 
For the Nine Months Ended
 
 
March 31, 2012
(in thousands)
   
March 31, 2011
(in thousands)
 
Taxable Income (loss) before income tax
         
United States
 
$
(741
)
 
$
(1,448
)
PRC
   
64,117
     
67,072
 
    Total
 
$
63,376
   
$
65,624
 
                 
Provision for Income Taxes
               
Current income tax
 
$
16,029
   
$
16,809
 
Deferred income tax
   
-
     
-
 
    Total
 
$
16,029
   
$
16,809
 
                 
Effective tax rate – worldwide (PRC rate)
   
25
%
   
26
%
                 
Reconciliation of U.S. statutory rate to effective income tax rate
         
Statutory U.S. tax rate
   
34
%
   
34
%
Tax rate difference (between domestic and foreign)
   
-9
%
   
-9
%
Other*
   
0
%
   
1
%
Effective worldwide tax rate
   
25
%
   
26
%
 
 
For the Three Months Ended
 
 
March 31, 2012
(in thousands)
   
March 31, 2011
(in thousands)
 
Taxable Income (loss) before income tax
         
United States
 
$
(198
)
 
$
(429
)
PRC
   
21,143
     
23,439
 
    Total
 
$
20,945
   
$
23,010
 
                 
Provision for Income Taxes
               
Current income tax
 
$
5,286
   
$
5,860
 
Deferred income tax
   
-
     
-
 
    Total
 
$
5,286
   
$
5,860
 
                 
Effective tax rate – worldwide (PRC rate)
   
25
%
   
25
%
                 
Reconciliation of U.S. statutory rate to effective income tax rate
         
Statutory U.S. tax rate
   
34
%
   
34
%
Tax rate difference (between domestic and foreign)
   
-9
%
   
-9
%
Other*
   
0
%
   
0
%
Effective worldwide tax rate
   
25
%
   
25
%
 
Other* - The percentage represents the expenses incurred by the Company that were not deductable for PRC income tax.
 
The Company did not have any significant temporary differences relating to deferred tax liabilities as of March 31, 2012 or June 30, 2011.  (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.
 
 
F-12

 
 
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 March 31, 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 March 31, 2012 or June 30, 2011 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 March 31, 2012 and June 30, 2011 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 March 31, 2012 and June 30, 2011, 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 March 31, 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 March 31, 2012 and June 30, 2011, the Company does not have a liability for unrecognized tax benefits.

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 “Closing Date”), the Company entered into a securities purchase agreement (the “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.
 
 
F-13

 
 
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 Conversion 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 nine month period ended March 31, 2012 and 2011, the Company recorded a gain on warrant re-valuation of $602,413 and a loss on warrant re-valuation of $7,947,841, respectively.  During the three month period ended March 31, 2012 and 2011, the Company recorded a loss on warrant re-valuation of $733,177 and a gain on warrant re-valuation of $9,220,821, 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
 
 
Attribute
 
March 31, 2012
   
June 30, 2011
   
October 29, 2009
 
Stock Price
 
$
1.68
   
$
1.48
   
$
2.05
 
Risk Free Interest Rate
   
0.51
%
   
0.81
%
   
1.50
%
Volatility
   
68.6
%
   
64.0
%
   
63.9
%
Exercise Price
 
$
2.255
   
$
2.255
   
$
2.255
 
Dividend Yield
   
0
%
   
0
%
   
0
%
Contractual Life (Years)
   
0.59
     
1.35
     
3.00
 
Fair Market Value
 
$
2,291,057
   
$
2,893,470
   
$
7,327,517
 
 
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 March 31, 2012 was $2,291,057.
 
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.
 
 
F-14

 
 
Stock Warrant Activity
 
The following is a summary of the Company’s stock warrant activity through March 31, 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:
 
   
Stock Warrants
   
Weighted Average Exercise Price
 
Outstanding – June 30, 2010
   
14,849,201
   
$
2.255
 
Exercisable – June 30, 2010
   
14,849,201
   
$
2.255
 
Granted
   
-
   
$
-
 
Exercised
   
(3,306,949)
   
$
2.255
 
Forfeited/Cancelled
   
-
   
$
 -
 
Outstanding – June 30, 2011
   
11,542,252
   
$
2.255
 
Exercisable – June 30, 2011
   
11,542,252
   
$
2.255
 
Granted
   
-
   
$
-
 
Exercised
   
-
   
$
-
 
Forfeited/Cancelled
   
-
   
$
-
 
Outstanding – March 31, 2012
   
11,542,252
   
$
2.255
 
Exercisable – March 31, 2012
   
11,542,252
   
$
2.255
 
  
The following is a summary of the Company’s stock warrants outstanding as of March 31, 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
   
Warrants Exercisable
 
Range of
exercise price
   
Number Outstanding
 
Weighted Average Remaining
Contractual Life (in years)
 
Weighted Average Exercise Price
   
Number Exercisable
   
Weighted Average Exercise Price
 
$
2.255
     
11,542,252
 
0.59 years
 
$
2.255
     
11,542,252
   
$
2.255
 
 
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 March 31, 2012, the Company had 914,643 shares of Series A Preferred Stock and 100,766,966 shares of common stock issued and outstanding.  As of June 30, 2011, the Company had 914,643 shares of Series A Preferred Stock and 100,751,966 shares of common stock issued and outstanding.
 
Recent Sale of Securities

During the three months ended March 31, 2012, the Chief Financial Officer earned and was vested in 15,000 shares of restricted common stock pursuant to his consulting agreement.  

As of March 31, 2012, the Company has accrued 99,000 shares of restricted common stock previously reported under stock based compensation to the following persons:

(1) 30,000 shares of restricted common stock to be issued to its Chief Financial Officer,
(2) 60,000 shares of restricted common stock to be issued to consultants,
(3) 9,000 shares of restricted common stock to be issued to its directors.
 
Such securities have not been registered under the Securities Act of 1933. The issuance of these shares will be exempted from registration pursuant to Section 4(2) of the Securities Act of 1933.

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.
 
 
F-15

 
 
The Company only has common stock and the following convertible instruments outstanding at March 31, 2012:
 
1.        914,643 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.        114,000 Common Shares – issuable to officers, directors and consultants under various agreements

Total number of potential additional dilutive common shares outstanding as of March 31, 2012 was 12,570,895 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:
 
   
For the Nine Months Ended
 
   
March 31, 2012
   
March 31, 2011
 
Net income attributable to common stockholders
 
$
47,904,032
   
$
40,681,747
 
                 
Basic weighted average outstanding shares of common stock
   
100,762,002
     
96,931,079
 
Weighted number of dilutive shares
   
1,002,014
     
4,577,187
 
Diluted weighted average common stock and common stock equivalents
   
101,764,016
     
101,508,266
 
                 
Earnings per share:
               
Basic
 
$
0.48
   
$
0.42
 
Dilutive
 
$
0.47
   
$
0.40
 
 
   
For the Three Months Ended
 
   
March 31, 2012
   
March 31, 2011
 
Net income attributable to common stockholders
 
$
14,911,182
   
$
26,346,201
 
                 
Basic weighted average outstanding shares of common stock
   
100,766,966
     
100,197,482
 
Weighted number of dilutive shares
   
1,028,643
     
3,834,322
 
Diluted weighted average common stock and common stock equivalents
   
101,795,609
     
102,136,976
 
                 
Earnings per share:
               
Basic
 
$
0.15
   
$
0.26
 
Dilutive
 
$
0.15
   
$
0.26
 

NOTE 13 - SEGMENT INFORMATION
 
The Company operates under the following business segments:
 
 
1. 
Product Sales - The Company purchases and sells diesel, gasoline, fuel oil and solvents in the PRC.
 
2. 
Agency Fees - The Company acts as an agent in the purchase and sale of the Products by other intermediaries in the PRC.
 
                        
   
Nine Month Period Ended
March 31, 2012
(In Thousands)
 
   
Product Sales
   
Agency Fees
   
Consolidated
Total
 
Net Sales
 
$
359,036
   
$
15,200
   
$
374,236
 
Cost of Sales
   
307,983
     
-
     
307,983
 
Operating Income
   
48,164
     
15,200
     
63,364
 
Segment Assets
   
324,987
     
-
     
324,987
 
Segment Liabilities
   
8,964
     
-
     
8,964
 
Segment Purchases
   
2,045
     
-
     
2,045
 
 
 
F-16

 
 
   
Nine Month Period Ended
March 31, 2011
(In Thousands)
 
   
Product Sales
   
Agency Fees
   
Consolidated
Total
 
Net Sales
 
$
336,397
   
$
16,709
   
$
353,106
 
Cost of Sales
   
283,397
     
-
     
283,397
 
Operating Income
   
54,081
     
11,531
     
65,612
 
Segment Assets
   
247,312
     
-
     
247,312
 
Segment Liabilities
   
10,898
     
-
     
10,898
 
Segment Purchases
   
1,960
     
-
     
1,960
 
  
   
Three Month Period Ended
March 31, 2012
(In Thousands)
 
   
Product Sales
   
Agency Fees
   
Consolidated
Total
 
Net Sales
 
$
124,851
   
$
4,370
   
$
129,221
 
Cost of Sales
   
107,367
     
-
     
107,367
 
Operating Income
   
16,571
     
4,370
     
20,941
 
Segment Assets
   
324,987
     
-
     
324,987
 
Segment Liabilities
   
8,964
     
-
     
8,964
 
Segment Purchases
   
13
     
-
     
13
 

   
Three Month Period Ended
March 31, 2011
(In Thousands)
 
   
Product Sales
   
Agency Fees
   
Consolidated
Total
 
Net Sales
 
$
114,396
   
$
5,178
   
$
119,574
 
Cost of Sales
   
95,486
     
-
     
95,486
 
Operating Income
   
17,829
     
5,178
     
23,007
 
Segment Assets
   
247,312
     
-
     
247,312
 
Segment Liabilities
   
10,898
     
-
     
10,898
 
Segment Purchases
   
-
     
-
     
-
 

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 nine month and three month periods ended March 31, 2012 and 2011, respectively, the Company stopped transporting or handling 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 nine month or three month periods ended March 31, 2012 and 2011, respectively.

 NOTE 14 – SUBSEQUENT EVENTS
 
The Company has evaluated for subsequent events up to the date the condensed consolidated financial statements were issued, and has concluded no events need to be reported during this period.

 
 
 
F-17

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS.

This report contains forward-looking statements that involve risks and uncertainties. We generally use words such as “believe,” “may,” “could,” “will,” “intend,” “expect,” “anticipate,” “plan,” and similar expressions to identify forward-looking statements, including statements regarding our ability to continue to generate new business based on our sales and marketing efforts, referrals and existing relationships, our financing strategy and ability to access the capital markets and other risks discussed in our Risk Factor section included in our Form 10-K for the year ended June 30, 2011, as filed with the Securities and Exchange Commission on September 13, 2011. Although we believe the expectations expressed in the forward-looking statements included in this Form 10-Q are based on reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause our actual results to differ materially from those expressed in any forward-looking statements. We cannot assure you that the results or developments expected or anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

Highlights and Executive Summary

Longwei Petroleum Investment Holding Limited (the “Company”) is an energy company engaged in the wholesale distribution of finished petroleum products in the PRC.  Our oil and gas operations consist of transporting, storage and selling finished petroleum products, entirely in the PRC.  We purchase diesel, gasoline, fuel oil and solvents from various petroleum refineries in the PRC. Our headquarters are located in Taiyuan, Shanxi Province. We have a total storage capacity for our products of 120,000 metric tons located at our fuel depot storage facilities in Taiyuan and in Gujiao, Shanxi, with 50,000 metric tons and 70,000 metric tons capacity, respectively at each location. The Gujiao facility was acquired in January of 2009 and commenced operations in November of 2010.  We are 1 of 3 licensed intermediaries in Taiyuan and the sole licensed intermediary in Gujiao that operates its own large scale storage tanks. We have the necessary licenses to operate and sell products not only in Shanxi but throughout the entire PRC.  Our storage tanks have the largest storage capacity of any private enterprise in Shanxi.  We seek to earn profits by selling our products at competitive prices with timely delivery to coal mining operations, power supply customers, large-scale gas stations and small, independent gas stations. We also earn revenue under an agency fee 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 our facilities. The sales price and the cost basis of our products is largely dependent on regulations and 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 our control.

We were incorporated under the laws of the State of Colorado on March 17, 2000 as Tabatha II, Inc.  On October 12, 2007, we changed our name to Longwei Petroleum Investment Holding Limited.

RESULTS OF OPERATIONS 

(All numbers referenced are "in thousands,” except price per metric ton “mt” and earnings per share)
 
For the Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011
 
Revenues

For the three months ended March 31, 2012, we reported revenues of $129,221, an increase of $9,647 or 8.1% from revenues of $119,574 reported for the three months ended March 31, 2011.  Our Taiyuan and Gujiao fuel storage depots generated revenues of $60,558 and $64,293, respectively, and we earned an additional $4,370 in agency fees during the three months ended March 31, 2012.  During this period our product mix was approximately split between diesel (52%), gasoline (47%), and other petroleum products (1%) sales.  The sales increase was due to the increase in product sales price.  The weighted average sales price per metric ton (“mt”) of petroleum products sold increased approximately 16.0% to $1,226/mt from $1,057/mt during the three months ended March 31, 2012 and 2011, respectively. 
   
For the Three Months Ended
       
   
March 31,
   
March 31,
       
(in thousands, except metric tons)
 
2012
   
2011
   
% Change
 
Product Sales:
                 
   Taiyuan Facility
 
$
60,558
   
$
63,100
     
(4.0%
)
   Gujiao Facility
   
64,293
     
51,296
     
25.3%
 
Total Product Sales
   
124,851
     
114,396
     
9.1%
 
                         
Agency Fees
   
4,370
     
5,178
     
(15.6%
)
                         
Total Revenues
 
$
129,221
   
$
119,574
     
8.1%
 
                         
Sales Volume: (mt)
                       
   Taiyuan Facility
   
49,956
     
60,140
     
(16.9%
)
   Gujiao Facility
   
51,900
     
48,076
     
8.0%
 
Total Sales Volume
   
101,856
     
108,216
     
(5.9%
)
                         
Weighted average selling price per mt
 
$1,226/mt
   
$1,057/mt
     
16.0%
 
 
 
3

 
 
 
We continue to allocate product sales between our two facilities, Taiyuan and Gujiao, to better serve our customer base.   The two facilities are approximately 30 kilometers apart and their service markets overlap.  Total sales volume for the three month period ended March 31, 2012 dropped 5.9% to 101,856mt from 108,216mt for the three month period ended March 31, 2011.  The drop in volume was primarily due to rising fuel prices between the periods and the PRC’s attempts to slow down economic growth.  During this timeframe we also declined certain sales opportunities to maintain our margins during a period of rising inventory costs, as well as carefully managed our cash flow due to the large deposit paid for the Huajie Petroleum assets.  The deposit of $87,046 has been paid in cash generated through operations.

The increase in the price per mt of petroleum products was due to the increase in international crude oil prices and corresponding price increases set by the PRC to retail petroleum prices.  During the time from three month period ended March 31, 2011 through the three month period ended March 31, 2012, the PRC increased retail petroleum prices four times, but decreased retail prices once in October 2011.
 
Brent Crude Price vs. PRC Retail Prices – Price Trend Lines
 
 
 
 
Sales for our third fiscal quarter of 2012 (three months ended March 31, 2012) increased $2,837 or 2.2% to $129,221 from $126,384 for the second fiscal quarter of 2012 (three months ended December 31, 2011).   During the third fiscal quarter of 2012 the weighted average sales price per mt of petroleum products sold increased approximately $50/mt or 4.3% to $1,226/mt from $1,176/mt  because of retail price increases in both February 2012 (300 RMB or approximately $48/mt) and March 2012 (600RMB or approximately $95/mt).  These price increases more closely aligned the PRC retail petroleum prices to the world prices based on the increase in crude oil prices.

Our volume sales decreased 1,089mt or 1.1% during the third fiscal quarter of 2012 to 101,856mt from 102,945mt for the second fiscal quarter of 2012.  The Chinese New Year is typically celebrated during our third fiscal quarter ended March 31.  During this national holiday celebration the Company’s operating activities are significantly curtailed for approximately two weeks.
 
 
4

 

Costs of Sales

Costs of sales increased by $11,881 or 12.4% to $107,367 for the three months ended March 31, 2012 compared to $95,486 for the three months ended March 31, 2011.  As a percentage of total revenues our total cost of sales between the periods increased by 3.2% as a percentage of revenues to 83.1% from 79.9%.  The increase in cost of sales was primarily due to higher weighted average inventory costs during a period of rising international prices and a period of lower retail prices implemented by the PRC in October 2011.  The PRC retail price was subsequently increased in February and March 2012 to more accurately reflect worldwide crude oil prices.

The Company also experienced a drop in agency fee revenues of $808 or 15.6% to $4,370 during the three months ended March 31, 2012 compared to $5,178 during the three months ended March 31, 2011.  When the Company earns higher agency fees, the net effect lowers the percentage of total cost of sales because there are no costs associated with the agency fees.

We pay market prices from our refinery suppliers and carefully manage our inventory levels to adjust to pricing fluctuations. The three-month weighted average cost basis per metric ton of petroleum product we sold increased by $172/mt or 19.5% to $1,054mt from $882/mt during the three months ended March 31, 2012 and 2011, respectively.  During the three month period ended March 31, 2012, the Company’s gross profit margin on product sales declined 15.7% to 14.0% from 16.6% during the three month period ended March 31, 2011, because of higher inventory costs due to rising international crude oil prices.
 
   
For the Three Months Ended
     
   
March  31,
   
March 31,
     
   
2012
   
2011
 
% Change
 
Product Sales Revenue and Cost per metric ton (“mt”)
               
   Weighted average selling price/mt
$
1,226/mt
 
$
1,057/mt
   
16.0
%
   Weighted average cost/mt
 
1,054/mt
   
882/mt
   
19.5
%
Gross profit/mt
$
172/mt
 
$
175/mt
   
(1.7
%)
                   
Gross profit margin
 
14.0%
   
16.6%
   
(15.7
%)
 
Cost of sales for our third fiscal quarter of 2012 (three months ended March 31, 2012) increased $3,365 or 3.2% to $107,367 from $104,002 for the second fiscal quarter of 2012 (three months ended December 31, 2011).   As a percentage of total revenues our total cost of sales between the quarters increased by 0.8% as a percentage of revenues to 83.1% from 82.3%.  The increase in the total cost of sales as a percentage of total revenues was primarily because of the decrease in agency fee revenues of $921 or 17.4% to $4,370 during the three months ended March 31, 2012 compared to $5,291during the three months ended December 31, 2011.  When the Company earns higher agency fees, the net effect lowers the percentage of total cost of sales because there are no costs associated with the agency fees.

During the third fiscal quarter of 2012 the weighted average cost per mt of petroleum products sold increased approximately $44/mt or 4.4% to $1,054/mt from $1,010/mt during the second fiscal quarter of 2012 because of rising international crude prices.  However, the gross profit on product sales improved $6/mt or 3.6% to $172/mt (14.0% gross profit margin on product sales) during the three months ended March 31, 2012 as compared to $166/mt (14.1% gross profit margin on product sales) during the three months ended December 31, 2011.  The improved gross profit is primarily due to the PRC price increases in February and March 2012 to more accurately reflect worldwide crude oil process.

The cost basis of finished petroleum products fluctuates during the year due to the pricing mechanism in place in the PRC.  The price of finished petroleum products is established by a PRC regulatory body, National Regulatory Development Commission (“NDRC”), under a formula based on the movement of international prices over a look-back period of 22 working days and generally resets when the price increases or decreases by 4%.  The NDRC adjusts domestic finished oil prices by modifying the retail price of gasoline and diesel in all provinces, which has an upstream pricing effect over the wholesale price of finished oil products.  We attempt to manage our costs by utilizing our storage capacity to adjust inventory levels based on the anticipated movement of industry pricing to take advantage of pricing and supply and demand fluctuations within the marketplace.  The Company’s average age of inventory for the three months ended March 31, 2012 was approximately 50 days as the Company held more inventory to take advantage of additional product purchases for on-hand inventory during a period of rising prices by utilizing our large storage capacity.  This compares to the Company’s average age of inventory for the three months ended March 31, 2011 of approximately 51 days also during a time rising prices for international crude oil.  During this time we also increased our advances to suppliers to lock in pricing based on uncertainty associated with the international crude oil price fluctuations from tensions in the Middle East.  The Company is continually working to optimize its inventory turnover, which expands sales capacity based on increased inventory movement.  In times of anticipated rising prices the Company tries to lock-in pricing and increase inventory on-hand prior to the PRC pricing mechanism adjusting the set retail price upwards.  Our supplier advance balance with refineries allows us to lock-in pricing and supply so that we can react quickly to purchases based on anticipated movements in the international price of crude oil and the timing of the PRC pricing levels adjustments.
 
Operating Expenses

Operating expenses for the three months ended March 31, 2012 decreased $168 or 15.5% to $913 as compared to $1,081 for the three months ended March 31, 2011, due primarily to lower professional fees paid during the period.  As a percentage of revenues, operating expenses declined to 0.7% for the three months ended March 31, 2012 from 0.9% for the three months ended March 31, 2011.  Operating expenses during 2012 included non-cash expenses of $535 in depreciation and $17 in accrued stock based compensation.  The Company paid approximately $361 in cash payments for salaries, consulting and professional fees, insurance and travel primarily related to fees and expenses for administration and the operations of the public company.  Operating expenses during 2011 included non-cash expenses of $469 in depreciation and $227 in stock based compensation.  The Company paid $385 in cash payments for salaries, consulting and professional fees, insurance and travel primarily related to fees and expenses for administration and the operations of the public company.  

Operating Income

Operating income for the three months ended March 31, 2012 decreased $2,066 or 9.0% to $20,941 from $23,007 for the three months ended March 31, 2011, primarily due to the price increases in the petroleum market and retail price decrease in the PRC, which reduced the Company’s overall gross profit margin 3.2% between the periods.
 
 
5

 

Income Before Taxes

Income before taxes for the three months ended March 31, 2012 decreased $12,019 or 37.3% to $20,212 as compared to $32,231 for the three months ended March 31, 2011 primarily due to the increase in other income/expenses associated with the accounting for the non-cash warrant derivative liability charge.

Other income/expenses for the three months ended March 31, 2012 were primarily related to the non-cash expense charge for the change in the warrant derivative liability of ($733).  Other income for the three months ended March 31, 2011 were primarily related to the non-cash income reported for the change in the warrant derivative liability of $9,221.  The non-cash income and expense are accounted for in accordance with GAAP for the change in the fair value of the warrant derivative liability.  If the non-cash adjustment had not been required to be recorded, the Company’s income before taxes would have decreased $2,065 or 9.0% to $20,945 from $23,010 for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011.

The financial instrument classified as derivatives consisted of Warrants to purchase shares of our common stock issued in connection with our October 2009 Financing.  The Warrants have a three year term that expire October 29, 2012 and have an exercise price per share of $2.255.  The increase in the warrant derivative liability expense was attributable to the increase in the calculation variables of stock price and risk-free rate of return.

The interest income increased $1 for the period to $4 for the three months ended March 31, 2012 from $3 for the three months ended March 31, 2011 because of higher average cash balances during the period.  The Company had no outstanding long-term debt.

Income tax expense for the three months ended March 31, 2012 decreased $574 or 10.0% to $5,286 from $5,860 for the three months ended March 31, 2011, due to the decrease in operating income earned during the period.

Net Income

Net income decreased $11,445 or 43.4% to $14,926 for the three months ended March 31, 2012 from $26,371 for the three months ended March 31, 2011, due to the reasons set forth above.  
 
Comprehensive income for the three months ended March 31, 2012 decreased $12,843 or 43.3% to $16,800 from $29,643 for the three months ended March 31, 2011, due to the decrease in net income.  The foreign currency translation adjustment decreased $1,398 or 42.7% to $1,874 for the three months ended March 31, 2012 from $3,272 for the three months ended March 31, 2011. 

Net income attributable to common shareholders decreased by $11,435 or 43.4% to $14,911 for the three months ended March 31, 2012 from $26,346 for the three months ended March 31, 2011.  For the three months ended March 31, 2012 we paid $15 in cash dividends on preferred stock compared to $25 in cash dividends paid on preferred stock for the three months ended March 31, 2011.   
  
Basic and Diluted Income Attributable to Common Shareholders per Share

The Company’s basic net income attributable to common shareholders per share decreased $0.11 or 42.3% to $0.15 from $0.26 for the three months ended March 31, 2012 and 2011, respectively.

The Company’s diluted net income attributable to common shareholders per share decreased $0.11 or 42.3% to $0.15 from $0.26 for the three months ended March 31, 2012 and 2011, respectively.

For the Nine Months Ended March 31, 2012 Compared to the Nine Months Ended March 31, 2011
 
Revenues

For the nine months ended March 31, 2012, we reported revenues of $374,236, an increase of $21,130 or 6.0% from revenues of $353,106 reported for the nine months ended March 31, 2011.  Our Taiyuan and Gujiao fuel storage depots generated revenues of $183,671 and $175,365, respectively, and we earned an additional $15,200 in agency fees during the nine months ended March 31, 2012.  During this period our product mix was approximately split evenly between diesel and gasoline sales.  The sales increase was due to the increase in product sales price.  The weighted average sales price per metric ton (“mt”) of petroleum products sold increased approximately $229/mt or 23.5% to $1,202/mt from $973/mt during the nine months ended March 31, 2012 and 2011, respectively.
 
 
6

 

 
   
For the Nine Months Ended
       
   
March 31,
   
March 31,
       
(in thousands, except metric tons)
 
2012
   
2011
   
% Change
 
Product Sales:
                 
   Taiyuan Facility
 
$
183,671
   
$
198,332
     
(7.4%
)
   Gujiao Facility
   
175,365
     
138,065
     
27.0%
 
Total Product Sales
   
359,036
     
336,397
     
6.7%
 
                         
Agency Fees
   
15,200
     
16,709
     
(9.0%
)
                         
Total Revenues
 
$
374,236
   
$
353,106
     
6.0%
 
                         
Sales Volume: (mt)
                       
   Taiyuan Facility
   
155,378
     
205,167
     
(24.3%
)
   Gujiao Facility
   
143,286
     
140,608
     
1.9%
 
Total Sales Volume
   
298,664
     
345,775
     
(13.6%
)
                         
Weighted average selling price per mt
 
$1,202/mt
   
$973/mt
     
23.5%
 

The increase in the price per mt of petroleum products was due to the increase in international crude oil prices and corresponding price increases set by the PRC to retail petroleum prices.  During the time from nine month period ended March 31, 2011 through the nine month period ended March 31, 2012, the PRC increased retail petroleum prices six times, but decreased retail prices once in October 2011.

We continue to allocate product sales between our two facilities, Taiyuan and Gujiao, to better serve our customer base.   The two facilities are approximately 30 kilometers apart and their service markets overlap.  Total sales volume for the nine month period ended March 31, 2012 dropped 13.6% to 298,664mt from 345,775mt for the nine month period ended March 31, 2011.  The drop in volume was primarily due to rising fuel prices and the PRC’s attempts to slow down economic growth.  During this timeframe we also declined certain sales opportunities to maintain our margins, as well as carefully managed our cash flow due to the large deposit paid for the Haujie Petroleum assets.  The deposit of $87,046 has been paid in cash generated through operations.

Costs of Sales

Costs of sales increased by $24,586 or 8.7% to $307,983 for the nine months ended March 31, 2012 compared to $283,397 for the nine months ended March 31, 2011.  As a percentage of total revenues our total cost of sales between the periods increased by 2.0% as a percentage of revenues to 82.3% from 80.3%.  The increase in cost of sales was primarily due to higher weighted average inventory costs during a period of rising international prices and a period of lower retail prices implemented by the PRC in October 2011.  The PRC retail price was subsequently increased in February and March 2012 to more accurately reflect worldwide crude oil prices.

The Company also experienced a drop in agency fee revenues of $1,509 or 9.0% to $15,200 during the nine months ended March 31, 2012 compared to $16,709 during the nine months ended March 31, 2011.  When the Company earns higher agency fees, the net effect lowers the percentage of total cost of sales because there are no costs associated with the agency fees.
 
We pay market prices from our refinery suppliers and carefully manage our inventory levels to adjust to pricing fluctuations. The nine month weighted average cost basis per metric ton of petroleum product we sold increased by $211/mt or 25.7% to $1,031/mt from $820/mt during the nine months ended March 31, 2012 and 2011, respectively.  During the nine months ended March 31, 2012, the Company’s gross profit margin on product sales declined 9.6% to 14.2% from 15.7% during the nine month period ended March 31, 2011, due to rising international crude oil prices and the PRC retail price decrease in October 2011.

The Company’s average age of inventory for the nine months ended March 31, 2012 increased to approximately 50 days as the Company held more inventory to take advantage of additional product purchases for on-hand inventory during a period of rising prices by utilizing our large storage capacity.  This compares to the Company’s average age of inventory for the nine months ended March 31, 2011 of approximately 44 days during a time as the price of international crude oil began to rise steadily.  During this time we also increased our advances to suppliers to lock in pricing based on uncertainty associated with the international crude oil price fluctuations from tensions in the Middle East.  The Company is continually working to optimize its inventory turnover, which expands sales capacity based on increased inventory movement.  In times of anticipated rising prices the Company tries to lock-in pricing and increase inventory on-hand prior to the PRC pricing mechanism adjusting the set retail price upwards.  Our supplier advance balance with refineries allows us to lock-in supply so that we can react quickly to purchases based on the timing of the PRC pricing levels adjustments.
 
 
7

 
  

 
   
For the Nine Months Ended
     
   
March 31,
   
March 31,
     
   
2012
   
2011
 
% Change
 
Product Sales Revenue and Cost per metric ton (“mt”)
               
   Weighted average selling price/mt
$
1,202/mt
 
$
973/mt
   
23.5
%
   Weighted average cost/mt
 
1,031/mt
   
820/mt
   
25.7
%
Gross profit/mt
$
171/mt
 
$
153/mt
   
11.8
%
                   
Gross profit margin
 
14.2%
   
15.7%
   
(9.6
%)

Operating Expenses

Operating expenses for the nine months ended March 31, 2012 decreased $1,208 or 29.5% to $2,889 as compared to $4,097 for the nine months ended March 31, 2011, due primarily to lower professional fees paid, including stock based compensation during the period.  As a percentage of revenues, operating expenses declined to 0.8% for the nine months ended March 31, 2012 from 1.2% for the nine months ended March 31, 2011.  Operating expenses during the nine months ended March 31, 2012 included non-cash expenses of $1,580 in depreciation and $136 in accrued stock based compensation.  The Company paid approximately $1,173 in cash payments for salaries, consulting and professional fees, insurance and travel primarily related to fees and expenses for administration and the operations of the public company.  Operating expenses during the nine months ended March 31, 2011 included non-cash expenses of $1,399 in depreciation and $857 in stock based compensation.  The Company paid $1,841 in cash payments for salaries, consulting and professional fees, insurance and travel primarily related to fees and expenses for administration and the operations of the public company.  

Operating Income

Operating income for the nine months ended March 31, 2012 decreased $2,248 or 3.4% to $63,364 from $65,612 for the nine months ended March 31, 2011, primarily due to the price increases in the petroleum market and retail price decrease in the PRC, which reduced the Company’s overall gross profit margin 2.0% between the periods.

Income Before Taxes

Income before taxes for the nine months ended March 31, 2012 increased $6,302 or 10.9% to $63,978 as compared to $57,676 for the nine months ended March 31, 2011 primarily due to the increase in other income/expenses associated with the accounting for the non-cash warrant derivative liability charge.

Other income/expenses for the nine months ended March 31, 2012 were primarily related to the non-cash income reported for the change in the warrant derivative liability of $602.  Other income/expenses for the nine months ended March 31, 2011 were primarily related to the expense charge for the change in the warrant derivative liability of $7,948.  In accordance with GAAP, we recorded the non-cash income and expense charge for the change in the fair value of the warrant derivative, which increased $8,550 between the nine months ended March 31, 2012 and 2011, respectively.  If the non-cash adjustment had not been necessary to be recorded, the Company’s income before taxes would have decreased $2,248 or 3.4% to $63,376 from $65,624 for the nine months ended March 31, 2012 as compared to the nine months ended March 31, 2011.

The financial instrument classified as derivatives consisted of Warrants to purchase shares of our common stock issued in connection with our October 2009 Financing.  The Warrants have a three year term that expire October 29, 2012 and have an exercise price per share of $2.255.  The decrease in the warrant derivative liability expense was attributable to the changes in the calculation variables that factor in stock price, risk-free rate, volatility and duration outstanding for the Warrants, as well as the valuation on the exercise of Warrants during the nine months ended March 31, 2011.
  
The interest income remained the same at $12 for the nine month periods ended March 31, 2012 and 2011, respectively.  The Company had no outstanding long term-debt.

Income tax expense for the nine months ended March 31, 2012 decreased $780 or 4.6% to $16,029  from $16,809 for the nine months ended March 31, 2011, due to the decrease in operating income earned during the period.

Net Income

Net income increased by $7,082 or 17.3% to $47,949 for the nine months ended March 31, 2012 from $40,867 for the nine months ended March 31, 2011, due to the reasons set forth above.  
 
Comprehensive income for the nine months ended March 31, 2012 increased $3,907 or 7.7%% to $54,324 from $50,417 for the nine months ended March 31, 2011, due to the increase in net income.  The foreign currency translation adjustment decreased $3,175 or 33.2% to $6,375 for the nine months ended March 31, 2012 from $9,550 for the nine months ended March 31, 2011. 

Net income attributable to common shareholders increased by $7,223 or 17.8% to $47,904 for the nine months ended March 31, 2012 from $40,681 for the nine months ended March 31, 2011.  For the nine months ended March 31, 2012 we paid $45 in cash dividends on preferred stock compared to $186 in cash dividends paid on preferred stock for the nine months ended March 31, 2011.   
 
 
8

 

Basic and Diluted Income Attributable to Common Shareholders per Share

The Company’s basic net income attributable to common shareholders per share increased $0.06 or 14.3% to $0.48 from $0.42 for the nine months ended March 31, 2012 and 2011, respectively.

The Company’s diluted net income attributable to common shareholders per share increased $0.07 or 17.5% to $0.47 from $0.40 for the nine months ended March 31, 2012 and 2011, respectively.

We do not anticipate significant increases in selling, general and administration expenses other than those directly attributed to increases in sales and public company administration expenses such as our compliance costs associated with our internal controls requirements of Sarbanes Oxley.

Reconciliation of GAAP to non-GAAP Financial Measures

The following table contains financial measures that are not calculated in accordance with GAAP.  Such measures, which are unaudited and should only be read in conjunction with our financial statements and related notes included elsewhere in this report, are intended to serve as a supplement to the GAAP results.  The unaudited non-GAAP information reflects the adjustment to GAAP Net Income Attributable to Common Shareholders on a non-GAAP basis, whereby the effect of the noncash adjustment for each period presented of the change in the fair value of derivatives associated with the October 2009 Warrants is added back to the GAAP Net Income Attributable to Common Shareholders.  This non-GAAP adjustment has been used to calculate the non-GAAP basic and diluted earnings per share.  The non-GAAP operating results for the quarters presented are not necessarily indicative of results for any future periods, but management believes these non-GAAP financial measures provide useful information to investors for a more accurate picture of the Company’s operations on an ongoing basis.
 
Longwei Petroleum Investment Holding Limited
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(in thousands, except per share data)

   
For the Nine Months Ended
 March 31,
   
For the Three Months Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
GAAP Net Income Attributable to Common Shareholders
 
$
47,949
   
$
40,867
   
$
14,911
   
$
26,346
 
Non-GAAP adjustments:
                               
    Add: Non-Cash Charge for the Change in Fair Value of Derivative
   
(602
)
   
7,948
     
733
     
(9,221
)
Non-GAAP Net Income Attributable to Common Shareholders (a)
 
$
47,347
   
$
48,815
   
$
15,644
   
$
17,125
 
                                 
GAAP Earnings Per Share:
                               
    Basic
 
$
0.48
   
$
0.42
   
$
0.15
   
$
0.26
 
                                 
    Diluted
 
$
0.47
   
$
0.40
   
$
0.15
   
$
0.26
 
                                 
Non-GAAP Earnings Per Share:
                               
    Basic
 
$
0.47
   
$
0.50
   
$
0.16
   
$
0.17
 
                                 
    Diluted
 
$
0.47
   
$
0.48
   
$
0.15
   
$
0.17
 
                                 
Weighted Average Common Shares Outstanding:
                               
    Basic
   
100,762,002
     
96,931,079
     
100,766,966
     
100,197,482
 
                                 
    Diluted
   
101,764,016
     
101,508,266
     
101,795,609
     
102,136,976
 

(a) Non-GAAP adjustment net of the non-cash expense for the change in the fair value of the warrant derivative liability is added back to the GAAP Net Income Attributable to Common Shareholders in order to calculate the Non-GAAP Net Income Attributable to Common Shareholders and Non-GAAP Earnings Per Share.  A reconciliation of these calculations is provided above.   (The warrant derivative liability non-cash charge is associated with the issuance of Warrants for the October 2009 Financing.  The Warrants have a three year term expiring on October 29, 2012 at an exercise price of $2.255 per share.)
 
 
9

 
  
Liquidity and Capital Resources
 
General

Cash and cash equivalents totaled $6,889 at March 31, 2012.  As of March 31, 2012, our current assets increased $48,214 or 33.8% to $190,764 from $142,550 at year end June 30, 2011, primarily due to the increase in inventory and advances to suppliers to take advantage of price fluctuations in international crude oil prices during the quarter ended March 31, 2012.  The Company also maintained a cash deposit of $87,046 for the purchase of the Huajie Petroleum assets.  Overall, we had a decrease in cash flows of $2,533 during the nine month period ended March 31, 2012 resulting from $959 of cash used in operating activities, $2,057 of cash used in investing activities for facility and equipment improvements, $45 of cash used in financing activities for dividends, and the effect of the exchange rate changes in cash of $528.

Our current ratio is approximately 21:1 (current assets to current liabilities) and improves to approximately 42:1 including the deposit, but net of the fair value of the warrant derivative liability at March 31, 2012.  Total current assets including the fixed asset purchase deposit as of March 31, 2012 was $277,810.  We have no long-term debt as of March 31, 2012.  

Average age of accounts receivable remained approximately the same at 20 days on total sales, and 81 days on credit sales during the nine