Attached files
UNITED
STATES
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 December 31, 2009
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period
for ,
2009
Commission
File No. 000-31751
LONGWEI
PETROLEUM
INVESTMENT
HOLDING LIMITED
(Name
of small business issuer 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)
|
(617) 699-6325
(Registrant’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act:
|
||
Title
of each class registered:
|
Name
of each exchange on which registered:
|
|
None
|
None
|
|
Securities
registered under Section 12(g) of the Exchange Act:
|
||
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.
Yes o No o
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 o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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 o
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o No x
The
aggregate market value of the registrant’s voting common stock held by
non-affiliates as of December 31, 2009 based upon the closing price reported for
such date on the OTC Bulletin Board was US $43,555,174.
As of
February 12, 2010, the registrant had 85,191,546 shares of its common stock
issued and outstanding.
Documents Incorporated by
Reference: None.
TABLE
OF CONTENTS
PAGE | ||||||
PART I | ||||||
ITEM
1.
|
Condensed Consolidated Financial Statements | F-1 | ||||
Condensed Consolidated Balance Sheets as of December 31, 2009 (Unaudited) and June 30, 2009 |
F-1
|
|||||
Unaudited Condensed Consolidated Statements of Operations for the Six and Three Months Ended December 31, 2009 and December 31, 2008 |
F-2
|
|||||
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2009 and December 31, 2008 |
F-3
|
|||||
Notes to the Condensed Consolidated Financial Statements |
F-4
|
|||||
ITEM
2.
|
Management’s Discussion and Analysis or Plan of Operation | 17 | ||||
ITEM
3.
|
Quantitative and Qualitative Disclosures About Market Risk | 21 | ||||
ITEM
4T.
|
Controls and Procedures | 21 | ||||
PART II | ||||||
ITEM
1.
|
Legal Proceedings | 22 | ||||
ITEM
1A.
|
Risk Factors | 22 | ||||
ITEM
2.
|
Unregistered Sales of Equity Securities and Use of Proceeds | 22 | ||||
ITEM
3.
|
Defaults Upon Senior Securities | 22 | ||||
ITEM
4.
|
Submission of Matters to a Vote of Security Holders | 22 | ||||
ITEM
5.
|
Other Information | 22 | ||||
ITEM
6
|
Exhibits | 22 | ||||
SIGNATURES | 23 |
ITEM
1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Longwei
Petroleum Investment Holding Limited and Subsidiaries
Condensed
Consolidated Balance Sheets
December
31,
2009
|
June
30,
2009
|
|||||||
Assets
|
(In Thousands,
|
|||||||
Current
Assets:
|
Except Share Data)
|
|||||||
(unaudited) | ||||||||
Cash
|
$ | 12,556 | $ | 7,308 | ||||
Accounts
Receivable, Net of Allowance for Doubtful Accounts of $0 as of December
31, 2009 and $0 as of June 30, 2009
|
26,639 | 26,796 | ||||||
Inventories
|
16,766 | 13,976 | ||||||
Prepaid
Expenses
|
590 | - | ||||||
Advances
to Suppliers
|
52,964 | 35,317 | ||||||
Total
Current Assets
|
109,515 | 83,397 | ||||||
Property,
Plant and Equipment, Net
|
44,237 | 36,745 | ||||||
Total
Assets
|
$ | 153,752 | $ | 120,142 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
Payable
|
$ | 1,764 | $ | 2,275 | ||||
Convertible
Notes Payable
|
- | 800 | ||||||
Warrant
Derivative Liability
|
19,514 | - | ||||||
Taxes
Payable
|
4,301 | 2,144 | ||||||
Total
Current Liabilities
|
25,579 | 5,219 | ||||||
Total
Liabilities
|
25,579 | 5,219 | ||||||
Commitments
and Contingencies
|
||||||||
Shareholders'
Equity:
|
||||||||
Preferred
Stock, No Par Value, 86,000,000 Shares Authorized, 0 Issued and
Outstanding as of December 31, 2009 and June 30, 2009
|
- | - | ||||||
Series
A Convertible Preferred Stock, No Par Value, 14,000,000 Shares Authorized,
13,499,274 and 0 Issued and Outstanding as of December 31, 2009 and June
30, 2009 (Liquidation Preference of $14,849,201 as of December 31,
2009)
|
6,176 | - | ||||||
Common
Stock, No Par Value; 500,000,000 Shares Authorized; 85,131,546
and 81,852,831 Issued and Outstanding, 13,499,274 Shares Held in
Escrow Subject to Contingent Future Events, as of December 31, 2009 and
June 30, 2009
|
15,590 | 11,949 | ||||||
Shares
to be Issued
|
- | 126 | ||||||
Stock
Subscription Receivable
|
- | (76 | ) | |||||
Deferred
Stock Based Compensation
|
(120 | ) | (25 | ) | ||||
Additional
Paid-in Capital
|
8,644 | 2,540 | ||||||
Retained
Earnings
|
87,860 | 90,519 | ||||||
Other
Comprehensive Income
|
10,023 | 9,890 | ||||||
Total
Shareholders' Equity
|
128,173 | 114,923 | ||||||
Total
Liabilities and Shareholders' Equity
|
$ | 153,752 | $ | 120,142 |
The
accompanying notes to these unaudited condensed consolidated financial
statements are an integral part of these balance sheets.
F -
1
Unaudited
Condensed Consolidated Statements of Operations and Other Comprehensive
Income
(In
Thousands, Except Share Data)
For the Three Months Ended
December
31,
|
For the Six Months Ended
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
Sales
|
$ | 71,236 | $ | 53,643 | $ | 130,597 | $ | 98,118 | ||||||||
Cost
of Sales
|
57,308 | 41,704 | 105,060 | 76,539 | ||||||||||||
Gross
Profit
|
13,928 | 11,939 | 25,537 | 21,579 | ||||||||||||
General
and Administrative Expenses
|
862 | 43 | 1,407 | 2,210 | ||||||||||||
Operating
Income
|
13,066 | 11,896 | 24,130 | 19,369 | ||||||||||||
Change
in Fair Value of Derivatives
|
(13,220 | ) | - | (14,276 | ) | - | ||||||||||
Interest
Income
|
4 | 4 | 9 | 8 | ||||||||||||
Interest
Expense
|
(22 | ) | (102 | ) | (53 | ) | (124 | ) | ||||||||
(Loss)
Income Before Income Tax Expense
|
(172 | ) | 11,798 | 9,810 | 19,253 | |||||||||||
Income
Tax Expense
|
(3,403 | ) | (3,039 | ) | (6,180 | ) | (5,003 | ) | ||||||||
Net
(Loss) Income
|
(3,575 | ) | 8,759 | 3,630 | 14,250 | |||||||||||
Foreign
Currency Translation
|
6 | (436 | ) | 133 | 634 | |||||||||||
Comprehensive
(Loss) Income
|
$ | (3,569 | ) | $ | 8,323 | $ | 3,763 | $ | 14,884 | |||||||
Net (Loss) Income
|
$ | (3,575 | ) | $ | 8,759 | $ | 3,630 | $ | 14,250 | |||||||
Preferred
Stock Dividends Paid in Cash
|
(156 | ) | - | (156 | ) | - | ||||||||||
Preferred
Stock Deemed Dividends
|
(8,644 | ) | - | (8,644 | ) | - | ||||||||||
Net
(Loss) Income Attributable to Common Shareholders
|
(12,375 | ) | $ | 8,759 | (5,170 | ) | $ | 14,250 | ||||||||
(Loss)
Earnings Per Common Share:
|
||||||||||||||||
Basic
|
$ | (0.15 | ) | $ | 0.11 | $ | (0.06 | ) | $ | 0.19 | ||||||
Diluted
|
$ | (0.15 | ) | $ | 0.11 | $ | (0.06 | ) | $ | 0.18 | ||||||
Weighted
Average Common Shares Outstanding:
|
||||||||||||||||
Basic
|
83,347,520 | 76,205,000 | 83,334,315 | 76,205,000 | ||||||||||||
Diluted
|
83,347,520 | 81,080,000 | 83,334,315 | 81,080,000 |
The
accompanying notes to these unaudited condensed consolidated financial
statements are an integral part of these balance sheets.
F -
2
Longwei
Petroleum Investment Holding Limited and Subsidiaries
Unaudited
Condensed Consolidated Statements of Cash Flows
For
the Six Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
(In Thousands)
|
||||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
Income
|
$ | 3,630 | $ | 14,250 | ||||
Adjustments
to Reconcile Net Income to Net Cash Provided By Operating
Activities—
|
||||||||
Depreciation
and Amortization
|
154 | 197 | ||||||
Stock
Based Compensation
|
119 | - | ||||||
Change
in Fair Value of Derivatives
|
14,276 | - | ||||||
Accretion
of Debt Discount
|
- | 637 | ||||||
(Increase)
Decrease in Assets—
|
||||||||
Accounts
Receivable
|
157 | (18,463 | ) | |||||
Inventories
|
(2,790 | ) | 10,462 | |||||
Prepaid
Expenses
|
(590 | ) | - | |||||
Advances
to Suppliers
|
(17,647 | ) | (5,696 | ) | ||||
Increase
(Decrease) in Liabilities—
|
||||||||
Accounts
Payable
|
(601 | ) | (193 | ) | ||||
Taxes
Payable
|
2,157 | 1,581 | ||||||
Other
Current Liabilities
|
- | 142 | ||||||
Net
Cash (Used in) Provided By Operating activities
|
(1,135 | ) | 2,917 | |||||
Cash
Flows From Investing Activities:
|
||||||||
Property
Improvements
|
(7,646 | ) | (1,994 | ) | ||||
Net
Cash Used in Investing Activities
|
(7,646 | ) | (1,994 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Net
Proceeds From Issuance of Series A Convertible Preferred
Stock
|
13,820 | - | ||||||
Net
Proceeds From Issuance of Common Stock
|
76 | - | ||||||
Net
Cash Provided By Financing activities
|
13,896 | - | ||||||
Effect
of Exchange Rate Changes in Cash
|
133 | 86 | ||||||
Increase
in Cash
|
5,248 | 1,009 | ||||||
Cash,
Beginning of Period
|
7,308 | 8,633 | ||||||
Cash,
End of Period
|
$ | 12,556 | $ | 9,642 | ||||
Supplemental
Cash Flow Information:
|
||||||||
Cash
Paid During the Period for
|
||||||||
Interest
|
$ | - | $ | - | ||||
Income
Taxes
|
$ | 4,023 | $ | 3,961 | ||||
Supplemental
Schedule of Noncash Investing and Financing activities:
|
||||||||
Common
Stock Issued for Services, Deferred Compensation
|
$ | 239 | $ | - | ||||
Increase
to Warrant Derivative Liability for Fair Value of Stock Warrants Prior to
Conversion to Common Stock
|
$ | 3,645 | $ | - | ||||
Increase
to Common Stock, Par, for Conversion of Debt
|
$ | 892 | $ | - | ||||
Increase
to Common Stock, Par, for Common Stock Compensation Related to October
2009 Financing
|
$ | 317 | $ | - | ||||
Initial
Fair Value Allocation of Investor Stock Warrants, to Warrant Derivative
Liability
|
$ | 6,205 | $ | - | ||||
Initial
Fair Value Allocation of Placement Agent Warrants, to Warrant Derivative
Liability
|
$ | 1,122 | $ | - | ||||
Increase
to Additional Paid in Capital, for Beneficial Conversion
Feature
|
$ | 8,644 | $ | - | ||||
Increase
to Accounts Payable for Quarterly Dividends Accrued
|
$ | 156 | $ | - | ||||
Increase
to Warrant Derivative Liability for Cumulative Effect of Accounting
Change
|
$ | 1,557 | $ | - |
The
accompanying notes to these unaudited condensed consolidated financial
statements are an integral part of these balance sheets.
F -
3
Longwei
Petroleum Investment Holding Limited and Subsidiaries
Footnotes
to the Unaudited Condensed Consolidated Financial Statements
For
the Six Months Ended December 31, 2009 and 2008
NOTE
1 - NATURE OF BUSINESS
Longwei
Petroleum Investment Holding, Limited (the “Company”) is an energy company that,
through its subsidiaries, engages in oil and gas operations in the People’s
Republic of China (“PRC”). Oil and gas operations consist of
transporting, marketing and selling finished petroleum products. The
Company’s headquarters and primary facilities are located in Taiyuan City,
Shanxi Province (“Shanxi”). The Company’s second facility is located in Gujiao,
Shanxi. The Gujiao facility increased the Company’s storage capacity for its
products from 50,000 metric tons to 120,000 metric tons. The Gujiao facility was
acquired in January 2009 and began to operate and generate revenues and profits
for the Company in October, 2009. The Company purchases diesel, gasoline, fuel
oil and kerosene (the “Products”) from various petroleum refineries in the PRC.
The Company is 1 of 3 licensed intermediaries in Taiyuan City 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’s storage tanks have the
largest storage capacity of any non-government controlled entity in
Shanxi. The Company seeks to earn profits by selling its Products at
competitive prices to large scale gas stations, coal plants, other power supply
customers and small, independent gas stations. The Company also earns revenue by
acting as a purchasing agent for other intermediaries in Shanxi and through the
sale of diesel and gasoline at gas stations located at each of the Company’s
facilities. The sales price and the cost basis of the Company’s products are
largely dependent on 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.
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
Principles
of Consolidation
The
condensed consolidated financial statements, prepared in accordance with
generally accepted accounting principles in the United States of America
(“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.
Subsidiaries
|
State
and Countries Registered In
|
Percentage of
Ownership
|
|||
Longwei
Petroleum Investment Holding Limited
|
British
Virgin Islands
|
100.00 | % | ||
Taiyuan
Yahua Energy Conversion Ltd.
|
People’s
Republic of China
|
100.00 | % | ||
Taiyuan
Longwei Economy & Trading Ltd.
|
People’s
Republic of China
|
100.00 | % | ||
Shanxi
Heitan Zhingyou Petrochemical Co., Ltd
|
People’s
Republic of China
|
100.00 | % (a) |
(a)
|
A
total of 95% of the ownership units are held by the Company. The remaining
5% of the ownership units are held in trust by an individual who is also
an employee of the Company. This ownership structure is organized as such
due to PRC business ownership laws.
|
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with GAAP for interim financial information and with the instructions
to Form 10-Q. They do not include all of the information and footnotes
required GAAP for a complete financial presentation. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation, have been included in the
accompanying unaudited condensed consolidated financial statements.
Operating results for the periods presented are not necessarily indicative
of the results that may be expected for the full year. The Company’s
accounting policies and certain other disclosures are set forth in the notes to
the condensed consolidated financial statements contained in the Company’s
Annual Report on Form 10-K for the year ended June 30, 2009 as filed with the
United States Securities and Exchange Commission on October 13, 2009. These
condensed consolidated financial statements should be read in conjunction with
the Company’s audited condensed consolidated financial statements and notes
thereto. The preparation of condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
F -
4
Accounting
for Derivatives
The
Company evaluates conversion options, stock warrants or other contracts to
determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for under the relevant sections of the
Financial Accounting Standards Board’s (the “FASB”) Accounting Standards
Codification (“ASC”), namely ASC Topic 815-40, “Derivative Instruments and Hedging:
Contracts in Entity’s Own Equity” (“ASC Topic 815-40”). The result
of this accounting treatment could be that the fair value of a financial
instrument is classified as a derivative instrument and is marked-to-market at
each balance sheet date and recorded as a liability. In the event that the
fair value is recorded as a liability, the change in fair value is recorded in
the statement of operations as other income or other expense. Upon
conversion or exercise of a derivative instrument, the instrument is marked to
fair value at the conversion date and then that fair value is reclassified to
equity. Financial instruments that are initially classified as equity that
become subject to reclassification under ASC Topic 815-40 are reclassified to a
liability account at the fair value of the instrument on the reclassification
date.
Cumulative
Effect of Change in Accounting Principle
On July
1, 2009, the Company adopted certain sections of ASC 815-40 (formerly known as
“EITF 07-5”) and, as a result, determined that certain of its stock warrants
previously issued contain down round protection and such instruments are
not considered indexed to a company’s own stock because neither the occurrence
of a sale of common stock by the Company at market nor the issuance of another
equity-linked instrument with a lower strike price is an input to the fair value
of a fixed-for-fixed option on equity shares. Accordingly, the warrants
with price protection qualify as derivatives and need to be separately accounted
for as a liability under ASC 815-40. In accordance with ASC 815-40,
the cumulative effect of the change in accounting principle has been applied
retrospectively and has been recognized as an adjustment to the opening balance
of equity. The cumulative-effect adjustment amounts recognized in the
statement of financial position as a result of the initial adoption of this
policy were determined based on the amounts that would have been recognized if
the policy had been applied from the issuance date of the instrument. As a
result of the accounting change, retained earnings as of July 1, 2009 increased
from $90,519 thousand, as originally reported, to $93,030 thousand, warrant
derivative liability increased to $1,557 and additional paid-in capital
decreased from $2,540 thousand as originally reported, to $0. Common
stock, par value, as of July 1, 2009 decreased from $11,949 thousand, as
originally reported, to $10,421 thousand.
Reclassifications
Certain
reclassifications have been made to the condensed consolidated financial
statements as of June 30, 2009 and for the six and three months ended December
31, 2008 in order to be comparable with the condensed consolidated financial
statements as of and for the six and three months ended December 31, 2009,
respectively.
NOTE
3 – 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, an allowance for
doubtful accounts has not been recorded. Trade accounts receivable at December
31, 2009 and June 30, 2009 consisted of the following:
December
31,
2009
(000’s)
|
June
30,
2009
(000’s)
|
|||||||
Trade
Accounts Receivable
|
$ | 26,639 | $ | 26,796 | ||||
Less:
Allowance for Doubtful Accounts
|
-
|
-
|
||||||
Totals
|
$ | 26,639 | $ | 26,796 |
F -
5
NOTE
4 – INVENTORIES
As of
December 31, 2009 and June 30, 2009, inventory consisted of significant
quantities of diesel and gasoline, among others, as outlined
herein:
December
31,
2009
(000’s)
|
June
30,
2009
(000’s)
|
|||||||
Diesel
Oil
|
$
|
6,538
|
$
|
7,951
|
||||
Gasoline
|
7,021
|
6,025
|
||||||
Fuel
Oil
|
1,802
|
-
|
||||||
Solvent
|
1,405
|
-
|
||||||
Total
|
$
|
16,766
|
$
|
13,976
|
NOTE
5 – ADVANCES TO SUPPLIERS
As of
December 31, 2009 and June 30, 2009, advances to suppliers consisted of
significant deposits on account with the Company’s refinery
partners. The deposits are held by the Company’s refinery partners to
ensure that the delivery of inventory to the Company is made in a timely
manner. The Company also attempts to maintain a significant balance
on account with refinery partners with the expectation of receiving preferential
pricing from the refinery partners.
December
31,
2009
(000’s)
|
June
30,
2009
(000’s)
|
|||||||
Advances
to Suppliers
|
$
|
52,964
|
$
|
35,317
|
||||
Other
|
-
|
-
|
||||||
Total
|
$
|
52,964
|
$
|
35,317
|
NOTE
6 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following:
December
31,
2009
(000’s)
|
June
30,
2009
(000’s)
|
|||||||
Land
and Buildings
|
$
|
44,209
|
$
|
36,561
|
||||
Machinery
and Production Equipment
|
2,799
|
2,799
|
||||||
Railway
|
1,440
|
1,440
|
||||||
Motor
Vehicles
|
215
|
215
|
||||||
Total
Property, Plant and Equipment
|
48,663
|
41,015
|
||||||
Accumulated
Depreciation
|
(4,426
|
)
|
(4,270
|
)
|
||||
Total
|
$
|
44,237
|
$
|
36,745
|
Depreciation
expense for the six and three months ended December 31, 2009 and 2008 was $154
thousand and $197 thousand and $77 thousand and $117 thousand,
respectively.
NOTE
7 – ACQUISITION OF GUJIAO
On August
7, 2007, the Company entered into an agreement to purchase the assets of Shanxi
Heitan Zhingyou Petrochemical Co., Ltd (“Shanxi Heitan”) for approximately
$17,000 thousand. On August 7, 2007, a payment was made towards the
acquisition price for approximately $11,888 thousand. On February 5,
2008, the purchase agreement was amended to change the terms of the purchase
agreement such that the total purchase price would be approximately $29,966
thousand rather than $17,000 thousand and the Company would not only acquire the
assets of Shanxi Heitan but the Company would also acquire a 95% ownership of
Shanxi Heitan. The remaining 5% of the Shanxi Heitan was not eligible
to be acquired under PRC law and was therefore allocated by Shanxi Heitan to an
unaffiliated individual from Taiyuan City to be held in trust on behalf of the
Company. On January 22, 2009, the Company therefore held majority control of the
assets and ownership units of Shanxi Heitan. The Company hired an
external professional valuation firm to conduct a valuation of the assets
acquired from Shanxi Heitan. The external professional valuation firm
determined that the value of the assets was in excess of the total purchase
price paid by the Company of approximately $30,000 thousand. In
accordance with the purchase method of accounting, the results of Shanxi Heitan
and the estimated fair market value of the assets and liabilities of Shanxi
Heitan assumed have been included in the condensed consolidated financial
statements from the date of acquisition, January 22, 2009 through December 31,
2009.
The
purchase price of Shanxi Heitan was allocated to the assets acquired and
liabilities assumed by the Company. The Company recorded the full value of the
purchase price to land and buildings within the Company’s property, plant and
equipment classification on the balance sheets.
F -
6
(000’s)
|
||||
Land
and Buildings
|
$
|
29,966
|
||
Net
Assets Acquired
|
$
|
29,966
|
||
Purchase
Consideration
|
$
|
29,966
|
Goodwill
is comprised of the residual amount of the purchase price over the fair value of
the acquired tangible and intangible assets. Shanxi Heitan was a
dormant entity upon the date of acquisition. Operations by Shanxi Heitan at
the Gujiao facility began in October 2009 when limited shipments of Products
began. By November 2009, significant shipments of Products were being
delivered at the Gujiao facility. For the six and three months ended December
31, 2009, the Gujiao facility generated revenues of $8,474 thousand,
respectively. The gross margin generated from these revenues for the
six and three months ended December 31, 2009 was 16%. As a result, the inclusion
of Shanxi Heitan’s operating results from January 22, 2009 through December 31,
2009 does not represent financial results the Company would expect from the
Gujiao facility if it were fully operational for that time period. If the
operating results of Shanxi Heitan, which was a dormant entity at the time, had
been included since the beginning of the prior fiscal year, July 1, 2008, the
Company’s pro-forma consolidated revenue and the Company’s pro-forma net income
for the six and three months ended December 31, 2008 would have been $98,118
thousand (unchanged) and $53,643 thousand (unchanged) and $14,250 thousand
(unchanged) and $8,759 thousand (unchanged), respectively.
NOTE
8 – TAXES
Taxes
payable consisted of the following:
December
31,
2009
(000’s)
|
June
30,
2009
(000’s)
|
|||||||
Income
Tax Payable
|
$
|
3,422
|
$
|
960
|
||||
Value
Added Tax Payable
|
803
|
733
|
||||||
Business
Taxes and Other Payables
|
76
|
451
|
||||||
Total
|
$
|
4,301
|
$
|
2,144
|
NOTE
9 – CONVERTIBLE DEBT
On December 18, 2007, the Company
issued convertible debt totaling $2,100 thousand (the “Convertible Debt”) to
four entities (the “Holders”). The Convertible Debt bore interest at
an annualized rate of 4%, was convertible to shares of the Company’s common
stock at a fixed exercise price of $0.70 per share, contained piggyback
registration rights and a cashless conversion provision if the Company was
unable to register the shares of the Company’s common stock underlying the
Convertible Debt by December 18, 2008. In connection with the
Convertible Debt issuance, the Company issued a total of 1,500,000 warrants (the
“Class A Common Stock Purchase Warrants”) to purchase 1,500,000 shares of the
Company’s common stock. The Class A Common Stock Purchase Warrants
had an exercise price of $0.80 and could be exercised at any time until December
18, 2010.
On December 18, 2008, the Company
defaulted on the Convertible Debt when it failed to make repayment of the
Convertible Debt in accordance with the terms entered into with the Holders on
December 18, 2007.
On February 2, 2009, the Company
entered into a settlement agreement with the Holders of the Convertible
Debt. The significant terms of the settlement agreement are provided
below:
1.
|
The
maturity date of the Convertible Debt was extended to September 18,
2009
|
2.
|
The
interest rate on the Convertible Debt was retroactively adjusted to
approximately 8% for the period from December 17, 2007 through December
18, 2008 and $168 thousand in interest was payable to the Holders
immediately
|
3.
|
The
exercise price of the Class A Common Stock Purchase Warrants was lowered
from $0.80 to $0.70
|
4.
|
The
exercise period of the Class A Common Stock Purchase Warrants was extended
from December 10, 2010 to December 10,
2012
|
5.
|
The
Company agreed to issue an additional 1,200,000 warrants (the “Class B
Common Stock Purchase Warrants”) to the Holders. The Class B
Common Stock Purchase Warrants had an exercise price of $0.70 and could be
exercised at any time until February 2,
2014.
|
6.
|
If
the Convertible Debt is not repaid upon the maturity date, September 18,
2009, the interest rate on the Convertible Debt would increase to a 10%
annualized rate
|
As of
December 31, 2009, a balance of $0 remained outstanding on the Convertible
Debt. A total of $867 thousand of principle and interest accrued on
the Convertible Debt was converted to common stock in the six months ended
December 31, 2009. Accrued interest as of December 31, 2009 totaled
$0.
F -
7
NOTE
10 – 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 Perpetual Preferred Stock (the “Series A
Preferred Stock”), and warrants (the “Investor 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 thousand, issuance cost totaled $2,468 thousand. National
Securities Corporation acted as placement agent and received (i) a placement fee
in the amount equal to 6% of the gross proceeds, (ii) 50,000 shares of the
Company’s common stock and (iii) warrants to purchase up to 1,349,927 shares of
common stock at the Exercise Price with a three-year term (“Placement Agent
Warrants” and together with the Investor Warrants, the “Warrants”). An
additional 105,000 shares of the Company’s common stock were issued to other
third parties who provided assistance with the capital raise.
The
Warrants have an Exercise Price which is subject to adjustments in certain
circumstances for stock splits, combinations, dividends and distributions,
reclassification, exchange or substitution, reorganization, merger,
consolidation or sales of assets, issuance of additional shares of common stock
or equivalents. The Warrants may not be exercised if it would result
in the holder beneficially owning more than 4.9% of the Company’s outstanding
common shares.
Accounting for the
Warrants
The
Company analyzed the Warrants in accordance to 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. 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 at each reporting period.
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 Black Scholes 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
|
December
31,
2009
|
October
29,
2009
|
||||||
Stock
Price
|
$ | 2.70 | $ | 2.05 | ||||
Risk
Free Interest Rate
|
1.49 | % | 1.50 | % | ||||
Volatility
|
63.90 | % | 63.90 | % | ||||
Exercise
Price
|
$ | 2.255 | $ | 2.255 | ||||
Dividend
Yield
|
0 | % | 0 | % | ||||
Contractual
Life (Years)
|
2.77 | 3 |
Allocation of the Proceeds
at Commitment Date and Re-Measurement as of December 31,
2009
In
accordance with ASC Topic 470-20, “Debt with Conversion and Other
Options,” the proceeds of $14,849 thousand from the October 2009
Financing were first allocated between the Series A Preferred Stock and the
Warrants based upon their estimated relative fair values as of the closing date,
resulting in an aggregate amount of $6,205 thousand being allocated to the
Warrants and $8,644 thousand being allocated to the Series A Preferred Stock as
of October 29, 2009.
F -
8
The
re-measured fair value of the Investor Warrants as of December 31, 2009 was
$17,177 thousand. The change in fair value of the Investor Warrants
of $10,972 thousand was recorded in earnings for the six and three month periods
ended December 31, 2009.
Placement Agent
Warrants
In
accordance with ASC Topic 340 subtopic 10 section S99-1 “Miscellaneous
Accounting Expenses of Offering” (“ASC Topic 340 subtopic 10 section S99-1”),
the specific incremental costs directly attributable to the October 2009
Financing may properly be deferred and charged against the gross proceeds of the
October 2009 Financing. In accordance with the SEC accounting and reporting
manual, the cost of issuing equity securities is charged directly to equity as a
deduction against the fair value assigned to shares issued in the October 2009
Financing. Accordingly, the Company concluded that the Warrants
issued to the placement agents are directly attributable to the October 2009
Financing. If the Company had not issued the Placement Agent
Warrants, the Company would have had to pay the same amount of cash as the fair
value. Therefore, as of the Closing Date, the Company recorded the
total fair value of the Placement Agent Warrants of $1,122 thousand as a
deduction of the fair value assigned to the Series A Preferred
Stock.
Since
they contain the same terms as the Investor Warrants, the Placement Agent
Warrants are also entitled to the benefits of the “down-round protection”
provisions, which means that the Placement Agent Warrants will also need to be
accounted for as a derivative under ASC Topic 815 with changes in fair value
recorded in earnings at each reporting period. As of December 31, 2009, the
total fair value of the Placement Agent Warrants was $1,718 thousand, therefore,
the changes of the total fair value of the Placement Agent Warrants of $596
thousand was recorded in earnings for the six and three month periods ended
December 31, 2009.
Summary of Fair Value
Assigned to Warrants and the Re-measurement of Fair Value
As
of
December
31, 2009
(000’s)
|
As
of
October
29,
2009
(000’s)
|
Changes
in
Fair
Value
(000’s)
|
||||||||||
Fair
Value of the Warrants:
|
||||||||||||
Investor
Warrants
|
$ |
17,177
|
$ |
6,205
|
$ |
10,972
|
||||||
Placement
Agent Warrants
|
1,718
|
1,122
|
596
|
|||||||||
$ |
18,895
|
$ |
7,327
|
$ |
11,568
|
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 summarized as follows. The Company has filed a Form 8-K on
November 2, 2009 to provide the complete contractual terms and actual copies of
the documents associated with the October 2009 Financing. The following
disclosures should be read in conjunction with the Form 8-K filed on November 2,
2009.
Liquidation
Preference
In the
event of the liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or involuntary (each, a “Liquidation”), the holders
of the Series A Preferred Stock then outstanding shall be entitled to receive,
out of the assets of the Company available for distribution to its stockholders,
an amount equal to $14,849 thousand or US$1.10 per share of the Series A
Preferred Stock, plus any accrued but unpaid dividends thereon, whether or not
declared, together with any other dividends declared but unpaid thereon, as of
the date of Liquidation (collectively, the “Liquidation Price”) before any
payment shall be made or any assets distributed to the holders of the common
stock or any other junior stock. If upon the occurrence of Liquidation, the
assets thus distributed among the holders of the Series A Preferred Stock shall
be insufficient to permit the payment to such holders of the full Liquidation
Price, then the entire assets of the Company legally available for distribution
shall be distributed ratably among the holders of the Series A Preferred
Stock.
Dividends
Dividends
on the Series A Preferred Stock shall accrue and be cumulative from and after
the issuance date, October 29, 2009. For each outstanding share of
Series A Preferred Stock, dividends are payable at the per annum rate of 6% of
the Liquidation Price per share of the Series A Preferred
Stock. Dividends are payable quarterly within five (5) days following
the last business day of each June, September, December and March of each year
(each, a “Dividend Payment Date”), and continuing until the Series A Preferred
Stock is fully converted. The Company shall have the right, at its sole and
exclusive option, to pay all or any portion of each and every quarterly dividend
that is payable on each Dividend Payment Date, either (i) in cash, or (ii) by
issuing to the holder of Series A Preferred Stock such number of fully paid and
non-assessable unrestricted freely-tradeable shares of the Company’s common
stock equal to the value of the cash dividend payable divided by the twenty (20)
day volume weighted average price (“VWAP”) of the Company’s common stock as
quoted on the NASDAQ Over-the-Counter Bulletin Board or other national senior
stock exchange in the United States of America (the “Quoted Market Price”) of
the last business day of each June, September, December and March of each year
until each share of the Series A Preferred Stock is converted in full to common
stock and is no longer outstanding. The Series A Preferred Stock has no maturity
date and is perpetual in nature. Therefore, there is no limit on the amount of
dividends that may be paid to the holders of the Series A Preferred
Stock.
F -
9
Voting
Rights
The
holders of the Series A Preferred Stock are not entitled to any voting rights
other than those provided for by Colorado law.
Conversion
Rights
At any
time on or after the date of the initial issuance of the Series A Preferred
Stock, the holder of any such shares of Series A Preferred Stock may, at such
holder’s option, subject to the limitations described below in “Conversion
Restriction”, elect to
convert all or portion of the shares of Series A Preferred Stock held by such
person into a number of fully paid and non-assessable shares of common stock
equal to the quotient of Liquidation Price of the Series A Preferred Stock
divided by the initial conversion price of US$1.10. The initial conversion price
may be adjusted for stock splits and combinations, dividend and distributions,
reclassification, exchange or substitution, reorganization, merger,
consolidation or sales of assets, issuance of additional shares of common stock
or equivalents with lower price or without considerations etc, as stipulated in
the Series A Preferred Stock certificate of designation.
Conversion
Restriction
Holders
of the Series A Preferred Stock may not convert the Series A Preferred Stock to
common shares if the conversion would result in the holder beneficially owning
more than 4.9% of the Company’s outstanding shares of common stock.
Registration Rights
Agreement
In
connection with the October 2009 Financing, the Company entered into a
registration rights agreement (the “RRA”) with the Investors in which the
Company agreed to file a registration statement (the “Registration Statement”)
with the SEC to register a total of 120% of the shares of common stock
underlying the Series A Preferred Stock (the “Conversion Shares”) the Warrants
(the “Warrant Shares”) and the shares underlying the Make Good Agreement (the
“Make Good Shares” and together the “Investor Shares”), sixty (60) days after
the Closing Date. The Registration Statement was filed on December
24, 2009. An amendment to the Registration Statement was filed on February 11,
2010. The Company is working to ensure the Registration Statement will be
approved by the SEC in February 2010
The
Company is required to keep the Registration Statement continuously effective
under the Securities Act until such date as is the earlier of the date when all
of the securities covered by that registration statement have been sold or the
date on which such securities may be sold without any restriction pursuant to
Rule 144 (the “Financing Effectiveness Period”). If the Registration
Statement is not declared effective within the foregoing time periods or ceases
to be effective prior to the expiration of the Financing Effectiveness Period,
the Warrants will be granted a cashless exercise option such that upon exercise
of the Warrants, the holder of the Warrants will not need to pay any cash upon
exercise and will be granted a number of shares of common stock determined by
dividing the Quoted Market Price of the Company’s common stock into the value of
the Quoted Market Price in excess of the Exercise Price.
The
Company evaluated the contingent obligation related to the RRA liquidated
damages in accordance to ASC Topic 825 subtopic 20 “Accounting for Registration
Payment Arrangements” (“ASC Topic 825 subtopic 20”), which requires the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement be separately recognized and measured in accordance with ASC Topic
450, “Accounting for Contingencies” (“ASC Topic 450”). The Company
concluded that there are no contingent future payments or a scenario whereby
consideration would need to be transferred and such obligation was not probable
to incur based on the best information and facts available as of December 31,
2009. Therefore, no contingent obligation related to the RRA was
recognized as of December 31, 2009.
Security Escrow
Agreement
In
conjunction with the October 2009 Financing, the Company also entered into a
make good escrow agreement with the Investors (the “Securities Escrow Agreement
”), pursuant to which the Company’s majority shareholders initially placed
13,499,274 shares of Common Stock (equal to 100% of the number of shares of
Common Stock underlying the Make Good Shares) (the “ Escrow Shares ”) into an
escrow account. The Escrow Shares are being held as security for the achievement
of $23,900 thousand in audited net income for the fiscal year ending June 30,
2010 (the “2010 Performance Threshold”). If the Company achieves the 2010
Performance Threshold, the Escrow Shares will be released back to the majority
shareholders. If the 2010 Performance Threshold is not achieved, an aggregate
number of Escrow Shares (such number to be determined by the formula set forth
in the Securities Escrow Agreement) will be distributed to the Investors, based
upon the number of Investor Shares (on an as converted basis) purchased in the
October 2009 Financing and still beneficially owned by such Investor, or such
successor, assign or transferee, at such time. If less than 100% of the 2010
Performance Threshold is achieved, based on the formula set forth in the
Securities Escrow Agreement, a certain amount of Escrow Shares may be released
to the Investors. If any Investor transfers Investor Shares, the rights to the
Escrow Shares shall similarly transfer to such transferee, with no further
action required by the Investor, the transferee or the Company. With respect to
the 2010 Performance Threshold, net income shall be defined in accordance with
GAAP and reported in the Company’s audited financial statements for the fiscal
year ending June 30, 2010 adjusted for any expense recorded as a result of the
Securities Escrow Agreement during the fiscal year ending June 30,
2010.
F -
10
According
to the accounting interpretation and guidance of the staff of the SEC, the
placement of shares in escrow is viewed as a recapitalization similar to a
reverse stock split. The agreement to release the shares upon achievement of
certain criteria is presumed to be a separate compensatory arrangement with the
Company. Accordingly, when the Escrow Shares are released back to the majority
shareholders, an expense equal to the amount of the grant-date fair value of
$2.05 per share of the Company’s common stock as of October 29, 2009, or the
date of the Securities Escrow Agreement will be recognized in the Company’s
financial statements in accordance with FASB ASC Topic 718, “Compensation –
Stock Compensation”. Otherwise, if the net income threshold is not met and the
Escrow Shares are released to the investors instead, it will be accounted for as
a capital transaction with the investors resulting in adjustments to the
stockholders’ equity accounts only. In this event, no income or expense would be
recognized in the Company’s financial statements.
As the
release of the Escrow Shares to the majority shareholders requires the
attainment of the performance threshold for 2010, the Company will only commence
to recognize compensation expense when the Company will be able to evaluate
whether it is probable that the Company will achieve the 2010 Performance
Threshold to provide for the ultimate release of the Escrow Shares back to the
majority shareholders. For the six and three months ended December
31, 2009, no compensation expense has been recognized in the Company’s condensed
consolidated financial statements in relation to the Securities Escrow
Agreement. If the 2010 Performance Threshold is met and all of the Escrow Shares
are released back to the Company’s majority shareholders, the Company estimates
noncash stock compensation expense of $27,674 thousand will be recognized for
the fiscal year ending June 30, 2010. However, there are many variables
associated with the accounting for this potential noncash stock compensation
expense and the Company has no accurate method of predicting certain events such
as the Investors’ decision to convert the Series A Preferred Stock, the
Investors or Placement Agent Warrant holders’ decisions to convert the Warrants,
and the noncash expense associated with the fair value adjustments to the
Warrants for the year ending June 30, 2010, all of which have a significant
impact on whether or not the Company meets the 2010 Performance Threshold and
whether or not the Escrow Shares are delivered to the Investors or the majority
shareholders of the Company.
Fair Value of the Series A
Preferred Stock:
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 Black Scholes 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.
Accounting for the Series A
Preferred Stock
The
Series A Preferred Stock has been classified as permanent equity as there was no
redemption provision at the option of the holders that is not within the control
the Company on or after an agreed upon date. The Company evaluated the embedded
conversion feature in its Series A Preferred Stock to determine if there was an
embedded derivative requiring bifurcation. The Company concluded that
the embedded conversion feature of the Series A Preferred Stock does not
required to be bifurcated because the conversion feature is clearly and closely
related to the host instrument. The Company believes the economic risks and
characteristics of the Series A Preferred Stock itself and the common stock the
embedded conversion feature allows the Investor to convert into have similar
economic risks and characteristics.
Allocation of the Proceeds
at Commitment Date and Calculation of Beneficial Conversion
Feature
The
following table summarized the allocation of the gross proceeds from the October
2009 Financing to the Series A Preferred Stock and the Warrants:
Gross
proceeds Allocated
(000’s)
|
Number
of Instruments
|
Allocated
Value per Instrument
(000’s)
|
||||||||||
Investor
Warrants
|
$ |
6,205
|
13,499,274
|
$ |
0.4597
|
|||||||
Series
A Preferred Stock
|
8,644
|
13,499,274
|
$ |
0.6403
|
||||||||
Total
|
$ |
14,849
|
F -
11
The
Company then evaluated whether a beneficial conversion feature exists by
comparing the operable conversion price of Series A Preferred Stock with the
fair value of the common stock at the commitment date. The Company
concluded that the fair value of common stock was greater than the operable
conversion price of Series A Preferred Stock at the commitment date and the
intrinsic value of the beneficial conversion feature is greater than the
proceeds allocated to the Series A Preferred Stock. In accordance to
ASC Topic 470, subtopic 20-30-6, if the intrinsic value of beneficial conversion
feature is greater than the proceeds allocated to the Series A Preferred Stock,
the amount of the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds allocated to the Series A Preferred
Stock. Accordingly, the total proceeds allocated to Series A
Preferred Stock were allocated to the beneficial conversion feature with a
credit to additional paid-in capital upon the issuance of the Series A Preferred
Stock. Since the Series A Preferred Stock may convert to the
Company’s common stock at any time on or after the initial issue date, the
entire discount previously recorded as the beneficial conversion feature was
immediately recognized as a deemed dividend and a reduction to net income
attributable to common shareholders.
The
movement of the balance of the Series A Preferred Stock presented on the
condensed consolidated balance sheet is as follows:
Par
Value
(000’s)
|
||||
Series
A Preferred Stock, Balance as of July 1, 2009
|
$
|
-
|
||
Proceeds
allocated to Series A Preferred Stock as of October 29,
2009
|
8,644
|
|||
Allocation
of Proceeds to Beneficial Conversion Feature
|
(8,644
|
)
|
||
Amortization
of Beneficial Conversion Feature Deemed Analogous to a Dividend on the
Series A Preferred Stock
|
8,644
|
|||
Deduction
of Issuance Costs Incurred in October 2009 Financing Paid in
Cash
|
(1,029
|
)
|
||
Deduction
of Initial Fair Value of the Placement Agent Warrants and Common Stock
Issued in Connection with October 2009 Financing
|
(1,439
|
)
|
||
Series
A Preferred Stock, Balance as of December 31, 2009
|
$
|
6,176
|
NOTE
11 – DETACHABLE STOCK PURCHASE WARRANTS
On July
1, 2009 the Company adopted ASC 815-40 due to the reset provision in the Class A
and Class B stock warrants. ASC 815-40 requires the Company to re-evaluate the
warrants issued with the convertible notes and to determine if the previous
accounting for these items would change. Upon this re-evaluation, the Company
determined it is required to reclassify the stock warrants from equity to a
liability account. The Company will have to mark to market the value of the
stock warrants each reporting period. The Company used a Black-Scholes valuation
model to determine the value of the stock warrants associated with the
convertible notes as of July 1, 2009. In accordance with the guidance of ASC
815-40, a cumulative adjustment increasing July 1, 2009 retained earnings by
$2,511 thousand was recorded as of July 1, 2009 to reflect this new accounting
policy. The Company will be required to re-value these amounts in each reporting
period based on a revised valuation of the warrant derivative
liability.
The
Company valued the stock warrants as of the issuance dates, December 17, 2007
and February 2, 2009, and as of the most recent fiscal year end, June 30, 2009,
in order to determine the cumulative adjustment to retained earnings. The
Company then valued the stock warrants as of December 31, 2009 in order to mark
the stock warrants to market.
As
of
December
31, 2009
(000’s)
|
As
of
June
30, 2009
(000’s)
|
Changes
in
Fair
Value *
(000’s)
|
||||||||||
Fair
Value of the Warrants:
|
||||||||||||
Class
A Warrants
|
$ |
-
|
$ |
825
|
$ |
1,330
|
||||||
Class
B Warrants
|
619
|
732
|
1,377
|
|||||||||
$ |
619
|
$ |
1,557
|
$ |
2,707
|
*
Inclusive of re-measurement of fair value of Class A and Class Warrants,
respectively, on the date of exercise of the Class A and Class B Warrants,
respectively, during the six and three months ended December 31,
2009.
F -
12
The
valuation attributes utilized in Black Scholes valuation calculations to
determine the valuation of the warrants on each particular date is provided
below.
Class
A Stock Warrant - Valuation Inputs
|
||||||||||||||||
Attribute
|
September
30,
2009
|
July
1,
2009
|
February
9,
2009
|
December
17,
2007
|
||||||||||||
Stock
Price
|
$ | 1.47 | $ | 0.99 | $ | 0.45 | $ | 1.50 | ||||||||
Risk
Free Interest Rate
|
1.43 | % | 1.72 | % | 1.38 | % | 3.49 | % | ||||||||
Volatility
|
63.93 | % | 63.93 | % | 149.18 | % | 70.37 | % | ||||||||
Exercise
Price
|
$ | 0.70 | $ | 0.70 | $ | 0.70 | $ | 0.70 | ||||||||
Dividend
Yield
|
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Contractual
Life (Years)
|
3.22 | 3.47 | 3.86 | 5.00 |
Class
B Stock Warrant - Valuation Inputs
|
||||||||||||||||
Attribute
|
December
31,
2009
|
September
30,
2009
|
June
30,
2009
|
February
9,
2009
|
||||||||||||
Stock
Price
|
$ | 2.70 | $ | 1.47 | $ | 0.99 | $ | 0.45 | ||||||||
Risk
Free Interest Rate
|
2.50 | % | 2.41 | % | 2.66 | % | 1.88 | % | ||||||||
Volatility
|
63.9 | % | 63.93 | % | 63.93 | % | 123.37 | % | ||||||||
Exercise
Price
|
$ | 0.70 | $ | 0.70 | $ | 0.70 | $ | 0.70 | ||||||||
Dividend
Yield
|
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Contractual
Life (Years)
|
4.11 | 4.36 | 4.62 | 5.86 |
The
following is a summary of the Company’s stock warrant activity, adjusted for
changes in the exercise price of the warrants:
Stock
Warrants
|
Weighted
Average Exercise Price
|
|||||||
Exercisable
– June 30, 2008
|
1,500,000
|
$
|
-
|
|||||
Granted
(Class B Warrants)
|
1,200,000
|
$
|
0.70
|
|||||
Exercised
|
-
|
$
|
-
|
|||||
Forfeited/Cancelled
|
-
|
$
|
-
|
|||||
Outstanding
– June 30, 2009
|
2,700,000
|
$
|
0.70
|
|||||
Exercisable
– June 30, 2009
|
-
|
$
|
0.70
|
|||||
Granted
|
-
|
$
|
0.70
|
|||||
Exercised
|
(2,414,286
|
)
|
$
|
0.70
|
||||
Forfeited/Cancelled
|
-
|
$
|
0.70
|
|||||
Outstanding
– December 31, 2009
|
285,714
|
$
|
0.70
|
|||||
Exercisable
– December 31, 2009
|
285,714
|
$
|
0.70
|
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
|
||||||||||||||
$
|
0.70
|
285,714
|
4.11
years
|
$
|
0.70
|
285,714
|
$
|
0.70
|
NOTE
12 – 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, 14,000,000 of which have been designated as Series A
Convertible 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 December 31, 2009,
13,499,274 shares of the Company’s Series A Convertible Preferred Stock and
85,131,546 shares of the Company’s common stock were issued and outstanding. A
total of 13,499,274 shares of the Company’s common stock previously issued and
outstanding were placed in escrow by the majority shareholders of the Company in
accordance with the October 2009 Financing and will either be released to the
majority shareholders or the Investors depending upon certain contingent events,
once the Company has completed its annual audit for the year ending June 30,
2010.
Stock
Issuance
On July 16, 2009, the Company completed
a private placement with 4 investors and issued 158,484 shares of common stock
for $76 thousand.
F -
13
Debt
Conversions
During
the three months ended December 31, 2009, the holders of the Convertible Debt
issued on December 18, 2007 agreed to convert a total of $321 thousand of
convertible debt and related accrued interest to 457,023 shares of common
stock.
During
the three months ended September 30, 2009, the holders of the Convertible Debt
issued on December 18, 2007 agreed to convert a total of $571 thousand of
convertible debt and related accrued interest to 815,483 shares of common
stock.
Stock
Warrant Exercise
During the three months ended December
31, 2009, the remaining holders of Class A Stock Warrants elected to exercise
1,142,857 Class A Stock Warrants valued at $1,851 thousand on a cashless basis.
The Company issued 780,159 shares of common stock in accordance with the
exercise notices.
During the three months ended December
31, 2009, the remaining holders of Class B Stock Warrants elected to exercise
914,286 Class B Stock Warrants valued at $1,491 thousand on a cashless basis.
The Company issued 602,837 shares of common stock in accordance with the
exercise notices.
On August 18, 2009, a holder of Class A
Stock Warrants elected to exercise 357,143 Class A Stock Warrants valued at $303
thousand on a cashless basis. The Company issued 184,729 shares of common stock
in accordance with the exercise notice.
Stock
Based Compensation
On
October 26, 2009, the Company agreed to a new consulting agreement with its
Chief Financial Officer. The agreement is for a term of twelve months effective
on October 1, 2009. The Chief Financial Officer received a share
award of 100,000 shares of common stock, 25,000 of which are immediately vested
and 75,000 of which are subject to a vesting schedule over twelve months. A
total of $54 thousand in stock based compensation expense was recognized on
October 26, 2009. The remaining value of the stock award is classified as
deferred stock based compensation expense and will be amortized over the twelve
months ending September 30, 2009. A total of $94 thousand in stock based
compensation expense was recognized in connection with this consulting agreement
for the three months ended December 31, 2009.
On June
30, 2009, the Company entered into a consulting agreement whereby the Company
agreed to issue 25,000 shares of common stock valued at $25 thousand to its
Chief Financial Officer as partial compensation pursuant to the terms of the
consulting agreement. The consulting agreement is effective on July
1, 2009 for a three month term. The stock award was fully amortized over the
three month term ending September 30, 2009 resulting in stock based compensation
expense of $25 thousand.
NOTE
13 – COMMITMENTS & CONTINGENCIES
Litigation
We may be
involved from time to time in ordinary litigation that will not have a material
effect on the Company’s operations or finances. The Company is not aware of any
pending or threatened litigation against the Company or the Company’s officers
and directors in their capacity as such that could have a material impact on the
Company’s operations or finances.
Contingent
Fees - Consultant
On April
9, 2009, the Company entered into an agreement with an entity to provide
advisory services with regard to a potential capital raise to be completed by
the Company. The agreement provided for negotiable cash fees for
advisory services provided in connection with the capital raise of between $400
thousand and $1,200 thousand. On October 30, 2009, the agreement was
terminated and the Company and consultant entered into a new joint marketing
agreement for the calendar year ending December 31, 2010. No contingent
consideration was included in the new joint market
agreement.
Contingent
Significant Noncash Stock Compensation Expense
A total
of 13,499,274 shares of the Company’s common stock previously issued and
outstanding were placed in escrow by the majority shareholders of the Company in
accordance with the October 2009 Financing and will either be released to the
majority shareholders or the Investors depending upon certain contingent events,
once the Company has completed its annual audit for the year ending June 30,
2010. If the 2010 Performance Threshold is met and all of the Escrow Shares are
released back to the Company’s majority shareholders, the Company estimates
noncash stock compensation expense of $27,674 thousand will be recognized for
the fiscal year ending June 30, 2010. However, there are many variables
associated with the accounting for this potential noncash stock compensation
expense and the Company has no accurate method of predicting certain events such
as the Investors’ decision to convert the Series A Preferred Stock, the
Investors or Placement Agent Warrant holders’ decisions to convert the Warrants,
and the noncash expense associated with the fair value adjustments to the
Warrants for the year ending June 30, 2010, all of which have a significant
impact on whether or not the Company meets the 2010 Performance Threshold and
whether or not the Escrow Shares are delivered to the Investors or the majority
shareholders of the Company.
F -
14
NOTE
14 – EARNINGS PER SHARE
The following table shows the
information used in the calculation of basic and diluted earnings per
common share (in
thousands, except number of shares and per share amounts):
For
the Six Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Numerator
— Basic and Diluted:
|
||||||||
Net
(Loss) Income Attributable to Common Shareholders
|
$ | (5,170 | ) | $ | 14,250 | |||
Denominator:
|
||||||||
Weighted
Average Common Shares Outstanding — Basic
|
83,334,315 | 76,205,000 | ||||||
Add: Common
Stock Underlying Series A Preferred Stock
|
4,842,131 | - | ||||||
Add: Common
Stock Underlying Investor Stock Warrants
|
4,842,131 | - | ||||||
Add: Common
Stock Underlying Placement Agent Stock Warrants
|
484,213 | - | ||||||
Add: Common
Stock Underlying Class A Stock Warrants
|
1,268,855 | 1,875,000 | ||||||
Add: Common
Stock Underlying Class B Stock Warrants
|
1,145,853 | - | ||||||
Add: Common
Stock Underlying Convertible Debt
|
510,086 | 3,000,000 | ||||||
Less: Anti-Dilutive
Shares Included Herein
|
(13,093,269 | ) | - | |||||
Weighted
Average Common Shares Outstanding — Diluted
|
83,334,315 | 81,080,000 | ||||||
Basic
(Loss) Earnings Per Common Share:
|
||||||||
Net
(Loss) Income — Basic
|
$ | (0.06 | ) | $ | 0.19 | |||
Diluted
(Loss) Earnings Per Common Share:
|
||||||||
Net
(Loss) Income — Diluted
|
$ | (0.06 | ) | $ | 0.18 |
For
the Three Months Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Numerator
— Basic and Diluted:
|
||||||||
Net
(Loss) Income Attributable to Common Shareholders
|
$ | (12,375 | ) | $ | 8,759 | |||
Denominator:
|
||||||||
Weighted
Average Common Shares Outstanding — Basic
|
84,347,520 | 76,205,000 | ||||||
Add: Common
Stock Underlying Series A Preferred Stock
|
18,933,415 | - | ||||||
Add: Common
Stock Underlying Investor Stock Warrants
|
18,933,415 | - | ||||||
Add: Common
Stock Underlying Placement Agent Stock Warrants
|
1,893,341 | - | ||||||
Add: Common
Stock Underlying Class A Stock Warrants
|
1,236,601 | 1,875,000 | ||||||
Add: Common
Stock Underlying Class B Stock Warrants
|
1,139,890 | - | ||||||
Add: Common
Stock Underlying Convertible Debt
|
293,778 | 3,000,000 | ||||||
Less: Anti-Dilutive
Shares Included Herein
|
(42,430,440 | ) | - | |||||
Weighted
Average Common Shares Outstanding — Diluted
|
83,347,520 | 81,080,000 | ||||||
Basic
(Loss) Earnings Per Common Share:
|
||||||||
Net
(Loss) Income — Basic
|
$ | (0.15 | ) | $ | 0.11 | |||
Diluted
(Loss) Earnings Per Common Share:
|
||||||||
Net
(Loss) Income — Diluted
|
$ | (0.15 | ) | $ | 0.11 |
The
calculation of (loss) earnings per common share is based on the weighted-average
number of our common shares outstanding during the applicable period. The
calculation for diluted (loss) earnings per common share recognizes the effect
of all dilutive potential common shares that were outstanding during the
respective periods, unless their impact would be anti-dilutive. We use the
treasury stock method to calculate the dilutive effect of stock warrants,
convertible debt and other common stock equivalents (potentially dilutive
shares). For the period ended December 31, 2009 above, we have excluded
certain potentially dilutive shares from the calculation of diluted (loss)
earnings per share.
NOTE
15 – SEGMENT INFORMATION
1.
|
Product
Sales - The Company purchases and sells diesel, gasoline, fuel oil and
kerosene in the PRC.
|
2.
|
Agency
Sales - The Company acts as an agent in the purchase and sale of products
by other gas and oil distributors in the PRC
.
|
F -
15
Six
Months Ended
December
31, 2009
|
Product
Sales
(000’s)
|
Agency
Sales
(000’s)
|
Consolidated
Total
(000’s)
|
|||||||||
Net
Sales
|
$
|
123,643
|
$
|
6,954
|
$
|
130,597
|
||||||
Cost
of Sales
|
105,060
|
-
|
105,060
|
|||||||||
Segment
Operating Income
|
17,176
|
6,954
|
24,130
|
|||||||||
Segment
Assets
|
153,752
|
-
|
153,752
|
|||||||||
Expenditures
for Segment Assets
|
7,646
|
-
|
7,646
|
Six
Months Ended
December 31,
2008
|
Product
Sales
(000’s)
|
Agency
Sales
(000’s)
|
Consolidated
Total
(000’s)
|
|||||||||
Net
Sales
|
$
|
92,687
|
$
|
5,431
|
$
|
98,118
|
||||||
Cost
of Sales
|
76,539
|
-
|
76,539
|
|||||||||
Segment
Operating Income
|
13,938
|
5,431
|
19,369
|
|||||||||
Segment
Assets
|
110,427
|
-
|
110,427
|
|||||||||
Expenditures
for Segment Assets
|
1,994
|
-
|
1,994
|
Three
Months Ended
December
31, 2009
|
Product
Sales
(000’s)
|
Agency
Sales
(000’s)
|
Consolidated
Total
(000’s)
|
|||||||||
Net
Sales
|
$
|
67,636
|
$
|
3,600
|
$
|
71.236
|
||||||
Cost
of Sales
|
57,308
|
-
|
57,308
|
|||||||||
Segment
Operating Income
|
9,466
|
3,600
|
13,066
|
|||||||||
Segment
Assets
|
153,752
|
-
|
153,752
|
|||||||||
Expenditures
for Segment Assets
|
-
|
-
|
-
|
Three
Months Ended
December 31,
2008
|
Product
Sales
(000’s)
|
Agency
Sales
(000’s)
|
Consolidated
Total
(000’s)
|
|||||||||
Net
Sales
|
$
|
50,160
|
$
|
3,482
|
$
|
53,643
|
||||||
Cost
of Sales
|
41,704
|
-
|
41,704
|
|||||||||
Segment
Operating Income
|
8,414
|
3,482
|
11,896
|
|||||||||
Segment
Assets
|
110,427
|
-
|
110,427
|
|||||||||
Expenditures
for Segment Assets
|
1,273
|
-
|
1,273
|
NOTE
16 – SUBSEQUENT EVENTS
The
Company has evaluated for subsequent events between the balance sheet date of
December 31, 2009 and February 12, 2010, the date the condensed consolidated
financial statements were issued.
Conversion
of Series A Preferred Stock to Common Stock
In
January 2010, certain Investors elected to convert a total of 600,000 shares of
Series A Preferred Stock to 600,000 shares of the Company’s common
stock.
Exercise
of Class B Common Stock Purchase Warrants
In
January 2010, the remaining holder of 285,714 of Class B Common Stock Purchase
Warrants elected to convert the stock warrants to purchase the Company’s common
stock on a cashless basis. A total of 107,339 shares of common stock
were issued to the holder upon exercise.
NOTE
17 – RECENTLY ISSUED ACCOUNTING STANDARDS
In
September 2009, the FASB issued Accounting Standards Update (“ASU”)
2009-06, “Implementation Guidance on Accounting for Uncertainty in Income Taxes
and Disclosure Amendments for Nonpublic Entities”. ASU 2009-06 provides
additional implementation guidance on accounting for uncertainty in income taxes
and eliminates the disclosures required by paragraph ASC Topic 740-10-50-15(a)
through (b) for nonpublic entities. The Company believes the adoption of
ASU 2009-09 will not have a material impact on its unaudited condensed
consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13, which amends
ASC Topic 605, “Revenue Recognition”, to require companies to allocate the
overall consideration in multiple-element arrangements to each deliverable by
using a best estimate of the selling price of individual deliverables in the
arrangement in the absence of vendor-specific objective evidence or other
third-party evidence of the selling price. ASU 2009-13 will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 and early adoption will be
permitted. The Company believes the adoption of ASU 2009-13 will not have a
material impact on its unaudited condensed consolidated financial
statements.
F -
16
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 create innovative technology products, 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, 2009, as filed with the Securities and
Exchange Commission on October 13, 2009. 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 that,
through its subsidiaries, engages in oil and gas operations in the People’s
Republic of China (“PRC”). Oil and gas operations consist of
transporting, marketing and selling finished petroleum products. The
Company’s headquarters and primary facilities are located in Taiyuan City,
Shanxi Province (“Shanxi”). The Company’s second facility is located in Gujiao,
Shanxi. The Gujiao facility increased the Company’s storage capacity for its
products from 50,000 metric tons to 120,000 metric tons. The Gujiao facility was
acquired in January 2009 and began to operate and generate revenues and profits
for the Company in October, 2009. The Company purchases diesel, gasoline, fuel
oil and kerosene (the “Products”) from various petroleum refineries in the PRC.
The Company is 1 of 3 licensed intermediaries in Taiyuan City 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’s storage tanks have the
largest storage capacity of any non-government controlled entity in
Shanxi. The Company seeks to earn profits by selling its Products at
competitive prices to large scale gas stations, coal plants, other power supply
customers and small, independent gas stations. The Company also earns revenue by
acting as a purchasing agent for other intermediaries in Shanxi and through the
sale of diesel and gasoline at gas stations located at each of the Company’s
facilities. The sales price and the cost basis of the Company’s products are
largely dependent on 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.
For the
three months ended December 31, 2009, the Company reported revenues of $71,236
thousand, an increase of 33% from revenues of $53,643 thousand reported for the
three months ended December 31, 2008. The Company continued to expand
its customer base. The new Gujiao facility also began to ship significant
deliveries of Products during December 2009. The Gujiao facility generated
$8,474 thousand in revenues while not at full capacity during the three months
ended December 31, 2009. We believe Gujiao is on track to generate at least $40
million in revenues for the year ended June 30, 2010.
Results
of Operations
The
following tables set forth key components of the Company’s results of operations
for the six and three months ended December 31, 2009 and 2008,
respectively. All numbers referenced herein are “in
thousands”.
17
For
the Six Months Ended December 31, 2009 Compared to the Six Months Ended December
31, 2008
(In Thousands, Except per Share Data) | ||||||||
2009
|
2008
|
|||||||
Revenues
|
$
|
130,597
|
$
|
98,118
|
||||
Costs
of Sales
|
105,060
|
76,539
|
||||||
Gross
Profit
|
25,537
|
21,579
|
||||||
Total
Operating Expenses
|
1,407
|
2,210
|
||||||
Income
From Operations
|
24,130
|
19,369
|
||||||
Other
Income and Expenses
|
(14,320
|
)
|
(116
|
)
|
||||
Provision
for Income Taxes
|
(6,180
|
)
|
(5,003
|
)
|
||||
Net
Income
|
3,630
|
14,250
|
||||||
Foreign
Currency Translation Adjustment
|
133
|
634
|
||||||
Comprehensive
Income
|
$
|
3,763
|
$
|
14,884
|
||||
Basic
(Loss) Income Attributable to Common
Shareholders
Per Share
|
$
|
(0.06
|
)
|
$
|
0.19
|
|||
Diluted
(Loss) Income Attributable to Common
Shareholders
Per Share
|
$
|
(0.06
|
)
|
$
|
0.18
|
Revenues
Revenues
for the six months ended December 31, 2009 were $130,597 thousand as compared to
$98,118 thousand for the six months ended December 31, 2008. The increase of
$32,479 thousand or 33% was primarily due to certain new customer contracts and
an additional $8,474 thousand in revenues generated by the new Gujiao
facility. Additionally, the average sales price per metric ton of
product the Company sold was $0.80 thousand and $0.72
thousand during the six months ended December 31, 2009 and 2008,
respectively.
Costs
of Sales
Costs of
sales for the six months ended December 31, 2009 were $105,060 thousand as
compared to $76,539 thousand for the six months ended December 31,
2008. The increase of $28,521 thousand or 37% was primarily due to
the revenue growth resulting from certain new customer contracts. The
Company’s gross profit was 20% and 22%, respectively, for the six months ended
December 31, 2009 and 2008. The average cost basis per metric ton of
product the Company sold was $0.57 thousand and $0.55
thousand during the six months ended December 31, 2009 and 2008,
respectively.
Operating
Expenses
Operating
expenses for the six months ended December 31, 2009 amounted to $1,407 thousand
as compared to $2,210 thousand for the six months ended December 31,
2008. The decrease of $803 thousand or 36% was primarily due to the
curtailing of administrative costs in order to focus resources on the new Gujiao
facility’s buildout. Operating expenses for the remaining two
quarters of the year ended June 30, 2010 should be more substantial. Management
expects salaries of all employees in the PRC will be paid in
cash. Repairs and maintenance expense is likely to increase as a
result of the initial operations of the Gujiao facility.
Net
Income
Net
income for the six months ended December 31, 2009 was $3,630 thousand as
compared to $14,250 thousand for the six months ended December 31, 2008. In
accordance with GAAP, the Company recorded a noncash adjustment to the fair
value of its newly issued stock warrants and previously outstanding stock
warrants totaling $14,276. If the noncash adjustment had not been necessary to
record, the Company’s net income would have been $17,906 thousand, which would
represent net income growth of 26% for the six months ended December 31, 2009 as
compared to the six months ended December 31, 2008.
Basic
and Diluted (Loss) Income Attributable to Common Shareholders per
Share
The
Company’s basic net (loss) income attributable to common shareholders per share
was $(0.06) and $0.19 for the six months ended December 31, 2009 and 2008,
respectively. The Company recorded a deemed dividend of $8,644 thousand, which
is a noncash adjustment, during the six months ended December 31, 2009. The
deemed dividend is a result of the calculation of the estimated fair market
value of the stock the investor purchased less the purchase price of the stock.
The deemed dividend is calculated by multiplying the number of
shares of common stock that the Series A Preferred Stock is convertible into, or
13,499,274, by the difference between the fair market value of the Company’s
common on October 29, 2009, or $2.05, less the purchase price of the Series A
Preferred Stock, or $1.10 per share. As a result of the Series A Preferred Stock
being immediately convertible into common stock, the deemed dividend is a
one-time nonrecurring expense and does not result in any additional mark to
market adjustment, expense, or adjustment to the Company’s basic and diluted
(loss) income attributable to common shareholders per share in any future
reporting period.
18
The
Company’s diluted net (loss) income attributable to common shareholders per
share was $(0.06) and $0.18 for the six months ended December 31, 2009 and 2008,
respectively.
For
the Three Months Ended December 31, 2009 Compared to the Three Months Ended
December 31, 2008
(In Thousands, Except per Share Data) | ||||||||
2009
|
2008
|
|||||||
Revenues
|
$
|
71,236
|
$
|
53,643
|
||||
Costs
of Sales
|
57,308
|
41,704
|
||||||
Gross
Profit
|
13,928
|
11,939
|
||||||
Total
Operating Expenses
|
862
|
43
|
||||||
Income
From Operations
|
13,066
|
11,896
|
||||||
Other
Income and Expenses
|
(13,238
|
)
|
(98
|
)
|
||||
Provision
for Income Taxes
|
(3,403
|
)
|
(3,039
|
)
|
||||
Net
(Loss) Income
|
(3,575
|
)
|
8,759
|
|||||
Foreign
Currency Translation Adjustment
|
6
|
(436
|
)
|
|||||
Comprehensive
(Loss) Income
|
$
|
(3,569
|
)
|
$
|
8,323
|
|||
Basic
(Loss) Income Attributable to Common
Shareholders
Per Share
|
$
|
(0.15
|
)
|
$
|
0.11
|
|||
Diluted
(Loss) Income Attributable to Common
Shareholders
Per Share
|
$
|
(0.15
|
)
|
$
|
0.11
|
Revenues
Revenues
for the three months ended December 31, 2009 were $71,236 thousand as
compared to $53,643 thousand for the three months ended December 31,
2008. The increase of $17,593 or 33% was primarily due to certain new customer
contracts and additional $8,474 thousand revenues generated by the
new Gujiao facility. Additionally, the average sales price per metric
ton of product the Company sold was $0.79 thousand and $0.70
thousand during the three months ended December 31, 2009 and 2008,
respectively.
Costs
of Sales
Costs of
sales for the three months ended December 31, 2009 were $57,308 thousand as
compared to $41,704 thousand for the three months ended December 31,
2008. The increase of $15,604 thousand or 37% was primarily due
to the revenue growth resulting from certain new customer contracts and the
additional $8,474 thousand in revenues generated by the new Gujiao facility. The
Company’s gross profit was 20% and 22%, respectively, for the three months ended
December 31, 2009 and 2008. The average cost basis per metric ton of
product the Company sold was $0.62 thousand and $0.55 thousand during
the three months ended December 31, 2009 and 2008, respectively.
Operating
Expenses
Operating
expenses for the three months ended December 31, 2009 amounted to $862
thousand as compared to $43 thousand for the three months ended
December 31, 2008. The increase of $819 thousand was primarily
due to the increased administrative costs from the Gujiao facility. Management
expects salaries of all employees in China will be paid in
cash. Repairs and maintenance expense is likely to increase as a
result of the initial operations of the Gujiao facility.
Net
(Loss) Income
Net
(loss) income for the three months ended December 31, 2009 was $(3,575)
thousand as compared to $8,759 thousand for the three months ended
December 31, 2008, due to the reasons set forth above. In accordance with GAAP,
the Company recorded a noncash adjustment to the fair value of its newly issued
stock warrants and previously outstanding stock warrants totaling $13,220
thousand. If the noncash adjustment had not been necessary to record, the
Company’s net income would have been $9,645 thousand, which would represent net
income growth of 10% for the three months ended December 31, 2009 as compared to
the three months ended December 31, 2008.
Basic
and Diluted (Loss) Income Attributable to Common Shareholders per
Share
The Company’s basic net
(loss) income attributable to common shareholders per share was $(0.15) and
$0.11 for the three months ended December 31, 2009 and 2008, respectively. The
Company recorded a deemed dividend of $8,644 thousand, which is a noncash
adjustment, during the three months ended December 31, 2009. The deemed dividend
is a result of the calculation of the estimated fair market value of the
stock the investors purchased less the purchase price of the stock. The
estimated deemed dividend is calculated by multiplying the number of
shares of common stock that the Series A Preferred Stock is convertible into, or
13,499,274, by the difference between the fair market value of the Company’s
common on October 29, 2009, or $2.05, less the purchase price of the Series A
Preferred Stock, or $1.10 per share. As a result of the Series A Preferred Stock
being immediately convertible into common stock, the deemed dividend is a
one-time nonrecurring expense and does not result in any additional mark to
market adjustment, expense, or adjustment to the Company’s basic and diluted
(loss) income attributable to common shareholders per share in any future
reporting period.
The
Company’s diluted net (loss) income attributable to common shareholders per
share was $(0.15) and $0.11 for the three months ended December 31, 2009
and 2008, respectively.
19
Liquidity
and Capital Resources
As of
December 31, 2009, the Company’s current assets were $109,515 thousand and
current liabilities were $25,579 thousand. Cash and cash equivalents totaled
$12,556 thousand as of December 31, 2009. The Company’s shareholders’ equity at
December 31, 2009 was $128,173 thousand. The Company had cash (used in) provided
by operating activities for the six months ended December 31, 2009 and 2008 of
$(1,135) thousand and $2,917 thousand, respectively. The Company used
approximately 85%, or $11,750 thousand of the gross proceeds from the October
2009 Financing to directly advance a refinery partner for future inventory
purchases. Total advances to suppliers for the six months ended December 31,
2009 totaled $17,647 thousand. During the three months ended March 31, 2010, the
Company expects significant deliveries of inventory to each of the Company’s two
facilities. The Company had net cash used in investing activities of $7,646
thousand and $1,994 thousand for the six months ended December 31, 2009 and
2008, respectively. During the six months ended December 31, 2009, the Company
incurred $7,646 thousand in costs to refurbish and prepare the Gujiao facility
in order for the facility to be fully operational as of January 1, 2010. During
the six months ended December 31, 2008, the Company incurred $1,994 thousand in
costs to refurbish the Company’s facilities at the Taiyuan facility. The Company
had net cash provided by financing activities of $13,896 thousand and $0 for the
six months ended December 31, 2009 and 2008, respectively. The Company closed
private placements for $13,820 thousand $76 thousand in net proceeds in October
and July, 2009, respectively.
Off-Balance
Sheet Arrangements
The
Company does not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
“special purpose entities” (SPEs).
Critical
Accounting Policies and Estimates
The
discussion and analysis of the Company’s results of operations and liquidity and
capital resources are based on the Company’s consolidated financial statements,
which have been prepared in accordance with GAAP. In connection with the
preparation of consolidated financial statements, the Company is required to
make assumptions and estimates about future events, and apply judgments that
affect the reported amounts of assets, liabilities, revenue, expenses, and the
related disclosures. The assumptions, estimates and judgments included within
these estimates are based on historical experience, current trends and other
factors the Company believes to be relevant at the time the consolidated
financial statements were prepared. On a regular basis, the accounting policies,
assumptions, estimates and judgments are reviewed to ensure that the
consolidated financial statements are presented fairly and in accordance with
GAAP. However, because future events and their effects cannot be determined with
certainty, actual results could differ from the assumptions and estimates, and
such differences could be material.
The
preparation of consolidated financial statements in conformity with GAAP
requires the Company to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates and assumptions are used for, but are
not limited to: (1) inventory costs and reserves; (2) asset
impairments (3) and depreciable lives of assets. Future events and their
effects cannot be predicted with certainty, and accordingly, accounting
estimates require the exercise of judgment. The accounting estimates used in the
preparation of the consolidated financial statements will change as new events
occur, as more experience is acquired, as additional information is obtained and
as the Company’s operating environment changes. The Company evaluates and
updates these assumptions and estimates on an ongoing basis and may employ
outside experts to assist with these evaluations. Actual results could differ
from the estimates that have been used.
Significant
accounting policies are discussed in Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial statements. The
Company believes the following accounting policies are the most critical to aid
in fully understanding and evaluating the Company’s reported financial results,
as they require management to make difficult, subjective or complex judgments,
and to make estimates about the effect of matters that are inherently uncertain.
Description
|
Judgments
and Uncertainties
|
Effect
if Actual Results
Differ
from Assumptions
|
||
Inventories
|
||||
The
Company states its inventories at the lower of cost or market value and
net of the cost of excess and obsolete items.
|
The
determination of inventory valuation reserves requires management to make
estimates and judgments on the future salability of inventories. Valuation
reserves for excess, obsolete, and slow-moving inventory are estimated by
comparing the inventory levels in order to identify inventory
for which the resale value or replacement value is less than the
inventoriable cost. Other factors that management considers in determining
these reserves include whether individual inventory parts meet current
specifications and can be substituted for a part currently being sold or
used as a service part, overall market conditions, and other inventory
management initiatives.
|
Estimates
of future product demand may prove to be inaccurate, in which case
inventory may be understated or overstated the provision required for
excess and obsolete inventories. In the future, if inventories are
determined to be overvalued, the Company would be required to recognize
such costs in cost of sales at the time of such determination. Likewise,
if inventories are determined to be undervalued, costs of sales may have
been over-reported in previous periods and the Company would be required
to recognize such additional operating income at the time of
sale.
|
Impairment
of Long Lived Assets
|
||||
The
carrying amounts of long-lived assets are reviewed periodically in order
to assess whether the recoverable amounts have declined below the carrying
amounts.
|
These
assets are tested for impairment whenever events or changes in
circumstances indicate that their recorded carrying amounts may not be
recoverable. When such a decline has occurred, the carrying amount is
reduced to recoverable amount. The recoverable amount is the greater of
the net selling price and the value in use. It is difficult to
precisely estimate selling price because quoted market prices for the
Company’s assets or cash-generating units are not readily available. In
determining the value in use, expected cash flows generated by the asset
or the cash-generating unit are discounted to their present value, which
requires significant judgment relating to level of sales volume, selling
price and amount of operating costs. The Company uses all readily
available information in determining an amount that is a reasonable
approximation of recoverable amount, including estimates based on
reasonable and supportable assumptions and projections of sales volume,
selling price and amount of operating costs.
|
Estimates
contemplated by the Company with regard to the recoverability of carrying
amounts for its long lived assets may prove to be inaccurate, in which
case property, plant and equipment may be understated or overstated. In
the future, if property, plant and equipment are determined to be
overvalued, the Company would be required to recognize such costs in
operating expenses at the time of such determination. Likewise, if
property, plant and equipment are determined to be undervalued, operating
expenses may have been over-reported in previous periods and the Company
would be required to recognize such additional operating income at the
time of sale.
|
Depreciable
Lives
|
||||
The
estimated depreciable life of long lived assets is estimated upon the
acquisition of assets .
|
These
assets are reviewed by management and assigned a specific depreciable
life. The depreciable life is used to estimate the term for
which the assets cost basis should be depreciated or expense
over. The Company uses all readily available information in
determining a depreciable life that is a reasonable approximation of the
actual depreciable life of an asset.
|
Estimates
for depreciable life contemplated by the Company may prove to be
inaccurate, in which case property, plant and equipment may be understated
or overstated. In the future, if property, plant and equipment are
determined to be overvalued, the Company would be required to recognize
such costs in operating expenses at the time of such determination.
Likewise, if property, plant and equipment are determined to be
undervalued, operating expenses may have been over-reported in previous
periods and the Company would be required to recognize such additional
operating income at the time of
sale.
|
20
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
required for smaller reporting companies.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure
Controls and Procedures
Our
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e)) under the
Exchange Act) that is designed to ensure that information required to be
disclosed by the Company in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Pursuant
to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation
with the participation of the Company’s management, the Company’s Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
effectiveness of the Company’s disclosure controls and procedures (as defined
under Rule 13a-15(e) under the Exchange Act) as of the nine months ended
December 31, 2009. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of December 31, 2009, our
disclosure controls and procedures were not effective at the reasonable
assurance level due to the material weaknesses described below.
In light
of the material weaknesses described below, we performed additional analysis and
other post-closing procedures to ensure our financial statements were prepared
in accordance with generally accepted accounting principles. Accordingly, we
believe that the financial statements included in this report fairly present, in
all material respects, our financial condition, results of operations and cash
flows for the periods presented.
A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or
combination of control deficiencies, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected. Management has identified the following three
material weaknesses which have caused management to conclude that, as of
December 31, 2009, our disclosure controls and procedures were not effective at
the reasonable assurance level:
1.
|
Management's
conclusion is based on, among other things, the audit adjustments recorded
for fiscal years 2009 and 2008, and for the lack of segregation of duties
and responsibilities within the
Organization.
|
It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
Remediation of Material
Weaknesses
To
remediate the material weaknesses in our disclosure controls and procedures
identified above, we are developing a plan to ensure that all information will
be recorded, processed, summarized and reported accurately, and as of the date
of this report, we have taken the following steps to address the
above-referenced material weaknesses in our internal control over financial
reporting:
1.
|
We
will continue to educate our management personnel to comply with the
disclosure requirements of Securities Exchange Act of 1934 and Regulation
S-K; and
|
|
2.
|
We
will increase management oversight of accounting and reporting functions
in the future.
|
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL
No
changes in the Company's internal control over financial reporting have come to
management's attention during the Company's last fiscal quarter that have
materially affected, or are likely to materially affect, the Company's internal
control over financial reporting.
21
ITEM
1. LEGAL PROCEEDINGS.
We may be
involved in litigation, negotiation and settlement matters that may occur in our
day-to-day operations. Management does not believe the implication of this type
of litigation will have a material impact on our consolidated financial
statements.
ITEM
1A. RISK FACTORS
Not
required for smaller reporting companies.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On
October 29, 2009, the Company entered in a Securities Purchase Agreement with
certain accredited investors (the “Investors”) (the “Purchase Agreement”)
pursuant to which the Company issued and sold 13,499,274 of its newly designated
Series A Convertible Preferred Stock (the “Series A Preferred Stock”) and
warrants (the “Warrants”) to purchase an aggregate of 13,499,274 shares of the
Company’s common stock for an aggregate purchase price of $14,849,201.50 (the
Warrants and, together with the Series A Preferred Stock, the “Private Placement
Securities”). National Securities Corporation acted as the lead placement
agent on the private placement and was awarded 50,000 shares of common stock and
1,349,927 Warrants to purchase common stock under the same terms as the
Investors.
On
October 26, 2009, the Company entered into a consulting agreement whereby the
Company agreed to issue 100,000 shares of common stock to its Chief Financial
Officer as partial compensation pursuant to the terms of the consulting
agreement. Such securities have not been registered under the
Securities Act of 1933. The issuance of these shares was exempted from
registration pursuant to Section 4(2) of the Securities Act of
1933.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM
5. OTHER INFORMATION.
None.
ITEM
6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibit
No.
|
Description
|
|
10.1 | Consulting Agreement dated June 30, 2009 between the Company and James Crane (Incorporated by reference to the Form 8-K filed with the SEC on July 10, 2009) | |
10.2 | Form of Securities Purchase Agreement (Incorporated by reference to the Form 8-K filed with the SEC on November 2, 2009) | |
10.3 | Form of Registration Rights Agreement (Incorporated by reference to the Form 8-K filed with the SEC on November 2, 2009) | |
10.4 | Form of Common Stock Purchase Warrant (Incorporated by reference to the Form 8-K filed with the SEC on November 2, 2009) | |
10.5 | Form of Series A Convertible Preferred Stock Certificate & Designation (Incorporated by reference to the Form 8-K filed with the SEC on November 2, 2009) | |
10.6 | Form of Make Good Escrow Agreement (Incorporated by reference to the Form 8-K filed with the SEC on November 2, 2009) | |
10.7 | Consulting Agreement (Incorporated by reference to the Company's Form 8-K filed with the SEC on November 11, 2009) | |
31.1
|
Certification
of Chief Executive Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer, Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
of Chief Financial Officer, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
22
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February
16, 2010
Principal
Executive Officers of
Longwei
Petroleum Investment Holding Limited
|
|||
By:
|
/s/ Cai
Yongjun
|
||
Cai
Yongjun
Chief
Executive Officer
|
|||
By:
|
/s/
James Crane
|
||
James
Crane
Chief
Financial Officer and Principal Accounting Officer
|
|||
23