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EX-31.2 - EXHIBIT 31.2 - LONGWEI PETROLEUM INVESTMENT HOLDING LTDex312.htm
EX-32.2 - EXHIBIT 32.2 - LONGWEI PETROLEUM INVESTMENT HOLDING LTDex322.htm
EX-31.1 - EXHIBIT 31.1 - LONGWEI PETROLEUM INVESTMENT HOLDING LTDex311.htm
EX-32.1 - EXHIBIT 32.1 - LONGWEI PETROLEUM INVESTMENT HOLDING LTDex321.htm


UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q /A

(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, 2010
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period for          , 2010
 
Commission File No. 001-34793

LONGWEI PETROLEUM
INVESTMENT HOLDING LIMITED

 (Name of registrant as specified in its charter)
 
Colorado
 
84-1536518
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
No. 30 Guanghau Avenue, Wan Bailin District, Taiyuan City, Shanxi Province,China
 
030024
(Address of principal executive offices)
 
(Zip Code)
 
(727) 641-1357
 (Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer
o
 
Accelerated filer
o
         
Non-accelerated filer
(Do not check if a smaller reporting company)
o
 
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

As of February 14, 2011, the registrant had 100,179,198 shares of its common stock issued and outstanding.

 
 
1

 
 
TABLE OF CONTENTS
 
 
 
       
PAGE
   
EXPLANATORY NOTE
  F-1
   
PART I
   
ITEM 1.
 
Condensed Consolidated Financial Statements
 
F-1
   
Condensed Consolidated Balance Sheet as of December 31, 2010 (Unaudited) and June 30, 2010
 
F-1
   
Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the Six Months Ended December 31, 2010 and December 31, 2009
 
F-2
   
Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the Three Months Ended December 31, 2010 and December 31, 2009
 
F-3
   
Unaudited Condensed Consolidated Statement of Cash Flows for the Six Months Ended December 31, 2010 and December 31, 2009
 
F-4
   
Notes to the Unaudited Condensed Consolidated Financial Statements
 
F-5
ITEM 2.
 
Management’s Discussion and Analysis or Plan of Operation
  3
ITEM 3.
 
Quantitative and Qualitative Disclosures About Market Risk
  8
ITEM 4.
 
Controls and Procedures
  8
         
   
PART II
   
ITEM 1.
 
Legal Proceedings
  8
ITEM 1A.
 
Risk Factors
  9
ITEM 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
  9
ITEM 3.
 
Defaults Upon Senior Securities
  9
ITEM 4.
 
Removed and Reserved
  9
ITEM 5.
 
Other Information
  9
ITEM 6
 
Exhibits
  9
         
   
SIGNATURES
  10
         
         
 
 
 
 
 
2

 
EXPLANATORY NOTE
 
This amendment on Form 10-Q/A (the "Amendment") amends the Quarterly Report on Form 10-Q for Longwei Petroleum Investment Holding Limited (the "Company"), as initially filed with the Securities and Exchange Commission ("SEC") on February 14, 2011 (the "Original Report").   The purpose of this Amendment is to (i) amend and restate our financials to reflect warrants exercised during the second fiscal quarter ended December 31, 2010 that were not correctly recorded.  When warrants were exercised we did not debit warrant derivative liability expense (a non-cash charge) for $4,589 thousands and credited common stock for the same amount. Consequently, we have understated common stock and warrant derivative liability expenses; (ii) amend fully dilutive earnings per share to correctly apply the treasury stock method when computing dilution.  Under this method warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  Consequently, we have overstated the fully diluted weighted average common shares outstanding.  The fully diluted weighted average common shares outstanding were 103,136,580 and 101,216,165 for the six and three month ended December 31, 2010, respectively; and, (iii) amend certain disclosure in Item 2 to reflect the foregoing financial changes.  This Amendment amends and restates the Original Report in its entirety in order to provide a complete and more accurate presentation.
 
 ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Longwei Petroleum Investment Holding Limited and Subsidiaries
Condensed Consolidated Balance Sheets

     
   
December 31,
2010
   
June 30,
2010
 
Assets
 
(In Thousands)
 
 
Current Assets:
 
Restated
(Unaudited)
       
Cash
 
$
15,124
   
$
10,125
 
Accounts Receivable, Net of Allowance for Doubtful Accounts of $0 in 2010 and $0 in 2009
   
34,671
     
25,837
 
Inventories
   
48,058
     
33,745
 
Advances to Suppliers
   
84,213
     
74,287
 
                 
Total Current Assets
   
182,066
     
143,994
 
                 
 Property Plant and Equipment, Net
   
45,921
     
43,577
 
                 
Total Assets
 
$
227,987
   
$
187,571
 
                 
Liabilities and Stockholders' Equity
               
Current Liabilities:
               
                 
Accounts Payable
 
$
434
   
$
578
 
Warrant Derivative
   
14,664
     
2,084
 
Taxes Payable
   
6,369
     
7,129
 
                 
Total Current Liabilities
   
21,467
     
9,791
 
                 
Total Liabilities
   
21,467
     
9,791
 
                 
Stockholders' Equity:
               
                 
Preferred Stock, No Par Value, 100,000,000 Shares Authorized; 1,641,337 and 6,934,273 Issued and Outstanding as of December 31, 2010 and June 30, 2010
   
751
     
3,172
 
Common Stock, No Par Value; 500,000,000 Shares Authorized; 99,977,406 and 92,633,485 Issued and Outstanding as of December 31, 2010 and June 30, 2010
   
31,044
     
20,887
 
Deferred Stock Based Compensation
   
(847
)
   
(1,238
Additional Paid-in Capital
   
8,644
     
8,644
 
Retained Earnings
   
148,459
     
134,124
 
Other Comprehensive Income
   
18,469
     
12,191
 
                 
Total Stockholders' Equity
   
206,520
     
177,780
 
                 
Total Liabilities and Stockholders' Equity
 
$
227,987
   
$
187,571
 

The accompanying notes to these consolidated financial statements are an integral part of these balance sheets.


 



 
F - 1

 
 

Longwei Petroleum Investment Holding Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income

 
     
For the Six Months Ended December 31,
 
     
2010
     
2009
 
     
(In Thousands, Except 
Per Share Data)
 
      Restated          
Net Sales
 
$
233,532
   
$
130,597
 
                 
Cost of Sales
   
187,911
     
105,060
 
                 
Gross Profit
   
45,621
     
25,537
 
                 
Operating Expenses
   
3,016
     
1,407
 
                 
Operating Income
   
42,605
     
24,130
 
                 
 Derivative Income (Expense)
   
(17,169
)
   
(14,276
 Interest Income
   
9
     
9
 
 Interest Expense
   
-
     
(53
)
                 
Income Before Income Tax Expense
   
25,445
     
9,810
 
                 
Income Tax Expense
   
(10,949
)
   
(6,180
)
                 
Net Income
   
14,496
     
3,630
 
                 
Foreign Currency Translation Adjustment
   
6,278
     
133
 
                 
Comprehensive Income
 
$
20,774
   
$
3,763
 
                 
Net Income
 
$
14,496
   
$
3,630
 
Preferred Stock Dividends Paid in Cash
   
(161
)
   
(156
)
Preferred Stock Deemed Dividends
 
 
-
     
(8,644
)
                 
Net Income Attributable to Common Shareholders
 
$
14,335
   
$
(5,170
)
                 
Earnings per Common Share:
               
Basic
 
$
0.15
   
$
(0.06
)
                 
Diluted
 
$
0.14
   
$
(0.06
)
                 
Weighted Average Common Shares Outstanding:
               
Basic
   
95,315,824
     
83,334,315
 
                 
Diluted
   
103,136,580
     
83,334,315
 
                 

 
The accompanying notes to consolidated financial statements are an integral part of these statements.



 
F - 2

 

 
Longwei Petroleum Investment Holding Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income

 
     
For the Three Months Ended December 31,
 
     
2010
     
2009
 
     
(In Thousands, Except 
Per Share Data)
 
      Restated           
Net Sales
 
$
120,184
   
$
71,236
 
                 
Cost of Sales
   
96,661
     
57,308
 
                 
Gross Profit
   
23,523
     
13,928
 
                 
Operating Expenses
   
1,460
     
862
 
                 
Operating Income
   
22,063
     
13,066
 
                 
 Derivative Income (Expense)
   
(6,763
)
   
(13,220
 Interest Income
   
6
     
4
 
 Interest Expense
   
-
     
(22
)
                 
Income Before Income Tax Expense
   
15,306
     
(172
)
                 
Income Tax Expense
   
(5,704
)
   
(3,403
)
                 
Net Income
   
9,602
     
(3,575
)
                 
Foreign Currency Translation Adjustment
   
2,811
     
6
 
                 
Comprehensive Income
 
$
12,413
   
$
(3,569
)
                 
Net Income
 
$
9,602
   
$
(3,575
)
Preferred Stock Dividends Paid in Cash
   
(54
)
   
(156
)
Preferred Stock Deemed Dividends
 
 
-
     
(8,644
)
                 
Net Income Attributable to Common Shareholders
 
$
9,548
   
$
(12,375
)
                 
Earnings per Common Share:
               
Basic
 
$
0.10
   
$
(0.15
)
                 
Diluted
 
$
0.09
   
$
(0.15
)
                 
Weighted Average Common Shares Outstanding:
               
Basic
   
97,381,843
     
83,347,520
 
                 
Diluted
   
101,216,165
     
83,347,520
 
                 

 
The accompanying notes to consolidated financial statements are an integral part of these statements.




 
F - 3

 
 

Longwei Petroleum Investment Holding Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows

   
For the Six Months Ended December 31,
 
   
2010
   
2009
 
   
 (In Thousands)
 
Cash Flows From Operating Activities:
  Restated        
Net Income
 
$
14,496
   
$
3,630
 
                 
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
               
Depreciation and Amortization
   
930
     
154
 
Stock Based Compensation
   
630
     
119
 
Change in Warrant Derivative Liability
   
17,169
     
14,276
 
(Increase) Decrease in Assets:
               
Accounts Receivable
   
(7,932
)
   
157
 
Inventories
   
(13,090
 )
   
(2,790
)
Advances to Suppliers
   
(7,587
)
   
(17,647
)
Other Current Assets
   
-
     
(590
)
Increase  (Decrease) in Liabilities:
               
Accounts Payable
   
(154
)
   
(601
)
Taxes Payable
   
(955
)
   
2,157
 
Net Cash Provided By (Used in) Operating activities
   
3,507
     
(1,135
)
                 
Cash Flows From Investing Activities:
               
Purchase and Improvements to Land and Buildings
   
(1,960
)
   
(7,646
)
Net Cash Provided By (Used in) Investing Activities
   
(1,960
)
   
(7,646
)
                 
Cash Flows From Financing Activities:
               
Proceeds from Preferred Stock Sale
   
-
     
13,820
 
Proceeds from Common Stock Sale
   
-
     
76
 
Proceeds from the Exercise of Warrants
   
2,908
     
-
 
Payment of Dividends
   
(161
)
   
-
 
Net Cash Provided By (Used in) Financing Activities
   
2,747
     
13,896
 
                 
Effect of Exchange Rate Changes in Cash
   
705
     
133
 
                 
(Decrease) Increase in Cash
   
4,999
     
5,248
 
                 
Cash, Beginning of Period
   
10,125
     
7,308
 
                 
Cash, End of Period
 
$
15,124
   
$
12,556
 
                 
Supplemental Cash Flow Information:
               
Cash Paid During the Period for
               
     Interest, Net of Amounts Capitalized
 
$
-
   
$
-
 
     Income Taxes
 
$
12,139
   
$
4,023
 
Supplemental Schedule of Noncash Investing and Financing Activities:
               
Conversion of Preferred Stock into Common Stock
 
$
2,421
   
$
-
 



The accompanying notes to consolidated financial statements are an integral part of these statements.




 
F - 4

 


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

NOTE 1 - NATURE OF BUSINESS

Longwei Petroleum Investment Holding Limited (the “Company”) is an energy company engaged in the wholesale distribution of finished petroleum products in the People’s Republic of China (the “PRC”).  The Company’s oil and gas operations consist of transporting, storage and selling finished petroleum products, entirely in the PRC.  The Company purchases diesel, gasoline, fuel oil and solvents (the “Products”) from various petroleum refineries in the PRC. The Company’s headquarters are located in Taiyuan City, Shanxi Province (“Taiyuan”). The Company has a storage capacity for its Products of 120,000 metric tons located at its fuel depot storage facilities in Taiyuan and in Gujiao, Shanxi (“Gujiao”), 50,000 metric tons and 70,000 metric tons of capacity respectively at each location. The Gujiao facility was acquired in January of 2009 and commenced operations in January of 2010. The Company is 1 of 3 licensed intermediaries in Taiyuan and the sole licensed intermediary in Gujiao that operates its own large scale storage tanks. The Company has the necessary licenses to operate and sell Products not only in Shanxi but throughout the entire PRC. The Company seeks to earn profits by selling its Products at competitive prices with timely delivery to coal mining operations, power supply customers, large-scale gas stations and small, independent gas stations. The Company also earns revenue under an agency fee by acting as a purchasing agent for other intermediaries in Shanxi, and through limited sales of diesel and gasoline at two retail gas stations, each located at the Company’s facilities. The sales price and the cost basis of the Company’s products are largely dependent on regulations and price control measures instituted and controlled by the PRC government as well as the price of crude oil. The price of crude oil is subject to fluctuation due to a variety of factors, all of which are beyond the Company’s control.

The Company was incorporated under the laws of the State of Colorado on March 17, 2000 as Tabatha II, Inc.  On October 12, 2007, the Company changed its name to Longwei Petroleum Investment Holding Limited.

Control by Principal Shareholders
 
The Company’s directors, executive officers and their affiliates or related parties, own beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, the directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company's assets or business.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements.  The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the consolidated financial statements.

In June 2009 the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification ("Codification" or "ASC") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.  All accounting references have been updated and therefore, FASB references have been replaced with ASC references.

The Company operates in two segments in accordance with accounting guidance FASB ASC Topic 280, Segment Reporting.  Our Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
 
Principles of Consolidation
 
The condensed consolidated financial statements, prepared in accordance with GAAP, include the assets, liabilities, revenues, expenses and cash flows of the Company and all of its subsidiaries. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books and records of the Company’s subsidiaries to present them in conformity with GAAP.  Many of our estimates and assumptions involved in the application of GAAP may have a material impact on reported financial condition, and operation performance and on the comparability of such reported information over different reporting periods. All significant intercompany balances and transactions have been eliminated in consolidation.


 
F - 5

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

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the SEC.  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading.  These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations.  All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited financial statements at June 30, 2010 as filed in the Company Form 10-K filed with the SEC on September 28, 2010.

Use of Estimates

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We base these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events.  These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  By their nature, estimates are subject to an inherent degree of uncertainty.  Actual results may differ from management’s estimates.  The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.

Foreign Currency Translation and Other Comprehensive Income

The accounts of the Company’s PRC subsidiaries are maintained in the PRC Renminbi (“RMB”) and the accounts of the US parent company are maintained in the US Dollar (“USD”).   The accounts of the PRC subsidiaries were translated into USD in accordance with the provisions of FASB ASC Topic 830, Foreign Currency Matters, with the RMB as the functional currency for the PRC subsidiaries.  According to ASC 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity is translated at historical rates; and statement of income items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC Topic 220, Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements.

Total comprehensive income is defined as all changes in stockholders’ equity during a period, other than those resulting from investments by and distributions to stockholders (i.e. issuance of equity securities and dividends).  Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for currency translation. The gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statements of income. The total comprehensive income represents the activity for a period net of related tax and was a gain of $6,278,080 and a gain of $133,063 for the six month periods ended December 31, 2010 and 2009, respectively.  The total comprehensive income was a gain of $2,810,791 and a gain of $6,847 for the three month periods ended December 31, 2010 and 2009, respectively.

Accumulated other comprehensive income related to the foreign currency translation in the consolidated statement of shareholders’ equity amounted to $18,468,639 and $12,190,559 as of December 31, 2010 and June 30, 2010, respectively.  The balance sheet amounts with the exception of equity at December 31, 2010 and June 30, 2010 were translated at RMB 6.6118 to $1.00 USD and at RMB 6.8086 to $1.00 USD, respectively.  The average translation rates applied to income and cash flow statement amounts for the six and three month periods ended December 31, 2010 and 2009 were at RMB 6.7226 to $1.00 USD and RMB 6.6670 to $1.00 USD, and RMB 6.8385 to $1.00 USD and RMB 6.8360 to $1.00 USD, respectively.





 
F - 6

 
 
Concentration of Risk

Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash.  The Company maintains cash balances at financial institutions or state owned banks within the PRC, which do not provide for insurance against lost funds.  The Company also maintains cash balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for banks located in the US.  Balances at financial institutions or state owned banks within the PRC are not insured and amounted to $12,419,226 and $9,959,080 at December 31, 2010 and June 30, 2010, respectively.  As of December 31, 2010 the Company had cash balances of $2,304,754 in excess of federally insured limits in its US bank.  As of June 30, 2010 the Company did not have deposits in excess of federally insured limits in its US bank.  The Company has not experienced any losses with regard to its bank accounts and believes it is not exposed to any risk of loss on its cash in bank accounts.

The Company operates in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the USD and RMB.

The Company’s operations are carried out in the PRC.  Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the United States and PRC, and by the general state of the economy in the PRC.  The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the US.  These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange.  The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company is susceptible to credit risk on accounts receivable from customers and advances to suppliers.  Generally, the Company does not obtain security from its customers or vendors in support of these accounts.

Payments of dividends may be subject to some restrictions due to the fact that the operating activities are conducted in subsidiaries residing in the PRC.

Fair Value Measurements

Effective January 1, 2009, the FASB ASC Topic 825 “Financial Instruments,” requires disclosure about fair value of financial instruments.

The FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
 
Various inputs are considered when determining the fair value of the Company’s warrant derivative liability and long-term debt.  The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.  These inputs are summarized in the three broad levels listed below.

·  
Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.

·  
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).

·  
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs.  The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.  The Company had a warrant derivative liability carried at fair value on a recurring basis at December 31, 2010.

The following are the major categories of assets and liabilities measured at fair value on a recurring basis as reported during the six months ended December 31, 2010, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).  A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.




 
F - 7

 

 
   
Level 1:
   
Level 2:
   
Level 3:
       
 
Description
 
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
   
Total at
December 31,
2010
 
                         
Warrant Derivative Liability
  $ -     $ 14,664,070     $ -     $ 14,664,070  
                                 
                                 
Total
  $ -     $ 14,664,070     $ -     $ 14,664,070  


The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction.  For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion.  For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

Valuation Techniques

The Company’s financial assets valued based upon Level 2 inputs are comprised of detachable common stock purchase warrants, namely the stock warrants issued in connection with the Company’s October 2009 Financing.  The Company estimated the fair value of the derivative liabilities using a Lattice pricing model and available information that management deems most relevant.  Among the factors considered in determining the fair value of financial instruments are discounted anticipated cash flow, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price and trading history of similarly traded securities, and other factors generally pertinent to the valuation of financial instruments.

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.


Reclassification

Certain reclassifications have been made to the consolidated financial statements as of June 30, 2010 and for the six and three months ended December 31, 2009 in order to be comparable with the condensed consolidated financial statements as of and for the six and three months ended December 31, 2010. These reclassifications had no effect on net loss or cash flows as previously reported.

Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) ASU No. 2010-09 (ASC Topic 855), which amends Subsequent Events Recognition and Disclosures, ASU No. 2009-16 (ASC Topic 860), which amends Accounting for Transfer of Financial Assets, ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures - Overall, ASU No. 2009-08, Earnings per Share, ASU No. 2009-12(ASC Topic 820), Investments in Certain Entities That Calculate Net Asset Value per Share, and various other ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company, or their effect on the financial statements would not have been significant.

In April 2010, the FASB issued Accounting Standard Update, 2010-17, Revenue Recognition-Milestone Method (Topic 605): “Milestone Method of Revenue Recognition-a consensus of the FASB Emerging Issues Task Force.” This is an update regarding the milestone method of revenue recognition. The scope of this update is limited to arrangements that include milestones relating to research or development deliverables. The update specifies criteria that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The criteria apply to milestones in arrangements within the scope of this update regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting.  The update will be effective for fiscal years, and interim periods within those years, beginning on or after September 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. This update is not expected to have a material impact on the Company’s financial statements.



 
F - 8

 
 
In March 2010, the FASB issued Accounting Standard Update, 2010-13, Compensation-Stock Compensation (Topic 718): “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades-a consensus of the FASB Emerging Issues Task Force.” This is an update regarding the effect of denominating the exercise price of a share-based payment awards in the currency of the market in which the underlying equity security trades and that currency is different from (1) entity’s functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The update clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The update will be effective for interim and annual periods beginning on or after December 15, 2010, will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. This update is not expected to have a material impact on the Company’s financial statements.

Other accounting standards have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the Company’s financial statements.

NOTE 3 – COMMITMENTS AND CONTINGENCIES

The Company has no rent expense or lease commitments for the six and three month periods ended December 31, 2010 and 2009.

The Company has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for the Company’s business and at prevailing market prices.  No material annual loss is expected from these commitments.

The Company has advances to several refineries for inventory in the amount of $84,212,875, as of December 31, 2010, which will be offset against future purchases from the suppliers.

Legal Matters

The Company is not involved in any legal matters except for those arising in the normal course of business.  While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might be involved in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

NOTE 4 – ACCOUNTS RECEIVABLE

The Company’s business operations are conducted in the PRC. During the normal course of business, the Company extends unsecured credit to its customers. Management reviews its accounts receivable on a regular basis to determine if an allowance for doubtful accounts is necessary and adequate. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Through the date of these financial statements, the Company has never experienced a significant bad debt.  As a result, no allowance for doubtful accounts has been recorded. Trade accounts receivable at December 31, 2010 and June 30, 2010 consisted of the following:

   
December 31,
2010
(in thousands)
 
June 30,
2010
 (in thousands)
 
           
Trade Accounts Receivable
 
$
34,671
   
$
25,837
 
Less: Allowance for Doubtful Accounts
   
-
     
-
 
Totals
 
$
34,671
   
$
25,837
 

NOTE 5 – INVENTORIES

As of December 31, 2010 and June 30, 2010, inventory consisted of significant quantities of diesel and gasoline, among others, as outlined herein:
 
 
December 31,2010
 
June 30, 2010
 
  (in thousands)     (in metric tons)   (in thousands)     (in metric tons)  
                     
Diesel
  $ 23,898       28,606     $ 19,775       26,430  
Gasoline
    22,224       25,804       12,539       16,246  
Fuel Oil
    706       2,090       800       1,540  
Solvents
    1,230       1,140       631       1,110  
Total
  $ 48,058       57,640     $ 33,745       45,326  
 
 
 
F - 9

 

NOTE 6 – ADVANCES TO SUPPLIERS

As of December 31, 2010 and June 30, 2010, 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 attempts to maintain a significant balance on account with refinery partners with the expectation of receiving preferential pricing and delivery from our suppliers.
 
   
December 31,
2010
(in thousands)
   
June 30,
2010
(in thousands)
 
             
Advances to Suppliers
 
$
84,213
   
$
74,287
 
Other
   
-
     
-
 
Total
 
$
84,213
   
$
74,287
 

NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following: 
 
   
December 31,
2010
(in thousands)
   
June 30,
2010
(in thousands)
 
                 
Land and Buildings
 
$
46,462
   
$
44,394
 
Machinery and Production Equipment
   
3,676
     
2,814
 
Railway
   
1,965
     
1,448
 
Motor Vehicles
   
215
     
215
 
Total Property, Plant and Equipment
   
52,318
     
48,871
 
Accumulated Depreciation
   
(6,397
)
   
(5,294
)
Total
 
$
45,921
   
$
43,577
 

Depreciation expense for the six and three months ended December 31, 2010 and 2009 was $930 and $154 and $462 and $77, respectively.

NOTE 8 – TAXES

Taxes payable consisted of the following: 
   
December 31,
2010
(in thousands)
   
June 30,
2010
(in thousands)
 
             
Income Tax Payable
  $ 5,550     $ 5,827  
Value Added Tax Payable
    697       1,255  
Business Taxes and Other Payables
    122       47  
Total
  $ 6,369     $ 7,129  
 
NOTE 9 – PREFERRED STOCK - OCTOBER 2009 FINANCING

On October 29, 2009 (the “Closing Date”), the Company entered into a securities purchase agreement (the “Purchase Agreement”), with several investors, including institutional, accredited and non-US persons and entities (the “Investors”), pursuant to which the Company issued and sold units, comprised of its newly designated Series A Convertible Perpetual Preferred Stock (the “Series A Preferred Stock”), and warrants (the “Warrants”), for a purchase price of US$1.10 per unit (the “October 2009 Financing”).  The Company sold 13,499,274 units in the aggregate, which included (i) 13,499,274 shares of Series A Preferred Stock and (ii) Warrants to purchase an additional 13,499,274 shares of common stock at an exercise price of US$2.255 per share (the “Exercise Price”) with a three-year term.  Gross proceeds totaled $14,849,201, or net proceeds of $12,381,281 net of issuance costs of $2,467,920.  The Company’s placement agent also received 1,349,927 Warrants as part of their compensation under the same terms as the Investors.
 
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.

 
 
F - 10

 
 
Accounting for the Warrants

The Company analyzed the Warrants in accordance with ASC Topic 815 to determine whether the Warrants meet the definition of a derivative under ASC Topic 815 and, if so, whether the Warrants meet the scope exception of ASC Topic 815, which is that contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments for purposes of ASC Topic 815.  The Company adopted the provisions of ASC Topic 815 subtopic 40 “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“ASC Topic 815 subtopic 40”) on July 1, 2009, which applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC Topic 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.  As a result of adopting ASC Topic 815 subtopic 40, the Company concluded that the Warrants issued in the October 2009 Financing should be treated as a derivative liability because the Warrants are entitled to a price adjustment provision to allow the Conversion Price to be reduced in the event the Company issues or sells any additional shares of common stock at a price per share less than the then-applicable Exercise Price or without consideration, which is typically referred to as a “down-round protection” or “anti-dilution” provision.  According to ASC Topic 815 subtopic 40, the “down-round protection” provision is not considered to be an input to the fair value of a fixed-for-fixed option on equity shares which leads the Warrants to fail to be qualified as indexed to the Company’s own stock and then to fail to meet the scope exceptions of ASC Topic 815. Therefore, the Company accounted for the Warrants as derivative liabilities under ASC Topic 815 (codification of EITF 00-19).  Pursuant to ASC Topic 815, derivatives should be measured at fair value and re-measured at fair value with changes in fair value recorded in earnings under the other income/expense in the consolidated statement of operations at each reporting period.  During the six and three month period ended December 31, 2010, the Company recorded a loss on warrant re-valuation of $12,579,939 and $2,173,543, respectively.  During the six and three month period ended December 31, 2009, the Company recorded a loss on warrant re-valuation of $14,276,000 and $13,220,000.

Fair Value of the Warrants

Fair value is generally based on independent sources such as quoted market prices or dealer price quotations. To the extent certain financial instruments trade infrequently or are non-marketable securities, they may not have readily determinable fair values. The Company estimated the fair value of the Warrants and Series A Preferred Stock using a Lattice pricing model and available information that management deems most relevant. Among the factors considered in determining the fair value of financial instruments are discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price and trading history of similarly traded securities, and other factors generally pertinent to the valuation of financial instruments. The following table provides the valuation inputs used to value the Warrants issued in connection with the October 2009 Financing.

 
October 2009 Financing Warrants - Valuation Inputs  
Attribute  
December 31,
 2010
   
June 30,
2010
   
October 29,
2009
 
Stock Price
  $ 2.59     $ 1.95     $ 2.05  
Risk Free Interest Rate
    1.08 %     1.13 %     1.50 %
Volatility
    62.0 %     80.1 %     63.9 %
Exercise Price
  $ 2.255     $ 2.255     $ 2.255  
Dividend Yield
    0 %     0 %     0 %
Contractual Life (Years)
    1.85       2.36       3  
Fair Market Value
  $ 14,664,070     $ 2,084,131     $ 7,327,517  

In accordance with ASC Topic 470-20, “Debt with Conversion and Other Options,” the gross proceeds of $14,849,201 from the October 2009 Financing were first allocated to the warrant derivative based on its fair value of $7,327,517 with the residual value of $7,521,684 allocated to the Series A Preferred Stock as of October 29, 2009.  The remeasured fair value of the Investor Warrants as of December 31, 2010 was $14,664,070.

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 is 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.




 
F - 11

 
 
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 is 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.

Key Terms of October 2009 Financing - Filed in 8K

Additional key terms of the Series A Preferred Stock sold by the Company in the October 2009 Financing were filed in 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.

Stock Warrant Activity

The following is a summary of the Company’s stock warrant activity through December 31, 2010, only one class of warrants outstanding - related to the October 2009 Financing stock warrants, adjusted for any changes in the exercise price of the stock warrants:

   
Stock
Warrants
   
Weighted Average Exercise Price
 
Outstanding – June 30, 2010
   
14,849,201
   
$
2.255
 
Exercisable – June 30, 2010
   
14,849,201
   
$
2.255
 
Granted
   
-
   
$
-
 
Exercised
   
3,256,849
   
$
-
 
Forfeited/Cancelled
   
-
   
$
-
 
Outstanding – December  31, 2010
   
11,592,352
   
$
2.255
 
Exercisable – December 31, 2010
   
11,592,352
   
$
2.255
 

The following is a summary of the Company’s stock warrants outstanding as of December 31, 2010, only one class of warrants outstanding – related to the October 2009 Financing stock warrants, adjusted for any changes in the exercise price of the stock warrants:

Warrants Outstanding
   
Warrants Exercisable
 
Range of
exercise price
   
Number
Outstanding
 
Weighted Average Remaining Contractual Life (in years)
 
Weighted Average
Exercise Price
   
Number
Exercisable
   
Weighted Average
Exercise Price
 
$
2.255
     
11,592,352
 
1.85 years
 
$
2.255
     
11,592,352
   
$
2.255
 

NOTE 10 – STOCKHOLDERS’ EQUITY

The Company is authorized to issue 600,000,000 shares, in aggregate, consisting of 500,000,000 shares of common stock, no par value, and 100,000,000 shares of preferred stock, no par value. The Company's current Certificate of Incorporation authorizes the Board of Directors (the “Board”) to determine the preferences, limitations and relative rights of any class or series of preferred stock prior to issuance.  Each such class or series must be given distinguishable designated rights prior to issuance. As of December 31, 2010, 1,641,337 shares of the Company’s preferred stock and 99,977,406 shares of the Company’s common stock were issued and outstanding.  As of June 30, 2009, 6,934,273 shares of the Company’s preferred stock and 92,633,485 shares of the Company’s common stock were issued and outstanding.

Recent Sale of Securities

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.

During October 2010, the holders of Convertible Preferred Stock elected to convert 1,745,419 shares of preferred stock into 1,745,419 shares of common stock.

During October 2010, the holders of Warrants elected to exercise 454,546 warrants on a cashless basis into 116,461 shares of common stock.



 
F - 12

 
 
During November 2010, the holders of Convertible Preferred Stock elected to convert 2,056,540 shares of preferred stock into 2,056,540 shares of common stock.

During November 2010, the holders of Warrants elected to exercise 1,507,273 warrants on a cashless basis into 531,494 shares of common stock.

During November 2010, the holders of Warrants elected to exercise 419,272 warrants on a cash basis into 419,272 shares of common stock.

During November 2010, two consultants to the Company earned 60,000 shares of common stock for services rendered.

During December 2010, the holders of Convertible Preferred Stock elected to convert 777,845 shares of preferred stock into 777,845 shares of common stock.

During December 2010, the holders of Warrants elected to exercise 875,758 warrants on a cash basis into 875,758 shares of common stock.

During December 2010, two directors earned and were vested in 6,000 shares and 3,000 shares of common stock, respectively, as part of their board compensation.  The Chief Financial Officer earned and was vested in 15,000 shares of common stock as part of his agreement.

NOTE 11 – EARNINGS PER SHARE

FASB ASC Topic 260, earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations.

The Company only has common stock and the following convertible instruments outstanding at December 31, 2010:

1.  
1,641,337 Preferred Shares – convertible on a 1:1 basis for common shares
2.  
11,592,352 October 2009 Financing Warrants – exercisable at $2.255 per share
3.  
30,000 Common Shares – issuable to officers and directors under agreement


Basic earnings per share is calculated dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is based on the assumption that all dilutive convertible shares, stock options, warrants and other equity awards were converted or exercised during the period. Dilution is computed by applying the treasury stock method. Under this method, warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

The following table sets forth the computation of basic and dilutive net income per share:
 
   
(In Thousands, Except Per Share Data)
For the Six Months Ended
December 31,
 
   
2010
   
2009
 
   
Restated
       
Net income (loss) attributable to common stockholders
  $ 14,335     $ (5,170 )
                 
Basic weighted average outstanding shares of common stock
    95,316       83,334  
Weighted number of dilutive shares
    7,821       -  
Diluted weighted average common stock and
   common stock equivalents
    103,137       83,334  
                 
Earnings (loss) per share:
               
Basic
  $ 0.15     $ (0.06 )
Fully Diluted
  $ 0.14     $ (0.06 )




 
F - 13

 

 
   
(In Thousands, Except Per Share Data)
For the Three Months Ended
December 31,
 
   
2010
   
2009
 
   
Restated
       
Net income (loss) attributable to common stockholders
  $ 9,548     $ (12,375 )
                 
Basic weighted average outstanding shares of common stock
    97,382       83,348  
Weighted number of dilutive shares
    3,834       -  
Diluted weighted average common stock and
   common stock equivalents
    101,216       83,348  
                 
Earnings (loss) per share:
               
Basic
  $ 0.10     $ (0.15 )
Fully Diluted
  $ 0.09     $ (0.15 )

NOTE 12 - SEGMENT INFORMATION

The Company operates under the two business segments determined in accordance with FASB ASC Topic 280, “Segment Reporting.”
 
 
1. 
Product Sales - The Company purchases and sells diesel, gasoline, fuel oil and solvents in the PRC.
 
 
2. 
Agency Fees - The Company acts as an agent in the purchase and sale of the Products by other intermediaries in the PRC.
 
 
(In Thousands)
Six Months Ended
December 31, 2010
 
Product
Sales
   
Agency
Sales
   
Consolidated
Total
 
Net Sales
 
$
222,001
   
$
11,531
   
$
233,532
 
Cost of Sales
   
187,911
     
-
     
187,911
 
Operating Income
   
31,074
     
11,531
     
42,605
 
Segment Assets
   
227,987
     
-
     
227,987
 
Segment Liabilities
   
21,467
     
-
     
21,467
 
  

(In Thousands)
Six Months Ended
December 31, 2009
 
Product
Sales
   
Agency
Sales
   
Consolidated
Total
 
Net Sales
 
$
123,643
   
$
6,954
   
$
130,597
 
Cost of Sales
   
105,060
     
-
     
105,060
 
Operating Income
   
17,176
     
6,954
     
24,130
 
Segment Assets
   
153,752
     
-
     
153,752
 
Segment Liabilities
   
25,579
     
-
     
25,579
 


(In Thousands)
Three Months Ended
December 31, 2010
 
Product
Sales
   
Agency
Sales
   
Consolidated
Total
 
Net Sales
 
$
114,518
   
$
5,666
   
$
120,184
 
Cost of Sales
   
96,661
     
-
     
96,661
 
Operating Income
   
16,397
     
5,666
     
22,063
 
Segment Assets
   
227,987
     
-
     
227,987
 
Segment Liabilities
   
21,467
     
-
     
21,467
 
  



 
F - 14

 

(In Thousands)
Three Months Ended
December 31, 2009
 
Product
Sales
   
Agency
Sales
   
Consolidated
Total
 
Net Sales
 
$
67,636
   
$
3,600
   
$
71,236
 
Cost of Sales
   
57,308
     
-
     
57,308
 
Operating Income
   
9,466
     
3,600
     
13,066
 
Segment Assets
   
153,752
     
-
     
153,752
 
Segment Liabilities
   
25,579
     
-
     
25,579
 

Product Sales

The Company derives the bulk of its revenue from sales of diesel, gasoline, fuel oil and solvents. These product sales revenues are recognized when customers take possession of goods in accordance with the terms of purchase order agreements that evidence agreed upon pricing and when collectability is reasonably assured. Cost of revenues for product sales include costs to purchase and transport the product to the Company, costs to deliver the goods to the customer and depreciation on product storage and delivery equipment.

Agency Fees

Agency fee revenues consist of fees charged to intermediaries who lack the required licenses to purchase directly from refineries. The Company allocates a portion of its purchasing quota to these customers for a fee similar to a sales commission. Agency fee revenues are recognized when there is evidence of an arrangement that specifies pricing and irrevocable allocation of a portion of the Company’s purchase quota and collection has occurred. Cost of agency fee service revenues may consists of selling commission, transportation or other costs, if any, associated with the agency fee arrangement.  For year ended June 30, 2010 and thereafter, the Company stopped transporting or handling the Products associated with the agency sales and only acted in a broker capacity allowing other intermediaries to use its licenses to take possession of the Products.

NOTE 13 – SUBSEQUENT EVENTS
 
The Company has evaluated for subsequent events between the balance sheet date of December 31, 2010 and February 14, 2011, the date the unaudited condensed consolidated financial statements were issued.

During the period from second quarter ended December, 2010 through February 14, 2011, the holders of Convertible Preferred Stock elected to convert 192,926 shares of preferred stock into 192,926 shares of common stock.

During the period from second quarter ended December 31, 2010 through February 14, 2011, the holders of Warrants elected to exercise 50,100 warrants on a cashless basis into 8,866 shares of common stock.

NOTE 14 - RESTATEMENT
 
While preparing our third quarterly review, we noted warrants exercised were not correctly recorded during the second quarter ended December 31, 2010. When warrants were exercised we had not debited to warrant derivative liability expense (a non-cash charge) for $4,589 thousand and credited to common stock for the same amount. Consequently, we have understated common stock and understated derivative expenses. We also noted that we had not correctly applied the treasury stock method when computing dilution for fully diluted earnings per share. Under this method warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Consequently we have overstated the fully diluted weighted average common shares outstanding. The changes were made as follows:
 
 
Original Reported
 
RESTATED
       
Balance Sheet
December 31. 2010
 
December 31, 2010
    Change  
Common Stock
  $ 26,455     $ 31,044     $ 4,589  
Retained Earnings
    153,048       148,459       (4,589 )
                         
                         
 
For the six months
 
For the six months
         
Income statement
ended December 31, 2010
 
ended December 31, 2010
    Change  
Derivative Income (Expense)
  $ (12,580 )   $ (17,169 )   $ 4,589  
Income before income tax
    30,034       25,445       (4,589 )
Net income
    19,085       14,496       (4,589 )
Net income attributable to
                       
common shareholders
    18,924       14,335       (4,589 )
                         
                         
Earnings per common share
                       
Basic
  $ 0.20     $ 0.15     $ (0.05 )
Diluted
  $ 0.17     $ 0.14     $ (0.03 )
Weighted average common shares outstanding
                       
Diluted shares
    114,084,066       103,136,580       (10,947,486 )
                         
                         
                         
 
For the three months
 
For the three months
         
Income statement
ended December 31, 2010
 
ended December 31, 2010
    Change  
Derivative Income (Expense)
  $ (2,174 )   $ (6,763 )   $ 4,589  
Income before income tax
    19,895       15,306       (4,589 )
Net income
    14,191       9,602       (4,589 )
Net income attributable to
                       
common shareholders
    14,137       9,548       (4,589 )
                         
                         
Earnings per common share
                       
Basic
  $ 0.15     $ 0.10     $ (0.05 )
Diluted
  $ 0.12     $ 0.09     $ (0.03 )
Weighted average common shares outstanding
                       
Diluted shares
    113,673,173       101,216,165       (10,536,593 )
                         

 
F - 15

 

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

This report contains forward-looking statements that involve risks and uncertainties. We generally use words such as “believe,” “may,” “could,” “will,” “intend,” “expect,” “anticipate,” “plan,” and similar expressions to identify forward-looking statements, including statements regarding our ability to continue to generate new business based on our sales and marketing efforts, referrals and existing relationships, our financing strategy and ability to access the capital markets and other risks discussed in our Risk Factor section included in our Form 10-K for the year ended June 30, 2010, as filed with the Securities and Exchange Commission on September 28, 2010. Although we believe the expectations expressed in the forward-looking statements included in this Form 10-Q are based on reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause our actual results to differ materially from those expressed in any forward-looking statements. We cannot assure you that the results or developments expected or anticipated by us will be realized or, even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

Highlights and Executive Summary

Longwei Petroleum Investment Holding Limited (the “Company”) is an energy company engaged in the wholesale distribution of finished petroleum products in the People’s Republic of China (the “PRC”).  Our oil and gas operations consist of transporting, storage and selling finished petroleum products, entirely in the PRC.  We purchase diesel, gasoline, fuel oil and solvents (the “Products”) from various petroleum refineries in the PRC. Our headquarters are located in Taiyuan City, Shanxi Province (“Taiyuan”). The Company has a storage capacity for its Products of 120,000 metric tons located at its fuel depot storage facilities in Taiyuan and in Gujiao, Shanxi (“Gujiao”), 50,000 metric tons and 70,000 metric tons of capacity respectively at each location. The Gujiao facility was acquired in January of 2009 and commenced operations in January of 2010. The Company is 1 of 3 licensed intermediaries in Taiyuan and the sole licensed intermediary in Gujiao that operates its own large scale storage tanks. The Company has the necessary licenses to operate and sell Products not only in Shanxi but throughout the entire PRC. The Company seeks to earn profits by selling its Products at competitive prices with timely delivery to coal mining operations, power supply customers, large-scale gas stations and small, independent gas stations. The Company also earns revenue under an agency fee by acting as a purchasing agent for other intermediaries in Shanxi, and through limited sales of diesel and gasoline at two retail gas stations, each located at the Company’s facilities. The sales price and the cost basis of the Company’s products are largely dependent on regulations and price control measures instituted and controlled by the PRC government as well as the price of crude oil. The price of crude oil is subject to fluctuation due to a variety of factors, all of which are beyond the Company’s control.

The Company was incorporated under the laws of the State of Colorado on March 17, 2000 as Tabatha II, Inc.  On October 12, 2007, the Company changed its name to Longwei Petroleum Investment Holding Limited.

RESULTS OF OPERATIONS 

 (All numbers referenced are "in thousands,” except price per metric ton “mt” and earnings per share)
 
For the Three Months Ended December 31, 2010 Compared to the Three Months Ended December 31, 2009
 
Revenues

For the three months ended December 31, 2010, we reported revenues of $120,184, an increase of $48,948 or 69% from revenues of $71,236 reported for the three months ended December 31, 2009.  We continued to expand our customer base and distribution platform.  Our Taiyuan and Gujiao fuel storage depots generated revenues of $69,095 and $45,423, respectively, and we earned an additional $5,666 in agency fees during the three months ended December 31, 2010.  During this period our product mix as a percentage of sales was split between diesel 45%, gasoline 53%, and other petroleum products 2% of total sales.  The sales increase was primarily due to the addition of our Gujiao facility, which began operations in January of 2010, and petroleum price increases.  The weighted average sales price per metric ton (“mt”) of product sold increased approximately 18% to $967/mt from $821/mt during the three months ended December 31, 2010 and 2009, respectively.
 
Costs of Sales

Costs of sales for the three months ended December 31, 2010 were $96,661 as compared to $57,308 for the three months ended December 31, 2009.  The increase of $39,353 or 69% was directly attributable to the increase in sales. The Company’s gross profit remained flat at 20% of revenues, for the three months ended December 31, 2010 and 2009. The average cost per metric ton of product the Company purchases have been steadily increasing in recent quarters and we have carefully managed our inventory levels to adjust to pricing fluctuations.  The weighted average cost basis per metric ton (“mt”) of product sold increased approximately 17% to $811/mt from $693/mt during the six months ended December 31, 2010 and 2009, respectively.
 
Operating Expenses

Operating expenses for the three months ended December 31, 2010 increased to $1,460 from $862 for the three months ended December 31, 2009.  The increase of $598 or 69% was primarily due to higher depreciation expense associated with Gujiao facility and public company expenses associated with legal, accounting, insurance and other professional fees.  As a percentage of sales, operating expenses remained approximately 1% of sales during the three months ended December 31, 2010 and 2009, respectively.

Operating Income

Operating income for the three months ended December 31, 2010 increased $8,997 or 69% to $22,063 from $13,066 for the three months ended December 31, 2009, primarily driven by strong revenue growth, and inventory and cost management.

Income Before Taxes

Income before taxes for the three months ended December 31, 2010 increased $ 15,478 or 8,999%  to $ 15,306 from a loss of $172 for the three months ended December 31, 2009, primarily due to the increase revenues and in other expenses associated with the accounting for the non-cash warrant derivative liability charge.

Other expense for the three months ended December 31, 2010 decreased $ 6,481or 49% to $ 6,757 from $ 13,238 for the three months ended December 31, 2009.  In accordance with GAAP, we recorded a noncash expense for the change in the fair value of the warrant derivative. The financial instrument classified as derivatives consisted of stock warrants issued in connection with our October 2009 Financing.  The warrants have a three year term that expire October 29, 2012 and have an exercise price per share of $2.255.  The warrant derivative liability expense was a non-cash charge of $6,763 and $ 13,220 for the three months ended December 31, 2010 and 2009, respectively.

Income tax expense for the three months ended December 31, 2010 increased $2,301 or 68% to $5,704 from $3,403 for the three months ended December 31, 2009, due to the increase in operating income earned during the period.

Net Income

Net income for the three months ended December 31, 2010 increased $ 13,177 or 137% to $ 9,602 from a loss of $3,575 for the three months ended December 31, 2009, due to the reasons set forth above.  Comprehensive income for the three months ended December 31, 2010 increased $ 15,982 or 448% to $ 12,413 from a loss of $3,569 for the three months ended December 31, 2009, due to the increase in net income, including the increase foreign currency translation adjustment of $2,800 between the periods. 

 
 
 
3

 
 
Basic and Diluted Income Attributable to Common Shareholders per Share
 
The Company’s basic net income attributable to common shareholders per share increased to $0.10 from a loss of $0.15 for the three months ended December 31, 2010 and 2009, respectively. In accordance with GAAP, we recorded a non-cash expense for the change in the fair value of derivatives of $ 6 ,763 or $ 0 . 07 per basic share and $13,220 or $0.16 per basic share for the three months ended December 31, 2010 and 2009, respectively.
 
The Company’s diluted net income attributable to common shareholders per share increased to $ 0.09 from a loss of $0.15 for the three months ended December 31, 2010 and 2009, respectively.  In accordance with GAAP, we recorded a non-cash expense for the change in the fair value of derivatives of $ 6,763 or $ 0.07 per diluted share and $13,220 or $0.16 per basic share for the three months ended December 31, 2010 and 2009, respectively
 
 
For the Six Months Ended December 31, 2010 Compared to the Six Months Ended December 31, 2009
 
Revenues

For the six months ended December 31, 2010, we reported revenues of $233,532, an increase of $102,935 or 79% from revenues of $130,597 reported for the six months ended December 31, 2009.  We continued to expand our customer base and distribution platform.  Our Taiyuan and Gujiao fuel storage depots generated revenues of $135,131 and $86,870, respectively, and we earned an additional $11,531 in agency fees during the six months ended December 31, 2010.  During this period our product mix as a percentage of sales was split between diesel 46%, gasoline 51%, and other petroleum products 3% of total sales.  The sales increase was primarily due to the addition of our Gujiao facility, which began operations in January of 2010, and petroleum price increases.  The weighted average sales price per metric ton (“mt”) of product sold increased approximately 17% to $935/mt from $797/mt during the six months ended December 31, 2010 and 2009, respectively.

Costs of Sales

Costs of sales for the six months ended December 31, 2010 were $187,911 as compared to $105,060 for the six months ended December 31, 2009.  The increase of $82,851 or 79% was directly attributable to the increase in sales. The Company’s gross profit remained flat at 20% of revenues, for the six months ended December 31, 2010 and 2009 (The total gross profit for the periods was approximately 15% from product sales, and a 5% contribution from agency fees, which has no product cost associated with revenue.) The average cost per metric ton of product the Company purchases have been steadily increasing in recent quarters and we have carefully managed our inventory levels to adjust to pricing fluctuations.  The weighted average cost basis per metric ton (“mt”) of product sold increased approximately 17% to $790/mt from $674/mt during the six months ended December 31, 2010 and 2009, respectively.
 
Operating Expenses

Operating expenses for the six months ended December 31, 2010 increased to $3,016 from $1,407 for the six months ended December 31, 2009.  The increase of $1,609 or 114% was primarily due to higher depreciation expense associated with Gujiao facility and public company expenses associated with legal, accounting, insurance and other professional fees.  As a percentage of sales, operating expenses remained approximately 1% of sales during the six months ended December 31, 2010 and 2009, respectively.

Operating Income

Operating income for the six months ended December 31, 2010 increased $18,475 or 77% to $42,605 from $24,130 for the six months ended December 31, 2009, primarily driven by strong revenue growth, and inventory and cost management.

Income Before Taxes

Income before taxes for the six months ended December 31, 2010 increased $ 15,635 or 159% to $ 25,455 from $9,810 for the six months ended December 31, 2009, primarily due to the increase revenues and in other expenses associated with the accounting for the non-cash warrant derivative liability charge.

Other expense for the six months ended December 31, 2010 increased $ 2,840 or 20% to $ 17,160 from $14,320 for the six months ended December 31, 2009.  In accordance with GAAP, we recorded a noncash expense for the change in the fair value of the warrant derivative. The financial instrument classified as derivatives consisted of stock warrants issued in connection with our October 2009 Financing.  The warrants have a three year term that expire October 29, 2012 and have an exercise price per share of $2.255.  The warrant derivative liability expense was a non-cash charge of $17,169 and $14,276 for the six months ended December 31, 2010 and 2009, respectively.

Income tax expense for the six months ended December 31, 2010 increased $4,769 or 77% to $10,949 from $6,180 for the six months ended December 31, 2009, due to the increase in operating income earned during the period.

Net Income

Net income for the six months ended December 31, 2010 increased $10,866 or 299% to $ 14 , 496 from $3,630 for the six months ended December 31, 2009, due to the reasons set forth above.  Comprehensive income for the six months ended December 31, 2010 increased $21,600 or 574% to $25,363 from $3,763 for the six months ended December 31, 2009, due to the increase in net income, including the increase foreign currency translation adjustment of $6,145 between the periods. 

Basic and Diluted Income Attributable to Common Shareholders per Share

  The Company’s basic net income attributable to common shareholders per share increased to $ 0.15 from a loss of $0.06 for the six months ended December 31, 2010 and 2009, respectively. In accordance with GAAP, we recorded a non-cash expense for the change in the fair value of derivatives of $ 17,169 or $ 0.18 per basic share and $14,276 or $0.17 per basic share for the six months ended December 31, 2010 and 2009, respectively.

The Company’s diluted net income attributable to common shareholders per share increased to $ 0 . 14 from a loss of $0.06 for the six months ended December 31, 2010 and 2009, respectively.  In accordance with GAAP, we recorded a non-cash expense for the change in the fair value of derivatives of $ 17,169 or $ 0.17 per diluted share and $14,276 or $0.17 per basic share for the six months ended December 31, 2010 and 2009, respectively.
 
 
 
4

 


Reconciliation of GAAP to non-GAAP Financial Measures

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

   
For the Six Months Ended
December 31,
   
For the Three Months Ended
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
                         
GAAP Net Income Attributable to Common Shareholders
  $ 14,335     $ (5,170 )   $ 9,548     $ (12,375 )
Non-GAAP adjustments:
                               
    Add: Non-Cash Charge for the Change in Fair Value of Derivative
    17,169       14,276       6,763       13,220  
Non-GAAP Net Income Attributable to Common Shareholders (a)
  $ 31,504     $ 9,106     $ 16,311     $ 845  
                                 
GAAP Earnings Per Share:
                               
    Basic
  $ 0.15     $ (0.06 )   $ 0.10     $ (0.15 )
                                 
    Diluted
  $ 0.14     $ (0.06 )   $ 0.09     $ (0.15 )
                                 
Non-GAAP Earnings Per Share:
                               
    Basic
  $ 0.33     $ 0.11     $ 0.17     $ 0.01  
                                 
    Diluted
  $ 0.28     $ 0.11     $ 0.14     $ 0.01  
                                 
Weighted Average Common Shares Outstanding:
                               
    Basic
    95,315,824       83,334,315       97,381,843       83,347,520  
                                 
    Diluted
    103,136,580       83,334,315       101,216,165       83,347,520  

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

As of December 31, 2010 our current assets increased $38,072 or 26% from $143,994 at year end June 30, 2010 to $182,066 at the six month period ended December 31, 2010.  Cash and cash equivalents totaled $15,124 at December 31, 2010.  Overall, we had an increase in cash flows of $4,999 during the six month period ended December 31, 2010 resulting from $3,507 of cash provided by operating activities, cash used in investing activities of $1,960 and cash provided by financing activities of $2,747.

Our current ratio is approximately 9:1 (current assets to current liabilities) and improves to 28:1 net of the fair value of the warrant derivative liability at December 31, 2010.  We have no long term debt as of December 31, 2010.  Accounts receivable turnover remained the same at 27 days, inventory turnover increased from 32 days to 46 days to hold more inventory on-hand during this period of rising prices, and the ratio of advances to suppliers to inventory decrease from 2.2:1 to 1.8:1 from year ended June 30, 2010 to December 31, 2010, respectively.  We have continued to improve our working capital management to enhance our flexibility on inventory management and purchasing capability to react to changes in market prices.
 
 
 
5

 

The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities during the periods indicated:

   
(In thousands)
Six Months Ended
December 31,
 
   
2010
   
2009
 
             
Cash at beginning of period
 
$
10,125
   
$
7,308
 
Net cash provided by operating activities
   
3,507
     
(1,135)
 
Net cash used by investing activities
   
(1,960)
     
(7,646)
 
Net cash provided by financing activities
   
2,747
     
13,896
 
Effect of exchange rate changes on cash
   
705
     
133
 
Cash at end of period
 
$
15,124
   
$
12,556
 
 
Cash Flows from Operating Activities

For the six months ended December 31, 2010, net cash provided by operations was $3,507 compared to net cash used in operations of $(1,135) for the six months ended December 31, 2009.  The increase of $4,642 or 409% in net cash provided by operations was primarily due to the increase in net income, but was offset by the increase in operating assets of $7,932 in accounts receivable, $13,090 in inventory, and $7587 in advances to suppliers.  We increased these balances as our capacity utilization has expanded from 50,000mt to 120,000mt during the last fiscal year with operations commencing at the Gujiao facility in January of 2010.  Based on the six months ended December 31, 2010 inventory product mix we have 57,639mt (or 19M gallons) of Product on-hand or 48% of our total storage capacity of 120,000mt valued at $48,058.  Our supplier advance balance with refineries allows us to lock-in supply so that we can react quickly to purchases based on the timing of the PRC pricing levels adjustments and adjust our on-hand inventory levels accordingly.

Cash Flows from Investing Activities

For the six months ended December 31, 2010, net cash used in investing activities was $(1,960) compared to net cash used in investing activities of $(7,646) for the six months ended December 31, 2009.  The decrease of $5,686 or 74% in net cash used in investing activities was primarily due to lower capital expenditures in the six months ended December 31, 2010.  The capital expenditures for the six months ended December 31, 2009 included the investment into the renovation and retrofit of the Gujiao facility, as well as improvements to our Taiyuan facility.
 
Cash flows from Financing Activities

For the six months ended December 31, 2010, net cash provided by financing activities was $2,747 compared to net cash provided by financing activities of $13,896 for the six months ended December 31, 2009.  The decrease of $11,149 or 80% in net cash provided by financing activities was primarily due to a decrease of $13,820 from the proceeds from the sale of preferred stock during the six months ended December 31, 2009 compared to proceeds from the exercise of warrants during the six months ended December 31, 2010.

Plan of Operations

Based on our current operations, we do not anticipate the purchase or sale of any significant equipment or expect any significant additions to the number of our employees.

We expect to continue to expand our customer base utilizing our existing distribution platform.  Our strategy is to leverage our customer and supplier relationships to develop additional business.  We may also look for opportunities to expand our business that we consider accretive to earnings.

We will continue to operate within our business model, which allows us a competitive advantage by utilizing our large storage capacity to adjust inventory levels based on the anticipated movement of industry pricing and acts as a hedge on pricing levels.  Utilizing our excess storage capacity allows us flexibility to take advantage of pricing, supply and demand fluctuations within the marketplace.  Our supplier advance balance with refineries allows us to lock-in supply so that we can react quickly to purchases based on the timing of the PRC pricing levels adjustments.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships that are currently material or reasonably likely to be material to our financial position or results of operations.
 
 
6

 
 
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 2, 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.

Warrant Derivative Liability

The Company issued warrants in connection with financing instruments.  The Company analyzed the accounting treatment and classification of the warrants and summarized the effects and conclusions. The Company accounts for the warrants pursuant to FASB ASC Topic 815.

Impairment analysis for long-lived assets and intangible assets

The Company’s long-lived assets and other assets (consisting of property and equipment and purchased intangible assets) are reviewed for impairment in accordance with the guidance of the FASB Topic ASC 360, “ Property, Plant, and Equipment”, and FASB ASC Topic 205 “ Presentation of Financial Statements ”.  The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset.  If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.  Impairment evaluations involve management’s estimates on asset useful lives and future cash flows.  Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions.  Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through December 31, 2010, the Company had not experienced impairment losses on its long-lived assets. 
 
Inventories

Inventories consist of finished petroleum products.  Inventories are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale.  When inventories are sold, their carrying amount is charged to expense in the year in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year the impairment or loss occurs. There were no declines in net realizable value of inventory for the six months ended December 31, 2010 and 2009.

Management has discussed the development and selection of these critical accounting policies with the Board of Directors and the Board has reviewed the disclosures presented above relating to them.
 
 
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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.
 
ITEM 4.  CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 
We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of December 31, 2010, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer, Cai Yongjun, and Chief Financial Officer, Michael Toups, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation and our subsequent evaluation in reviewing our March 31, 2011 Form 10Q, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our conclusion that our disclosure controls were not effective was based on the fact that, as more fully disclosed in our Current Report on Form 8-K filed on May 16, 2011, we identified a number of “significant deficiencies” in the process of preparing our financial statements for the third fiscal quarter ended March 31, 2011.  On May 13, 2011, the Chief Executive Officer and Chief Financial Officer for the company concluded that the previously issued financial statements for the fiscal second quarter ended December 31, 2010 should no longer be relied upon and that disclosure should be made and action taken to prevent future reliance.
 
The basis of management's determination that the financials for the second fiscal quarter could not be relied upon was that warrants exercised during the second fiscal quarter ended December 31, 2010 were not correctly recorded. When warrants were exercised, we did not debit warrant derivative liability expense (a non-cash charge) for $4,589 thousands and credited common stock for the same amount. Consequently, we understated common stock and warrant derivative liability expenses. Additionally, we failed to correctly apply the treasury stock method when computing dilution relating to our calculation of fully dilutive earnings per share. Under this method, warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Consequently, we overstated the fully diluted weighted average common shares outstanding. The fully diluted weighted average common shares outstanding were 103,136,580 and 101,216,165 for the six and three month ended December 31, 2010.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management has discussed the significant deficiencies identified in the Amendment with our board of directors and has engaged in the following remediation efforts to ensure that the significant deficiencies do not reoccur, which include adding additional accounting staff with greater expertise to assist the Company in preparation of its financial statements and allocating significant financial and human resources to strengthen the internal control structure.  As part of our efforts to comply with Section 404 of the Sarbanes-Oxley Act for the fiscal year 2011, we have been actively working with external consultants to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financials reporting.

These remediation efforts are designed to address the significant deficiencies identified and to improve and strengthen our overall control environment.  We believe these actions will prevent the significant deficiencies from recurring.  Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that disclosure controls or internal controls over financial reporting will prevent all errors, even as the aforementioned remediation measures are implemented and further improved to address all deficiencies.  The design of any system of controls is based in part upon certain assumptions about likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

The implementation of our remediation plan will require substantial expenditures, could take a significant period of time to complete, and could distract our officers and employees from the operation of our business.  However, our management believes that these remediation efforts will be completed by the end of the Company’s fiscal year ended June 30, 2011
   
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.
 
 
 
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ITEM 1A.  RISK FACTORS

Not required for smaller reporting companies.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sale of Securities

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.

During October 2010, the holders of Convertible Preferred Stock elected to convert 1,745,419 shares of preferred stock into 1,745,419 shares of common stock.

During October 2010, the holders of Warrants elected to exercise 454,546 warrants on a cashless basis into 116,461 shares of common stock.

During November 2010, the holders of Convertible Preferred Stock elected to convert 2,056,540 shares of preferred stock into 2,056,540 shares of common stock.

During November 2010, the holders of Warrants elected to exercise 1,507,273 warrants on a cashless basis into 531,494 shares of common stock.

During November 2010, the holders of Warrants elected to exercise 419,272 warrants on a cash basis into 419,272 shares of common stock.

During November 2010, two consultants to the Company earned 60,000 shares of common stock for services rendered.

During December 2010, the holders of Convertible Preferred Stock elected to convert 777,845 shares of preferred stock into 777,845 shares of common stock.

During December 2010, the holders of Warrants elected to exercise 875,758 warrants on a cash basis into 875,758 shares of common stock.

During December 2010, two directors earned and were vested in 6,000 shares and 3,000 shares of common stock, respectively, as part of their board compensation.  The Chief Financial Officer earned and was vested in 15,000 shares of common stock as part of his agreement.

The sales of the shares discussed above were made solely to “accredited investors,” as that term is defined in Regulation D under the Securities Act.  The shares were not registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. REMOVED AND RESERVED .
 
 
ITEM 5. OTHER INFORMATION.

None.
 
ITEM 6.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
 
Exhibit No.
 
Description
     
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

 
 
 
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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.
 
 
Principal Executive Officers of
Longwei Petroleum Investment Holding Limited
 
 
May 16, 2011
By:
/s/ Cai Yongjun
 
   
Cai Yongjun
Chief Executive Officer
(Principal Executive Officer)
 
       
 
By:
/s/ Michael Toups
 
   
Michael Toups
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
 
       

   
 
 
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